Summary: In the newest issue of The New England Journal of Medicine, famed health care economist Victor Fuchs argues that: “Current demographic, social, and economic forces will create new priorities for future biomedical innovations: more emphasis on improving quality of life and less on extending life, and more attention to value-enhancing innovations instead of pursuit of any medical advance regardless of its cost relative to its benefit.”
Sunday, Matthew Holt published a superb interview with Fuchs, (now the Henry J. Kaiser Professor Emeritus at Stanford University) on The Health Care Blog (THCB). Below, excerpts from that interview. At the end, I offer extended commentary on this exceptional interview. As always, Fuchs offers some eye-opening insights. You’ll find the complete September 19 THCB interview here.
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Fuchs begins by summarizing the main points of his new NEJM article: “New Priorities for Future Medical Innovations”:
Victor Fuchs: I think there [are] two key elements here, one of them better understood by a larger audience and one of them I think rather new. Let me do the new one first. The new one is that we are going through what I call the second demographic transition.
The first transition was when every country had high mortality and high fertility and then the mortality, especially of young people, started to drop, but fertility did not drop right away . . . and during that time the population soared because there was this discrepancy between mortality and fertility.
You see the high fertility made sense when mortality was high because you wanted to have at least a couple of children survive to adulthood, but when mortality dropped it didn’t sink into people’s consciousness right away, so it took quite a [while ] . . . a period which the historians and the demographers referred to as the demographic transition . . .
[This was a time when many in the U.S. were calling for “Zero Population Growth.” Before long, the slogans wouldn’t be necessary. More and more families would have only one child. So often, what we worry about most, at a particular point in time (Islamic terrorists, for instance, in the months and years since September 11, or the “Red Threat” in the 1950s and early 1960s), turns out to be the least of our problems. Today, unemployment and a sinking economy pose the greatest threat to American families. – MM]
But now the second demographic transition is the one that I talk about in the NEJM piece, . . . It has the following elements.
First is that a very large and increasingly large percentage of the population cohort lives until age 65, whereas at the beginning of the 20th century only a small percentage lived until 65. Now we’re going to 80% and we’ll eventually approach close to a 100% living till 65.
The second element is that life expectancy at 65 is increasing and it’s increasing at a quite brisk pace in recent decades. You put those two things together and you find out a very large and growing percentage of all the additional years that are lived . . . will be lived after 65.
[At] the beginning of the 20th Century only about 20% or not even 20% of the additional years were lived after 65. Now we’re getting to a point where close to 80% of the additional years are being lived after 65. Now that’s very important because the conditions of people over 65 are very different from the ones under 65.
Over 65 they’re not in the labor force. Four out of five men are out of the labor force and nine out of 10 women and they are very highly dependent on transfers from the younger people and that means more taxes on the younger people and so on.
So I think that the people are going to realize that increasing life expectancy as a major goal of biomedical innovations doesn’t have the same compelling force behind it as if it did when the population was different and . . . much of the additional years from additional life expectancy would be lived before 65 when people were in the workforce contributing to production and the tax base and so on.
That’s what I call the second demographic transition and I have no doubt that it will take a while for the implications of it to sink in to people just as the first one did, but eventually I believe it should result in a change in emphasis away from innovations that increase life expectancy to innovations that improve the quality of [life]– that’s the first point and I don’t think it’s well understood.
The second point has to do with the economic challenge of having healthcare expenditures growing so much more rapidly than the rest of the economy and most people realize that somehow that has to change. I think a lot people do realize it, and my point is that what we ought to be doing there is changing the emphasis from increasing life expectancy at any cost to finding innovations that would lower the cost of medical care without necessarily changing life expectancy or health outcomes generally.
. . . [But] there [are] still large elements in the population that resist that notion, because they have a stake in having things continue [as they are.]
Matthew Holt: . . . let me ask you your opinion. How much do you ascribe of the increase in life expectancy and most people living over 65 and then increasing life expectancy post 65 to changes in medical care, broadly described?
Victor Fuchs: Almost all of it. If you look where the big changes have come, let’s say decrease in infant mortality, tremendous decrease because they have technologies now that can keep very low birth weight babies alive. . .
Matthew Holt: Right, so you’re saying medical technology's got a pretty large contribution to what we’ve seen in terms of growth in life expectancy and longer life expectancy past 65. Now, I also recall from your colleague and good friend Alain Enthoven, the concept of "Flat-Of-The-Curve" medicine. There has been a lot of discussion — especially in the last couple of years about the work of Wennberg and his colleagues at Dartmouth about unequal variation, but also like unnecessary and nonproductive care.
Victor Fuchs: Those are two different issues. They shouldn’t be conflated. . . . One has to do with the curve being flat at a certain point as you have more and more MRIs and so forth. . . . a lot of the expenditures that we have now contribute little or nothing to increased life expectancy. . . . At the same time [some] technology moves the curve upwards . . . [In those cases] more medical care buys you more in health outcomes. . .
The problem, for us . . . is how we can cut back on the expenditures without cutting sharply into the health outcomes? I think it can be done, but it can only be done under certain circumstances. [Here is] my formula for how you get physicians to practice cost effective medicine . . . the physician needs three I’s. You need information because very often they don’t know what the contribution is of the different technologies and they certainly don’t know what the cost is.
Then infrastructure so that they can make use of specialized technology and specialized personnel. Give you an example: the most cost effective way [to treat people with diabetes] is to treat them with a team, mostly a non-physician team.
The third thing physicians need is incentives. If they don’t have an incentive to apply the information and to seek out the infrastructure, then it’s not going to do you any good.
It’s got to make sense to them and it’s got to make sense in dollars and cents as well as every other way. So, that’s where you reconcile all the Flat-Of-The-Curve Dartmouth stuff with the fact that [there] is technology which does increase life expectancy.
Matthew Holt: That’s a great distinction, I love your three I’s, information, infrastructure, incentives. . . . what do you regard as the likely outcome for the system or for the way we practice medicine given what you were talking about in terms of moving from an emphasis on increasing life expectancy to an increase in quality of life?
Victor Fuchs: I’m very pessimistic over the short-term or the intermediate term. The reason why I am pessimistic has to do with the whole underlying information base and decision making within our political system. You are no doubt aware of the fact that now we have a highly fractionated system of messages to people. We have– how many channels? I don’t know, but there are a large number of radio talk shows.
We have bloggers, God save them, there are some great ones like you, but they’re numerous and what you have is people tuning in only to the messages that they want to hear. The messages that reinforce their opinions. Psychological research has pretty well demonstrated that when someone has an opinion and they are surrounded by others with the same opinion, they will hold it more extremely [Meanwhile], given the ineffective political system that we have now – highly polarized, highly contentious, losing good people who don’t want to run again, who don’t want to serve in the Senate or the House . . . the chances of getting good policy out of that mix seems to me to be very poor.
Matthew Holt: Some of the discussion that you’ve raised in this piece, especially around improving quality of life as opposed to the life expectancy is being picked up in various parts of the healthcare system by some people with some power in the public sector, the Don Berwick’s of the world and also in the private sector.
Victor Fuchs: He’ll go with quality of care not quality of life. Berwick wants to improve the quality of care, whichever way it goes [whether people live longer or not] — I’m talking about innovations that don’t extend life, but make life more pleasant for older people while they are still alive. . . .
Matthew Holt: But some of that involves, some of the things like the diabetes care teams that you talked about, they may extend life, but also quality of care.
Victor Fuchs: That’s cost effectiveness. That will have benefits both in length of life and quality of life. Cost effective is a different issue. These are separate things.
A Value-Added Tax Dedicated to Providing Universal Coverage
Matthew Holt: Let me flip to a different issue. You just authored a new piece from the Institute for Economic Policy Research at Stanford with John Shoven, This is about a dedicated VAT solution.
Victor Fuchs: . . . I can explain that fairly quickly. Domestically the U.S. faces two big problems, which the commission on deficit reduction have been asked to address. The first one is to find an additional source of revenue and the second one is to get a handle on healthcare cost.
In fact, as Alice Rivlin says–and she is a member of the commission–long-run fiscal policy is health policy. Now we have proposed that if there is a dedicated value added tax, dedicated to paying for basic care for everyone, universal coverage, that will simultaneously increase revenue and get a handle on healthcare cost, provided that what people are then entitled to do is to join an accountable care organization that will be paid on a risk adjusted capitation basis. [Providers would not be paid fee-for-service, but will be paid a risk-adjusted lump sum to keep a patient well for a year (adjusted based on the patient’s overall health, age, income, race, etc.) taking the risk that they will fail, and the patient’s health care costs will exceed the lump sum. MM]
And we know that we can realize very extensive economies in that form of organization and delivery. At the same time we’ll also have cut out a lot of the costs associated with the present way that we finance care with employment-based insurance . . .The whole thing is really, you might say, a mess. That’s the long and the short of that piece, although we go into it some detail.
Matthew Holt: So, let me ask you about that because, of course, your work on this, which goes back 15 years or so, was also the basis of the book which you didn’t author, but you were clearly a big part of, with Ezekiel Emanuel – Healthcare Guaranteed. [This book focused on the concept of a value added tax which funded a voucher system, providing everyone with vouchers which entitled them to the same generous package of health care benefits, at no cost to the individual. MM]
[The system outlined in Healthcare Guaranteed] is tied to a system of Accountable Care Organizations. We didn’t get that in the Affordable Care Act (ACA) that just happened. So, can you give me a sense about how you think we can get people to think about this more systematically and more logically?
What Everyone Says Can’t Happen, Will Happen—But Not Now
Victor Fuchs: I don’t think we can. What I’m relying on here is something that De Tocqueville found about the United States a long time ago. He said that the United States moves from the impossible to the inevitable without ever stopping at the probable.
Another way to put this is that American history is studded with examples of major policy changes that were completely off the radar screen, they were politically infeasible until they became politically possible and I’ll just give you two examples; first, the emancipation of the slaves. No way, that was going to happen and then suddenly it did happen and the slaves were emancipated. I’ll give you a much more recent example, $1 trillion to bail out the major financial institutions.
Go back six months before that, no possibility; that was not politically feasible. Then in a matter of three weeks, the whole thing turned around and it became politically feasible.
So, what I’m saying is that I am trying to weigh out what I think is the best way to go, but the mechanism by which we get there will not be . . . painful, long drawn out discussion . . . it’ll be a response to a crisis and suddenly everybody; both houses, the President and everybody will realize that they have to do something substantial and they’ll do it and my hope is that they’ll do something sensible. But you see the two examples that I gave illustrate the way my thinking runs on how you get major policy change in America.
The interesting thing is that the De Tocqueville realized that 100 years ago and that was already true in the country. You go from the impossible to the inevitable without ever stopping at the probable.
Mathew Holt: That’s great. And talking about that, I want to ask you about the long drawn out debate that ended up in the Affordable Care Act (ACA) legislation. You wrote an article in The New England Journal, I think it was early 2009, suggesting that there was going to be severe difficulties getting something done. . . . So did you expect something to pass like the bill we got, and did you think it was what you’d call real health reform?
Victor Fuchs: The answer to the last question is “No,” it wasn’t real healthcare reform. As a matter of fact, by summer of last year the word “healthcare reform” was never heard from Obama . . .it always became health insurance reform, you know, to reform the insurance companies was a much more doable target.
To get real healthcare reform, there just wasn’t the support in the country and they found that out, they saw that was happening. . .
There was an excellent article by David Leonhardt, in the NY Times, that day after [the Affordable Care Act] passed, in which he pointed out that the primary function of this legislation was re-distributive [about redistributing health care dollars, and to some degree, health care services]. It didn’t change the healthcare system. . .
[The legislation offers only] “promises” [of real change] says Fuchs. You know there was a piece by Orszag and Emanuel in NEJM . . . did you see it?
Matthew Holt: Yeah, I did.
Victor Fuchs: [ Orszag and Emanuel suggest that] there’s a chance that [under the legislation] there will be some good changes in the organizations delivering care, but given Congress –the way it is –and given the other obstacles, I think the chances of those things working out are very small until the country gets into some kind of crisis situation.
We don’t know what that crisis will be. One possibility is China stops buying U.S. Bonds. There might be other possibilities. I’m not a political forecaster, but I can tell you that it will take a crisis to really turn healthcare around and in that case I hope they turn in the direction that I’ve been advocating.
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My comments:
A couple of years ago, someone asked me if I would be interested in speaking at a conference on longevity, and I explained that I couldn’t because: “I’m against it.” I was only half-kidding. As Fuchs points out, it was one thing when medical technology was saving babies and children, or pushing the envelope so that most of us will live to 65. But lately, some futurists have been talking about “making 85 the new 75” or “90 the new 80.”
We should be careful of what we wish for. In her new book, Palliative Care: Transforming the Care of Serious Illness, palliative care pioneer Dr. Diane Meier, points out that 13 percent of Americans over 65 and “42 percent of those 85 or older suffer from Alzheimer’s, the most common cause of dementia. (Prevalence is even higher if vascular dementia is included).”
This is a terrifying statistic. As we live longer, more and more of us will outlive our minds. And there is little that we can do about this. As Fuchs suggests, we should invest in technology that will improve the quality of life as we age. Living longer should not be our primary goal.
At the same time, as Fuchs says, we need to focus on developing medical technologies that “would lower the cost of medical care without necessarily changing life expectancy or health outcomes generally.” Making care more efficient—and safer—should be a top priority. With that in mind, physicians need “information, infrastructure and incentives.”
What Can’t Happen Will Happen
Perhaps most importantly, we should remember De Tocqueville’s insight: “the United States moves from the impossible to the inevitable without ever stopping at the probable.” Fuchs explains: “American history is studded with examples of major policy changes that were completely off the radar screen, they were politically infeasible [and everyone said they were impossible] until [suddenly] they became politically possible.”
As Churchill observed, Americans always do the right thing—after “trying everything else first.” De Tocqueville recognized what is unique about how we make progress: in the end, under great pressure, we leap to the right conclusion. Fuchs offers a superb example: “the emancipation of the slaves. No way, that was going to happen and then suddenly it did happen and the slaves were emancipated.”
As regular readers know, in the past I have argued that we are at a turning point in American History. We have no choice. Our economy, like our health care system, is heading for a wall. At the beginning of 2010, the conventional wisdom was that we couldn’t possibly pass health care reform legislation this year—except we did. This was because we were approaching a terrifying tipping point. More and more middle-class Americans are scared –and rightly so– that at some point in the near future, they are not going to be able to afford health care.
Funding Reform
Fuchs argues that the Accountable Care Act “doesn’t represent real reform.” I can’t agree. Though I do agree that, at first glance, the major thrust of the legislation is to redistribute the cost of care: The wealthiest 2 percent of all U.S. households (individuals earning over $200,000 or couples earning over $250,000) will be paying higher taxes to help fund universal coverage. Insurers that have been over-charging for Medicare Advantage without providing good value for those Medicare dollars also will contribute to financing reform: they will find their funding cut. Finally drug-makers, device-makers and insurers recognize that, under universal coverage, their revenues will grow, and all have agreed to kick in a share of their profits. As a result, low-income and middle-income Americans will receive the subsidies they need to buy health insurance. This change represent a major step toward making our health care system more equitable.
Fuchs would prefer a Value-Added Tax (VAT) on consumption as the best solution to financing reform. He helped Dr. Ezekiel Emanuel write Healthcare, Guaranteed, a book that describes a brilliant plan for universal coverage fully funded by a progressive VAT, and I agree that, going forward, we should give this proposal serious thought.
In the book, Emanuel sketches a bold plan that offers free, high quality health care to all Americans. No premiums. No deductibles. Low-co-pays. Under this proposal, the government insists that all insurers offer the same comprehensive benefits to everyone, benefits that are more generous than Medicare’s and more comprehensive than what 85 percent of all employers offer their employees. A 10 percent VAT on spending becomes the sole source of funding for universal coverage, and revenues from the VAT cannot be used for anything else. As Emanuel explains, because the VAT would be dedicated to health care, it would be progressive. Low-income people spend less because they have less discretionary income. Thus, they would pay less in VAT taxes. But under the plan, they would be entitled to the same health care benefits that high-income households receive, even though those families lay out more in VAT taxes. I have written about Healthcare, Guranteed, and how the VAT would work here, and here. It remains the best blueprint for transforming our health care system that I have seen.
That said, I still believe that the Accountable Care Act represents a good first step. But as health care reform evolves, we might well adopt some form of the Emanuel/Fuchs plan. As Fuchs points out, their plan is built on a network of “Accountable Care Organizations” [ACOs] that move away from fee-for-service to pay hospitals and doctors a lump sum for caring for patients. The legislation the president signed in March also encourages ACOs. In fact, newly installed Medicare director Don Berwick is already beginning to seed ACOs across the nation, using funds provided by the Accountable Care Act. In other words, the new legislation and the Emanuel/Fuchs plan are not irreconcilable.
The VAT is something to keep in mind as we move forward, but we are not in a position to introduce a brand-new tax with a European pedigree this year, and I doubt we could do it next year. As Fuchs observes, politically, we are too divided. Moreover, we are in the middle of a deep recession. But at some point in the not-too-distant future, a progressive VAT might well make sense.
Changing How Care is Delivered: Congress Yields Power
In the meantime, I would argue that the Accountable Care Act opens the door to making substantial, structural changes in our health care system. . . Here, I am more optimistic than Fuchs, who suggests that there is only a slim chance that former OMB director Peter Orszag and Zeke Emanuel are right in a recent NEJM article where they suggest the legislation will lead to “good changes in how care is delivered.”
Granted, change will take time. As Orszag and Emanuel stress, reform will be a process: “Perhaps most fundamentally, the Affordable Care Act (ACA) recognizes that reform, particularly changing the delivery system, is not a one-time event. It is an ongoing, evolutionary process requiring continuous adjustment. The ACA therefore establishes a number of institutions that can respond in a flexible and dynamic way to changes in the health care system . . .”
Orszag and Emanuel are talking about the Independent Payment Advisory Board (IPAB), the Center for Medicare and Medicaid Innovation (CMI), and the Patient-Centered Outcomes Research Institute. (PCORI) Each will strive to move U.S. healthcare toward more affordable, more compassionate, evidence-based care: “One of the essential aspects of the legislation is that unlike previous efforts, it does not rely on just one policy for effective cost control,” Orszag and Emanuel write. “Instead, it puts into place virtually every cost-control reform proposed by physicians, economists, and health policy experts and includes the means for these reforms to be assessed quickly and scaled up if they’re successful.”
For example, the Center for Medicare and Medicaid Innovation (CMI) is charged with testing pilot projects, including Accountable Care Organizations, that will change both how we pay for care—and how it is delivered. If a pilot is successful in leading to better coordinated, more efficient care, the legislation stipulates that “the Secretary of Health and Human Services has the authority to expand the duration and scope of a demonstration, even nationwide.” In other words the Secretary of HHS does not have to go through Congress. This represents a radical change.
In the past, Medicare needed congressional approval, and too often lobbyists persuaded legislators to delay or derail successful initiatives. After all, one man’s waste is another man’s income stream. For instance, one project that tested competitive bidding for durable medical equipment between 1999 and 2002 showed that the program could reduce Medicare expenditures in this area by 19%. Although Congress authorized the CMS to expand the program, it postponed implementation for eight years–until 2010. Presumably companies that manufactured the equipment were not enthusiastic about bidding that would trim their revenues.
Congress also has given the Independent Payment Advisory Board (IPAB) the power to rein in Medicare inflation without its approval. If projected per capita Medicare spending exceeds target growth rates in a given year, IPAB will have the authority to recommend proposals to limit Medicare spending growth. Congress can block those cuts only if it offers an alternative proposal that will achieve the same level of savings. If legislators do nothing, IPAB’s recommendations automatically go into effect. Orszag has called this “the largest yielding of sovereignty from the Congress since the creation of the Federal Reserve.” None of the proposals aimed at curbing inflation can ration care, increase taxes, change Medicare benefits or eligibility or increase beneficiary premiums and cost-sharing requirements. This suggests that IPAB may trim Medicare spending by refusing to pay for waste—i.e. unnecessary or redundant tests and ineffective, often unproven, treatments that cannot rightly be called “benefits.”
Under reform legislation Congress also has granted the Secretary of HHS the power to review the Medicare payment schedule and adjust “misvalued” physicians’ services to prevent either overtreatment or undertreatment. This could let her raise reimbursements for underpaid services such as palliative care, while lowering payments for some very lucrative surgeries, such as back surgery, that medical research suggests are done too often, without helping the patient.
“By enacting a broad portfolio of changes,” Orszag and Emanuel observe, “the ACA provides the best assurance that effective change will occur. Moreover, by taking a multifaceted approach that includes hard savings plus the mechanisms for creating a dynamic health care system, [the ACA] enables physicians, hospitals, and other providers to consistently improve outcomes, boost quality, and reduce costs as health care evolves.”
Will each of the reform initiatives embedded in the ACA work? Of course not. Will all of them fail? To suggest that they will is to take cynicism to an extreme that could best be called nihilism. Those who say that real reform will never happen are the descendents of those who insisted that the U.S. economy would always depend on slave labor.
Fuchs understands that, at some point, a crisis will force us to take the leap, and “do the right thing”–because the only alternative is a complete melt-down.
Orzag and Zeke Emanuel’s proposals continue the fragmented, duplicative, non-system which is confusing and a time-waster for practitioners and patients alike. The VAT is a horrible idea.
A single payer program, much like Taiwan’s would be a huge improvement.
I thought Fuchs piece was pretty telling about the American tendency to play chicken with reality until finally seeing that reality through the final attempt to avoid the grand crisis. Maggie, I know you think the new health care act will plant the seed of real reform, but too much politics will kill those seeds in the short run. The crisis that Fuchs predicts will be the telling issue about change or disaster, and it should be quite a ride until that crisis really approaches. If we do succeed in health care reform eventually, Fuchs sounds about right in what needs to be done as a general framework, IMO.
I’m afraid I agree with NG — things will need to get much worse before they get better. I hope I’m wrong.
What will happen, I fear, is that the GOP will succeed in gutting the healthcare bill; then, when it doesn’t work, proclaim that the bill was a failure from the outset.
Finally, as Churchill says, we’ll fix things. But first it will get uglier.
I think this ‘progressive VAT’ is a myth, as a flat rate consumption tax affects poorer people more simply because it’s a higher proportion of their income. In the UK, the richest 10% pay one in every 25 pounds of their income in VAT; the poorest 10% pay one in every seven pounds as VAT. I can’t see how hypothecating VAT to healthcare will stop a regressive effect on day to day living. A combined national insurance/income tax system is a much better way of paying for healthcare.
Marc,
Marc–I too would have thought that a VAT is always, necessarily, regressive– until I read the book and interviewed Emanuel.
Please bear with me while I explain it:
First, consider a middle-class family with joint income of, say, $60,000. (This is close to median income–half of all households earn less, half earn more.)
After taxes (income, property and sales taxes), let’s say they net $52,000. It’s safe to say that they probably spend close to the entire $52,000 just to cover the basics of life: rent or mortgage, food, ultilities, transportation to work, clothing, furniture, essential home repair (if they own) Maybe they are able to save a few thousand a year toward retirement–or a child’s college education.
So, let’s say they manage to save $3,000 and spend $49,000. They pay 10% on every dime they spend– so they pay a total VAT of $4,900 ( VATs in many countries apply only to certain items, this VAT applies to everything.)
But after paying the $4,900 VAT, they get all health care free of charge. No premiums, no deductibles, almost no co-pays. They have a voucher that entitles them to a very rich benefit package–better than the package provided by 85% of employers.
Then consider a wealthier familly–let’s say a household with joint income of $180,000.
After taxes, let’s say they
net $160,000. (These tax figures vary widely, depending on the size of their mortgage deduction, whether they pay state income taxes and how high local property taxes are. So this is just a back-of-the envelope figure)
They probably don’t spend every penny their earn (though some households in this income bracket do–especiallly if they have children–if they also have credit card debt, they may spend More than they earn.
But let’s assume, for the sake of argument, that they save 10% –or $16,000 toward retirement, child’s education, and a “rainy days” savings account–money set aside to cover unexpected expenses.
So they spend
$144,000– and pay a 10% VAT of $14,400.
Finally, consider a very wealthy family with joint income of $300,000.
After taxes, they net $250,00 (I’m assuming they have a big mortgage deduction as well as other deductions that wealthier people tend to have.)
They also save 10%– and spend $225,000.
They pay a 10% VAT of $22,500.
Now here’s the important point: Each of the three families receives exactly the same rich benefit package in exchange for their VAT taxes. All health care is free–no insurance premiums, no deductible, very, very little in the way of co-pays.
In 2010 dollars, that package would cost roughly $14,000 (I’m assuming a family package better than what 85% of employers now provide.)
The median income family pays $4,900 for a benefit package worth $14,000. The $180,000 family pays $14,400 for that package, the wealthy familiy pays $22,500. In other words, the wealthy family is subsidizing the median-income family.
Lower-middle class and low-income households, spending, say $20,000 to $30,000 a year would pay $2,000 to $3,000 in VAT taxes– and get the same package.
A household that spends $500,000 a year (private schools, keeping up two houses, cars, vacations, eating out, hiring people to keep up the grounds, clean the house, a live-in baby-sitter, etc. etc. would pay $50,000 in VAT taxes.
This is a progressive tax.
Granted, today, according to the Census bureau the average median-income family spends only about $3,500 on healthcare. The number is that low, because many families don’t have insurance, and thus only see a doctor in an emergency. Under this plan, they pay more–$4,900–but in return they get much, much more– all of the health care they need, and the secruity of knowing that they will always have all of the care they need.
The VAT doesn’t go up–it remains at 10%–though the revenues from the VAT rise each year, along with inflation. But an individua and rising incomes. (The wealthier families are likely to see their income rise, along with their spending.) A family pays more only if they spend more.
Keep in mind that all of the revenues from the VAT are used to fund healthcare. And this is the only source of fudning for healthcare– no employer contributions (which means wages should rise), no other special taxes for healthcare. . .
The math actually works (Fuchs is an excellent economist.)
I hope this makes sense.
FANTASTIC!- RE-PUBLISH AND CIRCULATE AS MUCH AS POSSIBLE
Dr. Rick Lippin
“Quality of Life Doctor for over 35 years”
Southampton,Pa
Maggie –
More than 100 countries have some variant of the VAT. As far as I can tell, exactly none come close to applying it to everything and none dedicate it to financing health insurance or anything else for that matter. In the U.S., where the population is more resistant to taxes than in many other countries, I can’t understand why you think our political system could ever pass a VAT that applied to everything and was dedicated to health insurance financing. Even if it did, it is highly unlikely that the funding source would be sufficient to allow the value of the voucher to keep pace with rising healthcare costs as the population ages and technology advances. Moreover, health insurance lends itself very well to being priced in contrast to, say, defense spending or environmental protection.
If we ever do move away from employer financing for the under 65 working population, I think we would be most likely to adopt something similar to the Swiss approach where everyone pays their own health insurance premium with subsidies for those who can’t afford it. In Switzerland, 45% of the population qualifies for a subsidy and people are expected to spend about 10% of income toward their insurance premium plus deductibles and co-pays before the subsidy kicks in. In addition, general taxation helps to cover part of the cost of operating hospitals. The Swiss approach applies to the entire population including the elderly and there is no government run plan. I think the Swiss model, as an alternative to our current system, is the best fit with our culture.
Barry,NG, Chris, Lou, Dr. Rick
Barry–
You are entirely right– the VAT that Emanuel and Fuchs propose is very different from any other VAT.
This is what makes it so original, and so brilliant. These are two extraordinarily intelligent men,and they thought long and hard about this problem
The originality and elegance (simple, and brilliant) of the plan is also why reviewers ranging from the Financial Times to Ezra Klein have given the ideas in this book such Kudos.
You argue that the public would never accept such a plan. I agree–right now.
But things are changing, in our economy, and politically.
Two years ago, who would have thought that some of these Tea-Party candidates would be elected in so many states?
In 2004, who would have thought that this country was ready to elect an African-American president?
At this point, things could go in either direction. I think it is very hard to predict what will happen over the next 2 to 3 years, though I’m hopeful that we will go in a more rational direction.
Fuchs argues that at crucial turning points in our history, things can seem politically impossible–until they suddenly become possible.
Unfortunately, before that happens, we may have to go through a serious crisis–see Chris Johnson and NG.
NG–
I do think we’re looking at “quite a ride” over the next few years. I have always though that reform would be a tumultuous process–and it will take years–a process, not an event.
And I agree with you and Fuchs on this: what will drive reform forward will be a crisis– quite possibly more than one crisis.
But I disagree as to whether the new legislation can seed reform. It can, and I believe it will. We all just need to give Berwick, and reformers as much support as possible. (Or put it this way: that is all that we can do.)
Many good things will and can happen tomorrow. And I mean literally tomorrow: As of Thursday, kids with pre-existing condtions can no longer be denied insurance and their parents can’t be gouged. No lifetime limits on insurance–etc. etc.
For many people, this is already a major turning point that changes their lives. We should pay attention to that.
I was heartened to see that the evening news on the networks was highlighting these changes today. NBC news with Brian Williams does a particuarly good job. (As do some commentators on CNBC. But I’m glad to see Williams reaching the mainstream.)
Chris-
I don’t think Republicans will be able to gut the bill.
First, I very much doubt that they will take the Senate. Even if they do, Obama has the veto.
And the president’s recent appointment of Elizabeth Warren suggests that he no longer focused on compromising with conservatives. He finally seems to understand that he and they are too far apart.
So the president went around Congress, and appointed Warren, just as he appointed Berwick.
Obama is not foldng on these domestic issues. He would veto any attempt to cip away at the Affordable Care Act.
As for the notion that conservatives could defund the bill–there was a good piece on Politico today or yesterday pointing out how hard that is. It quoted sensible Republican Gail Wilensky, pointing out that while unhappy politicians like to talk about this when they are angry about legislation that has passed–actually managing to remove funding is very, very difficult. It rarely happens.
Meanwhile Berwick understands that speed is of the essence. The more he does–as quickly as possible-will make it all but impossible to undo what he has done. He will be committing money to pilots–especially to Accountable care Organizations. And people will begin to see that things are happening. , ,
Lou– Taiwan is a tiny country. Trying to turn the U.S. into single-payer at this point in time would be chaos. For one of the best explanations as to why this is so, Google:
“Atul Gawande” and “the New Yorker” and “single-payer.”
He explains that you have to build on what you already have.
Also, keep in mind, the only developed countries in the West that have single-payer are Canada and the U.K. And these are not the best health care systems in the West: many countries in Western Europe have much better systems (higher quality, greater patient satisfaction, yet affordable) and they all use private sector insurers. These are non-profit private insurers–that is the key.
Dr. Rick–
Thank you very, very much.
I agree: what Fuchs has to say should be heard by everyone interested in reform.
Sorry Maggie, I totally disagree with your starting point that “we have to build on what we already have”. If that means keeping insurance corporations, we are already witnessing their extortion and ability to evade regulations–ceasing selling child-only plans, for one.
Yes, I realize the size of Taiwan, and have read the New Yorker article when it was published.
The VAT IS regressive and will hurt lower income people more.
I have read Fuchs since the 70s and never have found his approaches to be convincing.
Maggie, the way you put it sounds good, but I still see problems. Here are a few.
1. Linking healthcare funding to spending is a big risk, surely. In recession, people spend less. In the UK, healthcare has been explicitly ‘ringfenced’ by the coalition government, but they’d have a hard time doing that with VAT (even though they are putting it up from 17.5% to 20% starting 1 Jan).
2. Adding 10% to the cost of all goods and services will distort buying patterns and at the low end of income could cause more hardship for essential goods, as people there can’t afford much or any healthcare anyway. Some categories will surely have to be exempted, such as children’s clothes, as in the UK. And surely it wouldn’t apply to public services.
3. Further, adding VAT to everything would be massive administrative nightmare and would mean huge evasion. In the UK, companies and sole traders only have to become VAT registered when they reach a threshold of about $100,000 sales a year.
4. I thing you may misunderstand how VAT works in the production chain. Suppliers selling to other businesses charge VAT, but they reclaim VAT on purchases. That’s how it works in the UK – only the net value gets passed to the government and is mostly paid by the end customer.
5. All other developed countries, as far as I’m aware, provide eligibility for universal healthcare through public/private insurance systems and income tax although they can of course use VAT revenues too.
Overall, I think that last point is fundamental – I think we need to see healthcare as a right that is funded as closely as possible by the productive side of people’s contributions and not by their (capitalist) consumption.
Marc–
We are the only OECD country that doesn’t have a VAT.
This suggests one of two things:
a) we are right and everyone else is wrong
Or
b) we are wrong.
I can’t help but remember that for some years, we were the only (or one of very, very few) civilized countries that still had slaves. The UK abolished slavery long before we did . .
Why do these countries all have VATs? Because it is a way to tax that wealth that often escapes taxation.
A great many wealthy Americans run cash businesses. (I once went to a Park Avenue doctor who took only cash–no credit cards or checks. She had been in business for a long time, and had always only taken cash.) Restaurants, general contractors, some landlords, many other self-employed people take part if not all of payments in cash–and then don’t report all of their income.
But if we had a VAT, that money would be taxed as they spent it.
In addition, many wealthy older Americans no longer have earned income–and so they pay income tax only on capital gains and dividends–at a significantly lower rate.
For the last 25 or 35 years of their lives they may be paying significantly less tax than others.
Often these wealthy seniors spend lavishly. A VAT provides a way to tax some of their wealth. Otherwise, it simply consolidates, and in most cases, they leave it to their heirs.
Inheritance is fine, but as great wealth consolidates, too much money winds up in the hands of too few families.
This is bad for the economy (itleads to bubbles0 and the society (huge gaps between the wealthy and others.)
Of course we could just tax wealth directly–rather than taxing spending– but this would not be popular. And in many ways, it seems perverse to tax people for saving.
We need a variety of taxes so that we are not putting the lion’s share of the tax burden on earned income.
Indeed, taxing spending makes more sense than taxing work (earned income.) Work is genearlly a good thing: it keeps people occupied; even if they don’t love their work, it provides satisfaction; very often, what they do is useful.
Spending, American-style, on the other hand, is extremely wasteful. For the past 30 years or so we have been “conspicuous consumers” filling our closets with all sorts of things that we don’t need: gadgets; more clothing than we can wear; “stuff” that collects dust on our tabletops; three or four televisions (one for every child’s bedroom); cooking equipment and tools we never use, large gas-guzzling cars. .
We teach our children to be materialists who feel they must have everything other children have–and more.
We don’t teach them taste. (Traditionally, French women have many fewer pieces of clothing than American women. But they are more expensive, much finer, better made, and last longer. They are carefully selected–one reason so many French women look fantastic.
In many restaurants, we spend huge amounts of money on large portions of not very good food.
Another reason to have a VAT is to encourage saving rather than spending.
Americans are loaded down with debt. People are losing their homes in part because they bought more house than they could afford, or because they kept refinancing, tapping the equity in their home to buy things they really didn’t need. (Other naive, ofen low-income home-buyers were simply hood-winked by dishonest real estate agents, mortgage brokers, mortgage bankers and appraisors who lied to them about the value of the home, the terms of the mortgage, and what they could afford.)
If we tax spending, people might spend less. Our “shop until you drop” economy has helped turn us into the world’s biggest debtor.
But I digress. To go back to the VAT: in Europe, much healthcare is funded by a combination of income taxes, VAT and other taxes. Insurers pay a relatively small share of total healthcare costs. (Even in the U.S., private insurers now pay for less than half of all health care costs.)
I totally understand how a VAT works in the production chain. (While at Barron’s for many years, I often wrote about taxes- flat tax, VAT, state income taxes, etc. etc. )
It’s actually much harder to evade a VAT than to evade income taxes–precisely because it is part of the chain of production.
And the VAT has not proved an administrative nightmare in many other countries (particularly France.)
In a recession, if people spend less, revenues from the VAT might drop (though probably not sharply, unless we are in a serious depression like the Great Depression, that hits the rich.) In that case, the cost of healthcare would drop too. Doctors would charge less; hospitals would stop construction; drug-makers would have to cut prices–or find that they couldn’t sell their products.
In terms of hardship for the poor, as I explained in my first response, the poor would receive healthcare at no cost–that would more than make up for a !0% tax on household spending of $20,000 or $30,000 a year ($2,000 to $3,000).
(Tax credits could cover poor households that have no income.)
What most people don’t realize is that today, the uninsured (who are usually poor) pay a surprisingly large amount out-of-pocket for health care–more than other Americans.
In 2008, the uninsured paid $30 billion out of pocket for health care–and received $58 billion in uncompensated care. In other words, they paid for more than 1/3 of their health care expenses out of pocket–far more than most Americans.
Many paid more than the $2,000 to $3,000 they would pay in VAT taxes. And the VAT tax would buy
the peace of mind of knowing that you, and your family, can get whatever care you need–and the same qualify of care that wealthy families receive. This is priceless–and also means that many people who are now disabled due to poor health would be able to work and earn an income.
Finally, many in Washington agree that, eventually, we are going to have to have a VAT. We pay far less in total taxes than the citizens of other developed countries.
If we want safety nets (Medicare, Social Security) good public education, clean cities, a cleaner environment, a defense system that might protect us against terrorism . . . we will have to begin paying taxes that are comparable to what the citizens of other countries pay.
President Obama has already mentioned a VAT. I would guess it will happen within the next 5 years. But it will be a progressive tax only if it is dedicated to something that everyone needs and wants. Only then will low-income and middle-income Ameircans receive something, in exchange for their taxes, that is worth far more than what they are paying.
Lou–
I’m afraid we have to agree to disagree.
If you have been reading Fuchs for years, then you know the arguments.
I can say only that many consider him a brilliant economist, are persuaded that a VAT dedicated to healthcare would not be regressive, and that the vast majority of Americans (most of the the 85% who have employer-sponsored program) aren’t ready to give it up for an unknown gov’t plan.
Down the road, I suspect we’ll have a public option. And over time, many Americans might choose that option, moving us closer to single-payer.
But you can’t force Americans into single-payer. This is a democracy; they have to choose it.
As Gawande explained in his New Yorker article, in Canada and the UK– the only countries that have single-payer–it arose, quite naturallly, from the system they already had.
It’s true that we have to really focus on improving quality of life than extending life. Like the overused saying goes: Prevention is better than cure.
‘If we want safety nets (Medicare, Social Security) good public education, clean cities, a cleaner environment, a defense system that might protect us against terrorism . . . we will have to begin paying taxes that are comparable to what the citizens of other countries pay.’
Sure Maggie, but if you want to do more like the other OECD nations you need to set up decent universal insurance. I really, really don’t see a healthcare sales/VAT tax as a realistic option.
If you want to tax say wealthy older people you do so through their earnings/pensions.
And running cash only businesses is precisely where huge amounts of VAT is lost – you have to enforce VAT registration and I can’t see that happening in the US. And people will not spend on all this cash on VAT-able goods.
And as far as I’m aware, most US states already have a sales tax of about 4-6%.
You should certainly have VAT of some sort but I wouldn’t bet the healthcare farm on it.
The path-dependency concept is compelling; however you lump Canada and the UK together: “As Gawande explained in his New Yorker article, in Canada and the UK– the only countries that have single-payer–it arose, quite naturallly, from the system they already had.” However, Gawande’s article refers only to the UK; Canada having had a system similar to the US at the time, multiple competing private insurance companies and a big nonprofit BlueCross hospitalization presence.
Gawande does, however, describe the French experience, whose beginnings were also somewhat similar to the US system: “So it built on what it had, expanding the existing payroll-tax-funded, private insurance system to cover all wage earners, their families, and retirees…. Today Securite Sociale provides payroll-tax-financed insurance to all French residents, primarily through a hundred and fourty-four independent, not-for-profit, local insurance funds.”
So it appears that, although path-dependence is undeniable, there is a large degree of convergent evolution in action.
GZuckier–
You’re right Gawande doesn’t mention Canada–except to say that it reformed its health care system in 1966.
That’s a big difference. In 1965, we were able to roll out Medicare for all seniors, pretty much from scratch, creating a brand new program.
But our health care system was much, much much smaller then
There were many fewer people involved. There was far less money involved. (In 1965 doctors and hosptials just couldn’t do most of the things they can do today. ) The U.S. health care industry was tiny compared to what it is today.
To try to roll out a new system, from scratch, even just for seniors, would be impossible today–it would, as Gawande says, create chaos.
We have to build on what we have.
And that is exactly what Canada did –even in 1966, building on what had happened in Canada in the 1940s.
Here is the history of how Canadian care developed: “the Canadian story begins in 1946, when Tommy Douglas, the socialist premier of Saskatchewan, secured legislative approval of government-funded hospital insurance for all residents of the province. The federal government followed suit in 1957, funding hospital insurance for the entire country.
“Douglas led the way again in 1961, when Saskatchewan became the first province to fund full medical insurance for all its residents. In response, some 700 doctors in Saskatchewan went on strike for 23 days, charging that the Douglas plan opened the door to government control of health care. Several thousand citizens joined them, staging an orderly protest against the new “medicare” scheme outside the legislative building in the provincial capital.
“The protests eventually died down, and by 1966, the Canadian government had passed legislation providing money to provinces that followed Saskatchewan’s lead. Two years later, they all had.
“Proponents of the reforms touted them as a happy medium between the British system, where the government owned and operated hospitals, and the American system, where healthcare services were largely left to the private market. Canada’s federal government provided funding to the provinces, which the provinces used to deliver care.
“This happy medium soon crumbled. With health care now effectively “free” — that is, paid for by other taxpayers — Canadians began visiting the doctor twice as much. Exploding demand drove up costs. To keep spending under control, the federal government simply reduced how much it sent to provinces to run the system. Provinces in turn cut payments to doctors and covered fewer services and cutting-edge treatments.
“At first, doctors responded by billing patients directly for amounts greater than the government reimbursements. But in 1984, the federal government outlawed such practices — thereby banning private delivery of services covered under the Canada Health Act. At this point, the Canadian government effectively controlled health care in the country.”
“In 1957, Canada built on what had already happened in Saskatchewan in the 1940s.
“Then in 1966, Canada built on what Saskatchewan had done in 1961.”
Similarly, in the U.S, in the 50s and 60s we built on the employer-based system that began during WW II when employers couldnt’ raise wages, but were allowed to add benefits to the compensatoin package.
The rise of employer-based insurance, much like the election of Douglas, a Socialist, in Saske was an “accident of history” that laid the groundwork for what followed. Everything proceeded quite logically from that point.
In Canada the government, which was paying for care, began to control spending.
Meanwhile, in the U.S. employer-based insurance spread, in large part through Blue-Cross Blue-Shield–which did not do a very good job of controlling spending. It paid docs whatever they charged in a region (this became “usual and customary”) and they paid hospitals whatever hospitals said it cost them to care for patients–even if hospitals were very inefficient.
Blue Cost and Blue Shield then passed these costs onto customers, raising premiums and cutting benefits.
In Canada, the government couldnt’ pass rising costs on to anyone–except taxpayers, who would not accept spiraling taxes. So the govt reined in costs.
Meanwhile, in the U.S., in the 1980s, for-profit health insurers got into the business. (before than, almost all health insurance as non-profit. But Reagan cut back gov’t help for non-profits in 1980 and meanwhile, so much money was flooding into healthcare that for-profits saw an opportunity.)
With the exception of 6 or 7 years in the 1990s, when they experimented with “managed care” for-profits insurers did little to try to rein in spending, but just passed higher costs on in the form of higher premiums or lower benefits.
Medicare has tried, to some degree , to rein in spending, but Congress has (up until now) stood in its way. Lobbyists in the health care industry want to see spending continue to rise.
Now, however, under the new legislation, HHS and Medicare can begin to limit waste, and reduce spending on ineffective and over-valued care while moving away from fee-for-service (which encourages over-treatment.)
But, as Gawande points out, since today 85% of americans under 65 have insurance, much of it employer-based care, we would meet huge resistance if we decided to do away with that insurance and tell everyone that they now must sign up for government insurance, which would follow the Canadian model, capping total spending, cutting payments to doctors, and refusing to cover experiemental (i.e. “cutting edge” procedures and products.)
In Canada patients get far fewer angioplasties and by-passes than they do here. Americans like angioplasties which offer an instant (though temporary) answer to Angina. They prefer this to changing diet and exercise (which offers a more permanent answer to angina.)
We like MRIs– they do many fwer MRIs in Canada. Etc. Etc.
Canadian healthcare is far more affordable because a) doctors make far less. b) hospitals charge far less and invest much less in building new wings, etc. They don’t have huge reserves. They don’t have nearly as much redundant equipment. c) Canada refuses to pay drug-makers excessive prices. This means some drugs are not included in its formulary.
d) administrative costs are lower (but this is not the main reason Canadian health care is so much less expenisve. The underlying cost of care is less.)
All in all, outcomes are about as good in Canada as in the U.S. And Canadians are accustomed to and generally like their system.(Though some doctors lament not making nearly as much as U.S. physicians.)
Similarly, most Americans are accustomed to their employer-based, private-insurance system, and would be very upset if they were forced to switch, all at once, to a Canadian type government system which didn’t cover some cutting edge treatments, paid their docs much less, didn’t offer as many private rooms in hospitals, etc. etc. (Even though, in truth, the medical care is about as good. For example, mortalities for people with heart disease are no higher–despite much less aggressive care.)
This is why countries must build on what they have, and then refine it, over time.
This is also what France did, as GAwande explains. It began with a system that was very, very different from the U.S. system, and French healthcare evolved from there.