By ROBERT F. RICH and RICHARD J. ARNOULD
The health care system in Illinois: an emerging crisis needing urgent care
This is the fourth and final article in a series on health care in Illinois Issues. Previous articles in the series were published in April, May and July 1991.
Illinois faces a policy crisis in health care. The crisis parallels that for the nation. Both result in part from failures in the state and national health policies that were responsible for building a quality health care system. The increases in health expenditures that have partly resulted from these policies have placed great pressures on the ability of employers, the government and individuals to provide coverage for consistent health care to as many people as possible and on the medical establishment to provide care for others through the tradition of informal charity care.
The most important pillars in this system that has both succeeded and failed are 1) the provision of access to health care services for anyone in need, 2) the development of public and private insurance systems, usually tied to employment, in which financial risk is born largely by third party payers, and 3) an informal system of charity care for those who were not covered by either type of insurance.
Current policies do not effectively contain increases in health care expenditures, straining all three pillars to hold up the system. Public agency health expenditures increased more than 2.5 times from 1978 to 1988, but funds available to pay for health care services have not grown at the same pace. Similar increases in expenditures have occurred in the private sector, forcing a collision of choices among profits, salaries and health benefits. By 1990, health care cost increases and the linkage of coverage to employment resulted in more than 1.4 million Illinois residents having no insurance, private or public, forcing them either to rely on charity as a source of health care services or to go without.
If there are no significant changes in policies in Illinois, increases are likely to continue in the costs for health care and in the population without health care coverage. Consider that the elderly, who have high demand for health care, are the fastest growing segment of the population. Consider also that rural areas are losing access to needed health services because costs of providing services in less populated areas are higher than in denser urban areas. Moreover, public expectations of the health care system are unrealistically high and infeasible. The outlook for health care in Illinois is for further increases in expenditures with increased pressure for public and private solutions to the problem of providing coverage to the growing population of the uninsured.
The state must concentrate on the development of policies that rebuild the pillars of the health care system. For access, the first pillar, policies must provide a minimum level of access to all who need health care services and include some form of universal health insurance coverage. Present access problems are linked to increasing costs that result in part from the nature of Illinois' population — it is aging — and in part from the cracks in the second pillar: lack of incentives for efficiency in the financial arrangements between the public and private health insurers and the providers. Without such incentives, the first and second pillars will crumble and it may be too late to rehabilitate the third pillar, charity care.
If access problems are to be cured within reasonable budget parameters, policies must be put in place to 1) provide incentives for efficient production and consumption of health care services, 2) bring expectations in line with fiscal realities and 3) develop fair and equitable methods to ration services in order to provide fair distribution of services and keep expenditures within the realm of fiscal realities.
Historically, the first pillar of health care policy, access, has been closely tied to employment benefits. One has to be employed to receive coverage, but employers are not required to provide health care benefits. For those not employed the public sector (government) provides coverage for the elderly through Medicare and for the poor and disabled through Medicaid. The remainder are to have access as charity cases.
Straining all the pillars are the high demand and high costs of providing health care services to Illinois' aging population. Between 1970 and 1980 the Illinois population over age 65 grew
18/January 1992/Illinois Issues
by over 15 percent while the population under age 18 declined. In 1987 the Health Care Financing Administration reported that the average cost nationally of treating those over age 65 was $5,360 per capita ($9,178 for those over 85) compared to $1,776 for all ages and $745 for those 20 and under. While only national data are available on the costs of treating the elderly, the final report of the Governor's Health Summit in Illinois at the end of the Thompson administration concluded that "those in this age bracket [over 65] will consume four times as much health care as the rest of the population."
The strain placed on the system to provide access for the elderly is intensified because life expectencies are longer, many are medically indigent, and they frequently demand long-term care, which is a particular dilemma since Medicare provides very limited long-term care. As assets of the elderly who require long-term care are depleted, their needs often must be met with the Medicaid system which often does not cover full costs of providing medical care services.
Besides the problems of the elderly having access to health care, Illinois has another twofold access problem. The first relates to the state of the working population, a large portion of which is not covered by private or public (Medicare and Medicaid) insurance. The second relates to economic geography.
In 1990, 37 million or 17.8 percent of the U.S. population under age 65 were uninsured, according to the Employee Benefits Research Institute's 1991 Data Book. In Illinois, 1.4 million or 14.7 percent of the population were uninsured, covered neither by Medicaid nor any type of health insurance. Of these uninsured Illinoisans, approximately 600,000 were employed, with more than 50 percent of the 600,000 holding jobs in the service and retail industries, and 30 percent had annual family incomes over $20,000. The retail trade and service industries consist largely of small business, and the Small Business Administration estimated that in 1985 only 39 percent of businesses with fewer than 25 employees offered health insurance benefits. The number of people in Illinois employed in the service sector increased by over 33 percent from 1982 to 1987. During the same period the number employed in manufacturing declined by 8 percent following a 16 percent decline from 1977 to 1982. Thus, as the service sector grows the number of uninsured may increase.
The second problem of access occurs in rural areas. (See "Health care in rural Illinois" by Norman Walzer and LaVonne Straub, Illinois Issues, April 1991, pages 19-23.) Illinois has 76 rural counties (counties that do not contain Metropolitan Statistical Areas). Twenty-two entire counties and three partial counties are officially designated as having health manpower shortages. Illinois ranks sixth among the states in number of rural hospitals. In the last decade 22 of these hospitals closed their obstetrics units. As pointed out by Walzer and Straub, problems in rural areas are the result of 1) declining population that is disproportionately elderly and poor, 2) small employers who are less likely to provide health insurance, 3) small hospitals that cannot support up-to-date technology, 4) lack of adequate payment to maintain providers in these areas and 5) the high cost of malpractice insurance. Thus the poor as well as those who pay are losing access in rural areas and must travel farther for services.
The third pillar of traditional access to health services via an informal system of charity handled voluntarily by physicians and hospitals is vanishing as costs rise. Health care providers have handled the cost of charity services by charging higher prices to paying patients. This is called cost shifting, and the shift has strained the second pillar already fatiqued with high costs of health care. In an earlier article in this series Richard Krieg reported that uncompensated care in Illinois grew to $600 million in 1990 from $300 million in 1983. (See "Illinois' urban health care dilemma," Illinois Issues, May 1991, pages 20-24.)
Traditional payers of health care coverage, employers for their employees and the federal government for the elderly and disabled, no longer want to absorb the cost of charity care. Large firms have the market power to enable them to demand deals for health care for their employees that do not include costs associated with nonpayors. Large employers in Illinois are negotiating fixed cost contracts or discounts through various types of managed care. The federal government with its substantial health care market power has instituted a system of payments for Medicare patients that no longer gives providers adequate surplus to cover
January 1992/Illinois Issues/19
the cost of charity. Medicaid is in even worse shape. Krieg reported that Illinois Medicaid (funded by the state and federal government) covers only 79 percent of costs. A recent American Hospital Association survey revealed that Illinois was at the bottom of all states in the nation in percentage of costs covered by Medicaid payments. Thus access declines as providers become less able to provide charity care.
When payments do not cover costs of their patients, hospitals close, and access to health care at those hospitals is lost. During the 1980s in Illinois 24 hospitals closed their doors. These had a high percentage of Medicaid and charity care and/or they were located in rural areas. Illinois continues to have the fifth largest number of hospitals operating in the red. The U.S. Physician Payment Review Commission reports that in 1989 Illinois Medicaid payments were, on average, 48 percent of its Medicare payments. In addition, the state is very slow to reimburse providers, at times taking in excess of 200 days. The state was sued by health care providers who alleged inadequate state reimbursement for services to Medicaid patients. To leverage more federal funds for the state's Medicaid coffers, hospitals are now paying the state a "futures" tax.
There is irony in the original design of the second pillar's policies so the first and third pillars would work, creating access to health care for the needy and the uninsured. To assure maximum access, traditional public and private health insurance programs defined the coverage of the insured in a manner acceptable to the public and reimbursed providers in a manner that encouraged their participation. The former was achieved with service benefits coverage, while retrospective fee-for-service reimbursement to providers was used to accomplish the latter. For similar reasons, providers were paid for their services to Medicare and Medicaid patients on a variety of types of cost-plus formulations. At first these plans were very successful in generating access and assuring charity cases, but the systems provided no incentives for efficient consumption and production of health care services. These systems have been cited by many as a major cause for much of the increase in health care expenditures responsible for the access problems.
First, consider the impact of the reimbursement systems — both public and private — on provider incentives. The retrospective fee-for-service method pays for each unit of service at a price determined after the service was delivered. Providers treating a patient with gall bladder problem would be reimbursed for each service delivered, for example, each physician visit, physician procedure, lab test, x-ray, hospital stay, surgery room, intensive care, transfusion. The more procedures provided, the more income the providers received. The incentives in this system encourage providers to expand the number of services delivered, and the result was increased health care expenditures.
Public agency insurers were more likely to rely on a system of cost-plus pricing. Very similar to retrospective fee-for-service system, cost-plus pricing is also based on units of service provided. The public agency rather than the provider determines the fee, specifying the types of costs that will be covered and adding some mark-up. This system contains other species of inefficiency. Whereas both systems contain incentives to expand units of service, the cost-plus system adds the incentive for providers to increase costs. There is no reward for holding down costs for services or for using low-cost procedures. More costly technical procedures would be used when cheaper alternatives may have been available. Cost-plus systems also have no incentives for providers to keep patients well; if the patient did not go to the doctor, the doctor received no pay. Finally, with cost-plus contracts, the higher the cost the greater the plus or mark-up, minimizing incentives to keep costs low. Each of these inefficiencies increased health care costs, causing reduced access as government funds cover less and less in services.
Second, consider the impact of the level of coverage being defined by service benefits. The insurance plan reimburses the provider for the services delivered to treat an illness, such as a gall bladder problem. It does not define the level of coverage by specifying the number of units of each service for which the provider will be reimbursed. The most prominent form of private insurance required either no co-payment or only a limited one from the insured. Thus the consumer had little incentive to seek efficient providers or to request lower cost methods when available. Regulatory regimes in the form of State Health Planning Authorities were ineffective. The federal government provided so-called Hill-Burton funds to subsidize the building and expansion of hospital facilities in urban and rural area. This amounted to throwing gas on the fire in a system that already contained incentives to overexpand.
Thus the long-run positive effect of these cost-plus contracts may have been to increase access by increasing provider and consumer acceptance of health insurance. Their negative effect was the problem of escalated health care costs and increased consumer expectations to levels that neither the public nor private sector can support. Many private companies do not offer health insurance to employees, and states such as Illinois have found it necessary to introduce more stringent eligibility requirements for Medicaid administered by the state as health care costs have escalated. Ironically, the end result of the policy pillar that was to assure access has itself become another access problem.
Three principles, if followed, could substantially reduce the rate of increase in health care costs and improve access: 1) development of efficient health care purchase contracts, 2) universal health insurance coverage and 3) formal systems of rationing. Some policies and programs consistent with these approaches are already in place in Illinois, and provisions of current proposed legislation offer opportunities to follow these principles, or to thwart them.
To develop efficient provider contracts, it is absolutely critical
20/January 1992/Illinois Issues
that private and public (Medicare and Medicaid) payers abandon the historic retrospective fee-for-service and cost-plus contracts and move to contracts with incentives for efficient production and consumption of health care services. First, as described by Leroy Wehrle and Chandra Gravit (see "Health care in America: Can managed care manage it?" Illinois Issues, July 1991, pages 16-20), consumers must be given incentives to seek efficient producers and to access the system in an efficient manner. These incentives to patients are provided through employer benefit options that include lower health insurance costs that free up more funds for other work benefits. Deductibles and copayments paid by the consumer have become very common tools used to promote efficient consumption as well. Incentives for providers are in the form of fixed prepayments for providing services whereby the provider makes more profits if the services are produced efficiently and provided in an efficient mix and quantity.
These contractual arrangements that replace the inefficient system fall under the rubric of managed care systems popularly known as health maintenance organizations (HMOs), preferred provider organizations (PPOs) and competitive health plans (CMPs). State policy should promote the development and growth of managed care systems, intervening to guarantee adequate quality care and protection for enrollees in case of financial failure of the insurer. In 1989 there were 28 HMO plans in Illinois enrolling approximately 1.5 million or 12 percent of Illinois residents. This is slightly below the national average of 14 percent. Illinois was one of the few states that lost HMO enrollment in a recent period.
Managed care contracts can take other forms, but they will not produce the full effect of lower health care costs until most of the population is covered by them. Other managed care forms include: requirement for patients to access the system through primary care physician gatekeepers; precertification, meaning prior approval for a service from the insurer can be required for many nonemergency procedures; required second opinions for elective surgery; substantial copayments, whereby payment of a proportion of the charge by the patient can be required if the patient fails to utilize the preferred provider.
Similar to the private market, the state must develop contracts with providers that generate incentives for efficiency in their delivery of services to Medicaid patients. A number of demonstration projects across the country have tested the effects of placing Medicaid eligible patients in HMOs. The commonly cited problem is that Medicaid patients move in and out of the Medicaid system as their eligibility changes. HMOs need some stability in their patient base to have predictable costs. Although the demonstrations provide evidence of the feasibility of HMOs as a mechanism for contracting for the treatment of Medicaid enrollees, the jury remains out on the minimum enrollment period necessary for the HMO to work efficiently and, once that period is determined and implemented, the impact of HMOs on the cost of treating these people.
Illinois initiated a system of purchasing hospital services called I-Care in which hospitals place bids with the state to accept a certain number of Medicaid patient days at a significant discount off usual charges. Currently, over 80 percent of Medicaid inpatient hospital stays are paid to hospitals who competitively bid to provide services to Medicaid recipients. Clearly, this system has reduced the rate of increase in health care expenditures. The I-Care per diem system, although a move in the direction of more efficient contracts, may provide somewhat weaker incentives for total efficiency than HMOs. The prospectively determined per diem provides incentives for hospitals to treat patients efficiently because the more efficiently the hospital operates the more surplus or less loss the hospital incurs. On the other hand, as long as the bid price is high enough to permit the hospital to cover marginal costs and make some contributions to overhead, the hospital may have incentives to use excessive numbers of hospital days. Even with its faults, this bidding process clearly is a move in the proper direction.
HMOs generally pay physicians a predetermined capitation, that is, an amount of funds per enrollee per month. That amount is fixed whether the patient is sick or well. Clearly, providers make more money if enrollees are kept well and if they are treated efficiently when they become sick. HMOs actively engage in wellness programs to reduce overall high health risks in such areas as smoking and drug abuse and weight control. The success of HMOs in controlling health care costs to the population enrolled in them is well documented. Hospital admissions of HMO enrollees are as much as 40 percent lower than for those covered by other insurance plans, and HMOs provide some services more efficiently. However, HMOs and other managed care systems require safeguards by state policymakers. Their incentives to reduce the number of services could result in inadequate provision of services. Some type of service quality must be guaranteed. Another potential problem with the use of HMOs and any other managed care system is their impact on the structure of health care providers, hospitals, clinics, emergency rooms, etc. Policies must encourage the development of efficient health care provider systems and reward consumers for seeking out those systems. Hospitals as we have known them are becoming less and less viable, especially in rural and inner city areas. Attempts to save them may not be the appropriate solution. Instead, more efficient systems must be found for providing primary care and easy, efficient access for pregnant women and young children through rural and urban health clinics. In urban areas the costly hospital emergency room has become the access point for many of the medically indigent, and in rural areas without hospitals there is no nearby emergency service.
The second policy principle is providing access (at some agreed upon level) to all citizens. There seems to be an emerging national consensus that some form of universal
January 1992/Illinois Issues/21
access to health coverage is needed. Whether initiated by the federal government or as a universal access plan by a state for its residents, costs are an issue. Generally, policymakers continue to attempt to tie health care benefits to employment, shifting the risk of raising health care costs for universal health care coverage away from the government and to the private sectors. The concept is called "play or pay," requiring private business to either provide health benefits or pay a tax to permit employees to participate in some type of government-mandated insurance pool (see Wehrle and Gravit, Illinois Issues, July 1991).
Insurance pools for providing health care to the medically indigent are a relatively new state experiment. Modeled after automobile insurance pools, they provide individuals with benefits and risks (such as copayments) similar to those available through group insurance provided by an employer. Usually the state legislature organizes a board of trustees to serve as a comprehensive health insurance association. The association develops a standard policy that defines the benefits, eligibility and premium structure of the state-offered program. All state insurance companies are then required to offer eligible consumers a plan that provides benefits equal to or above the association's standards or refer the individual to a state-appointed insurance carrier. All insurers doing business with (or in) the state are required to share in underwriting losses that may occur. The jury is still out on the success of the experiment.
Another strategy for universal health care would mandate all employers to provide coverage to employees and create a giant insurance pool to cover all who are unemployed. All plans linked to employment create two problems. First, mandated employer-provided benefits increase labor costs, which could result in higher unemployment. Second, while they may address the problem of coverage for those who remain employed, they do not address the problem for the unemployed. One method of reducing the impact of the higher employer costs is to permit employers to offer scaled-down benefits. Illinois became one of eight states to permit (if not encourage) businesses with fewer than 25 workers to offer scaled-down health care benefits. Blue Cross-Blue Shield now offers a "no-frills" plan. Premiums for these special plans are approximately 40 percent lower than premiums for regular group coverage. However, individuals must assume a deductible of $1,000 compared to $100 for standard group coverage, and coverage for mental health and substance abuse treatment are usually not offered.
While these options may succeed in providing greater access to all citizens, they do not address the issue of cost containment that is central to the current crisis in the delivery of health care services. Indeed, in both the insurance pool and "no frills" insurance options, the cost problem will be exacerbated unless coverage is provided through insurance contracts that offer incentives for efficient production and consumption of health care services.
All of the health care legislation introduced during the last session of the Illinois General Assembly addressed the access issue for particular segments of the population or for particularly needy groups. Consequently, they provide a set of building blocks for debate on universal health care coverage. Massachusetts is the only state that has considered a comprehensive universal health care coverage plan, but experts believe that this plan would have limited success.
In Illinois' last legislative session, universal health care access was proposed in House Bill 300 which was not passed but which will be reintroduced. Aimed at providing services for the medically indigent, it proposed creation of the Universal Health Care Act and amendments to the insurance code and Health Maintenance Organization Act. Envisioning major changes in the design and delivery of health care services in Illinois, this bill calls for the governor to appoint a Universal Health Care Board and directs the board to develop a Universal Health Care Plan under which providers of certain health care services to Illinois residents will be reimbursed for providing those services. After a certain date it prohibits insurance companies, HMOs and other health service contractors from providing services that are covered under the plan for Illinois residents. The legislation also requires the board to develop an annual state health care services budget. HB 300 represents a beginning point for debating the universal health care access, but it does not address the problems of cost containment or funding.
Another bill (HB 1006) proposed full access to health care for an underserved group: employees of local government. Provisions allowed local government employees to choose group health care coverage under either the state group health insurance plan or an HMO. The bill also stipulated that local government pay the entire cost of providing coverage under the state's group insurance plan or for coverage under an HMO. While attempting to address the access issue, the measure did not deal with the cost containment issue.
A third measure (HB 955) was designed for the specific purpose of providing health care services for medically indigent residents of the state. This bill did not pass but will probably be reintroduced. It would create the local government health care fund, which would receive monies contributed by units of local government. These monies then would provide health care services to medically indigent residents of the state or allow the local government unit to qualify for participation in the Medicaid program. The bill stipulated that this fund should be used in conjunction with state monies appropriated to finance the provision of health care services to Medicaid beneficiaries.
Special amendments (HB 462) to the Illinois Public Aid Code were also introduced but not enacted to require the Department of Public Aid to provide medical coverage for children ages 7-19 who meet eligibility requirements similar to the income standard for Aid to Families with Dependent Children (AFDC).
Implementing universal health care coverage, particularly in
22/Januaiy 1992/Illinois Issues
times of recession, is a very difficult and perhaps infeasible project for Illinois. The state is faced with existing and future budget constraints. The legislature must continue to recognize that excessive health care costs reduce the ability of the state's manufacturers and other firms to remain competitive in the global economy. In developing health care policies, there may be trade-offs between access and costs, and it must be recognized that the costs could fall disproportionately on Illinois' manufacturing sector, smaller than it once was but the most rapidly growing sector of the economy, according to the Employee Benefits Research Institute's Data Book.
This tension between access and costs leads to the third policy principle: providing more focused care in an efficient manner. Access would be universal and costs would be reduced by limiting the range of services that are covered. These objectives can be achieved by introducing a formal system of rationing. Under such a system all citizens would be affected much like the current systems in Canada, England, New Zealand and other countries. The idea is to prioritize services and treatments, consciously and ethically balancing health care needs with budgetary constraints.
The argument for rationing is that the states (and the federal government) cannot currently finance a system of universal health care coverage. In the United States, implicit rationing of services occurs through market allocations: Those who can afford it get as much medical care as they desire and those who can't get only the health care benefits provided through the welfare system or through the insurance that is available to them. Equity and ethical considerations would lead one to say that there may be ways which are more "fair" for distributing those health care benefits that society can realistically afford. Consequently, formal systems of rationing are needed to limit the amount and type of care that will be publicly financed.
Twenty-seven states are currently considering some form of rationing, and Oregon is attempting to implement its 1989 legislation calling for rationing of services to Medicaid recipients. That implementation has created a great deal of controversy nationally, and it is unclear how Oregon's plan is going to work. A panel of 11, including doctors, health care administrators and citizens, has been developing a list of dangerous diseases that can be easily treated, such as pneumonia or appendicitis, and prevention-oriented measures, such as prenatal care. High on the list of priorities are pain killers for dying cancer patients; at the bottom are illnesses that are incurable or do not respond to treatment or those that are purely cosmetic. U.S. Rep. Henry A. Waxman (D-Calif), chairman of the House committee that oversees health care related legislation, is very skeptical of Oregon's plan. To fully implement the plan, Oregon needs a Medicaid waiver. The state has applied for the waiver but has yet to receive it.
Clearly, the development of a rationing system is very difficult and politically sensitive. If properly conceived, it can assure the most beneficial services to the maximum number of patients. If properly developed, individuals must never wait in a long queue with the chance that death may come before reaching the front of the line.
The largest single problem in the health care crisis is the mismatch between people's expectations for health care for all and the realities of what the health care system costs. Illinois as well as the rest of the nation must develop policies that result in the provision of some minimal level of health care services to everyone. The source of payment for that system must be carefully worked out so as to not generate more medically indigent by increasing levels of unemployment. This policy must be implemented with systems of incentives that generate efficient levels of consumption and production. Finally, we probably cannot avoid implementing some form of formal rationing.
It is clear that the Illinois General Assembly is expected to respond to issues of health care access. It is not clear whether such tough policy decisions will come sooner or later. Meanwhile, the pillars of the old policies grow ever more fragile.
Robert F. Rich is director of the Institute of Government and Public Affairs and professor of political science and health resources management at the University of Illinois. Richard J. Arnould is professor of economics and director of the Program in Health Economics, Management and Policy at the University of Illinois.
January 1992/Illinois Issues/23