On Chicago’s west side, Mount Sinai Hospital cares for sick people who live in overwhelmingly poor African American and Latino neighborhoods. Many of the people here have no medical insurance whatsoever; and to obtain some reimbursement for the expense of treating them, the hospital has assigned six full-time employees to the task of trying to place these patients on Medicaid.

Elmhurst Memorial Hospital, in affluent DuPage County, encounters few uninsured or even Medicaid patients. Even so, it must pay three full-time workers who do nothing all day but call insurance companies to make sure that incoming patients are indeed covered, and that they have followed their insurers’ protocols before admission.

Expenses like these, which contribute nothing to Americans’ health, do add to their staggering and rapidly growing collective medical bill–now running at more than $900 billion a year, about 14 percent of our gross national product, and growing by more than 10 percent annually. They also contribute to those incomprehensible, infuriating hospital bills for $5 aspirin.

The perversity of our current system of financing health care accounts in large part for the sorry record of the American medical business: although we spend at least half again as much of our total economic output on health care as does any other advanced country, roughly 37 million Americans have no health insurance. Millions more are just a layoff, major illness, or job change away from losing their protection. More than half of Chicagoans are either underinsured or completely uninsured. And the United States lags behind most advanced industrial countries in major health statistics, such as life expectancy and infant mortality.

This unenviable record of high cost, inequity, insecurity, and spotty performance can easily be explained: the United States is the only industrial country (except for South Africa) without national health insurance.

The momentum for national health insurance now seems unstoppable, as even longtime opponents such as doctors and insurance companies claim to be champions of reform. But what shape will reform take? How will it affect doctors, hospitals, and, most important, anyone who needs health care? The Clinton administration’s answers will remain murkily speculative until Hillary Rodham Clinton’s commission reports in detail this fall. But it seems clear that any plan must provide universal insurance and control costs, two objectives that may appear more at odds with each other than they need be.

With hospitals accounting for roughly 40 percent of the nation’s health bill, any attempt to cut or even control health costs will have to confront hospital costs. Yet, as the attempts over the past decade to contain these costs strongly suggest, focusing on one part of the system to the exclusion of others is like squishing a pillow with a fist: the stuffing balloons out somewhere else. The growth of the whole medical system–and not just hospital bills or drug prices–must be constrained if cost-control policies are to be effective.

To get a sense of the problems before considering possible solutions, let’s take a look at Mount Sinai and Elmhurst Memorial. Their clienteles are much different, but they’re both not-for-profit community hospitals of the same size, roughly 400 beds (although Mount Sinai is also a teaching hospital affiliated with the Chicago Medical School). They were founded around the same time (Mount Sinai in 1919 by philanthropic Jews, Elmhurst Memorial by community leaders in 1926), although Elmhurst’s greater prosperity in recent years has allowed it to invest more in its buildings. Elmhurst does well financially and Mount Sinai scrapes by, but both hospitals encounter irrational expenses as a result of the current system.

Benn Greenspan, the 46-year-old president of Mount Sinai Hospital, thinks he has “the best hospital job in the country.” It certainly isn’t the easiest. Mount Sinai has a strong sense of mission, which is to provide health care to the poverty-stricken, but this poverty greatly increases the hospital’s costs and reduces its revenues. Poorer people are more prone to virtually every sort of health problem–from violent trauma to cancer, from heart disease to mental illness. They also have few resources to pay for health care. They are less likely to see doctors when they should or to take all their medicine, which they often can’t afford. When they do wind up in the hospital they are often much sicker than middle-class patients. This is one of many tragic ways in which the current health-insurance system increases health care costs and reduces health care.

Who pays what at a hospital is an exceedingly complex issue. At Mount Sinai, 46 percent of the patients are on Medicaid, the inadequate federal-state health insurance for very poor people; the average for city hospitals is 14 percent Medicaid patients, for suburban hospitals 5 percent. Medicare, the federal insurance for the elderly, pays for another 23 percent of Mount Sinai patients; in the city as a whole it pays for 42 percent, in the suburbs 41 percent. Blue Cross and commercial insurance companies together cover only 8 percent (compared with 21 percent for the city as a whole, 32 percent for the suburbs). Health maintenance organizations or preferred provider organizations (HMO/PPO), which provide care through a defined group of doctors and providers, cover another 16 percent, about the same as in the city and suburbs. But 10 percent of Mount Sinai’s patients don’t pay at all, compared to 7 percent for city hospitals on average and only 4 percent for suburban hospitals. Patients from each category may also pay quite different amounts for similar procedures.

The hospital bills patients and their various health plans for rooms, supplies, and procedures; in most cases doctors bill separately for their fees. The charge for an average admission is about $13,000 at Mount Sinai (slightly above the city average, and about $3,000 higher than the suburban average). But Mount Sinai collects only about half of the fees that it charges, so that it actually takes in about $6,500 for each patient admitted. The “charge” for a hospital stay is an inconvenient fiction that grows from a system in which everyone is trying to pass the buck. It’s known as cost shifting.

Starting in 1983 Medicare tried to restrain rising costs to the federal government by setting a fixed fee in advance for about 470 diagnosis-related groups (or DRGs). Medicare payments quickly fell behind hospital costs, as did Medicaid. (Illinois was one of the worst states, reimbursing hospitals roughly two-thirds of their costs–not their charges). So hospitals, hoping to recoup some of their lost revenue from privately insured patients, raised their charges, and this touched off an avalanche of cost shifting, as everyone tried to avoid paying for somebody else’s shifted costs. Insurers raised premiums and copayments, shifting costs to employers and individuals. Many employers and individuals switched to HMOs and PPOs in response, shifting some costs and risks to the doctors, hospitals, and clinics that participated in these programs. Insurers intensified their longstanding risk-avoidance practices, constructing pools of insured individuals who were not likely to be sick, in effect shifting the burden of the new uninsurable back to hospitals, particularly public hospitals of last resort. In addition, many insurance companies shifted to various kinds of outside review to restrict the use of health care or to follow Medicare’s DRG lead.

As a consequence of all this there was a surge in the number of administrative employees in the health care industry, as hospitals, insurance companies, HMO/PPOs, and other health care institutions began hiring more clerks, nurses, and administrators to keep track of patients and money and to engage in the great game of cost-shifting. Indeed, the number of health care administrators has more than quadrupled since 1970, but especially in the 80s, while the number of all health care workers increased by about half. That made health care one of the past decade’s employment bright spots; it also made health care even more expensive, in the name of controlling expenses.

Poor Mount Sinai had to shift as much of the load as it could onto the 7 to 8 percent of its patients with commercial health insurance. And so last year real costs rose 2 percent, Greenspan said, but charges increased 15 percent and mainly affected the privately insured. Mount Sinai has lost some of its commercial-insurance patients over the past decade to hospitals in the western suburbs that have aggressively solicited patients in order to bolster their own finances. Luckily for Mount Sinai, in the last two years the state has improved its reimbursements to hospitals with disproportionate Medicaid caseloads. This is thanks to a new tax on hospitals and nursing homes that is under attack in the state legislature.

The juggling of costs even threatens to impinge on medical decisions. Several years ago Mount Sinai began using laparoscopic surgery to remove gall bladders, making a few small incisions and working with a probe rather than cutting a large incision and moving aside internal organs. The laparoscopic operation took longer and was more expensive to do–about $5,000 for the new surgery compared to $2,000 for the traditional operation. But recovery was easier and shorter–often less than a day rather than up to a week.

Which procedure did best by Mount Sinai? It depended on who was paying. Greenspan said that for inpatient gall bladder surgery (for which a hospital stay of about a week was assumed), Medicaid paid about $650 a day, Blue Cross paid $750 a day, and commercial insurers paid full charges that ran to several thousand dollars. A patient discharged later in the day of laparoscopic surgery would be considered an outpatient, however; in this case Medicaid would pay the hospital only a couple hundred dollars, although Blue Cross and commercial insurers would pay the same full charges.

What about a laparoscopic patient who, because of her medical history, ought to stay overnight for observation? That one night would make her an inpatient. With Blue Cross, the hospital would lose money by keeping the patient till morning–receiving just $1500 instead of several thousand. With Medicaid, the hospital would lose heavily by sending her home. With unrestricted commercial insurance, the hospital could cover its costs either way.

“Given that fundamental problem of inconsistency of payment, we’ve tried not to pay attention” to reimbursement issues when making medical decisions, Greenspan said. “But how do you not pay attention to this, not make a decision that costs us $4,500 if you’re a Blue Cross patient? When you’re acutely ill, you don’t want somebody making budgeting decisions on your back. While I believe in incentives and cost containment in medical care, that’s not the time. It should be done beforehand.”

Greenspan is an energetic, enthusiastic man who seems happy despite the sad tales he tells of a cockamamy system. “The health care system has intrinsically caused health care costs to go up,” he said. “It has caused confusion and inconsistency. There are so many irrationalities in it.” Mount Sinai has 20 different sets of rules for commercial insurers; a large university hospital could confront 300 or more different schemes. “There are additional people managing those [payment formulas], plus additional computer time, record keeping, and errors that come as a result,” Greenspan said.

As insurers attempted to control costs in the 80s, they forced hospitals to “unbundle” their charges, leading to much more complex billing. A hospital bill that once would have consisted of the number of days at so many dollars a day now might report 200 separate costs covering seven pages, and the typical hospital maintains a list of prices for 30,000 different services and supplies. The consulting firm Booz Allen & Hamilton concluded that a typical hospital devotes 30 percent of its staff expense to documenting each little service performed and item used, while just 24 percent is devoted to direct patient care.

Mount Sinai is lean by comparison with most hospitals, but there are still 50 people sending out and collecting bills, said Charles Weis, vice president for finance. That’s about half of the finance department, which itself accounts for 4 percent of the hospital staff. Weis said the finance department has increased by roughly 40 percent since the early 80s. If there were a uniform single payer, as in Canada’s national health insurance system, Weis said he could cut the 50 people he needs now in the billing department to 5. Of course, with universal insurance coverage, the six employees trying to qualify admitted patients for Medicaid also would be expendable. This streamlining would dramatically cut administrative costs, in Mount Sinai’s case permitting the hospital to expand its preventive-medicine programs, such as its community outreach program to reduce teen pregnancy.

A comparative study of U.S. and Canadian health care costs estimated that on average, administration accounts for 20 to 24 percent of all such costs in the United States. By contrast, in Canada, which has a single-payer national health insurance system administered by each province, 8 to 11 percent of total health care costs pay for administration. The biggest difference is in the insurers’ overhead: 12 percent of the premiums paid to private insurance companies go to cover the companies’ overhead, compared with 3 percent of the revenues financing Medicare and Medicaid and less than 1 percent of the revenues maintaining Canada’s national health insurance system.

Many of Mount Sinai’s financial burdens stem from the characteristics of the community it serves. For example, because the neighborhood is not safe, it must maintain a fleet of a dozen vans to transport patients to and from their homes. And with a relatively young population around it, Mount Sinai is overwhelmed by the demands of child delivery. Designed to deliver about 1,500 babies a year, its obstetrics- gynecology unit delivers about 3,600, often placing beds in hallways with expectant mothers.

Unfortunately for all concerned, many of those babies are premature or suffer from low birth weight (under five and one-half pounds). Poor, young, malnourished mothers, especially those who used alcohol, tobacco, or drugs during pregnancy, and especially African Americans, are at risk of having very small babies. Those babies in turn are more likely to suffer from learning disorders, mental retardation, and a host of lifelong health complications.

To handle them, Mount Sinai maintains a special intensive-care unit where these infants remain an average of 28 days at a cost of about $2,000 a day. While Mount Sinai usually manages to cover those expenses, such births add to the nation’s health bill, and the children are likely to remain a financial burden throughout their lifetimes.

Yet Mount Sinai also works to prevent such pregnancies. It breaks with the traditional medical model that focuses only on treating health problems, a model that lies at the root of so much of our nation’s poor health and high medical costs. Through outreach programs at local high schools, Mount Sinai has dramatically reduced the number of low birth-weight children–only 2 out of 60 deliveries over one recent 11-month period.

Through yet another program aimed at elementary-school children, Window of Opportunity, Mount Sinai teaches health and sex education and helps children develop a sense of self-esteem. The year before the program started at one grade school, there had been 15 pregnancies. Three years later there were zero over the course of a year. Greenspan estimates that the $50,000-a-year program saves about $400,000 a year simply in the medical costs of low birth-weight babies. Figuring in the avoided medical costs of treating chronic illnesses likely as the infants grow, the social return is nearly $1 million a year. Nevertheless, insurance usually doesn’t cover such programs as Window of Opportunity, and Mount Sinai scrambles for grants and other financing. “There’s a long-term benefit to rationalizing the system,” Greenspan argues. Systematic rationalization must be a goal of reform, and the Clinton administration’s early emphasis on childhood immunization is a step in that direction.

The tension between inadequate payment for difficult caseloads and their growing expensiveness has reached the breaking point at many hospitals. Since 1985, 16 Chicago-area hospitals have closed, most of them serving populations like Mount Sinai’s. While it is true that there is a surplus even now of hospital beds in the Chicago metropolitan area, that surplus is much less evident in poor neighborhoods. The average occupancy rate in the suburbs is now around 65 percent, roughly the national average; at Mount Sinai it is 78 percent.

Mount Sinai has survived in part because it cut costs and sought efficiencies, even as it expanded its community mission, during the long tenure of Greenspan’s predecessor, Ruth Rothstein, who now heads Cook County Hospital. “We’ve seen the future,” Greenspan says. “We understand what happens when resources are thin.”

For example, Mount Sinai has increasingly cooperated with the few remaining hospitals in its area. As insurers and the government applied pressure, hospitals cut the length of hospital stays and shifted many procedures to outpatient clinics. But as occupancy rates declined, capital costs were spread over fewer patients, driving up these patients’ costs. Hospitals then were forced to compete for the patients’ physicians (since it is the physician rather than the patient who usually chooses the hospital). One competitive strategy is to invest in the latest technology. It’s spurred a medical technology arms race, which has led to a costly overabundance of advanced technology–although Greenspan says that “we [the local west-side hospitals] really stopped beating each other up competing for physicians.”

Mount Sinai has also been a national leader in reducing the number of cesarean, or surgical, deliveries of children, which are now twice as common as they are medically indicated. America’s medical bill is inflated in part by too many unnecessary, even undesirable procedures. Research increasingly demonstrates that there are far more cesareans, heart bypass operations, and either surgical or radiation treatments for prostate cancer–just to name a few widespread procedures–than medical outcomes warrant. By some doctors’ estimates, nearly one-third of health care expenditures are medically unnecessary.

Yet doctors (and hospitals) make money from these procedures. As more and more doctors become specialists they become partial to the most advanced tools of their trade. Let doctors invest in their own outpatient clinics with magnetic resonance imagery (MRI) machines, and every headache will require an MRI.

Most doctors at Mount Sinai make about half of what they could make by simply moving out to the suburbs to a hospital like Elmhurst, where they would practice more genteel hours and escape the physical insecurity and sociomedical complications of the inner city. But for all their quite laudatory dedication, Mount Sinai’s doctors are still doing quite well; they just haven’t made out like bandits.

National spending on doctors doubled in real (inflation-adjusted) terms during the 80s. While the Census Bureau reports that annual earnings from all occupations rose an average of 9 percent in real terms from 1982 to 1989, real income for cardiologists rose 53 percent, orthopedic surgeons 63 percent, and ophthalmologists 43 percent. (Family practitioners and internists gained only 12 to 14 percent, and their ranks diminished.) The income of most self-employed specialist physicians was between $200,000 and $300,000 in 1988. (There has not been a comparable escalation in Canada, where physicians’ salaries rose at roughly one-fourth the rate of those in the United States from 1971 to 1985, before the recent U.S. takeoff, but without any shortage of applicants to medical school.)

A study last year in the journal Health Affairs concluded that physicians were making more not because they were working longer or seeing more patients but because they were using far more procedures and tests. “Moreover,” the study reported, “many of the procedures that are increasing most rapidly are among the most profitable relative to physician time and effort,” including some that have been shown not to be justified by medical outcomes. “Conversely, cognitive services such as visits, which are thought to be relatively underpaid, have not grown as rapidly.” Doctor incomes shot up after hospital cost controls were imposed in the early 80s, in part because there was “an explosion in outpatient surgery and diagnostic testing in hospital outpatient departments, freestanding surgery and imaging centers, independent laboratories, and physicians’ offices,” according to the Health Affairs report. Now doctors profit from these facilities as the work is shifted there from hospitals, but with relatively little–if any–overall cost savings.

Mount Sinai has not been as seriously affected as Elmhurst Hospital by the expansion of outpatient facilities, since few doctors want its patients. Indeed, Mount Sinai’s investments might even pass scrutiny by some rational planner. It raised more than $3 million for a new linear accelerator to treat cancer, since the west side was underserved and its patients not always welcome elsewhere. It shares a mobile MRI machine with other hospitals, getting it two days a week. But Greenspan argues that Mount Sinai needs two MRIs of its own (which a planner might reject), and he hopes to get one of them this year. Mount Sinai has two CAT scanners, Weis said, but a comparable hospital would have three. Still, Mount Sinai is having to put off $50 to $65 million in repairs it’s been advised it should be making to its buildings, including remodeling that could reduce operating costs.

Despite his yen for new equipment and the justifications he offers for it, Greenspan realizes that one of the fundamental problems of American health care is simply that the rational calculations of hospitals and physicians about their individual needs do not add up to a rational system. Nowhere is that more true than in capital investments. “Capital and educational expenses should not be part of the health care reimbursement system but a planned part of the national health care system,” Greenspan argues. “Capital should not be invested at the whim of who the payers are or what diseases come through the door.”

Leo Fronza knows the price of competition. The president and chief executive officer of Elmhurst Memorial Hospital, Fronza aims to meet the needs of his community while competing for doctors and patients. A well-regarded nonprofit hospital, Elmhurst Memorial feels it must keep up with the latest technology for many reasons, including that of attracting doctors.

In the early 80s open-heart surgery was not available in the immediate area, and Elmhurst Memorial constructed a new wing in which the operation would be performed. So did a nearby hospital, Good Samaritan. Then there was a rush of proposals for open-heart facilities from other suburban hospitals. Elmhurst argued for restraint before the Illinois Health Facilities Planning Board, which is supposed to govern hospital expansion. The hospital said it wanted to be able to reach a certain volume of open-heart operations, and cited an established correlation between a hospital’s success rate with an operation and its–and its doctors’–degree of experience performing it. But typically the board, like such boards in most states, did nothing to temper the medical arms race.

“Today we have almost every community hospital in the western suburbs performing, at varying degrees, this kind of procedure,” Fronza said. “The unnecessary capacity we have and unnecessary duplication of services has a cost attendant to it.” If there were fewer open-heart-surgery facilities, with each performing more operations, economics of scale could have held down the cost of each operation, less capital would have been invested, and the surgery would likely have gone better for the patients. Ironically, current research suggests that most open-heart surgery is of questionable medical value in any case.

Nationally, there are twice as many mammography machines as are needed to screen all women for breast cancer and five times the number needed to handle the current caseload. Because they’re not used efficiently, costs are twice what they should be and many women can’t afford the test. “In other words,” argues sociologist Paul Starr in his new book, The Logic of Health Care Reform, “because we have too many mammography machines, we have too little breast-cancer screening. Only in America are poor women denied a mammogram because there is too much equipment.”

Such anomalies abound in the medical marketplace. “In the 1980s competition was going to be the vehicle to regulate health care costs,” Fronza observed. “But if you go back now and look at the 1980 competition it was not in the form of quality and price but in the form of services. Institutions competed on the basis of service, open-heart surgery being one of those services. Hindsight tells us that model didn’t work.”

Competition has also made running the hospital–and going to the hospital–much more complex. “It’s what’s required on the other end if we want to get paid for what we do by the insurance companies,” Fronza said. “Bringing this complexity into the situation drives costs. The documentation required in hospitals is overwhelming.” Each payer wants to review and monitor costs, Fronza said, “and all of these reviews have attendant costs to them. Hospital prices are distorted, and the distortions come from cost shifting. That’s what leads to the $5 aspirin.”

Like Mount Sinai, Elmhurst “charges” for a hospital stay at rates it is only occasionally paid. Medicare pays for half its patients, HMO/PPOs and commercial insurance each cover a bit less than one-fourth, Medicaid accounts for 3 percent, and nobody picks up the tab for about 1 percent. The mix is quite different from Mount Sinai’s; if Mount Sinai’s were similar that hospital’s revenues would be $10 million a year greater.

James Doyle, vice president for finance at Elmhurst Memorial, reviewed some of the billing insanity. Even though Medicare has been using its prospective payment system–based on the infamous diagnosis- related groups–since 1983, it still requires all hospitals to file separate reports based on the pre-1983 method of billing. “The reason we file it is to determine whether they’re spending more under the new or old system,” Doyle said. “I’ve got a $50,000-a-year person working about half-time and a $40,000-a-year consultant to deal with that. Since 1983 they started squeezing inpatient costs, and the money started running to outpatient. Now there are six different payment systems for outpatient.”

Although Medicare has improved, it’s the privately managed care, such as PPOs and HMOs, “where there’s been growth in the costs,” Doyle said. “All of the insurers want to concoct deals to “manage’ the care. One person spends half her time analyzing deals that were previously paid at list price. Then you’ve got nurses–there’s a utilization review department. I don’t know how much of their time is spent on Medicare, but managed care [such as many PPO/HMOs] typically wants concurrent review [of the case and recommended procedures]. Either they do it or you do it. We have seven or eight nurses doing that full-time at $30,000 to $35,000 a year, dealing with inpatient review.” All this means that the insurance company is looking over the doctor’s shoulder at every stage, second-guessing medical decisions with a bookkeeper’s flinty eye.

“Then there’s the billing,” Doyle explained. “You don’t get paid what you send out. So you have to adjust the account to what the deal is. Typically there’s copay [or partial payment by the patient]. On a $10,000 deal, managed care may pay $8,000. Then you’ve got to adjust $2,000 and send the patient a bill for 20 percent. Clerks are out there banging away on calculators. Then the patients don’t understand the deals, so the patient calls us. You’ve got five people answering phones on why they were billed. We do about 1,200 calls a week.

“Then there’s this thing called insurance verification,” he continued. “With managed care, when you present yourself at the hospital we need to know what insurance you’ve got. There may be a requirement that you or we notify them you’re at the hospital. There may be a need to get an OK with the insurance gatekeeper. Typically we call on everybody to make sure we get paid and you are covered. We’ve got three people who do nothing but call insurance companies all day about admissions. Imagine people asking, ‘What do you do for a living?’ A lot of this is unnecessary. Cynics would say it’s designed to browbeat us into taking on the insured risk and submitting to capitation expense.”

Submitting, that is, to a fixed price, thereby accepting the risk that the patient can’t be treated for it–a risk that should be run by the insurance company. “Insurers try to pass the risk to the hospital and physician.”

The fun continues. Elmhurst deals with about 200 different payers, including about 40 managed care plans that have negotiated special deals. Typically, when the hospital sends out a bill it writes off part of the charge. If it’s a Medicare bill the hospital first bills the government, then the supplementary insurer (such as Blue Cross) if the patient has one, and then possibly the patient. Each of these bills has to be resolved in turn before the next can go out. When bills aren’t paid the hospital must send reminders, and the delays might go on for months.

Yet this barely scratches the surface. There may be a separate bill–each with its sequence of three billings–for the emergency room, for lab tests, for X rays, for surgery, and for anesthesiology, plus at least one for a physician. “You can have seven or eight bills in a sequence of three,” Doyle said, “and with Medicare you’re dealing with an old person who gets confused and likes to talk on the phone.”

Cost containment by either competition or regulation didn’t work especially well in the 80s at Elmhurst Memorial or anywhere else. At Medicare’s initiative, Elmhurst does more and more of its work with patients outside the hospital–for example, treating a bone infection with six weeks of intravenous therapy at home. This has many advantages and cuts some costs, but it shifts other costs to unpaid family care givers.

In 1980, Fronza estimated, about 10 percent of his hospital’s patients went home promptly after surgery (what’s referred to as “ambulatory surgery”). Now 60 percent of the surgery is ambulatory. But this means there are “way too many beds and too many hospitals,” Fronza said. In 1980 it was not uncommon for 90 percent to more than 100 percent of the beds to be occupied–some patients overflowed the rooms into the halls. Now only 45 to 65 percent of the beds in many of Elmhurst’s departments are filled. Yet Elmhurst continues to modernize and expand. Despite their problems, most hospitals are not actually losing money. With lots of effort, they find somebody to pay the bills.

Yet finding somebody to pay the bills is a big part of the bill. Elmhurst has aggressively computerized; but even so, just the billing share of the information-systems division employs roughly 30 people and accounts for nearly 3 percent of the hospitals’ budget. Billing personnel have increased by half over the past decade; information-systems and medical-records employment has probably doubled. As a result, Doyle estimates, about 16 percent of the hospital budget now goes to billing, accounting, purchasing, and medical records. He reckons he could get it down to 4 percent if he dealt with a single payer.

“The billing stuff is nuts,” he said. “I employ a lot of people doing it, but I wouldn’t say this thing works. It needs to be like Master Charge–give me a card and you get paid.”

Of course most countries, such as our neighbor to the north, have such a card. The General Accounting Office of the federal government concluded two years ago that “if the universal coverage and single-payer features of the Canadian system were applied in the United States, the savings in administrative costs alone would be more than enough to finance insurance coverage for the millions of Americans who are currently uninsured. There would be enough left over to permit a reduction, or possibly even the elimination, of copayments and deductibles.”

In Canada, insurance is provided by the provinces with federal financial support. Everyone qualifies for comprehensive care (with a very few small extra charges) simply by presenting their health card. Provincial governments and providers, such as hospitals and doctors, negotiate total hospital budgets and doctor fees. Within their budgets, hospitals seek efficiencies and juggle expenses as they wish. Major capital expenses are decided by the public body that oversees health care in each province.

The average Canadian has greater access to primary care, to physicians generally, and to a range of medical services than the average American, the GAO reported, with no lack of emergency high-technology care (although there are occasional waits for some nonemergency procedures) and at a cost one-third lower than our own. They achieve this with “low administrative costs, controls on hospital budgets and on the acquisition of high-technology equipment, and fee controls for physician services,” the GAO concluded, as have many other health policy experts.

Despite the GAO’s glowing assessment, the Clinton administration has never seriously considered the Canadian approach (let alone the more comprehensive and cheaper Swedish system). It is following the line identified as “managed competition.” Broadly described, this would assure everyone of insurance coverage through his or her regional “health alliance.” The government (or the alliance) would define a package of basic benefits and negotiate with several “accountable health plans” to deliver them. Through some combination of employer payroll taxes, sin taxes, and other revenues the alliance would pay the cost of the most economical plan. This coverage would constitute the basic health benefits guaranteed to all. Anyone who chose a more expensive plan than the basic package would have to pay the difference out of pocket (without the benefit of the tax deductions available now to employers and individuals).

The accountable health plans would probably each consist of a large insurance company and a network of hospitals, clinics, and doctors organized like a super-HMO, although there would probably be at least one–presumably more expensive–fee-for-service option along the lines of current commercial insurance coverage. Every year there would be a period when individuals and families could switch from one plan to another.

The system’s designers argue that this would control costs through competition among the networks of providers, or accountable health plans. (Something else would be required for the one-fourth or more of the nation’s population that lives in areas where there are not enough doctors and hospitals to form competing networks.) How it would work depends greatly on details yet to come, but its broad outlines produce slightly different mixes of apprehension and hope at Mount Sinai Hospital and Elmhurst Memorial.

“Clearly given who we are and who we serve, we are believers in a single-payer system,” Benn Greenspan says. “We believe it’s essential to reduce any costs not related to patient care, and it kills us to organize around different payment rates and payers. We believe our mission statement that health care is a right.” Yet he added, “Any reform is better than none. A universal basic-benefit package would automatically open the door to a more rational primary care system. But what’s in the basic-benefit package? That’s another frightening question.” Would it cover all the preventive and chronic care that many of Mount Sinai’s clients need? If it does no more than cover the unreimbursed care Mount Sinai now provides, the hospital would receive an extra seven to ten million dollars a year.

Greenspan worries especially that the accountable health plans may want to shun health care providers in the currently underserved poor areas. “We’re the outliers in the profession,” Greenspan said. “We’re not the guys in the country clubs and professional politics. We’re the people who do work others don’t want to do. We’ll be the last kid chosen for the team and in the worst position to get paid. The history of PPOs gives me some basis for thought, and it’s not glorious. [PPOs tend to exclude providers in low-income areas.] We were in some cases, if not many, the lowest-cost bidder for tertiary care–and we were never included” in any PPOs.

Skeptics like Gordon Schiff, director of the general medicine clinic at Cook County Hospital and an advocate of a single-payer system, argue that the incentives will be so great for the accountable health plans to avoid the worst risks that they will certainly try to do so. After all, according to a 1987 study, 1 percent of the population accounted for 30 percent of all health care spending, and 10 percent accounted for 72 percent. Accountable health plans, which are likely to be organized by insurance companies, will be able to enhance profits significantly if they can find a way to redline the worst patients out of the system.

After doing research into uncompensated care at Chicago hospitals, Henry Webber, former president of the Health and Medicine Policy Research Group, a Chicago-based health think tank, and a health policy lecturer at the University of Chicago, thinks there’s reason to worry that health plans might technically be open to the poor but provide few services in their neighborhoods.

Those services are apt to be there now. In his collaborative study, Webber found hospitals increasingly modifying the services they offer in ways that don’t just accommodate their patients but determine who they’ll be. Mount Sinai is a hospital tailored to the needs of the poor who live nearby.

“Certain hospital services are more likely to be delivered to medically indigent patients than to patients with income and insurance to pay for them,” wrote Webber and several coauthors. “Classic examples of hospital services that disproportionately serve low-income populations are trauma care and neonatal intensive care”–and both of these happen to be among Mount Sinai’s strengths.

Any universal health care program should allow the services hospitals offer to be chosen less on a financial basis and more on a medical basis. That might sound fine. But Webber’s point, and Greenspan’s fear, is that the new networks would try to avoid hospitals like Mount Sinai altogether. If that happened, people who live near Mount Sinai and wanted the insured care to which they were now formally entitled might have to travel miles to someplace else.

On the other hand, perhaps incentives are possible that would make the networks less concerned about avoiding risk. Walter McNerney thinks so. A former president of Blue Cross who’s now a professor at Northwestern’s Kellogg Graduate School of Management, McNerney argues that it will be possible to develop sophisticated “capitation” rates, that is, payments per person adjusted for the intensity of medical services needed.

Managed competition as imposed by the Clinton White House is likely to break with the present system on at least one critical point: everyone will now be insured. Universality will improve both health and health system finances. Yet managed competition can be seen as simply a consolidation of trends already under way.

“Managed competition intensifies the strategy that’s been in place for 20 years” (starting with President Nixon’s embrace of HMOs as a way of controlling health care costs), argues David Himmelstein, an associate professor of medicine at Harvard and a founder of Physicians for a National Health Program, which favors the single-payer model. “It’s just more of the same. That’s probably the best predictor of administrative costs. They’ve gone up”–and presumably will continue to do so. Although HMOs on average provide somewhat less expensive health coverage than the alternatives, their rates have closely tracked the increases of other insurers. Although some observers contend that HMO-style cost controls have slowed the rate of increase in hospital expenses, the effects have been modest at best and may largely reflect the shifting of costs to outpatient facilities.

Managed competition also embraces the increasingly popular argument that Americans consume too much health care because they are insulated from its costs. But the forces driving costs higher have not been patients demanding open-heart surgery they don’t need or an extra MRI. Financial barriers may stop some people from seeing a doctor at all, as a famous Rand Corporation study concluded, but they are ineffective at sorting out appropriate and inappropriate care. And once a person enters the health care system, the Rand study revealed, the costs are the same whether the patient has to pay a lot or nothing at all. The so-called greedy health care consumer as a cause of health inflation is a dangerous myth.

There is good reason to integrate a fragmented health care system in the name of efficiency and effectiveness. The big question is whether there should be regional coordination by a public body or consolidation under the leadership of a few big insurance companies (since managed competition would eliminate all but a few health insurers).

The advocates of a single-payer system see a competition between insurance companies as contributing little and costing much. In this view, managed competition means more micro-management of doctors by insurers and more austere medical treatment, except for those who may opt to pay out of pocket for more expensive plans. Better than individual cases monitored by insurance companies, argues Quentin Young, past president of Physicians for a National Health Program, would be doctors measured by their track records. If doctors are way out of line, say in resorting to cesareans, they could be called to account before a panel of peers or a public health body. The system should use the results of medical-outcomes research to guide doctors toward standard practices for particular illnesses and ask them to justify serious deviations from those standards. Young argues this and so do many others, including Elmhurst Memorial’s vice president, James Doyle. Schiff believes there are far more efficiencies to be gained by fostering cooperation between hospitals and health care workers than by fostering competition between insurance companies and health plans.

The main alternative to competition between networks as a method of cost control is the imposition of global budgets for the nation as a whole as well as for parts of the health care system, such as hospitals. In 1991 the comptroller general of the United States testified to Congress that the cost-control efforts of the past decade had largely failed, and that managed care–the foundation for managed competition–had proved to be of limited value in reducing costs. To control costs, he said, it is necessary to set firm budgets for the health care sector as a whole. Later studies by the General Accounting Office and a recent review of managed competition by the Congressional Budget Office support this view.

If global budgets were set, the amounts we spend as a society on health care–and for such competing priorities as the prevention of disease, efforts to reduce urban violence, and additional medical technology–would become a matter of public debate.

The executives at both Mount Sinai and Elmhurst Memorial worry about what such a global budget would mean for them. Charles Weis wonders if it would simply set in stone Mount Sinai’s current budget, which reflects so many nonpaying or underpaying patients, or raise the hospital’s financial base. Would it take into account Mount Sinai’s repeated deferrals of capital improvements over the years?

Leo Fronza is unhappier than Weis or Benn Greenspan with the prospect of a global budget, even more opposed to price controls or freezes. He would rather have competing insurance plans than a single payer who could say “take it or leave it” on prices. “I think the concept [of managed competition] has potential. It will force hospitals and physicians to work more closely together, to eliminate some of the fragmentation that has occurred in the past. There will be limitations on what will be paid for, that the name of the game is managing costs.”

James Doyle, Elmhurst’s vice president for finance, is a bit more ambivalent. Under managed care, the insurance companies would be a middleman of questionable necessity. “I’d almost like to deal directly with the [health alliance, the public body negotiating with the insurance companies],” Doyle said. “But I worry, what kind of numbers will they come up with? What the insurance companies are making and taking out of the system could be eliminated, but if there’s only one buyer in the market I’m dead meat and can’t get out of the way.”

Yet defenders of a public monopoly buyer and global budgets would argue that it’s because hospital finance directors couldn’t “get out of the way” that their strategy would more effectively control costs. With fewer plans, hospital billing might become less complex and cheaper.

Himmelstein argues that “the major part of dealing with insurers is not making out different insurance forms. It’s having to enforce inequality. As soon as you’ve got two plans, you’ve got 90 percent of the problem. It’s keeping track of internal flows and eligibility determinations for every patient.” It’s as if police had to keep financial accounts on each burglary call or firefighters did detailed accounting of every individual fire rather than operate under global budgets.

Both Greenspan and Fronza worry that a single payer with a global budget might not give them as much as they want, a not unexpected reaction from an administrator. Fronza has broader ideological questions about a Canadian system. “It is appealing to look at Canada and say they’ve found a better way to deliver health care to the population, but if you dig into it you have to understand there’s a philosophic difference between Canada and the United States. In the United States we view things individualistically. We want to have choice and to be treated as individuals. In Canada and some of the European countries, they come at it from the standpoint of the common good. That is one fundamental difference between the United States and Canada. Another fundamental difference is that they trust their government. We have an inborn distrust of government. We see government as intrusion rather than a help.”

When the single-payer approach isn’t simply dismissed out of hand as politically impossible, the main objections raised seem to be such ideological ones. This swift shifting of the debate from relative medical and financial merits to speculation about an unchangeable American psyche makes the argument suspect.

After all, the statistics on the health and effectiveness of treatment as much as those on economics favor Canada’s system over what we have now. Comparisons with managed competition are impossible, since it hasn’t been tried anywhere and many radically different variants have been proposed. In countries like Germany (an inspiration to Bill Clinton) that retain some private insurers in the national system, the insurers are all not-for-profit. They aren’t here.

The scare stories about Canada are either wrong or overblown. There may be waiting lists for some procedures, but there are no delays in emergency care because of a lack of technology. In any case, the United States is already technologically oversupplied. Delays in treatment are common here, anyway; they’re simply more concealed, as they stem from an inability to pay. Canada’s lower number of certain high-tech instruments reflects the avoidance of a medical arms race, not an inferior health care system. There are lower levels of technology in many other countries that have much better health statistics than the United States does.

The cultural argument for and against a single-payer system boils down to the proposition that Americans are so blinded by their suspicion of government that they can’t learn from others how to make government effective. It’s a proposition belied by the popularity of Social Security, and also of Medicare with all its flaws. Ironically, proponents of a Canadian-style system argue that it provides more choices–among doctors and health-care providers–than does managed competition, which would allow the people to choose between a few insurance plans but restrict their choice of physicians. Finally, if Americans were as individualistic as these cultural arguments suggest they wouldn’t even bother with insurance, a fundamentally collective device.

Despite Canadians’ affection for their health-care system, Canada does not stand as a medical holy grail. Also, some models of managed competition adopt many elements of a Canadian-style system. But there’s always a nagging question: why keep the private insurance companies, with their inefficiency and profit-taking, as intermediaries? Even if networks of health care are needed, why have the insurance companies organize them? Quentin Young makes his point with a political button: “It’s the insurance companies, stupid!”

Benn Greenspan objects to managed competition because it repackages the old system when the country needs to invent a new one. A new system, as the experience at Mount Sinai suggests, would have to merge the mission of maintaining Americans in better health with the mission of making a healthier society with less inequality, insecurity, and alienation. In the long run, those social changes would restrain medical costs at least as well as global budgets, managed competition, or any other health reform device now under consideration. The first step on this road is clear: guarantee health care for everyone

Art accompanying story in printed newspaper (not available in this archive): photos/Charles Eshelman.