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Decades of incremental policy solutions to the uninsured and health care system woes have only led to health care costs further outstripping wage gains, threatening to spiral the nation toward a Dickensian society.

Interview with Len Nichols, Director, Health Policy Program, New America Foundation

  A highly respected healthcare economist, Len Nichols directs the health policy program at the New America Foundation, an organization devoted to expand health insurance coverage to all Americans, while reigning in costs and improving the efficiency of the nation's health care system. Nichols is an adroit student of health care policy and politics. Before joining New America, Nichols was vice president of the Center for Studying Health System Change, a principal research associate at the Urban Institute, and the senior advisor for health policy at the Office of Management and Budget during the Clinton reform efforts of 1993-1994. As an economist, Nichols has published extensively on a variety of topics, including insurance market regulation and the effect of tax policy on health

insurance purchase decisions. An ERIU researcher, Nichols talked with ERIU about the failure of an incremental health care policy approach, which has been unsuccessful in containing health care cost growth, covering the uninsured, and producing safe and high-quality health care for patients and payers.

Let's start with your premise that incremental health policy solutions have failed. Why, in your opinion, have they failed?

NICHOLS: Let's define what it is we don't like about the system's performance before we discuss why incremental policies haven't been effective. Fundamentally, the dynamic we face is one in which an increasing fraction of our workforce cannot afford health insurance because health care cost growth vastly exceeds productivity and commensurate wage growth. So if we don't get the cost-growth trajectory under control, or find some way to increasingly finance subsidies for the lower-income population, we are going to be moving to a Dickens-like "Tale of Two Cities" -- great health care for a smaller and smaller fraction of our population. Many Americans don't want that to happen. The incremental reforms we've tried in the past 35 years haven't diverted us from that trajectory. There have been some minor advances, but basically the excess growth of health care costs vis-a-vis productivity and wages has been constant since we've been measuring this stuff around 1960.

What is it about the nature of incremental solutions and their inability to curtail health care cost growth?

NICHOLS: Incremental reforms don't convey a sense of urgency, the fear of that trajectory I described. They don't convey the reality of what we now know from the Institute of Medicine about the consequences of being uninsured. Because they don't convey that, they don't shake up the system. You need a sense of urgency to fundamentally change the way we deliver health care and the way we purchase it and use it. Another big problem with incremental reforms is that they don't change incentives enough.

What kind of incentives do we need?

NICHOLS: Our system is still largely fee-for-service oriented. Providers get more money for more procedures, than for consultations or evaluating and managing patients. Talking to patients about treatment options and spending extra time educating patients about why doing nothing may be the best course is not nearly as lucrative as strapping them on a gurney. I'm not implying that doctors are that crass, but all human beings respond to incentives. If all you've got is a hammer, everything looks like a nail. There are way more surgeries, testing, imaging, diagnostics, procedures, hospital admissions and lengths of stay than we probably need. The comparative data that has been compiled documents extremely wide geographic variations of medical practice. The places in the country that do the most extra services have the lowest outcomes. It's counterproductive. Research shows that an American has a 55 percent chance of getting the right thing done for them in real time. We do too much on the one hand and not enough on the other because the incentives are not right.

Capitation was an attempt to change that, but seems to have largely failed. Now we are looking at pay-for-performance. Are we headed in the right direction?

NICHOLS: At a minimum, it is the right concept. No one has got the perfect combination of incentives and measurements ready to be implemented nationwide. But, I think it's the right direction. Today doing more stuff, whether good or bad, makes more money. That is clearly a deep, fundamental incentive flaw that we have to overcome, if we're ever going to get this cost growth trajectory under control. Incentives are key and little bitty incremental things don't fundamentally get at those incentives.

What are a couple of examples of the biggest incremental policy failures?

NICHOLS: I think a lot of people had very high hopes for insurance market reform. Another example is health savings accounts (HSA). Some people are going to take them up, they'll buy a non-group policy and get the tax preferences for HSAs. But that is not going to solve our insurance problem. HSAs have been available for a couple of years and the number of uninsured continues to go up. If it hadn't been for Medicaid, the latest number of uninsured would be about two million higher. These incremental things aren't effective enough.

SCHIP seems to have been an example of a successful incremental policy. In terms of economic value, is it worth expanding a program like SCHIP?

NICHOLS: SCHIP is a very successful Band-Aid on a larger wound. What SCHIP has done is preserve coverage for lower-income children in households whose parents have lost employer coverage because they can't afford it anymore. What's really going on is that working families are dropping employer coverage because premiums are rising faster than their wages, and they're getting their kids signed up for SCHIP. So, it's been a safety net. I would have not used that money to cover children alone without covering the poor who are chronically ill.

But isn't incrementalism affordable in the current budgetary environment we live in?

NICHOLS: The attraction of incremental policy is that it won't cost much money. We have not yet been willing to spend what it will likely take to cover everyone, partly because of legitimate fear of the cost ten years down the road, if health care costs continue to grow faster than wages. We probably won't be able to solve the coverage problem until we have a credible set of policies on cost-growth containment. Part of the fear in doing it all in one grand bargain is that it would cost a lot. But the Institute of Medicine and others suggest that the net social cost of uninsurance to our nation is at least on the par with what we think it would cost to cover everybody. The cost of not covering people is really high.

Incremental fixes have been politically attractive. Why is there a disconnect between the economic and political?

NICHOLS: The lower price tag is a big reason. There is also a fundamental disconnect between the magnitude of our health system's problems and our political will to take them on. The effort in the Clinton era has made serious politicians more skittish because it is hard, in fact impossible, to think about how to cover everyone without having some kind of mandate to purchase coverage. At that point, you are immediately painted as some kind of crazy Trotsky-type, or someone who is going to break the Federal treasury. In an era in which no tax cut can be too big, it is hard to argue for universal health insurance in a credible fashion.

The other thing, to be fair, is that I don't think there is unanimity in Congress, and therefore among the American people, that it's the government's obligation to make sure that health insurance is accessible to all. There are people who would rather have low taxes than have everybody covered, and that's, in some sense, a quite legitimate political debate. I just wish we could have that debate.

What will it look like ten, fifteen years out if health care cost growth isn't controlled?

NICHOLS: Less than half of our population will be covered by employer-sponsored coverage, and approximately 25 to 30 percent of the population will be uninsured. That is in the same magnitude as during the Great Depression when we had 25 percent unemployment. The safety net will be increasingly strained. It will be difficult to deny evidence that the uninsured are not getting what the rest of us are getting, so it will just get uglier and uglier.

It sounds like we need a more coordinated approach in order to get the system to respond. Is that what this comes down to, that we need a more overall systematic approach?

NICHOLS: Yes, no doubt about it. It does not mean you have to have single payer here. There should be room for individual variation and choice, but I think there is going to have to be a systematic approach to the information infrastructure and probably a systematic approach to agreed-upon measurements of quality and outcomes.

Given the complacency for pursuing a universal approach, what is economically and politically acceptable at this point?

NICHOLS: Four things need to happen. First, we are going to have to have a conversation, not unlike what Hurricane Katrina has triggered all over the country asking questions such as "Who is in our community?" :Who belongs at our table of plenty?" "Who has a right to participate in what our health care system can yield to individuals?"

Second, we have to come to understand the economic imperative. This trajectory of health care costs exceeding wage growth is deeply troubling. With health care costs growing faster than GDP, prices, profits or wages have to give. With international competition, you can't just raise prices to cover this. If compensation costs are growing faster than revenues, jobs will have to be moved. We've got this implicit threat to the middle-class American lifestyle.

The third piece is creating a culture of value. We need to bring about better efficiency, better clinical value for the dollar. This means reorganizing incentives so that those providers who provide invaluable services the first time get more. If you want something that is not going to add clinical value by the best calculation we can make, you can have it as long as you pay for it yourself. But we can only afford more of a basic package for everybody.

The fourth thing is a credible policy design, because it has to be sold to the three big constituencies. You have to sell it to the medical profession, or at least a core of it and it has to be sold to the employer community. They've got to believe that cost-containment mechanisms are credible. And, of course, you've got to talk to the American people. It's going to take leadership.

What kind of mandate do you do in an American system?

NICHOLS: Universal coverage cannot happen without a mandate. We won't go for employer mandates or single payer as a country. That leaves you with exactly one choice - individual mandate. That has a virtue in being consistent with the best in American values - individual responsibility. Everybody should pay something, but no one should pay more than they can. So you've got to subsidize those with low incomes. Most economists don't believe an individual mandate would lead to wholesale dropping of employer-sponsored coverage. An individual mandate turns out to be smarter, more efficient and more politically feasible.

So what is it going to take to get America to consider comprehensive health care reform?

NICHOLS: We need politicians who are willing to lead. At the end of the day, we have to explain it to people, as only good politicians can. We have lost the courage to dream big and to think about this as an integrated whole rather than as a limited little problem. I would say that Hurricane Katrina may very well have a catalytic effect because it has forced us once again to think about what is our community and what we really want it to be, what we really want to give to our fellow citizens and what we really think is the obligation of the government versus individuals. That economic dynamic is not going away. If we understand that and create the environment in which a courageous politician can see how they can gain from being the first to articulate it, I think you'll find a bunch who will fall in line and compete over how to do it, not whether to do it.

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