Brief Overview of Health System Reform

Health care costs are busting government budgets in the US at all levels. Federal deficits on into the future, given current health care spending trends, will be principally due to rapidly rising costs for Medicare, Medicaid, CHIP, and other federal health programs. All fifty state budgets are threatened by the growth of demand for Medicaid funded health services. A state senator in Utah stated that ten years ago Medicaid required 9% of the state budget, but doubled to 18% this year and is expected to double again to 36% by the end of this decade. Total health spending in the US was $2.5 trillion in 2009, accounting for 17.6% of the GDP. As illustrated in the table below with data from 2007, health spending on a per capita basis in the US is approximately two to three times higher than is the case in other developed nations.

Remarkably, public spending (i.e., derived from taxation) for health care is higher in the US than anywhere else in the world and, in fact, constitutes 60% of American health care spending, or $1.5 trillion (out of a total US tax revenue stream of less than $4 trillion). Public spending on health care comes at an opportunity cost. For instance, at the state level, education budgets are threatened by increasing Medicaid costs. In 2010 Utah’s lowest in the nation per pupil spending rate had to be decreased while the Medicaid budget required and received an additional $48 million

Failure to improve American education over the past quarter century has resulted in an estimated $1.3 trillion to $2.3 trillion in lost (or never realized) GDP growth. Family budgets, too, have been hit hard by health care costs. The US Census Bureau has found that median income for a family of four is falling and was just over $50,000 in 2009 while the 2010 medical cost for a typical American family of four was just over $18,000.

Health care costs are high in the US because of two principle problems: poor quality and inefficiency. Thomson Reuters published a $700 billion per year list of savings possible through improving health care quality by reducing inappropriate care (including defensive medicine), preventing injury of hospitalized patients, and bringing American health care services in line with known clinical science. Inefficient administration of American health care financing costs up to $400 billion annually. US health systems are plagued by waste due to poor quality and inefficiency because of the penchant of Americans to expect market forces to introduce accountability into all transactions, including the purchase of health care.
Health care is not a commodity that can be efficiently distributed by a market. A market exists when a completely informed buyer can freely choose to enter into a transaction with a self-interested seller without any positive externality. Market efficiency is demonstrated when demand rises as price declines. None of these conditions exist within the health care sector.

Buyers of health care lack clinical knowledge (no caveat emptor) and are not free to decide whether to purchase health services (especially in urgent settings);
Sellers of health services are not supposed to act in their own self interest which is why society does not tolerate physicians and nurses whose greed pre-empts the best interests of their patients;
Positive externality refers to a situation when someone other than the buyer or seller has a legitimate interest in the outcome of a transaction, such as is the case when the general public has an interest in assuring the best care for a patient with a communicable disease. We have massive infusions of tax dollars into health systems because of positive externalities.
The inverse relationship between price and demand does not hold for health services. No one ever bought an appendectomy because it was on sale. Demand for health services is determined by epidemiology (the frequency of disease and injury), not by price.

Lack of accountability in our health system is not a market failure, since health care is not a commodity efficiently distributed by market forces. Rather, lack of accountability in health systems is a social failure. For instance, preventable hospital injuries can be discovered and eliminated not by individual buyers (patients) but by public health agencies. The pretense of markets, so characteristic of American health policy, has created perverse incentives to deliver mediocre care in an inefficient manner. Reducing poor quality and inefficiency waste will require inventing new social mechanisms to replace the failing business models which characterize the American health care delivery system.

Recently passed federal and state health ‘reform’ legislation (the Affordable Care Act and its predecessor in Massachusetts) are coverage initiatives and not the needed reform measures (for instance, read the Kaiser Family Foundation summary of the Affordable Care Act online at] Massachusetts officials testified before Congress one year before the passage of the Affordable Care Act that burgeoning costs made the Bay State’s health ‘reforms’ financially unsustainable. Recent projections by the Congressional Budget Office confirm that the Affordable Care Act will not prevent future “excess cost growth” in health care.

In summary, growth in US health care costs far exceeds any international comparison. Coverage initiatives, the standard American health policy approach over the past 50 years, ultimately fail to contain excessive growth in health care costs. The business model of private health insurance is administratively wasteful and invokes perverse incentives to deliver mediocre care. Sustainable health system reform must introduce social accountability into health care delivery while targeting improved quality and efficiency.

The graphic above allows the reader an easy view of the biggest problems in our health system (left side of the chart) and the Utah Healthcare Initiative (UHI) proposed solution (right side of the chart). This a state-based proposal for comprehensive, sustainable health system reform in Utah. UHI proposes to create one new government agency (the Utah Health Systems Commission) and re-name an existing publicly owned trust fund (the Public Employee Health Plan will be called the Utah Health Cooperative) while transforming it into the sole payment source for health services need by Utah residents. UHI also proposes to strengthen the current passive public health surveillance system for patient safety into a mandatory reporting system with trained staff for interventions to improve hospital performance.

The Utah Health System Commission will have two principle tasks: 1) define the clinically proven set of health benefits for every citizen in Utah; and 2) adjudicate claims against any part of the health system efficiently (i.e., in a fashion similar to workers compensation, with administrative law judges and without punitive damages or juries). The Commission will be given two years after passage of the enabling statute to determine what diagnostic and therapeutic interventions have been proven effective by clinical science while being the least expensive alternative. These interventions will constitute the initial Uniform Benefit for all Utah residents. The Commission will have the task of continuously reviewing clinical science as it evolves to keep the Uniform Benefit updated. The Commission will also organize an administrative law system, similar to the system which handles claims about workplace injuries and illnesses, for the purpose of adjudicating claims against any part of the health care system, such as malpractice by providers or failure to make payment by the Utah Health Cooperative. The principle features of this administrative law system will be that no punitive damages will be allowed and no jury trials will be conducted.
The Utah Health Cooperative (formerly the Public Employees Health Plan) would undergo a two-year transformation from its current role of providing efficiently paid health benefits to Utah State government and other public employees. PEHP is the most efficient payer in Utah, reporting less than 4% overhead while the largest four private health insurers in the state average 15% administrative costs. Upon passage of the enabling legislation, PEHP would be re-named the Utah Health Cooperative and would immediately begin selling health benefits to all Utahns, whether employed in the public sector or not. Medicaid, CHIP, and other publicly paid programs would be transferred to the Utah Health Cooperative as soon as practicable. Private health insurers would have two years to phase out their Utah operations. The Utah Health Cooperative would negotiate with the US DHHS to become the fiscal agent for Medicare in Utah, anticipating the time when Medicare beneficiaries living in the Beehive State could be phased into full participation in the program. The most important function of the Utah Health Cooperative, aside from receiving and managing all funds intended to support health services in Utah, would be to use its monopsony clout to improve health system function, including better use of primary care, improved distribution of public health, optimizing behavioral health services, negotiating better prices for pharmaceuticals and medical devices, and supporting continuous quality improvement system wide.
Patient injury would be reduced through standard public health surveillance and intervention.


This proposal is fashioned as a response to federal legislation offered by Rep. John Tierney (D-MA) and Sen. Bernie Sanders (I-VT) known as The States’ Right to Innovate in Health Care Act of 2009. This proposed legislation would offer states technical assistance and funding, as well as regulatory flexibility, to assist with the costs of planning and implementing innovative state-based programs through a competitive selection process. The legislation proposes grants up to $10 million for each state selected, which is an adequate sum for the anticipated planning and implementation of the proposed Commission and Cooperative in Utah.

Using a variety of sources rough estimate of Utah’s total health expenditures for 2009 would be $15 billion. Approximately 60% of US health expenditures arise from public taxation, or roughly $9 billion of Utah’s total 2009 health spending, leaving $6 billion from private sources (out of pocket from individuals or payments from private employers not offset by tax credits). Assuming that the relative proportions of waste due to poor quality and inefficiency cited above are applicable in Utah, approximately $6 billion of health spending in Utah during 2009 was lost to the cost of inappropriate care, patient injury, failure to deliver best practice care, and administrative overhead. Therefore, improved quality and efficiency anticipated through the proposed health system reform would substantially reduce (essentially eliminate?) the need for health care funds from private sources not offset by tax credits or mandated by law. The proposal accordingly anticipates that program funding will be principally derived through maintaining current public revenue streams paying for health care. There are currently three major public revenue streams: 1) publicly funded health care programs, including Medicaid, Medicare, CHIP, IHS, and a multitude of smaller health service programs ($4 billion); 2) assorted tax credits for employer/employee purchase of health benefits/care ($4 billion); and 3) funding for federal, state, and local government employee/retiree/dependent healthcare plus government mandated health service payments for workers compensation, vehicle insurance, etc. ($2 billion). During the initial two years after passage of enabling legislation, while the Utah Health Systems Commission is organizing the Uniform Benefit, the State of Utah will be required to assure the preservation of these public revenue streams for health care by: 1) negotiating with the national government for full carry over of all federal health care funding into a block grant to the state of Utah to be deposited with the Utah Health Cooperative (see paragraph 12); 2) identifying all state and local tax funding for health care and redirecting those funds in perpetuity to the Utah Health Cooperative; and 3) organizing an equitable levy of private employers and individuals, partially offset by federal and state tax credits, equal to the current level of tax supported health benefits purchased voluntarily in the private sector or mandated by law.

A few years ago a small hospital in rural central Utah undertook a quality improvement effort directed at reducing the morbidity, mortality, and cost related to pneumonia. The authors of the project successfully reduced the length of time to appropriate antibiotic therapy for patients presenting with pneumonia and therefore dropped the proportion of patients requiring hospitalization, cut average length of stay for hospitalized patients by 1/3, and halved average cost per case. Unfortunately, because of the perverse incentives currently characteristic of American health care delivery, reimbursement for pneumonia care fell even more than the drop in average cost per case, meaning that the hospital took a financial hit for improving the care of pneumonia patients. This hospital’s parent organization, Intermountain Health Care (IHC), is a non-profit organization with a community-oriented mission, and is responsible for roughly half of all hospital beds in Utah. IHC has continued to organize quality improvement efforts despite these adverse financial consequences, in part accounting for Utah’s lowest in the nation per capita health care costs. After the passage and implementation of this proposed legislation, IHC’s mission to improve the quality of care in its hospitals and clinics will be in congruence with the community mission of the proposed statewide payer for health services, the Utah Health Cooperative, with the added advantage of an administratively simple and lean payment mechanism. Efforts to systematize urgent high-level care needs (perinatal, trauma, cardiac, etc.) will be unimpeded by so-called market competition. The least expensive option for clinically proven care will be sustainably financed for all Utah residents. Primary care and behavioral health will be financially supported such that chronic care needs can be better managed in the outpatient setting. Stable funding for clinical health services will allow public health agencies to re-focus on their traditional primary and secondary prevention services.

Federal statutes, rules, regulations, and funding requirements currently effectively prevent any state from taking a comprehensive approach to sustainable health system reform. Unfortunately, this web of federal complexity in health policy eliminates the ‘laboratories of democracy’ from serious efforts to solve our nation’s most pressing domestic problem: rising health care costs. The Affordable Care Act is apparently the best that the sole remaining American legislative body (Congress) can do, and, as argued above, is completely inadequate. Congressional Republicans have been vocally arguing that the states should be granted more authority to pursue health system reform. President Obama has recently openly agreed with that position as long as any state plan provided for at least the same amount of coverage for no more cost than will be the case when the Affordable Care Act is fully implemented.

Given the apparent bi-partisan support for increasing the autonomy of state governments in fashioning health policy, the Utah Healthcare Initiative proposes that members of Congress from both parties consider and pass The States’ Right to Innovate in Health Care Act, offered by Rep. John Tierney D-MA. The purpose of this act (as stated in Sec. 2 of the draft) is to encourage States— (1) to develop plans for universal, comprehensive, cost-effective systems of health care with simplified administration to individuals residing in such States; and (2) to implement such plans by offering transitional grants and by removing Federal statutory and administrative barriers that may inhibit or discourage efforts by States to provide such health care while maintaining Federal payments for health care under Federal health care programs. Within the framework allowed by this act some states (such as Massachusetts) could follow the general outline of the Affordable Care Act and create mandates to buy health insurance, supplemental funding to assist families with the purchase, and health insurance exchanges. Other states, for instance Vermont, could choose to create a government-based single payer for all health services. In the event of passage of the States’ Right to Innovate in Health Care Act, the Utah Healthcare Initiative would vigorously encourage the passage of the here-in proposed Commission/Cooperative reforms.

The Utah Healthcare Initiative proposes to put these reforms into effect through a ballot initiative for the simple reason that lobbyists working for the status quo in our health care system are entrenched in Congress and in every state legislature. The business models for health insurers, pharmaceuticals, malpractice lawyers, medical device manufacturers, hospitals, and doctors will be either eliminated or substantially changed by any meaningful, sustainable health system reform. Of course, these various interests will use their vast resources to oppose these needed changes. Only a ballot initiative, which takes the question of health system reform to the patients, has a chance to succeed in making the comprehensive changes in the way we do health care business in this nation. Ballot initiatives can only occur at the state level.

The Utah Healthcare Initiative is a political issue committee (PIC) officially registered with the State of Utah Elections Office. As such, the Utah Healthcare Initiative can receive donations and dispense funds. UHI is actively seeking donors, participants, and sympathizers through blogs, a website, and an active public speaking schedule. Currently a member of the Utah State Legislature is working with the legislative counsel bureau to craft the needed legislative language for the ballot initiative. Essentially this involves writing the proposed changes to Utah’s health system into appropriate statutory format. Once this ‘bill’ is finished, UHI will begin the ballot initiative process by submitting it to the Lieutenant Governor’s office for review. UHI anticipates an arduous pathway towards placing the initiative on the ballot and eventually winning the necessary votes from the electorate to secure passage. Meanwhile, UHI is encouraging the Utah Congressional delegation to join with Rep. Tierney to secure the passage of the States’ Right to Innovate in Health Care Act.