A CONVERSATION WITH / Victor Fuchs

An Economist's View of Health Care Reform

By GINA KOLATA

Dr. Victor Fuchs is an economist who also sees himself as a humanist, a

person who is interested in values and who inquires how economics can help

people to think about social problems and arrive at solutions. Economics,

he explains, is about choice. It asks how people respond to incentives,

how they respond to constraints. And so, Dr. Fuchs observes, "economics is

the quintessential policy science."

Dr. Fuchs, an emeritus professor of economics, holds half a dozen titles

at Stanford University and is continuing his research while serving on the

steering committee of Stanford's Center for Biomedical Ethics and as a

research associate of the National Bureau of Economic Research. He is also

a past president of the American Economic Association and a member of the

American Philosophical Society and of the Institute of Medicine at the

National Academy of Sciences.

Dr. Fuchs, 76, visited Princeton University last week, lecturing and

meeting with graduate students. On a gray and chilly morning, sitting at a

small square table in a drafty section of his hotel's breakfast room, he

discussed how economic analysis could inform the nation's wrenching

debates about health care.

Q. There has been a lot of talk about health care reform, and at least one

major initiative, the Clinton health care plan. Do you foresee another,

more successful attempt to reform health care on the horizon?

A. The Clinton plan was a combination of ignorance and arrogance and it

turned out to be a disaster. But I never believed for a minute that they

could get major health care reform. Health care reform requires a

substantial political investment.

You're talking about one-seventh of the economy and huge numbers of

interest groups of all kinds. To change the status quo in a major way

means you have to achieve a tremendous political reform first. I've been

on record for a long time saying that I only see a major health care

reform coming to the U.S. in the wake of a war, a large-scale recession or

large-scale civil unrest.

Q. Don't Americans want health care reform?

A. Two-thirds of the American people say they favor universal coverage,

but the minute you start to spell out what that means -- subsidization for

the people who are poor and who are sick, and that the plan has to be

compulsory -- they are less supportive.

Q. We subsidize health care in a way, don't we? What about Medicare?

A. You pay for Medicare but there's going to be more and more resistance

to it. Remember, Medicare started as a small program. It was going to be

$4 billion or something like that. There's a generalized resistance to

higher taxes. People don't exactly realize that a lot of their taxes are

going to transfers to the elderly. They just know they are fed up with

paying higher taxes. The average working person today pays more in Social

Security and Medicare taxes then he pays in income taxes. But they don't

express it directly that way. They just don't want to pay more taxes.

Q. What about current proposals to provide Medicare coverage for

prescription benefits?

A. We see proposals to expand Medicare. And they're politically

popular. But then they're going to have to try and figure out how to pay

for it. One thing I'll go on record as saying is that the Clinton proposal

for paying for prescription drugs makes absolutely no sense. It is a

proposal to cover the cost of drugs from the first dollar up to a cap.

Q. What's wrong the Clinton prescription proposal?

A. The purpose of insurance is to protect the people who have big

expenses. So you ask why do they propose a plan that does just the

opposite? Because that's politically popular. People don't think they're

paying for somebody else's drugs. Everybody thinks they're going to get a

benefit. But that's not insurance. That's not what insurance is for.

Q. So will Congress succeed in expanding Medicare coverage and reforming

health care?

A. That's a political forecast, isn't it? All my life I've tried to spend

more time trying to figure out what the government should do than what

they will do.

Q. What should be done about health care?

A. I think we should have universal coverage financed by a general,

broad-based tax which is earmarked for health care -- such as a

value-added tax -- which would give every American a voucher to be part of

some health care plan.

I think that plan should not be a minimal sort of "safety net for the

poor" plan, but neither should it be one that would cover what every

American would be willing and able to pay for. I like to think of it as a

multitiered system where every American has basic coverage and people have

options to buy more, not subsidized by taxes but with their own after-tax

dollars.

The individual plans could decide if they want a co-payment, such as $10

for each prescription or a co-payment for an office visit. I don't operate

at the level of trying to specify details. I try to see what is the broad

strategy, what is the broad vision that we want to bring to this. I'm

trying to get across two points: universal coverage for a plan, but one

that is not completely egalitarian.

I think we are hung up with the idea that everything we do in health care

must be egalitarian, and we wind up with a very nonegalitarian

system. What I'm arguing for is some kind of middle ground.

Q. What happens now to the uninsured? Aren't they simply doing without the

most basic health care?

A. No. The truth is we do provide health care for everyone one way or

another. We have poverty clinics, we have county hospitals. Even surveys

by the people who are most inclined to be concerned about the uninsured

show that the uninsured get about two-thirds of the health care they would

get if they had insurance.

So people do get care. They don't get the same care that others

necessarily get. They don't get it under the same conditions that other

people get it. But there are not many people who simply die in the

streets, although they're the ones who make the newspapers.

Q. There is widespread concern about the nation's health care bill. What

do you think of the proposed ways of cutting it?

A. Any time you want to reduce health care spending one of two things

comes up. Let's reduce physicians' incomes or let's cut drug industry

profits. But these are one-time cuts. These are not cuts that reduce the

rate of growth. Unless you cut the underlying forces that allow for

growth, you make a tiny little difference.

If you cut physicians' net incomes by 20 percent, it's a difference of

one-tenth of 1 percent per annum in the growth rate of health care costs

over 20 years. Cutting drug industry profits would get you even less,

because half of drug industry profit is less than 20 percent than

physicians' net income. As a rough estimate, drug industry profits might

come to about 3 percent of health care spending.

If you cut that in half, it would be 1.5 percent. Spread that over 20

years and you've got three-quarters of a percent per annum. That's the

direct effect. The indirect effect could be much larger because if you cut

drug industry profits in half you might have a big effect on the amount of

investment in new research and development. That would show up in fewer

new drugs and less spending.

Q. Then what does it mean to say the prices of drugs are too high?

A. From an economist's point of view? We mean that the market conditions

are not producing a socially optimal allocation of resources. The classic

example is a monopoly. If a company has a monopoly, then we usually expect

that their prices will be higher than their socially desirable rate. But

that's a question that the Federal Trade Commission or the Department of

Justice ought to be looking into.

It's independent of whether we cover the elderly for drugs.

Q. What is driving up the cost of health care?

A. The principle factor by far is medical innovations like new drugs, new

surgical procedures and new diagnostic techniques. This is not just my

opinion. I surveyed the 50 leading health economists in the country on

this question. Over 80 percent of them agreed with me.

Q. We spend more money on health care than other industrialized

nations. Are we healthier?

A. Let's put it this way. We spend 40 percent per capita more for services

than people in Canada. We do get some services that they don't get. We get

easier access. We don't have the long waiting lines.

But basically their health outcomes are about the same as ours. If you

take as your first cut, Do we live longer? Do we have less morbidity? Do

we have less disability? The answer is no. It's about the same. Medical

care is one thing, health is something else. I've been doing research in

this field since 1965 and I almost invariably find that the health of

people has little to do with the quality or quantity of health care.

There are some areas in the United States that have twice as many

physicians per capita as other areas. There is no evidence that that shows

up in the health of the population -- none whatsoever.

Some areas in the U.S. have medical schools and some areas don't have

medical schools. There is a widespread belief in the academic medical

community that the presence of a medical school raises the standard of

care -- people are closer to the frontiers of medicine, the doctors there

can go to the grand rounds. I don't find any evidence whatsoever that

having a medical school in an area produces lower mortality rates. Nor is

it true that we're any sicker now from all this managed care and denial of

services and so on.

It's also very clear that over time the introduction of some drugs and

some medical procedures does improve health. Neonatal intensive care

units, the survival of low-birth-weight babies. That's improved

enormously, and almost all of it is due to better medical

interventions: both better scientific understanding what it takes to keep

a 1,000 gram baby alive and the technology to do it.

On the other hand, I don't want to overstate the payoff because medical

research has done virtually nothing to lower the incidence of low

birth-weight babies.

In the cardiovascular and cerebrovascular area, the combination of a much

more aggressive treatment of hypertension and better drugs had a big

payoff in lowering deaths from heart attacks and -- probably more

important -- in deaths from strokes.

Q. Are you saying that even though some medicine makes a difference, more

medical care can't do much to make us more healthy?

A. I'm saying that almost everyone is getting the medical care that

matters to health. Adding more care does not make much difference. The

stuff that's really effective, the antibiotics, the appendectomies and so

forth -- people get them. Health depends much more on the things we do to

and for ourselves or that we don't do.

It depends on cigarette smoking, it depends on obesity, it depends on

certain environmental conditions.

Q. So if more medical care does not make us healthier, what should we do

to improve our health?

A. Improved health will come about through changes in the physical and

psychosocial environments and in individual behavior and in medical

advances, not in increasing the quantity of medical care at a given point

in time.