"Homeostasis without Reserve — The Risk of Health System Collapse"

Lewis G. Sandy, M.D.
Robert Wood Johnson Foundation
Princeton, NJ 08543-2316 

In the early 1930s, at the height of the Depression, the great Harvard physiologist Walter Cannon, in his book The Wisdom of the Body, first outlined the theory of homeostasis, proposing that biologic systems use compensatory mechanisms to maintain stability in the face of environmental changes. Few physicians know,
however, that Cannon proposed that "stability is of prime importance" for organizations and social systems as well. [1]

Although most observers of the health care system view the 1990s as a period of extensive instability and change, in reality the health care system, taken as a whole, exhibited remarkable homeostasis. In 1992, most people in the United States received health care services from a personal physician who practiced in a small
group, with insurance provided by their employers. Health care costs were rising at double-digit rates, and the public was concerned about losing coverage as a result of the recession.

Now, in 2002, after a tumultuous decade in health care and in health policy, today's health care system looks remarkably similar. Some liberals might attribute the health system's ongoing problems to failed public policy, and some conservatives to poorly performing markets, but it is more useful to look at providers, patients, employers, and policymakers as parts of a single, interacting system that seeks stability, not change.

The Evidence for Homeostasis

Four strands of evidence support this model of health system homeostasis. The first is the reality that the so-called managed-care revolution in fact involved few innovations in the organization and financing of care. Whereas the proportion of the population enrolled in health maintenance organizations (HMOs) increased from 13.5 percent in 1990 to 30 percent in 2000, [2] most of the growth in managed care was through preferred-provider organizations or loosely structured HMOs, since neither physicians nor patients were enthusiastic about changing to tightly managed group-model or staff-model HMOs. In 1999, since most payers continued to have fee-for-service coverage, not coverage based on capitation, [3] the average physician derived only 17 percent of revenues from capitation fees, and existing financial incentives were perpetuated. [4] And although the administrative burdens of contracting with managed-care plans have
increased the overhead associated with practice, physicians' net incomes held fairly steady through the 1990s. [5] The so-called managed-care backlash from physicians and hospitals maintained fee-for-service financing and wide-open networks, while pressure from patients maintained their choice of providers.

The second argument for homeostasis comes from the anemic impact of changes in health care policy in the 1990s. In 1993 and 1994, the Clinton health plan, although one of the new administration's highest priorities, not only became bogged down in politics but also ran up against the public's basic satisfaction with how health care was organized, financed, and delivered. [6,7] In 1996, the enactment of the Health Insurance Portability and Accountability Act (HIPAA) represented an attempt to improve the individual insurance market and permitted medical savings accounts as a pilot program. The 1997 Balanced Budget Act created Medicare+Choice, which was intended to promote managed care under Medicare and to create new options for beneficiaries. Also in 1997, Congress created the State Children's Health Insurance Program (SCHIP), a new health insurance program for low-income children.

HIPAA has done little to improve the insurance market, and medical savings accounts have had limited appeal to date. Although SCHIP has been successful in enrolling 3.3 million children as of fiscal year 2000, many eligible children have not been enrolled, resulting in only modest reductions in the number of uninsured children. [8,9] Enrollment in Medicare+Choice plans peaked at 6.35 million in 1999, then declined to 5.61 million as of August 2001, when they accounted for only 14 percent of eligible Medicare beneficiaries. [10]

The third argument comes from the limited effect of organizational changes in hospitals and health systems. In a move catalyzed by the proposed Clinton health plan, hospitals began to form vertically and horizontally integrated health care systems, purchase physicians' practices, and increase their market power. The for-profit hospital sector was aggressively expanding, and nonprofit hospitals and health systems began to explore conversion to for-profit status.

In 2002, the evidence suggests that these efforts have led to few economies of scale or scope. [11] The for-profit hospital industry has been beset by scandal and business reversals. Most attempts at integration, such as the University of Pennsylvania's primary care system and the merger of the University of California at San Francisco and Stanford University Hospitals, were spectacular failures, and in the late 1990s, many hospital and health systems sold or spun off system components. [12] The promise of a seamless continuum of care foundered as a result of inadequate management, scant incentives, and concern about such regulatory and legal hurdles as antitrust and self-referral restrictions.

The final argument for homeostasis rests on the attitudes of the public, which evidenced a continuing preference for broad choice among providers and first-dollar insurance coverage, and the limited change during the decade in terms of public satisfaction with the system. For example, approximately 50 percent of survey respondents in the United States expressed a desire for fundamental change in our health system in 1990, whereas about 18 percent felt only minor changes were needed; these proportions were virtually identical in 2000. [13]

Some might argue that the lack of change in the health care system during the 1990s reflected flaws in managed care and in public policy, rather than efforts to maintain homeostasis under systemic stress. This view, which is the conventional wisdom among many health policy experts, suggests that we need better ideas in the marketplace (such as consumer-directed health care [14]) or in public policy (such as a Medicare prescription-drug benefit). The problem with this view is that it neglects both the compensatory responses that arise from incremental efforts to change single components of the health care system and the deeper forces that are the root causes of ongoing stress.

So What Has Changed?

Yet the turbulence of the 1990s did profoundly affect our health care system. Maintenance of homeostasis requires effort and consumes energy. The cumulative effect of the public-policy and marketplace changes of the 1990s has been the near-elimination of the system's reserve capacity and the exhaustion of available compensatory mechanisms. Each part of the health care system used strategies to maintain its own stability. Hospitals closed beds and tried to increase the productivity of their workers, particularly nurses. Physicians added staff and worked harder to maintain their income in the face of managed care. Employers passed on some health insurance cost increases to employees, with the average worker's single-coverage contribution rising from 11 percent of the premium in 1988 to 15 percent in 2001, and with even greater cost sharing envisioned in the future.[15]

Unfortunately, each of these compensatory mechanisms may be nearing its limits. Hospitals are experiencing nursing shortages due to the harsh conditions facing bedside nurses, and — although they have had some recent success in obtaining more favorable rates from insurers — most hospitals face the prospect not only of eroding margins but also of inadequate access to capital for their physical-plant or information-technology infrastructure. [16,17] Use of emergency departments increased 14 percent between 1997 and 2000, [18] and many emergency departments are reaching capacity, prompting diversions of critically ill patients to other facilities. Physicians' incomes have begun to drop, [19] and "running faster" — working even harder — is untenable as a long-term strategy. Employees' capacity to absorb further cost increases is ultimately limited, and health care spending will begin to crowd out other important goals. Wal-Mart, for example, has offered employees the opportunity to dip into their 401(k) retirement plans to help pay for their share of health insurance premiums, thus forcing workers to trade today's health security off against tomorrow's income security. [20] More important, the underlying sources of stress, or "deep forces," that were in place in 1992 have continued, practically unabated, throughout the decade.

Deep Force 1: Steady Increases in Real Health Care Costs

Although health care costs moderated in the mid-1990s and the booming economy slowed the growth of the uninsured population, much of the cost containment of the 1990s reflected reduced overall inflation and the health insurance underwriting cycle. [21] The underlying drivers of health care cost increases — the aging of the population and technological progress — have continued unabated, and national health care spending in 2000 was $1.3 trillion, or 13.2 percent of the gross domestic product. [22] Even the Federal Employees Health Benefits Program and the California Public Employees' Retirement System, two of the best-managed and most aggressive purchasers, faced premium increases of 13 percent and 25 percent, respectively, in 2002. [23,24] Clearly, we as a nation obtain value from this spending. [25] Health care is a driver of economic growth, and the fruits of modern medicine improve the quantity and quality of life. The problem is that,
in aggregate, our collective demand for health services is greater than our collective willingness to pay for them, from both public and private sources.

Deep Force 2: Unabated Demand for Health Care Services

The continuing demand for health care services comes from three sources: medical progress, demographic change, and wealth. As we develop new and better diagnostic and therapeutic technology, aggregate demand increases, even if unit costs go down. New therapies for depression, for hyperlipidemia, and for diabetes offer greater longevity and improved quality of life, but at greater cost. Advances in basic science (catalyzed by the understanding of the human genome and a growing budget for the National Institutes of Health) will lead to new breakthroughs in the future. [26]

Demographic and other changes have major roles in sustaining demand, as well. Age-specific disability rates are falling. [27] Some predict that this trend will reduce health spending, but it is more likely to increase costs, as healthier elderly persons seek more care to improve their quality of life through joint replacements, aggressive treatment of cardiac and peripheral vascular disease, and treatment of anxiety and depression. The aging of the baby-boomer cohort, "entitled" all their lives, will undoubtedly accelerate this trend. In addition, the epidemic of obesity and physical inactivity, caused by steady affluence, by changes in the nature of work and in our built environment, and by systematic alterations in the U.S. population's caloric balance, [28] will lead to an increasing prevalence of diabetes and heart disease.

Third, national disparities in wealth and income are increasing. Increases in disposable income among the affluent affect the mix of services delivered in health care. At the most extreme, some physicians are opting for "boutique medicine," offering expanded access and service to a small group of patients who are willing and able to pay a "concierge fee" on top of their health insurance premiums. [29] The greater wealth of the population overall also affects spending by pharmaceutical and medical-device companies, with disproportionate investment in lifestyle-enhancing drugs and devices.

Deep Force 3: Dispirited Providers

The health professions workforce is now showing signs of structural weakening. Over the 1990s, the number of students entering nursing school declined by 25 percent, [30] and the age of the average nurse increased from 37.7 to 45.2 years. [31,32] The cyclic nature of earlier nursing shortages delayed the recognition of these fundamental differences in the current nursing shortage.

For physicians, the future looks bleak as well. Most health policymakers dismissed physicians' concern about changes in medical practice either as transient complaints during a period of market transformation or as coming from a vocal minority of older physicians. Physicians have attempted to adapt to the managed-care environment and have tried toincrease their productivity. Yet providers who thought a few years of tumult might lead to some stability now foresee more years of aggravation, cost pressure, and diminishing reimbursement. Dissatisfaction is widespread among physicians, [33,34] and medical-school applications have decreased 15 percent [35] over the past four years.

Stress, Discontinuity, or Collapse?

These forces, in combination, threaten to overwhelm the health system's compensatory mechanisms. The early warnings of severe stress can be observed this year. Medicaid policy, for example, now allows states to make new trade-offs between the scope of benefits and enrollment. [36] States must choose whether it is better to cover more people with more limited benefits or to cover fewer people with broader benefits. Employers, facing double-digit cost increases, must choose whether to pass these cost increases on to workers or to drop or limit coverage. For the first time, we may be seeing serious problems of access to health care for Medicare beneficiaries. [37]

What does this model predict for the future? First, we should expect health professionals, traditionally rather
conservative, to become radicalized. Already the American Medical Association has endorsed previously unheard-of liberal policies during debates over the Patients' Bill of Rights and has encouraged the formation of physicians' unions for purposes of collective bargaining. Established labor unions view health care as prime ground for organizing, particularly among nurses and other hospital workers. Three states have already passed bills prohibiting mandatory overtime for nurses, and 13 other states have introduced such legislation. [38] Strikes and picket lines, work stoppages, and "white-coat flu" could be part of our future.

Second, we should expect more widespread, and more explicit, income-based differences in health care coverage. With health care costs increasingly being passed on to workers and with income inequality increasing, the costs of broad health care coverage will increasingly be unaffordable for all but the wealthiest. Just as we have accepted tiers in housing, education, and lifestyle, tiers in health care may become more and more acceptable. The number of uninsured persons will rise sharply; low-income workers and Medicaid patients will be able to afford only restricted health plans, whereas upper-income workers will have broader benefits and more choices. [39] Rationing, heretofore acceptable in the United States only when implicit (as in the absence of health care coverage for nearly 40 million people), may become both more explicit and more acceptable. The poor may just have to live with angina, while the wealthy receive coated stents and
immune therapy to keep their coronary arteries clear.

Third, we should expect periodic spikes in demand to cause stress to the health care system. In the aftermath of the terrorist attacks on September 11, 2001, the capacity of the nation's public-health and emergency-response systems is undergoing new scrutiny. Although it has become obvious hospitals do not have the capacity to care for the population in the event of a terrorist attack, few realize that another type of demand spike could increase stress on our nation's health care system — that caused by the introduction of highly effective, expensive technology. Rumbles of this phenomenon were heard in 2001. Recombinant human activated protein C, an effective drug against sepsis, which costs $10,000 per dose, received approval from the Food and Drug Administration, and hospital executives are wrestling with the costs and trade-offs involved in the use of this new drug. [40,41] Technological and scientific advances will undoubtedly lead to more high-cost blockbusters.

Preventing Collapse

Although some believe that health care underwent a revolution in the 1990s, the basic health care system that was in place a decade ago remains today as a result of the deployment of compensatory mechanisms by hospitals, employers, physicians, policymakers, and patients. These mechanisms have finite capacity, however, and our collective ability to absorb further shocks is rapidly diminishing. Some might believe the health system will continue to adapt to ongoing stress. It is far more likely that we will face major discontinuities, or even collapse of our health system, in years ahead.

How can we prevent discontinuity or collapse of our health care system? As a first step, we need more detailed analysis of system dynamics and of the reserve capacity in the health care system. Existing data-collection efforts are useful, but agencies such as the National Center for Health Statistics and the Agency for Healthcare Research and Quality are chronically and woefully underfunded. Data could be used to create a set of leading indicators, or "vital signs," of impending problems and to help community and health system leaders develop contingency plans to deal with health system disasters — the human, financial, legal, economic, and political challenges that will arise if and when a community health system collapses. A few examples of leading indicators that could be tracked are hospital margins and bond ratings, results of patient surveys about access to care, and findings from polls of physicians' offices to assess their
willingness to see Medicare and Medicaid patients. Just as the Great Depression led to innovations in the banking industry, such as the Federal Deposit Insurance Corporation, we will need to develop analogous stabilizing innovations in health care.

Second, policymakers need to address the deep forces that are stressing the system, rather than the superficial issues, such as the Patients' Bill of Rights, that dominate the agendas of policymakers and the media. The plight of the uninsured, the erosion of the safety net, and the need for fundamental redesign of the health care system will never be addressed without such refocusing.

Third, the public needs to confront and debate some fundamental realities of health care. Foremost among these is the fact that expanding coverage to the nation's uninsured would be enormously expensive, whereas letting nearly 40 million citizens live without coverage is unfair and cruel. Attacking insurers, drug companies, HMOs, doctors, or "waste, fraud, and abuse" makes powerful rhetoric, but does little to deepen understanding of what it would take to provide high-quality health care for all.

A high-quality, cost-effective, and just health care system can be developed in the United States. It would require the public will to spend substantial resources on expanding coverage, willingness on the part of providers to restructure the delivery of care so as to improve quality and access, [42] a general recognition of the limits to medicine and to spending on health services, [43] and a social consensus on the nature and degree of inequality in our health care system. We will need to do these things sooner or later. As in the case of a patient facing a physiological assault with diminished homeostatic reserve, it would be far preferable to treat the U.S. health system as an outpatient than to wait until it is in the intensive care unit, dependent on a ventilator and on pressor therapy.
 

Lewis G. Sandy, M.D.
Robert Wood Johnson Foundation
Princeton, NJ 08543-2316

I am indebted to Paul Ginsburg, Kelly Hunt, Jim Knickman, Risa Lavizzo-Mourey, Steve Schroeder, and Jessica Siehl.

The views expressed in this article are solely the author's and do not represent the views of the Robert Wood Johnson Foundation.

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Additional Reference:

1. Frenster JH, "Freedom-of-Choice Medical Care: A System of Double Vouchers for Patients and Physicians", American College of Physicians, 1990.

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