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Chapter 1

A Distinctive System of Health Care Delivery

Learning Objectives

• To understand the basic nature of the US health care system

• To outline the four key functional components of a health care de-livery system

• To discuss the primary characteristics of the US health care systemfrom a free market perspective

• To emphasize why it is important for health care managers to un-derstand the intricacies of the health care delivery system

• To get an overview of the health care systems in other countries

• To introduce the systems model as a framework for studying thehealth services system in the United States

1

The US health care delivery system is a behemoth that is almost impossible for any single entity to manage and control.

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IntroductionThe United States has a unique system ofhealth care delivery.* It is unlike any otherhealth care system in the world. Most devel-oped countries have national health insur-ance programs run by the government andfinanced through general taxes. Almost allcitizens in such countries are entitled to re-ceive health care services. Such is not thecase in the United States, where not allAmericans are automatically covered byhealth insurance. The US health care deliv-ery system is not a system in the true sense,even though it is called a system when ref-erence is made to its various features, com-ponents, and services. Hence, it may besomewhat misleading to talk about theAmerican health care delivery “system” be-cause a real system does not exist (Wolinsky1988, 54). The US health care system is un-necessarily fragmented, which is perhaps itscentral feature (Shortell et al. 1996). The de-livery system has continued to undergo pe-riodic changes, mainly in response toconcerns with cost, access, and quality. Inspite of these efforts, providing at least a ba-sic package of health care at an affordablecost to every man, woman, and child inAmerica remains an unrealized goal. It ishighly unlikely that this goal will materializeanytime soon, mainly because expanding ac-cess to health care, while containing overallcosts and maintaining expected levels ofquality, is a daunting challenge.

Describing health care delivery in theUnited States can be a frustrating task. To fa-cilitate an understanding of the structural andconceptual basis for the delivery of healthservices, this book is organized according toa systems framework presented at the end ofthis chapter. Also, the mechanisms of healthservices delivery in the United States are col-lectively referred to as a system throughoutthis book.

The main objective of this chapter is toprovide a broad understanding of how healthcare is delivered in the United States. Theoverview theme provided here introduces thereader to several concepts that are treatedmore extensively in later chapters.

An Overview of the Scope and Size of the SystemTable 1–1 demonstrates the complexity ofhealth care delivery in the United States.Many organizations and individuals are in-volved in health care. These range from ed-ucational and research institutions, medicalsuppliers, insurers, payers, and claimsprocessors to health care providers. Multi-tudes of providers are involved in the provi-sion of preventive, primary, subacute, acute,auxiliary, rehabilitative, and continuing care.An increasing number of managed care or-ganizations (MCOs) and integrated networksnow provide a continuum of care coveringmany of the service components.

The US health care delivery system ismassive. Total employment in various healthdelivery settings is approximately 10 million,including approximately 744,000 profes-sionally active doctors of medicine (MDs),2.2 million active nurses, 168,000 dentists,226,000 pharmacists, and more than 700,000

2 CHAPTER 1 • A Distinctive System of Health Care Delivery

*The expressions “health care delivery” and “health servicesdelivery” can have two slightly different meanings. In a broadsense, they collectively refer to the major components of thesystem and the process that enables people to receive healthcare. In a more restricted sense, they refer to the act of pro-viding health care services to patients, such as in a hospitalor physician’s clinic. By paying attention to the context, thereader should be able to identify which meaning is intended.

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An Overview of the Scope and Size of the System 3

Table 1–1 The Complexity of Health Care Delivery

Education/Research Suppliers Insurers Providers Payers Government

Medical schoolsDental schoolsNursing programsPhysician assistant

programsNurse practitioner

programsPhysical therapy,occupational therapy, speechtherapy programs

Research organizations

Private foundationsUS Public Health Service (AHRQ,ATSDR, CDC,FDA, HRSA, IHS,NIH, SAMHSA)

Professional associations

Trade associations

Pharmaceutical companies

Multipurpose suppliers

Biotechnology companies

Managed careplans

Blue Cross/Blue Shield plans

Commercialinsurers

Self-insured employers

MedicareMedicaidVATricare

Preventive CareHealth departments

Primary CarePhysician officesCommunity healthcenters

DentistsNonphysician providers

Subacute CareSubacute care facilitiesAmbulatory surgery centers

Acute CareHospitals

Auxiliary ServicesPharmacistsDiagnostic clinicsX-ray unitsSuppliers of medical equipment

Rehabilitative ServicesHome health agencies

Rehabilitation centersSkilled nursing facilities

Continuing CareNursing homes

End-of-Life Care Hospices

IntegratedManaged care organizations

Integrated networks

Blue Cross/Blue Shield plans

Commercial insurersEmployersThird-party administrators

State agencies

Public insurance financing

Health regulations

Health policyResearch fundingPublic health

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administrators in medical and health caresettings. Approximately 325,000 physical,occupational, and speech therapists providerehabilitation services. The vast array ofhealth care institutions includes 5,760 hos-pitals, 16,100 nursing homes, and 4,300 in-patient mental health facilities. Nearly 1,000federally qualified health center grantees,with over 5,700 clinical sites, provide pre-ventive and primary care services to ap-proximately 16 million people living inmedically underserved rural and urban areasyearly. Various types of health care profes-sionals are trained in 150 medical andosteopathic schools, 56 dental schools, 91schools of pharmacy, and more than 1,500nursing programs located throughout thecountry. There are 174.5 million Americanswith private health insurance coverage, 41.7million Medicare beneficiaries, and 42.5million Medicaid recipients. Health insur-ance can be purchased from over 1,300health insurance companies and 64 BlueCross/Blue Shield plans. Multitudes of gov-ernment agencies are involved with the fi-nancing of health care, medical and healthservices research, and regulatory oversightof the various aspects of the health care de-livery system (National Center for HealthStatistics 2006; Blue Cross Blue Shield As-sociation 2007; America’s Health InsurancePlans 2004; Kaiser Family Foundation Com-mission on Medicaid and the Uninsured2005; Kaiser Family Foundation MedicarePolicy Project 2005; American Associationof Colleges of Pharmacy 2007; AmericanAssociation of Medical Colleges 2007;American Association of Colleges ofOsteopathic Medicine 2007; American Den-tal Education Association 2007; National As-sociation of Community Health Centers2006).

A Broad Description of the SystemUS health care does not consist of a networkof interrelated components designed to worktogether coherently, which one would expectto find in a veritable system. To the contrary,it is a kaleidoscope of financing, insurance,delivery, and payment mechanisms thatremain unstandardized and loosely coordi-nated. Each of these basic functional com-ponents—financing, insurance, delivery, andpayment—represents an amalgam of public(government) and private sources. Thus,government-run programs finance and in-sure health care for select groups of peoplewho meet each program’s prescribed criteriafor eligibility. To a lesser degree, governmentprograms also engage in delivering certainhealth services directly to the recipients ofcare, such as veterans, military personnel,and the uninsured who may depend on cityand county hospitals or limited services of-fered by public health clinics. However, thefinancing, insurance, payment, and deliveryfunctions are largely in private hands.

The market-oriented economy in theUnited States attracts a variety of private en-trepreneurs driven by the pursuit of profitsin carrying out the key functions of healthcare delivery. Employers purchase health in-surance for their employees through privatesources, and people receive health care ser-vices delivered by the private sector. Thegovernment finances public insurancethrough Medicare, Medicaid, and the StateChildren’s Health Insurance Program(SCHIP) for a significant portion of the verylow-income, elderly, disabled, and pediatricpopulations. But, insurance arrangements formany publicly insured people are madethrough private entities, such as HMOs, andhealth care services and are rendered by pri-


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vate physicians and hospitals. The blend ofpublic and private involvement in the deliv-ery of health care has resulted in:

• a multiplicity of financial arrangementsthat enable individuals to pay for healthcare services

• numerous insurance agencies employingvaried mechanisms for insuring againstrisk

• multiple payers that make their own de-terminations regarding how much to payfor each type of service

• a large array of settings where medicalservices are delivered

• numerous consulting firms offering theirexpertise in planning, cost containment,quality, and restructuring of resources

There is little standardization in a sys-tem that is functionally fragmented. The var-ious system components fit together onlyloosely. Such a system is not subject to over-all planning, direction, and coordinationfrom a central agency, such as the govern-ment. Due to the missing dimension ofsystem-wide planning, direction, and coor-dination, there is duplication, overlap, inad-equacy, inconsistency, and waste leading tocomplexity and inefficiency. The systemdoes not lend itself to standard budgetarymethods of cost control. Each individual andcorporate entity within a predominantly pri-vate entrepreneurial system seeks to manip-ulate financial incentives to its ownadvantage without regard to its impact on thesystem as a whole. Hence, cost containmentremains an elusive goal. In short, the UShealth care delivery system is a behemoththat is almost impossible for any single enti-ty to manage and control. It is also an eco-

nomic megalith. The US economy is thelargest in the world and, compared to othernations, consumption of health care servicesin the United States represents a greaterproportion of the country’s total economicoutput. While crediting the system with de-livering some of the best medical care in theworld, at least according to some standards,it falls short of delivering equitable servicesto every American.

An acceptable health care delivery sys-tem should have two primary objectives: (1) it must enable all citizens to access healthcare services, and (2) the services must becost-effective and meet certain establishedstandards of quality. In many ways, the UShealth care delivery system falls short ofthese ideals. On the other hand, certain fea-tures of US health care are the envy of theworld. The United States leads the world inthe latest and the best in medical technology,medical training, and research. It offers someof the most sophisticated institutions, prod-ucts, and processes of health care delivery.These achievements are indeed admirable,but a lot more remains unaccomplished.

Basic Components of a Health ServicesDelivery SystemAs illustrated in Figure 1–1, a health care de-livery system incorporates four functionalcomponents—financing, insurance, delivery,and payment that—that are necessary for thedelivery of health services. The four function-al components make up the quad-functionmodel. Health care delivery systems differ de-pending on the arrangement of the four com-ponents. The four functions generally overlap,but the degree of overlapping varies between

Basic Components of a Health Services Delivery System 5

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a private and a government-run system and be-tween a traditional health insurance and man-aged care-based system. In a government-runsystem, the functions are more closely inte-grated and may even be indistinguishable.Managed care arrangements also integrate thefour functions to varying degrees.

FinancingHealth care often requires costly diagnostictests and procedures and lengthy hospitalstays. Financing is necessary to obtain health

insurance or to pay for health care services.For most privately insured Americans, healthinsurance is employer-based; that is, healthcare is financed by their employers as afringe benefit. A dependent’s spouse or chil-dren may also be covered by the workingspouse’s, or parent’s, employer. Most em-ployers, except for the very large ones, pur-chase health insurance for their employeesthrough an insurance company selected bythe employer. In recent years, employershave shifted their purchases from traditionalinsurance companies to MCOs.


EmployersGovernment–Medicare, MedicaidIndividual self-funding

FINANCING

Insurance companiesBlue Cross/Blue ShieldSelf-insurance

INSURANCE

Insurance companiesBlue Cross/Blue ShieldThird-party claims processors

PAYMENT

PhysiciansHospitalsNursing homesDiagnostic centersMedical equipment vendorsCommunity health centers

DELIVERY (Providers)

Access

Riskunderwriting

Capitationor

discounts

Utilizationcontrols

Integration of functions through managed care (HMOs, PPOs)

Figure 1–1 Basic Health Care Delivery Functions.

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InsuranceInsurance protects the insured against cata-strophic risks when needing expensive healthcare services. The insurance function alsodetermines the package of health servicesthe insured individual is entitled to receive.It specifies how and where health care ser-vices will be received. The insurance com-pany or MCO also functions as a claimsprocessor and manages the disbursement offunds to the providers of care.

DeliveryThe term delivery refers to the provision ofhealth care services and the receipt of insur-ance payments directly for those services.Common examples of providers who deliv-er care and services include physicians, den-tists, optometrists, and therapists in privatepractices, hospitals, diagnostic and imagingclinics, and suppliers of medical equipment(e.g., wheelchairs, walkers, ostomy supplies,oxygen). With few exceptions, mostproviders render services to people who havehealth insurance.

PaymentThe payment function deals with reimburse-ment to providers for services delivered. Re-imbursement is the determination of howmuch to pay for a certain service. Funds foractual disbursement come from the premi-ums paid to the insurance company or MCO.In the case of an insurance company, when acovered individual receives health care ser-vices, the provider of services either requirespayment up front or agrees to bill the insur-ance company on behalf of the patient. In theformer case, the patient files a claim with theinsurance company to be reimbursed for a

portion of the fees and charges paid to theprovider. The most common practice, how-ever, is for the insurance company to pay itsportion to the provider directly. When re-ceiving services under a managed care plan,the patient is usually required to pay only asmall out-of-pocket amount, such as $15 or$20, to see a physician. The remainder iscovered by the managed care plan.

A Disenfranchised SegmentSince the United States has an employer-based financing system, it is not difficult tosee why the unemployed generally have nohealth insurance. However, even some em-ployed individuals may not have health in-surance coverage for two main reasons: (1)In most states, employers are not mandatedto offer health insurance to their employees;therefore, some employers, due to econom-ic constraints, do not offer it. Some smallbusinesses simply cannot get group insur-ance at affordable rates and therefore are notable to offer health insurance as a benefit totheir employees. (2) In many work settings,participation in health insurance programs isvoluntary and does not require employees tojoin when an employer offers health insur-ance. Some employees choose not to sign upmainly because they cannot afford the cost ofhealth insurance premiums. Employers rarelypay 100 percent of the insurance premium;most require their employees to pay a por-tion of the cost, called premium cost shar-ing. Others require their employees to paythe full cost, in which case health insurancebecomes even more unaffordable. Evenwhen the employee has to pay 100 percentof the premium, the benefit is that employ-ees get group rates through their employerthat are generally lower than what the rates

A Disenfranchised Segment 7

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would be if the employees were to purchasehealth insurance on their own. Employeeswho do not have health insurance offered bytheir employers, or those who are self-employed, have to obtain health insurance ontheir own. Individual rates are typically high-er than group rates and, in some instances,health insurance is unavailable when adversehealth conditions are present.

In America, working people earning lowwages are the most disenfranchised becausemost of them are not eligible for public ben-efits and they cannot afford premium costsharing. The United States has a significantnumber of uninsured—those without privateor public health insurance coverage. In 2004,the proportion of Americans under age 65without health insurance was estimated at41.6 million, or 16–17 percent of the totalpopulation (National Center for Health Sta-tistics 2006, 26). The US government fi-nances health benefits for certain specialpopulations, including government employ-ees, the elderly (age 65 and over), peoplewith disabilities, some people with very lowincomes, and children from low-incomefamilies. The program for the elderly andcertain disabled individuals is calledMedicare. The program for the indigent,jointly administered by the federal govern-ment and state governments, is named Med-icaid. The program for children fromlow-income families, another federal/statepartnership, is called the State Children’sHealth Insurance Program (SCHIP). Forsuch public programs, the government mayfunction as both financier and insurer, or theinsurance function may be carved out to anHMO. Private providers, with a few excep-tions, render services to these special cate-gories of people. The government pays forthe services, generally by establishing con-

tractual arrangements with selected inter-mediaries for the actual disbursement of pay-ments to the providers. Thus, even ingovernment-financed programs, the fourfunctions of financing, insurance, delivery,and payment may be quite distinct.

Transition from Traditional Insurance to Managed CareUnder traditional insurance, the four basichealth delivery functions have been frag-mented; that is, the financiers, insurers,providers, and payers have often been dif-ferent entities, with a few exceptions. For ex-ample, self-insured employers, Medicaid insome states, and most participants inMedicare have integrated the functions of fi-nancing and insurance. Commercial insurershave integrated the functions of insuranceand payment. During the 1990s, however,health care delivery in the United States un-derwent a fundamental change involving atighter integration of the basic functions offinancing, insurance, payment, and deliverythrough managed care.

Previously, fragmentation of the func-tions meant a lack of control over utilizationand payments. The quantity of health careconsumed refers to utilization of health ser-vices. Traditionally, determination of the uti-lization of health services and the pricecharged for each service were left up to theinsured individuals and their physicians. Dueto rising health care costs, current deliverymechanisms have instituted some controlsover both utilization and price.

Managed care is a system of health caredelivery that (1) seeks to achieve efficien-


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cies by integrating the basic functions ofhealth care delivery, (2) employs mecha-nisms to control (manage) utilization ofmedical services, and (3) determines theprice at which the services are purchasedand, consequently, how much the providersget paid. The primary financier is still theemployer or the government, as the case maybe. Instead of purchasing health insurancethrough a traditional insurance company, theemployer contracts with an MCO, such as anHMO or a PPO, to offer a selected healthplan to its employees. In this case, the MCOfunctions like an insurance company andpromises to provide health care services con-tracted under the health plan to the enrolleesof the plan. The term enrollee (member)refers to the individual covered under theplan. The contractual arrangement betweenthe MCO and the enrollee—including thecollective array of covered health servicesthat the enrollee is entitled to—is referred toas the health plan (or “plan,” for short). Thehealth plan uses selected providers fromwhom the enrollees can choose to receive rou-tine services. This primary care provider—often a physician in general practice—is cus-tomarily charged with the responsibility to de-termine the appropriateness of higher level orspecialty services. The primary care providerrefers the patient to receive specialty servicesif deemed appropriate.

Managed care integrates the four basicfunctions of health care delivery. Eventhough financing is primarily through theemployers, health plans set up negotiated feearrangements through contracts with theproviders. The negotiated fee arrangementsare based on either capitation or discounts.Capitation is a payment mechanism inwhich all health care services are includedunder one set fee per covered individual. In

other words, it is a predetermined fixed pay-ment per member per month (PMPM). As analternative to capitation, some MCOs nego-tiate discounts against the providers’ cus-tomary fees. Generally, HMOs usecapitation, whereas PPOs use discounts.Managed care topics are discussed in greaterdetail in Chapter 9.

Costs are also managed indirectlythrough control over utilization. The plan un-derwrites risk; that is, in setting the premi-ums, the plan relies on the expected cost ofhealth care utilization. There is a risk that ex-penditures for providing health care servicesmay exceed the premiums collected. Theplan thus assumes the role of insurance. Theplan pays the providers (through capitationor discounted fees) for services rendered tothe enrollees and thus assumes the paymentfunction. Delivery of services may be par-tially through the plan’s own hired physi-cians, but most services deliver throughcontracts with external providers, such asphysicians, hospitals, and diagnostic clinics.

Primary Characteristics of the US Health Care SystemIn any country, certain external influencesshape the basic character of its health servicesdelivery system. These forces consist of thepolitical climate of a nation, economic de-velopment, technological progress, social andcultural values, physical environment, popu-lation characteristics, such as demographicand health trends, and global influences (Fig-ure 1–2). The combined interaction of theseenvironmental forces influences the courseof health care delivery.

Primary Characteristics of the US Health Care System 9

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Ten basic characteristics differentiate theUS health care delivery system from that ofother countries:

1. No central agency governs the system.

2. Access to health care services is se-lectively based on insurance coverage.

3. Health care is delivered under imper-fect market conditions.

4. Third-party insurers act as intermedi-aries between the financing and de-livery functions.

5. Existence of multiple payers makesthe system cumbersome.

6. Balance of power among variousplayers prevents any single entityfrom dominating the system.

7. Legal risks influence practice behavior.

8. Development of new technology cre-ates an automatic demand for its use.

9. New service settings have evolvedalong a continuum.

10. Quality is no longer accepted as anunachievable goal in the delivery ofhealth care.

No Central AgencyThe US health care system is not adminis-tratively controlled by a department or anagency of the government. Most other de-veloped nations have national health careprograms in which every citizen is entitledto receive a defined set of health care ser-


Political climate• President and Congress• Interest groups• Laws and regulations

Physical enviroment• Toxic waste, air pollutants, chemicals• Sanitation• Ecological balance, global warming

Population characteristics• Demographic trends and issues• Health needs• Social morbidity (AIDS, drugs, homicides, injuries, auto accidents, behavior-related diseases)

Social values and culture• Ethnic diversity• Cultural diversity• Social cohesion

Technology development• Biotechnology• Information systems

Economic conditions• General economy• Competition

Healthcare

delivery

Global infuences• Immigration• Trade and travel• Terrorism• Epidemics

Figure 1–2 External Forces Affecting Health Care Delivery.

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vices. Availability of “free” services canbreak a system financially. To control costs,these systems use global budgets to deter-mine total health care expenditures on thenational scale and to allocate resources with-in the budgetary limits. Availability of ser-vices as well as payments to providers issubject to such budgetary constraints. Thegovernment also controls the proliferation ofhealth care services, especially costly med-ical technology. System-wide controls overthe allocation of resources determine to whatextent government-sponsored health careservices are available to the citizenry. For in-stance, the availability of specialized ser-vices is restricted.

By contrast, the United States has main-ly a private system of financing as well asdelivery. Private financing, predominantlythrough employers, accounts for approxi-mately 55 percent of total health care ex-penditures; the government finances theremaining 45 percent (National Center forHealth Statistics 2006, 374). Private deliv-ery of health care means that the majority ofhospitals and physician clinics are privatebusinesses, independent of the government.No central agency monitors total expendi-tures through global budgets and controls theavailability and utilization of services. Nev-ertheless, the federal and state governmentsin the United States play an important role inhealth care delivery. They determine public-sector expenditures and reimbursement ratesfor services provided to Medicaid, SCHIP,and Medicare beneficiaries. The governmentalso formulates standards of participationthrough health policy and regulation mean-ing that providers must comply with the stan-dards established by the government to becertified to provide services to Medicaid,SCHIP, and Medicare beneficiaries. Certifi-cation standards are also regarded as mini-

mum standards of quality in most sectors ofthe health care industry.

Partial AccessCountries with national health care programsprovide universal access; that is, health careis available to all citizens. Such is not thecase in the United States. Access means theability of an individual to obtain health careservices when needed. In the United States,access is restricted to: (1) those that havehealth insurance through their employers, (2)those covered under a government healthcare program, (3) those who can afford tobuy insurance out of their own private funds,and (4) those that are able to pay for servicesprivately. Health insurance is the primarymeans for ensuring access. Even though theUnited States offers among the best medicalcare in the world, such care is generally avail-able primarily to those adequately coveredunder a health insurance plan or have ade-quate means to pay for it privately.

As stated earlier, a relatively large seg-ment of the US population is uninsured. Forcontinuous basic and routine care—com-monly referred to as primary care—theuninsured are often unable to see a physicianunless they can pay the physician’s fees orunless they have access to a Federally-Qualified Health Center (FQHC). FQHCsprovide primary care and enabling servicesin medically underserved urban and rural ar-eas, regardless of patients’ ability to pay.Uninsured patients, who cannot afford to payfor private physicians and do not have accessto free care at a health center, often wait un-til health problems develop to seek care. Atthat point, they may be able to receive ser-vices in a hospital emergency department,for which the hospital does not receive anydirect payments (unless the patient is able to


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pay). Uninsured Americans, therefore, areable to obtain medical care for acute illness.Hence, one can say that the United Statesdoes have a form of universal catastrophichealth insurance even for the uninsured (Alt-man and Reinhardt 1996, xxvi). It is well ac-knowledged that the absence of insuranceinhibits the patient’s ability to receive well-directed, coordinated, and continuous healthcare through access to primary care servicesand, when needed, referral to specialty ser-vices. Experts generally believe that the in-adequate access to basic and routine primarycare services is one of the main reasons whythe United States, in spite of being the mosteconomically advanced country, lags behindother developed nations in measures of pop-ulation health, such as infant mortality andoverall life expectancy.

Imperfect MarketUnder national health care programs, pa-tients have varying degrees of choice inselecting their providers; however, true eco-nomic market forces are virtually nonexis-tent. In the United States, even though thedelivery of services is largely in privatehands, health care is only partially governedby free market forces. The delivery and con-sumption of health care in the United Statesdo not quite meet the basic tests of a freemarket, as described below. Hence, the sys-tem is best described as a quasi-market or animperfect market. Following are some keyfeatures characterizing free markets.

In a free market, multiple patients (buy-ers) and providers (sellers) act independent-ly. In other words, in a free market, patientscan choose to receive services from anyprovider. Providers neither collude to fixprices, nor are prices fixed by an externalagency. Rather, prices are governed by the

free and unencumbered interaction of theforces of supply and demand (Figure 1–3).Demand, in turn, is driven by the prices pre-vailing in the free market. Under free marketconditions, the quantity demanded will in-crease as the price is lowered for a givenproduct or service. Conversely, the quantitydemanded will decrease as the price in-creases.

At casual observation, it may appear thatmultiple patients and providers do exist. Mostpatients, however, are now enrolled eitherin a private health plan or in government-sponsored Medicare, Medicaid, or SCHIPprograms if they meet the eligibility criteria.These plans act as intermediaries for the pa-tients. Also, the consolidation of patients intohealth plans has the effect of shifting thepower from the patients to the administratorsof the plans. The result is that, in many re-spects, the health plans, not the patients, arethe real buyers in the health care servicesmarket. Private health plans, in many in-stances, offer their enrollees a limited choiceof providers rather than an open choice.

Theoretically, prices are negotiated be-tween the payers and providers. In practice,however, prices are determined by the pay-ers, such as managed care, Medicare, andMedicaid. Because prices are set by agenciesexternal to the market, they are not governedby the unencumbered forces of supply anddemand.

For the health care market to be free, un-restrained competition must occur amongproviders based on price and quality. Gener-ally speaking, free competition exists amonghealth care providers in the United States.The consolidation of buying power in thehands of private health plans, however, isforcing providers to form alliances and inte-grated delivery systems on the supply side.Integrated delivery systems (discussed in


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Chapter 9) are networks of health servicesorganizations. In certain geographic sectorsof the country, a single giant medical systemhas taken over as the sole provider of majorhealth care services, restricting competition.As the health care system continues to movein this direction, it appears that only in largemetropolitan areas will there be more thanone large integrated system competing to getthe business of the health plans.

A free market requires that patients haveinformation about the availability of variousservices. In reality, patients do not alwayshave adequate information about services.

Technology-driven medical care has becomehighly sophisticated. New diagnostic meth-ods, intervention techniques, and drugs thatare more effective fall in the domain of theprofessional physician. Also, medical inter-ventions are commonly required in a state ofurgency. Hence, patients have neither theskills nor the time and other resources to ob-tain necessary information when needed.Channeling all health care needs through aprimary care provider is likely to reduce thisinformation gap when the primary provideracts as the patient’s advocate or agent. Onthe other hand, the Internet is becoming a


Demand Supply

QQuantity

Price

P E Market-determined equilibrium

Under free-market conditions, there is an inverse relationship between the quantity of medical services demanded and the priceof medical services. That is, quantity demanded goes up when the prices go down and vice versa. On the other hand, there is adirect relationship between price and the quantity supplied by the providers of care. In other words, providers are willing to sup-ply higher quantities at higher prices, and vice versa. In a free market, the quantity of medical care that patients are willing topurchase, the quantity of medical care that providers are willing to supply, and the price reach a state of equilibrium. The equi-librium is achieved without the interference of any nonmarket forces. It is important to keep in mind that these conditions existonly under free-market conditions, which are not characterisitic of the health care market.

Figure 1–3 Relationship between Price, Supply, and Demand under Free-Market Conditions.

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prominent source of medical information.Pharmaceutical advertising is also having animpact on consumer expectations.

In a free market, patients have informa-tion on price and quality for each provider.The current system has other drawbacks thatobstruct information-seeking efforts. Item-based pricing instead of package pricing isone such hurdle. Surgery is a good exampleto illustrate item-based pricing. Patients cangenerally obtain the fees the surgeon wouldcharge for a particular operation. But the fi-nal bill, after the surgery has been per-formed, is likely to include charges forsupplies, use of the hospital’s facilities, andservices performed by providers, such asanesthesiologists, nurse anesthetists, andpathologists. These providers, sometimes re-ferred to as phantom providers functioningin an adjunct capacity, bill for their servicesseparately. Item billing for such additionalservices, which sometimes cannot be antic-ipated in advance, makes it extremely diffi-cult to ascertain the total price beforeservices have actually been received. Pack-age pricing and capitated fees can help over-come these drawbacks, but they have maderelatively little headway for pricing medicalprocedures. Package pricing refers to a bun-dled fee for a package of related services. Inthe surgery example, this would mean oneall-inclusive price for the surgeon’s fees, hos-pital facilities, supplies, diagnostics, pathol-ogy, anesthesia, and postsurgical follow-up.As discussed earlier, with capitation allhealth care services are included under oneset fee per covered individual. Capitation ismore all encompassing than package pric-ing. Whereas package pricing covers ser-vices bundled together for one episode,capitation covers all services an enrollee mayneed during an entire year.

In recent years, quality of health care hasreceived much emphasis. Performance rat-ing of health plans has met some success.However, apart from some sporadic newsstories and selectively published health plan,provider, and hospital “report cards,” thepublic still has scant information on the qual-ity of health care providers.

In a free market, patients must directlybear the cost of services received. The pur-pose of insurance is to protect against the riskof unforeseen catastrophic events. Since thefundamental purpose of insurance is to meetmajor expenses when unlikely events occur,having insurance for basic and routine healthcare undermines the principle of insurance.When you buy home insurance to protect yourproperty against the unlikely event of a fire,you generally do not anticipate the occurrenceof a loss. The probability that you will suffera loss by fire is very small. Also, if a fire oc-curs and causes major damage, insurance willcover the loss, but the policy does not coverroutine wear and tear on the house such aschipped paint or a leaking faucet. Health in-surance, however, generally covers basic androutine services that are predictable. Healthinsurance coverage for minor services, such ascolds and coughs, earaches, and so forth,amounts to prepayment for such services.Health insurance has the effect of insulatingpatients from the full cost of health care.There is a moral hazard that once enrolleeshave purchased health insurance, they will usehealth care services to a greater extent than ifthey were without health insurance. Even cer-tain referrals to higher-level services may beforgone if the patient has to bear the full costof these services.

In a free market for health care, patientsas consumers make decisions about the pur-chase of health care services. The main fac-


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tors that severely limit the patient’s ability tomake health care purchasing decisions havealready been discussed. Even with the bestintentions, the circumstances surroundingsickness and injury generally prohibit com-parative shopping based on price and quali-ty. Further, such information is not easilyavailable. At least two additional factors lim-it the ability of patients to make decisions.First, decisions about the utilization of healthcare are often determined by need rather thanprice-based demand. Need has generallybeen defined as the amount of medical carethat medical experts believe a person shouldhave to remain or become healthy (Feldstein1993, 74–75). Needs can also be based onself-evaluation of one’s own health status.Second, the delivery of health care can resultin demand creation. This follows from self-assessed need, which, coupled with moralhazard, leads to greater utilization. This cre-ates an artificial demand because prices arenot taken into consideration. Practitionerswho have a financial interest in additionaltreatments also create artificial demand(Hemenway and Fallon 1985), commonly re-ferred to as supplier-induced demand orprovider-induced demand. Functioning asthe patients’ agents, physicians exert enor-mous influence on the demand for healthcare services (Altman and Wallack 1996).Research studies have pointed to physicians’behavior of creating demand to their own fi-nancial benefit (see, for instance, the work ofMcGuire and Pauly 1991). Demand creationoccurs when physicians prescribe medicalcare beyond what is clinically necessary. Itcan include practices such as making morefrequent follow-up appointments than nec-essary, prescribing excessive medical tests,and performing unnecessary surgery (San-terre and Neun 1996, 369).

Third-Party Insurers and PayersInsurance often functions as the intermedi-ary among those who finance, deliver, andreceive health care. As discussed earlier,health care is primarily financed by employ-ers in the private sector and by the govern-ment in the public sector. Because thegovernment is a large economic machine, itcan self-insure against risk. Even though thegovernment assumes the insurance function,payments to providers are generally handledthrough insurance intermediaries. Somelarge employers may also be able to self-insure; however, most private employers pur-chase health insurance from an insurancecompany or MCO. The employer’s role is es-sentially relegated to selecting health plansand assisting employees with the enrollmentprocess. The insurance company takes overmost other administrative functions associ-ated with the plan. The providers as well asthe enrollees must comply with the policiesset forth by the insurance company in mat-ters associated with the provision of, andpayment for, health services. Delivery ofhealth care is often viewed as a transactionbetween the patient and the provider. But in-surance and payment functions introduce athird party into the transaction (Griffith1995, 279), the patient being the first partyand the provider the second party.

The intermediary role of insurancecreates a wall of separation between the fi-nancing and delivery functions so that qual-ity of care often remains a secondaryconcern. In normal economic markets, theconsumer is armed with the power to influ-ence demand based on the price and qualityof goods and services. Another way to illus-trate this concept is to say that, in a free mar-ket, consumers vote with their dollar bills for


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the best candidate among competing prod-ucts, based on the price and quality of eachproduct. The insurance intermediary gener-ally does not have the incentive to be the pa-tient’s advocate on either price or quality. Atbest, employees can air their dissatisfactionswith the plan to their employer, who has thepower to discontinue the current plan andchoose another company. In reality, howev-er, employers may be reluctant to changeplans if the current plan offers lower premi-ums compared to a new plan. Nationalhealth care programs have even fewer in-centives for promoting quality, althoughthey can contain costs by artificially fixingprices.

Multiple PayersA national health care system is also some-times referred to as a single-payer systembecause there is generally one primary pay-er, the government. When delivering ser-vices, providers send the bill to an agency ofthe government that subsequently sends pay-ment to each provider.

By contrast, the United States has a mul-tiplicity of health plans and insurance com-panies because each employer is free todetermine the type of health plan it offers.Each plan spells out the type of services theenrollee can receive. Some plans make anarbitrary determination of how much theywill pay for a certain type of service. ForMedicare and Medicaid recipients, the gov-ernment has its own set of regulations andpayment schedules.

Multiple payers often represent a billingand collection nightmare for the providers ofservices. Multiple payers make the systemmore cumbersome in several ways:

• It is extremely difficult for providers tokeep tabs on the numerous health plans.For example, it is difficult to keep upwith which services are covered undereach plan and how much each plan willpay for those services.

• Providers must hire a battery of claimsprocessors to bill for services and mon-itor receipt of payments. Billing prac-tices are not always standardized. Eachpayer establishes its own format.

• Payments can be denied for not follow-ing exactly the requirements set by eachpayer.

• Denied claims necessitate rebilling.

• When only partial payment is received,some health plans may allow the providerto balance bill the patient for the amountthe health plan will not pay. Other plansprohibit balance billing. Even when thebalance billing option is available to theprovider, it triggers a new cycle of billingsand collection efforts.

• Providers must sometimes engage inlengthy collection efforts including writ-ing collection letters, turning delinquentaccounts over to collection agencies, andfinally writing off as bad debt the amountsthat cannot be collected.

• Government programs have complexregulations for determining that paymentis made for services actually delivered.Medicare, for example, requires eachprovider to maintain lengthy documen-tation on services provided.

When all the costs of billing, collections,bad debts, and maintaining medical recordsare aggregated for the entire system, the


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United States ends up spending far more inadministrative costs than the national healthcare system of any country in the world.

Power BalancingThe US health services system involves mul-tiple players (not just multiple payers). Thekey players in the system have been phy-sicians, administrators of health serviceinstitutions, insurance companies, large em-ployers, and the government. Big business,labor, insurance companies, physicians, andhospitals make up the powerful and politi-cally active special interest groups repre-sented before lawmakers by high-pricedlobbyists. Each player has its own economicinterests to protect. Physicians, for instance,want to maximize their incomes and haveminimum interference with the way theypractice medicine; institutional administra-tors seek to maximize payment (commonlyreferred to as reimbursement) from privateand public insurers. Insurance companiesand MCOs are interested in maintaining theirshare of the health care insurance market;large employers want to minimize the coststhey incur for providing health insurance asa benefit to their employees. The governmenttries to maintain or enhance existing bene-fits for select population groups and simul-taneously reduce the cost of providing thesebenefits. The problem is that the self-interestsof different players are often at odds. For ex-ample, providers seek to maximize govern-ment reimbursement for services deliveredto Medicare, Medicaid, and SCHIP benefi-ciaries, but the government wants to containcost increases. Employers dislike risinghealth insurance premiums. Health plans,under pressure from the employers, may con-

strain fees for the providers, who resent anycuts in their incomes.

The fragmented self-interests of the var-ious players produce countervailing forceswithin the system. One positive effect ofthese opposing forces is that they prevent anysingle entity from dominating the system.On the other hand, each player has a largestake in health policy reforms. In an envi-ronment that is rife with motivations to pro-tect conflicting self-interests, achievingcomprehensive systemwide reforms is nextto impossible, and cost containment remainsa major challenge. Consequently, the ap-proach to health care reform in the UnitedStates is often characterized as incrementalor piecemeal.

Legal RisksAmerica is a litigious society. Motivated bythe prospects of enormous jury awards,Americans are quick to drag the alleged of-fender into the courtroom at the slightest per-ception of incurred harm. Private health careproviders have become increasingly moresusceptible to litigation. By contrast, in na-tional health care programs the governmentsare immune from lawsuits. Hence, in theUnited States, the risk of malpractice law-suits is a real consideration in the practice ofmedicine. To protect themselves against thepossibility of litigation, some practitionersengage in what is referred to as defensivemedicine by prescribing additional diagnos-tic tests, scheduling return checkup visits,and maintaining copious documentation.Many of these additional efforts may beunnecessary; hence, they are costly andinefficient.


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High TechnologyThe United States has been the hotbed of re-search and innovation in new medical tech-nology. Growth in science and technologyoften creates demand for new services de-spite shrinking resources to finance sophis-ticated care. People generally want “the latestand the best,” especially when health insur-ance would pay for new treatments. Physi-cians and technicians want to try the latestgadgets. Hospitals compete on the basis ofhaving the most modern equipment and fa-cilities. Once capital investments are made,their costs must be recouped through uti-lization. Legal risks for providers and healthplans alike may also play a role in discour-aging denial of new technology. Thus, sev-eral factors promote the use of costly newtechnology once it is developed.

Continuum of ServicesMedical care services are generally classi-fied into three broad categories: curative(e.g., drugs, treatments, and surgeries), res-torative (e.g., physical, occupational, andspeech therapies), and preventive (e.g., pre-natal care, mammograms, and immuniza-tions). Health care service settings are nolonger confined to the hospital and the physi-cian’s office, where many of the aforemen-tioned services were once delivered. Severalnew settings, such as home health, subacutecare units, and outpatient surgery centers, haveemerged in response to the changing config-uration of economic incentives. Table 1–2 de-picts the continuum of health care services.

Quest for QualityEven though the definition and measurementof quality in health care are not as clear-cut

as they are in other industries, the deliverysector of health care has come under in-creased pressure to develop quality standardsand to demonstrate compliance with thosestandards. There are higher expectations for


Types of Health Services Delivery Settings

Preventive care Public health programsCommunity programsPersonal lifestyles

Primary care Physician’s office or clinicSelf-careAlternative medicine

Specialized care Specialist provider clinicsChronic care Primary care settings

Specialist provider clinicsHome healthLong-term care facilitiesSelf-careAlternative medicine

Long-term care Long-term care facilities Home health

Subacute care Special subacute units(hospitals, long-term care facilities)

Home healthOutpatient surgical centers

Acute care HospitalsRehabilitative care Rehabilitation departments

(hospitals, long-term care facilities)

Home healthOutpatient rehabilitation

centersEnd-of-life care Hospice services provided in

a variety of settings

Table 1–2 The Continuum of Health Care Services

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improved health outcomes at the individualand the broader community levels. The con-cept of continuous quality improvement hasalso received much emphasis in managinghealth care institutions.

Trends and DirectionsSince the final two decades of the 20th cen-tury, the US health care delivery system hascontinued to undergo certain fundamentalshifts in emphasis summarized in Figure1–4. Later chapters discuss these transfor-mations in greater detail and focus on thefactors driving them.

Promotion of health at lesser cost hasbeen the driving force behind these trends.An example of a shift in emphasis is the con-cept of health itself; the focus is changingfrom illness to wellness. Such a change re-quires new methods and settings for wellnesspromotion, although the treatment of illnesscontinues to be the primary goal of the healthservices delivery system. Many of thesechanges are interrelated. A change in onearea requires a modification in other areas.For example, the system of managed care hasbeen necessary for shifting the emphasisfrom illness to wellness, from acute care toprimary care, and from inpatient to outpa-

tient settings. These fundamental moves willshape the future of the health care system.

Significance for Health Care Practitionersand PolicymakersAn understanding of the health care deliverysystem is essential for managers and policy-makers. In fact, an understanding of the in-tricacies within the health services systemwould be beneficial to all those who comein contact with the system. In their respectivetraining programs, health professionals, suchas physicians, nurses, technicians, therapists,dietitians, pharmacists, and others, may un-derstand their own individual roles, but re-main ignorant of the forces outside theirprofession that could significantly impactcurrent and future practices. An understand-ing of the health care delivery system can at-tune health professionals to their relationshipwith the rest of the health care environment.It can help them better understand changesand their potential impact on their own prac-tice. Adaptation and relearning are strategiesthat can prepare health professionals to copewith an environment that will see ongoingchange long into the future.

Policy decisions to address specific prob-lems must also be made within the broadermacro context because policies designed tobring about change in one health care sectorcan have wider repercussions, both desirableand undesirable, in other areas of the system.Policy decisions and their implementation areoften critical to the future direction of thehealth care delivery system. However, in amultifaceted system, future issues will bebest addressed by a joint undertaking that in-volves a balanced representation of the keyplayers in health services delivery: physi-

Significance for Health Care Practitioners and Policymakers 19

◊ Illness

◊ Acute care

◊ Inpatient

◊ Individual health

◊ Fragmented care

◊ Independent institutions

◊ Service duplication

Wellness

Primary care

Outpatient

Community well-being

Managed care

Integrated systems

Continuum of services

Figure 1–4 Trends and Directions in Health Care Delivery.

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cians, insurance companies, managed careorganizations, employers, institutional repre-sentatives, and the government.

Significance for Health Care ManagersAn understanding of the health care systemhas specific implications for health servicesmanagers, who must understand the macroenvironment in which they make critical de-cisions in planning and strategic manage-ment, regardless of whether they manage aprivate institution or a public service agency.Such decisions and actions eventually affectthe efficiency and quality of services deliv-ered. The interactions between the system’skey components and their implications mustbe well understood because the operations ofhealth care institutions are strongly influ-enced, either directly or indirectly, by thefinancing of health services, reimbursementrates, insurance mechanisms, delivery modes,new statutes and legal opinions, and govern-ment regulations.

The environment of health care deliverywill continue to remain fluid and dynamic.The viability of delivery settings, and thusthe success of health care managers, oftendepends on how the managers react to thesystem dynamics. Timeliness of action is of-ten a critical factor that can make the differ-ence between failure and success. Followingare some more specific reasons why under-standing the health care delivery system isindispensable for health care managers.

Positioning the OrganizationHealth services administrators need to un-derstand their own organizational positionwithin the macro environment of the system.Senior managers, such as chief executive of-

ficers, need to evaluate where their organi-zation actually fits in the continuum of ser-vices. They must constantly gauge the natureand impact of the fundamental shifts illus-trated in Figure 1–4. Managers need toconsider which changes in the current con-figuration of financing, insurance, payment,and delivery might affect their organization’slong-term stability. Middle and first-linemanagers also need to understand their rolein the current configuration and how thatrole might change in the future. How shouldresources be realigned to effectively respondto those changes? For example, they need toevaluate whether certain functions in theirdepartments will have to be eliminated, mod-ified, or added. Would the changes involvefurther training? What processes are likelyto change and how? What do they need to doto maintain the integrity of their institution’smission, the goodwill of the patients theyserve, and the quality of their services? Re-gardless of the situation, a well thoughtthrough and appropriately planned change islikely to cause less turbulence for theproviders as well as the recipients of care.

Handling Threats and OpportunitiesChanges in any of the functions of financ-ing, insurance, payment, and delivery canpresent new threats or opportunities in thehealth care market. Health care managerswill be more effective if they proactively dealwith any threats to their institution’s prof-itability and viability. Managers need to findways to transform certain threats into newopportunities.

Evaluating ImplicationsManagers are better able to evaluate the im-plications of health policy and new reform


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proposals when they understand the relevantissues and how such issues link to the deliv-ery of health services in the establishmentsthey manage.

PlanningSenior managers are often responsible forstrategic planning regarding which servicesshould be added or discontinued, which re-sources should be committed to facility ex-pansion, or what should be done with excesscapacity. Any long-range planning must takeinto consideration the current makeup ofhealth services delivery, the evolving trends,and the potential impact of these trends.

Capturing New MarketsHealth care administrators are in a better po-sition to capture new health services marketsif they understand emerging trends in the fi-nancing, insurance, payment, and deliveryfunctions of health care. New opportunitiesmust be explored before any newly evolvingsegments of the market get overcrowded. Anunderstanding of the dynamics within thesystem is essential to forging new marketingstrategies to stay ahead of the competitionand often to finding a service niche.

Complying with RegulationsDelivery of health care services is heavilyregulated. Health care managers must com-ply with government regulations, such asstandards of participation, licensing rules,security and privacy laws regarding patientinformation, and must operate within theconstraints of reimbursement rates. TheMedicare and Medicaid programs have peri-odically made drastic changes to their reim-bursement methodologies that have triggered

the need to make operational changes in theway services are organized and delivered.Private agencies, such as the Joint Commis-sion on Accreditation of Healthcare Organi-zations (Joint Commission), also play anindirect regulatory role, mainly in the mon-itoring of quality of services. Health caremanagers have no choice but to play by therules set by the various public and privateagencies. Hence, it is paramount that healthcare managers acquaint themselves with therules and regulations governing their areasof operation.

Following the Organizational MissionKnowledge of the health care system and itsdevelopment is essential for effective man-agement of health care organizations. Bykeeping up to date on community needs,technological progress, consumer demand,and economic prospects, managers can be ina better position to fulfill their organization-al missions to enhance access, improve ser-vice quality, and achieve efficiency in thedelivery of services.

Health Care Systems of Other CountriesCanada and most Western European coun-tries have national health care programs thatprovide universal access. There are three ba-sic models for structuring national healthcare systems.

1. In a system under national health in-surance (NHI), such as in Canada,the government finances health carethrough general taxes, but the actualcare is delivered by private providers.In the context of the quad-function

Health Care Systems of Other Countries 21

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model, NHI requires a tighter con-solidation of the financing, insurance,and payment functions coordin-ated by the government. Delivery ischaracterized by detached privatearrangements.

2. In a national health system (NHS),such as the one in Great Britain, in ad-dition to financing a tax-supportedNHI program, the government alsomanages the infrastructure for the de-livery of medical care. Under such asystem, the government operatesmost of the medical institutions. Mosthealth care providers, such as physi-cians, either are government employ-ees or are tightly organized in apublicly managed infrastructure. Inthe context of the quad-function mod-el, NHS requires a tighter consolida-tion of all four functions.

3. In a socialized health insurance(SHI) system, such as in Germany,government-mandated contributions,by employers and employees, financehealth care. Private providers deliverhealth care. Private not-for-profit in-surance companies, called sicknessfunds, are responsible for collectingthe contributions and paying phy-sicians and hospitals (Santerre andNeun 1996, 134). In a socializedhealth insurance system, insuranceand payment functions are closely in-tegrated, and the financing function isbetter coordinated with the insuranceand payment functions than it is in theUnited States. Delivery is character-ized by independent private arrange-ments. The government exercisesoverall control.

In the remainder of this book, the terms“national health care program” and “nation-al health insurance” are used generically andinterchangeably to refer to any type ofgovernment-supported universal access healthcare program. Table 1–3 presents selectedfeatures of the national health care programsin Canada, Germany, and Great Britain com-pared to the United States. Following is abrief discussion of health care delivery insome selected countries from various partsof the world to illustrate the application ofthe three models discussed above and to pro-vide a sample of the variety of healthcaresystems in the world.

Australia In the past, Australia switched from a uni-versal national health care program to a pri-vately financed system. Since 1984, it hasreturned to a national program calledMedicare financed by income taxes and anincome-based Medicare levy. The system isbuilt on the philosophy of everyone con-tributing to the cost of health care accordingto his or her capacity to pay. In addition toMedicare, approximately 43 percent of Aus-tralians carry private health insurance (Aus-tralian Government 2004).This private healthinsurance covers gaps in public coverage,such as dental services, and covers care re-ceived in private hospitals (Willcox 2001).Acquiring private health insurance is volun-tary, but is strongly encouraged by the Aus-tralian government through tax subsidies forpurchasers and tax penalties for non-purchasers (Healy 2002). Public hospitalspending is funded by the government, butprivate hospitals offer better choice. Costsincurred by patients receiving private med-ical services, whether in or out of the hospi-


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tal, are reimbursed in whole or in part byMedicare (Healthcare Costs 2002). Privatepatients are free to choose and/or changetheir doctors. The well-organized medicalprofession in Australia is composed mainlyof private practitioners who provide care pre-dominantly on a fee-for-service basis (Hall1999; Podger 1999).

CanadaCanada implemented its national health in-surance system—referred to as Medicare—under the Medical Care Act of 1966.Currently, Medicare is composed of 13provincial and territorial health insurance

plans sharing basic standards of coverage asdefined by the Canada Health Act (HealthCanada 2006). The bulk of financing forMedicare comes from general provincial taxrevenues; the federal government provides aconstant amount that is independent of actu-al expenditures. The public pays for nearly70 percent of total health care expendituresin Canada. The remaining 30 percent, payingfor supplementary services such as drugs,dental care, and vision care, is financed pri-vately (Canadian Institute for Health Infor-mation 2005). Provincial and territorialdepartments of health have the responsibili-ty to administer medical insurance plans, de-termine reimbursement for providers, and


United States Canada Great Britain Germany

Table 1–3 Health Care Systems of Selected Industrialized Countries

Type

Ownership

Financing

Reimbursement (hospital)

Reimbursement (physicians)

Consumer co-payment

Pluralisitic

Private

Voluntary, multipayer system (premiumsor general taxes)

Varies (DRG, negotiated fee-for-service, per diem,capitation)

RBRVS, fee for service

Small to significant

National health insurance

Public/Private

Single-payer (general taxes)

Global budgets

Negotiated fee for service

Negligible

National health system

Public

Single-payer (general taxes)

Global budgets

Salaries and capitation payments

Negligible

Socialized health insurance

Private

Employer-employee (mandated payrollcontributions and general taxes)

Per diem payments

Negotiated fee for service

Negligible

Note: RBRVS, resource-based relative value scale.

Source: Data from R.E. Santerre and S.P. Neun, Health Economics: Theories, Insights, and Industry Studies, p. 146, © 1996, Irwin.

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deliver certain public health services. Prov-inces are required by law to provide reason-able access to all medically necessaryservices and to provide portability of bene-fits from province to province. The programprovides comprehensive coverage, but ex-cludes dental care. Coverage for home healthcare and prescription drugs varies across theprovinces. To cover these exclusions, manyCanadians have supplemental coveragethrough private insurance provided by em-ployers. Patients are free to select theirproviders (Akaho et al. 1998). Several prov-inces have established contracts with providersin the United States for certain specializedservices. However, contrary to popular per-ceptions, few Canadians have to obtainhealth care services in the United States dueto waiting times or unavailability of technol-ogy in their own country (Katz et al. 2002).

Nearly all the Canadian provinces (On-tario being one exception) have resorted toregionalization by creating administrativedistricts within each province. The objectiveof regionalization is to decentralize authori-ty and responsibility to more efficiently ad-dress local needs and to promote citizenparticipation in health care decision-making(Church and Barker 1998). The majority ofCanadian hospitals are operated as privatenonprofit entities run by community boardsof trustees, voluntary organizations, or mu-nicipalities, and most physicians are in pri-vate practice (Health Canada 2006). Mostprovinces use global budgets and allocate setreimbursement amounts for each hospital.Physicians are paid fee-for-service rates ne-gotiated between each provincial govern-ment and medical association (MacPhee1996; Naylor 1999).

Over the years, federal financial supportto the provinces was drastically reduced. Un-der the increasing burden of higher costs,

certain provinces, such as Alberta and On-tario, have started small-scale experimenta-tion with privatization. However, in 2003, theHealth Council of Canada, comprised of rep-resentatives of federal, provincial, and terri-torial governments, as well as health careexperts, was established to assess Canada’shealth care system performance and establishgoals for improvement. The Council’s 2003First Ministers’ Accord on Health Care Re-newal created a five-year, $16 billion HealthReform Fund targeted to improving primaryhealth care, home care, and catastrophic drugcoverage (Health Council of Canada 2005).

ChinaSince the economic reforms initiated in thelate 1970s, health care in the People’s Re-public of China has undergone significantchanges, most prominently reflected in healthinsurance and health care delivery. In urbanChina, health insurance has evolved from apredominantly public insurance (either gov-ernment or public enterprise) system to amulti-payer system. Government employeesare covered under government insurance asa part of their benefits. Employees for pub-lic enterprises are largely covered throughpublic enterprise insurance, but the actualbenefits and payments vary according to thefinancial well-being of the enterprises. Em-ployees of foreign businesses or joint ven-tures typically are well insured throughprivate insurance arrangements. Almost allof these plans contain costs through a vari-ety of means such as experience-based pre-miums, deductibles, co-payments, and healthbenefit dollars (i.e., pre-allocated benefitdollars for health care that can be convertedinto income if not fully used). The unem-ployed, self-employed, and employees work-ing for small enterprises (public or private)


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are largely uninsured. They can purchase in-dividual or family plans in the private mar-ket or pay for services out of pocket.

In rural China, except for a few well-to-do communities, fee-for-service has replacedthe cooperative medical system. Health in-surance is not mandatory. In 2002, the Chi-nese government introduced a new basicinsurance plan for poor, rural citizens. Underthis plan, the government provides the equiv-alent of $2.50 a year to cover basic insur-ance, which the plan holder matches with$1.25. These plans do not cover primary careservices or drugs; rather, they cover only in-patient services, with a very high deductible(Blumenthal and Hsiao 2005).

Health care delivery has also undergonesignificant changes. The former three-tier re-ferral system (primary, second, tertiary) hasbeen largely abolished. Patients can now goto any hospital of their choice as long as theyare insured or can pay out of pocket. As a re-sult, large (tertiary) hospitals are typicallyoverutilized whereas smaller (primary andsecondary) hospitals are underutilized. Useof large hospitals contributes to medical costescalation and medical specialization. In rur-al China, the cooperative medical system runby “barefoot” doctors (peasant paramedics)has been abolished. “Barefoot” doctors ei-ther have changed their profession or havereceived further training to become licensedphysicians to practice in rural hospitals orprivate clinics.

Major changes in health insurance anddelivery have made access to medical caremore difficult for the poor and uninsured. Asa result, wide and growing disparities inhealth care access, quality, and outcomes arebecoming apparent between rural and urbanareas and between the rich and the poor. Itremains uncertain whether China will con-tinue its current course of medical special-

ization and privatization, or restore its previ-ously integrated health care delivery systemaimed at achieving universal access. The re-cent SARS epidemic serves as a wake-upcall to the government, which now recog-nizes the importance of a well-developedpublic health infrastructure. To this end, thegovernment has created an electronic diseasereporting system based at the district level. Inaddition, each district in China now has ahospital dedicated to infectious disease.However, flaws in the system, particularly inmonitoring infectious disease in the remotelocalities that comprise some districts, re-main (Blumenthal and Hsiao 2005).

GermanyThe German health care system is charac-terized by socialized health insurance (SHI)financed by pooling employer and employ-ee premium contributions. Nonprofit sick-ness funds manage the social insurance pool.About 88 percent of the population has beenenrolled in a sickness fund; another 11 per-cent of Germans either have private healthinsurance or are government workers withspecial coverage provisions. Less than 0.2percent of Germans are uninsured (Busse2002). Sickness funds act as purchasing en-tities by negotiating contracts with hospitals.To control costs, the system employs globalbudgets for the hospital sector and places an-nual limits on spending for physician ser-vices. During the 1990s, Germany adoptednew legislation to promote competitionamong sickness funds (Brown and Amelung1999).

Great BritainBritain follows the national health system(NHS) model. Coincidentally, the British


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health delivery system is also named NHS(National Health Service), which marked50 years of existence in 1998. The NHS isfounded on the principles of primary care andhas a strong focus on community health ser-vices. The system owns its hospitals and em-ploys its hospital-based specialists and otherstaff on a salaried basis. The primary carephysicians, referred to as general practitioners(GPs), are mostly private practitioners.

Since 1991, the NHS has undergonesome major transformations initiated by for-mer Prime Minister Thatcher and continuedby Tony Blair’s Labor government. Thequasi-market reforms initially resulted in thecreation of primary care groups (PCGs),which brought local GPs, community nurs-es, and other health care and social servicesprofessionals under semiautonomous localhealth care delivery units. Local health au-thorities had fiscal and management respon-sibilities for most PCGs (Bindman et al.2001).

In recent years, PCGs have evolved intoprimary care trusts (PCTs) in England, localhealth groups in Wales, health boards inScotland, and primary care partnerships inNorthern Ireland. PCTs have geographical-ly assigned responsibility for communityhealth services, and each person living in agiven geographic area is assigned to a PCT.A typical PCT is responsible for approxi-mately 50,000–250,000 patients (Dixon andRobinson 2002). PCTs function indepen-dently of the local health authorities and aregoverned by a consumer-dominated board.A fully developed PCT has its own budgetallocations used for both primary care andhospital-based services. In this respect, PCTsfunction like MCOs in the United States.

It is also of interest to note that 11.5 per-cent of the British population holds privatehealth care insurance (Dixon and Robinson

2002), and approximately 2.2 billion poundsare spent annually in the acute sector of pri-vate health care (Doyle and McNeilly 1999).

IsraelUntil 1995, Israel had a system of universalaccess based on the German model of SHIfinanced through an employer tax andincome-based contributions from individu-als. The insurance function was managed byfour sickness funds. In 1995, the country leg-islated an NHI program replacing the citi-zens’ sickness fund contributions with aspecific health tax, which is an earmarkedpayroll tax. In addition, general tax revenuesupplements the health tax revenue. The con-tribution of general tax revenue toward theNHI depends on the yearly, government-determined level of NHI funding. The em-ployer tax for health care was abolished in1997; as a result, the share of general tax rev-enue as a percentage of total health care fi-nancing rose from 26 percent in 1995 to 46percent in 2000 (Rosen 2003).

The insurance function and the deliveryof care are still in the hands of the sicknessfunds. Citizens can enroll in any of the foursickness funds, which are nonprofit, in-dependent legal entities operating within aregulatory framework defined by the gov-ernment. The funds compete based on clientsatisfaction and provide a minimum, pre-defined basic package of health care services.The sickness funds also sell private health in-surance to supplement the basic package.

Unlike Germany, approximately 85 per-cent of the general hospital beds in Israel areowned by the government and the GeneralSick Fund, the largest of the four sicknessfunds. Hospitals are reimbursed under theglobal budget model (Chinitz and Israeli1997). There was a major effort in the early


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1990s to shift hospitals from governmentownership to independent, nonprofit trusts,but this endeavor failed due to the opposi-tion of health care unions. Despite this, gov-ernment hospitals have been granted farmore autonomy in the intervening years(Rosen 2003).

JapanSince 1961, Japan has been providing uni-versal coverage to its citizens through twomain types of health insurance schemes. Thefirst one is an employer-based system mod-eled after Germany’s SHI program. The sec-ond is a national health insurance program.Generally, large employers (with more than300 employees) have their own health pro-grams. Nearly 2,000 private, nonprofit healthinsurance societies manage insurance forlarge firms. Smaller companies either bandtogether to provide private health insuranceor belong to a government-managed plan.Day laborers, seamen, agricultural workers,the self-employed, and retirees are coveredunder the national health care program. In-dividual employees pay roughly 8 percent oftheir salaries as premiums and receive cov-erage for about 90 percent of the cost ofmedical services, with some limitations. De-pendents get a little less than 90 percentcoverage. Employers and the national gov-ernment subsidize the cost of private premi-ums. Coverage is comprehensive, includingdental care and prescription drugs. Patientsare free to select their providers (Akaho etal. 1998; Babazono et al. 1998). Providersare paid on a fee-for-service basis with littlecontrol over reimbursement (McClellan andKessler 1999).

Several health policy issues have emergedin Japan in the past few years. First, since2002, some business leaders and economists

have urged the Japanese government to liftits ban on mixed public and private paymentsfor medical services, arguing private pay-ments should be allowed for services notcovered by medical insurance (i.e., servicesinvolving new technologies or drugs). TheJapan Medical Association and Ministry ofHealth, Labor, and Welfare have arguedagainst these recommendations, stating sucha policy would favor the wealthy, create dis-parities in access to care, and could be a riskto patient safety. While the ban on mixedpayments has not been lifted, Prime MinisterKoizumi expanded the existing “exception-al approvals system” for new medical tech-nologies in 2004, which will allow privatepayments for selected technologies notcovered by medical insurance at hospitalsmeeting certain conditions (Nomura andNakayama 2005).

Another recent policy development inJapan is hospitals’ increased use of a newsystem of reimbursement for inpatient careservices, called diagnosis-procedure combi-nations (DPCs). The DPC system, spear-headed by the Ministry of Health, Labor, andWelfare, started in 2003 with 82 hospitals.Using DPC, hospitals receive daily fees foreach condition and treatment, regardless ofactual provision of tests and interventions,proportionate to patients’ length of stay. It istheorized that the DPC system will incen-tivize hospitals to provide more efficient,higher quality care to patients (Nomura andNakayama 2005).

SingaporePrior to 1984, Singapore had a British-styleNHS program where medical services wereprovided mainly by the public sector and fi-nanced through general taxes. Since then, thenation has designed a system based on


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market competition and self-reliance. Singa-pore has achieved universal access throughgovernment policy requiring mandatory pri-vate contributions but little government fi-nancing. The program, known as Medisave,mandates every working person, includingthe self-employed, to deposit a portion ofearnings into an individual Medisave ac-count. Employers are required to match em-ployee contributions. These savings can onlybe withdrawn (1) to pay for hospital servicesand some selected expensive physicianservices, and (2) to purchase a government-sponsored insurance plan (called Medi-shield) for catastrophic (expensive andmajor) illness. For basic and routine services,people are expected to pay out of pocket.Those who cannot afford to pay receive gov-ernment assistance (Hsiao 1995). In 2002,the government introduced ElderShield,which defrays out-of-pocket medical ex-penses for the elderly and severely disabledpeople requiring long-term care (SingaporeMinistry of Health 2004). The fee-for-service system of payment to providers isprevalent throughout Singapore (McClellanand Kessler 1999).

Developing CountriesDeveloping countries containing 84 percentof the world’s population, claim only 11 per-cent of the world’s health spending. Yet, thesecountries account for 93 percent of theworldwide burden of disease. The six devel-oping regions of the world are East Asia andthe Pacific, Europe (mainly Eastern Europe)and Central Asia, Latin America and theCaribbean, the Middle East and NorthAfrica, South Asia, and Sub-Saharan Africa.Of these, the latter two have the least re-sources and the greatest health burden. On a

per capita basis, industrialized countries havesix times as many hospital beds and threetimes as many physicians as developingcountries. People with private financialmeans can find reasonably good health carein many parts of the developing world. Themajority of the populations, however, haveto depend on limited government servicesthat are often of questionable quality as eval-uated by Western standards. As a general ob-servation, government financing for healthservices increases in countries with higherper capita incomes (Schieber and Maeda1999).

The Systems FrameworkA system consists of a set of interrelated andinterdependent components designed toachieve some common goals, and the com-ponents are logically coordinated. Eventhough the various functional componentsof the health services delivery structure inthe United States are at best only loosely co-ordinated, the main components can beidentified by using a systems model. Thesystems framework used here helps one un-derstand that the structure of health care ser-vices in the United States is based on somefoundations, provides a logical arrangementof the various components, and demon-strates a progression from inputs to outputs.The main elements of this arrangement aresystem inputs (resources), system structure,system processes, and system outputs (out-comes). In addition, system outlook (futuredirections) is a necessary element of a dy-namic system. This system’s framework hasbeen used as the conceptual base for or-ganizing later chapters in this book (see Fig-ure 1–5).


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The Systems Framework 29

Figure 1–5 The Systems Model and Related Chapters.

II. SYSTEM RESOURCESHuman Resources

“Health Services Professionals” (Chapter 4)

Nonhuman Resources

“Medical Technology” (Chapter 5)

“Health Services Financing” (Chapter 6)

IV. SYSTEM OUTCOMESIssues and Concerns

“Cost, Access, and Quality” (Chapter 12)

Change and Reform

“Health Policy” (Chapter 13)

III. SYSTEM PROCESSESThe Continuum of Care

“Outpatient and Primary Care Services” (Chapter 7)

“Inpatient Facilities and Services” (Chapter 8)

“Managed Care and Integrated Organizations“ (Chapter 9)

Special Populations

“Long-Term Care” (Chapter 10)

“Health Services for Special Populations” (Chapter 11)

V. SYSTEM OUTLOOK“The Future of Health Services Delivery” (Chapter 14)

ENVIRONMENT

TRENDS

FUTURE

I. SYSTEM FOUNDATIONSCultural Beliefs and Values and Historical Developments

“Beliefs, Values, and Health” (Chapter 2)

“The Evolution of Health Services in the United States” (Chapter 3)

System Features

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System FoundationsThe current health care system is not an ac-cident. Historical, cultural, social, and eco-nomic factors explain its current structure.These factors also affect forces that shapenew trends and developments, and those thatimpede change. Chapters 2 and 3 provide adiscussion of the system foundations.

System ResourcesNo mechanism for health services deliverycan fulfill its primary objective without de-ploying the necessary human and nonhumanresources. Human resources consist of thevarious types and categories of workers di-rectly engaged in the delivery of health ser-vices to patients. Such personnel—thatinclude physicians, nurses, dentists, phar-macists, other doctoral trained professionals,and numerous categories of allied health pro-fessionals—usually have direct contact withpatients. Numerous ancillary workers, suchas billing and collection agents, marketingand public relations personnel, and buildingmaintenance employees, often play an im-portant but indirect supportive role in the de-livery of health care. Health care managersare needed to manage various types of healthcare services. This book discusses primarilythe personnel engaged in the direct deliveryof health care services (Chapter 4). The non-human resources include medical technolo-gy (Chapter 5) and health services financing(Chapter 6).

Resources are closely intertwined withaccess to health care. For instance, in certainrural areas of the United States, access is re-stricted due to a shortage of certain cate-gories of health professionals. Development

and diffusion of technology also determinethe caliber of health care to which peoplemay have access.

System ProcessesThe system resources influence the develop-ment and change in physical structures, suchas hospitals, clinics, and nursing homes.These structures are associated with distinctprocesses of health services delivery, and theprocesses are associated with distinct healthconditions. Most health care services are de-livered in noninstitutional settings mainlyassociated with processes referred to as out-patient care (Chapter 7). Institutional healthservices, or inpatient care, are predomi-nantly associated with acute care hospitals(Chapter 8). Managed care and integratedsystems (Chapter 9) represent a fundamentalchange in the financing (including paymentand insurance) and delivery of health care.Even though managed care represents an in-tegration of the resource and process ele-ments of the systems model, it is discussedas a process for the sake of clarity and con-tinuity of the discussions. Special institu-tional and community-based settings havebeen developed for long-term care (Chapter10) and mental health (Chapter 11).

System OutcomesSystem outcomes refer to the critical issuesand concerns surrounding what the healthservices system has been able to accomplish,or not accomplish, in relation to its primaryobjective. As indicated earlier, the primaryobjective of any health care delivery systemis to provide, to an entire nation, cost-


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Summary 31

effective health services that meet certain es-tablished standards of quality. The previousthree elements of the systems model play acritical role in fulfilling this objective. Ac-cess, cost, and quality are the main outcomecriteria for evaluating the success of a healthcare delivery system (Chapter 12). Issuesand concerns regarding these criteria triggerbroad initiatives for reforming the systemthrough health policy (Chapter 13).

System OutlookA dynamic health care system must beforward-looking. In essence, it must projectinto the future the accomplishment of desiredsystem outcomes in view of anticipated so-cial, cultural, and economic changes. Chap-ter 14 discusses these future perspectives.

SummaryThe United States has a unique system ofhealth care delivery. The basic features thatcharacterize this system, or patchwork ofsubsystems, include: the absence of a cen-tral agency to govern the system, unequal ac-cess to health care services due to lack ofhealth insurance for all Americans, healthcare delivery under imperfect market condi-tions, existence of multiple payers, third-party insurers functioning as intermediariesbetween the financing and delivery aspectsof health care, balancing of power amongvarious players, legal risks influencing prac-tice behavior, new and expensive medicaltechnology, a continuum of service settings,and a focus on quality improvement. Nocountry in the world has a perfect system.

Most nations with a national health care pro-gram also have a private sector that varies insize. The developing countries of the worldface serious challenges due to scarce re-sources and strong underlying needs forservices.

Health care administrators must under-stand how the health care delivery systemworks and evolves. Such an understandingimproves their awareness of the positiontheir organization occupies within the macroenvironment of the system. It also facilitatesstrategic planning and compliance withhealth regulations, enabling them to dealproactively with both opportunities andthreats, and enabling them to effectivelymanage health care organizations. The sys-tems framework provides an organized ap-proach to an understanding of the variouscomponents of the US health care deliverysystem.

Under free-market conditions, there isan inverse relationship between the quantityof medical services demanded and the priceof medical services. That is, quantity de-manded goes up when the prices go downand vice versa. On the other hand, there is adirect relationship between price and thequantity supplied by the providers of care. Inother words, providers are willing to supplyhigher quantities at higher prices, and viceversa. In a free market, the quantity of med-ical care that patients are willing to purchase,the quantity of medical care that providersare willing to supply, and the price reach astate of equilibrium. The equilibrium isachieved without the interference of anynon-market forces. It is important to keep inmind that these conditions exist only underfree-market conditions, which are not char-acteristic of the health care market.

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Review Questions

1. Why does cost containment remain an elusive goal in US health services delivery?

2. What are the two main objectives of a health care delivery system?

3. Name the four basic functional components of the US health care delivery system. Whatrole does each play in the delivery of health care?

4. What is the primary reason for employers to purchase insurance plans to provide healthbenefits to their employees?

5. Why is it that despite public and private health insurance programs, some US citizensare without any coverage?

6. What is managed care?

7. Why is the US health care market referred to as “imperfect”?

8. Discuss the intermediary role of insurance in the delivery of health care.

9. Who are the major players in the US health services system? What are the positive andnegative effects of the often-conflicting self-interests of these players?

10. What main roles does the government play in the US health services system?

11. Why is it important for health care managers and policymakers to understand the intri-cacies of the health care delivery system?

12. What kind of a cooperative approach do the authors recommend for charting the futurecourse of the health care delivery system?

13. What is the difference between national health insurance (NHI) and a national health sys-tem (NHS)?

14. What is socialized health insurance (SHI)?


accessadministrative costsbalance billcapitationdefensive medicinedemandenrolleefree marketglobal budgethealth planinpatient caremanaged care

MedicaidMedicaremoral hazardnational health insurancenational health systemneedoutpatient carepackage pricingphantom providerspremium cost sharingprimary careprovider

quad-function modelreimbursementsingle-payer systemsocialized health insurancestandards of participationsupplier-induced demandsystemthird partyuninsureduniversal accessutilization

Test Your UnderstandingTerminology

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