How Universal Enrollment Affects the Relationship
between Access, Cost and Quality (Level of Care) The following essay provides background information in text and graphic format for the effects described in Chapter Nine of the book Chronic Crisis. This essay is in four parts:
1. The Relationship Between Access, Cost and Quality (Level of Care)
2. The Direct Effects of Having an Uninsured Population
3. The Indirect Effects of Having an Uninsured Population
4. Conclusion. Universal enrollment healthcare systems uniformly have lower healthcare costs than the United States. It may well be that the solution to lower healthcare costs lies in universal enrollment. The Organization for Economic Cooperation and Development (OECD) has thirty member
nations. Twenty-nine of those nations have lower healthcare costs than the U.S. in terms of both per capita healthcare costs and percent of GDP spent on healthcare. Every industrialized nation with lower healthcare costs has universal enrollment. Is universal enrollment part of a successful business model for lower healthcare costs? And, if so, why? First, lets review some basics. Part 1: The Relationship Between Access, Cost and Quality (Level of Care)
The Typical Cost Curve Shows the Relationship Between Price and Quantity The "cost curve" or "production curve", perhaps more accurately called "the cost of production curve", shows the relationship between cost and quantity for the production of any uniform commodity. The quantity produced is shown on the x-axis, the cost per unit produced is shown on the y-axis, and the relationship between unit price and quantity produced is shown as a curved line. The slope of that curve indicates that as more goods are produced the unit cost of production decreases - at least to a point. In monopolies, or in other markets that do not compete on price (as will be discussed later) producers may contain total costs and realize greater profits by producing at some lesser level of production. In figure 1 the cost (C) to produce on unit of any produce is dependent on the quantity produced (Q). The total cost of production is the rectangular area defined by the product of cost x quantity (C x Q) Figure 1 
Regarding Quality
The cost curve assumes that a given level of quality is produced. If the market demands a higher level of quality, the level of the entire cost curve rises. This raises unit cost to C', and for any given quantity increases total production cost. Conversely, if a lower quality product is acceptable, production costs will fall and the entire cost curve will drop. Figure 2 shows a cost curve labeled to reflect the production of healthcare. As such, the cost curve shows the relationship between price, quantity and the level of care. Cost (C and C') reflects Per Capita costs of providing different levels of healthcare to a fixed number of people (Q) - the population with healthcare coverage. The cost curves at A and B reflect different levels of care (quality). When Q is held constant and the level of care rises from B to A, the change (increase) in the shaded area reflects the increase in total healthcare costs. Figure 2 
The higher level of care at A has both a higher per capita cost (C'), and a greater total cost. This model holds for clinics, for hospitals, for HMOs, for the healthcare industry as a whole, or as a comparison between different nations' healthcare systems.
This model may also be used to reflect the same level of care but at different per capita costs. For example, if a given level of care is initially produced at per capita cost C' but the same level of care can be produced more effciently, per capita costs will fall from C' to C. Increased efficiency thus reduces both per capita and total healthcare costs. Similarly, any given level of care with high administrative costs is not necessarily a higher level of care, just a costlier level of care. This is the situation in the United States where the cost of healthcare administration is higher in the private health insurance industry than in the public (Medicare) system. Both systems ostensibly deliver the same level of care since they both draw upon the same physician pool and use the same hospitals. Furthermore, the cost of healthcare administration is higher for private insurance companies in the United States than for private health insurance companies in foreign countries. Americans are paying more than many foreign countries for the same, or a similar, level of care simply because of higher administrative costs. Shopping for Value in Healthcare Patients, the consumers of healthcare, are increasingly asked to shop for medical services based on value. The producers and marketers of healthcare are increasingly aware that value in healthcare is much more than providing quality outcomes. They are also aware that profitability is linked to the level of care. Value is the relationship between price and a plethora of factors including not only outcomes, but also convenience, reputation, ease of access, timeliness of service, and so on. Even such nebulous factors as the personal relationships between doctors and patients affect patient choices and become part of the "value" equation. Quality is often mentioned when value is discussed, but quality, in regard to the level of care, is largely a matter of perception. Quality is only one of several factors in the total equation for value. Quality is perceived as the availability of new technologies, as a reputation for good outcomes, as a reputation for specialty training, or as access to the latest medical research. But even when these measures of quality are present, if a facility is too expensive, or if waiting times are too long, or if the staff is overworked, or tired, or grumpy, then "quality" in terms of outcomes has diminished importance in the equation for "value." Outcomes are overshadowed by accessibility, price, convenience, and so on. Patients will accept older technology in a facility without an adjoining research wing, but where the doctors and nurses can take the time to "care." They will shop where they find value. Thus, assuming an open market for medical services, patients shopping for value determine the market for quality outcomes, convenience, service, and the aggregate level of care. Researchers may develop new technologies and raise the potential for a new and higher level of care, but consumers determine the level of care that is ultimately implemented. Arguably however, there is much less an open market for medical services than one would like to imagine. Insurance companies sell policies with a defined set of benefits, a defined panel of physicians, an approved formulary, and a defined list of hospitals where patients may receive care. Insurance companies approve or deny tests and procedures based on economic as well as health outcomes. In this sense insurance companies attempt to define a priori the level of care for which they will pay, and therefore the level of care that is ultimately available to patients. As attractive as the notion may seem that there is an open market for medical services, this is only partly true. The market for medical services is only accessible after one has first negotiated the market for health insurance. In order to find value in the medical services market one must first shop for value in the health insurance market.
*** The simple cost of production curve portrays the relationships between cost, access and level of care. It must be interpreted with this caveat: there is not a pure market for medical services. Nevertheless an aggregate level of care exists, it is somewhat market driven, and a per capita cost can be calculated for any population. Part 2: The Direct Effects of Having an Uninsured Population
Costs for Healthcare are Higher in Non-Universal Healthcare Systems.
Costs to the long-term insured population in a non-universal healthcare system are necessarily higher than in a universal enrollment healthcare system. This is true for reasons related to the effects that a large uninsured population exerts on both the hospital and health insurance industries. Hospitals pass along the costs of caring for the uninsured to insured patients, whose insurance companies then pass those costs to their clients. Likewise insurance companies pass the costs of enrolling new clients to their long term clients. These costs affect a non-universal enrollment system differently than a universal enrollment system. More importantly, because of pressures generated by the uninsured population, a non-universal enrollment system can never reach the same market equilibrium that can be reached by universal enrollment systems.
*** The most readily recognized effect that a large uninsured population has on healthcare and health insurance costs is the cycle that occurs because of "cost shifting." This cycle is shown in Figure 3, which is redrawn from a publication by the Texas State Comptrollers Office. It shows how uninsured patients go to the emergency room for "free" care when they need medical services. (Emergency rooms are required by law to treat their acute conditions.) Hospitals must then find some means to cover these uncompensated emergency room expenses. Remember, these are not Medicaid patients whose expenses are at least partly covered; these are uninsured patients whose bills often go unpaid. Hospitals and other providers may have funds available through charity organizations or other public recources to assist with these expenses, but when these charity funds are gone, hospitals cover remaining expenses by redistributing the costs among paying patients - by cost shifting. Figure 3
 The inflated medical bills for insured patients get passed on to insurance companies. Insurance companies then pass along the costs as increased premium prices. As the prices of premiums continue to rise, fewer individuals and small businesses are able to afford health insurance. More people become uninsured. More people, when they finally do require medical care, use emergency services - which they perceive to be free. This cycle is not simply self perpetuating; the problem actually grows with each iteration. When enrollment in a healthcare system is neither automatice nor mandatory some of the population will not enroll; they become "free-riders". They will not pay for healthcare coverage until they have a need for medical services. Then, when people with high likelihood of needing medical services do enroll for health insurance, insurers may find themselves paying more for medical services than these new clients will pay in premiums. This is more true in non-universal enrollment healthcare systems. The number of newly insured each year is substantial. The money to provide for their immediate medical needs comes from those who have already paid into insurance funds. In this manner the "long-term insured" subsidize the "short-term insured", and the insurance company is merely keeping the books (for a fee, of course). This cycle is old. Its financial effects were not significantly felt until the 1980s. For years charitable organizations have knit themselves together into a "safety net" to accommodate the uninsured. But that safety net is now wearing thin. The size of the uninsured population has become large and uncompensated care is now a serious problem not only for providers, but for insurers and policy makers alike. *** There is a second very similar cycle that increases premium prices with each iteration. The engine that drives this cycle is the phenomenon refered to as "adverse selection." Once again, the fuel for that engine is the large population of uninsured. This cycle, shown in Figure 4, is modified from personal correspondence from a friend in the Albany County (NY) Department of Health.
Figure 4  Insurers never know which people from among the uninsured population will decide that their health status is such that they need health insurance. Nor do insurers know when they will do so. When these people do decide they need health insurance, insurers face the risk that medical expenses will exceed the amount that will be collected in premiums. They face the problem called "adverse selection". It is expensive for insurance companies to screen new insurees and assess their level of risk. This increases administrative costs directly and those higher costs are passed to the insured populatin. All insurance companies hope to insure low risk clients. Insurers in non-universal enrollment healthcare systems face greater financial risk than insurers in universal enrollment healthcare systems because in universal enrollment systems everyone is always insured and everyone has already had access to healthcare and presumably fewer people present a financial risk to insurers. But in non-universal enrollment systems, in order to deal with adverse selection, insurers must be more attentive to the risks they accept and to the people they will insure. In this sense they compete for low risk clients rather than for increased market share. It was previously mentioned that some markets are more profitable when companies compete on criteria other than price. This is one example of such a market. Health insurance companies in the United States maximize profits by limiting production. They limit production by denying coverage to high risk clients. They provide coverage only to low risk clients (the "healthy") or to large groups with substantial wealth (the "wealthy"). Insurance companies will argue that they do compete based on price, but to a very, very large degree they compete to enroll low risk clients and in this regard they are primarily competing based on the ability to recognize and avoid risk rather than on the capacity to provide a service at a competitive price. This strategy, however, is expensive; it becomes attractive only when it is more profitable than price-based competition. The end result of the strategy is that the expense of screening potential insurees is passed on to the insured population. Thus increased health insurance premiums reflect increased administrative costs related to adverse selection. The problem of adverse selection thus becomes the problem and expense of the long-term insured population who bear both the administrative cost of screening and the cost of medical care for high risk newly insured clients. ***
Effects of Price and Product Differentiation in a Non-Universal Enrollment Environment It is hardly surprising that insurance companies seek to increase profits. We have already mentioned two cost shifting methods that maximize profitability (shifting the cost of screening and shifting the costs of medical care for the newly insured). Two additional methods are Price Differentiation and Produce Differentiation. Market responses to both price and product differentiation promote cost and price increases in non-universal enrollment situations. Price differentiation is a common marketing practice. Simply stated, it means that a seller will sell the same product or service at different prices to different customers. The seller may negotiate a separate price with each sale hoping to get the h ighest possible price with each negotiation. In Figure 3, the highest negotiable price is shown as P1'. At P1' the seller will make the greatest profit. The seller will sell some product at P1' and some at lower prices down to P1. There is a price below which the seller will not sell,or at least below which the seller would lose money. This is the break-even price and equals the cost of production, shown here as P1. Thus, P1-P1' is the negotiable price range. Figure 5 shows a typical cost curve and illustrates total revenues under conditions of price and product differentiation. Q1 represents the total number of people insured. Total revenues are shown as the entire shaded area to the left of Q1. The total costs of production represent all costs incurred to bring the product to the customer, including marketing costs, shipping costs and so on. Production costs are defined by the rectangular area defined by P1 x Q1. In order to stay in business a company must sell at P1 or higher. Under conditions of price differentiation this is certainly possible because sales revenue cover not only the cost of production - the rectangular area - but revenues may also include the triangular area above P1. And revenues in the triangular area are pure profit! Figure 5  The practice of price differentiation is alive and well in the insurance industry today. The same insurance company may sell the same policy to different customers at different prices. This is often justified with the statement that it simply costs less to insure some groups than others. But remember, price differentiation is also an effective means of maximizing profits. Product differentiation refers to the development of different products suitable to different needs. Examples in the health insurance market include different deductibles, different co-pays, different waiting periods before obtaining full coverage, plans that cover vision or dental benefits, plans that cover drug benefits, even Health Savings Accounts (HSAs) are a form of product differentiation. Each plan is designed to suit the needs of a particular market niche. Each has its own production costs and may be sold at a variety of prices (price differentiation). The broad spectrum of product and price differentiation and the ensuing potential for increased profitability is thus suitably illustrated in Figure 3. Even though product differentiation may be publicized as a means of reducing the total number of uninsured, this strategy fails to be effective; the number of uninsured continues to grow. Furthermore many of the newer health insurance products provide only coverage for catastrophic events and do not promote routine preventive medical care.
Part 3: The Indirect Effects of having an Uninsured Population
The Pool of Uninsured Is in a Self-Perpetuating Cycle
Although product differentiation effectively entices some new entrants to the health insurance market, it does not begin to address the pressures placed on the market by the increasing pool of uninsured. The problems described above do not represent a static situation. The pool of uninsured continues to grow and the price of health insurance premiums continues to rise. As shown in Figures 4 and 5 the problem is self-perpetuating and self-escalating. Both cycles illustrate the effect that a large population of uninsured has on increasing health insurance costs - costs that are invariably born by the long-term insured. Figure 6 shows the combined effect that these cycles have on increasing premium costs and on reducing the number with healthcare coverage. Figure 6 
True, there are attempts to interrupt both these cycles. Some hospitals have actually closed their emergency rooms attempting to reduce the need for cost shifting. Product differentiation represents another attempt. There are also efforts to lower the costs of administration by such means as implementing more efficient medical records systems, by proposals for uniform accounting methods.
As has already been discussed, as the numbers of the uninsured increase, there is an increasing financial burden placed on those who are already insured, either upon individuals or perhaps more importantly, upon the corporate sponsors of health insurance benefits. But, even large corporations cannot finance infinite increases in health insurance costs - especially when a substantial portion of the increasing cost is for administration and not for healthcare. But these present efforts merely pit the ability of providers to cost-shift and the ingenuity of health insurance marketers to develop an increasingly enticing variety of health insurance products as they strive to bring the uninsured into their plans. For many individuals and small employers however the game is already over, the dollar cost of health insurance simply exceeds its value. And for many people, health insurance is only affordable because they work for large and profitable corporations capable of providing healthcare benefits. As the Pool of Un-Insured Grows, So Does the Financial Burden on the Long-term Insured As long as there is an uninsured population this pressure, driven by adverse selection, will persist. The definitive measure to interrupt this cycle is a Universal Enrollment Healthcare System, as suggested in Figures 7 and 8. Figure 7
 With a policy of mandatory enrollment, as is shown in Figure 8, the population without insurance no longer fuels the effects of adverse selection, or generates the pressures of price and product differentiation, and no longer drives prices upward, and no longer drives more clients into the pool of uninsured. Whether this is accomplished in a multi-payer-system (such as Switzerland, where enrollment is mandatory) or a single-payer system (such as in Canada or the UK, where enrollment is by default) makes no difference. Implementing a policy of Universal Enrollment lowers per capita healthcare costs. Figure 8  In this model the equilibrium price (P2) under conditions of universal enrollment (Q2) is lower than the lowest negotiable price (P1) with non-universal enrollment (Q1). Part 4: Conclusion
How Does Universal Healthcare Lower Healthcare Costs? In universal enrollment healthcare systems there are no free-riders. Everyone is enrolled and everyone pays toward healthcare coverage through either a tax or a premium payment. Thus a universal enrollment plan directly lowers the financial burden placed on the long-term insured by these two mechanisms; first, by lowering the financial burden of free-riders on the long-term insured, and second, by lowering administrative costs associated with adverse selection. Universal Enrollment Permits a Lower Cost Equilibrium on the Cost Curve Although adverse selection justifies price and product differentiation which sustain high health insurance prices, the true cost to consumers in this situation is not due to adverse selection or price differentiation. The true cost to consumers is the inability of the present United States system to reach the P2/Q2 equilibrium state. This is the equilibrium state that nations with universal enrollment have already attained. Without universal enrollment, the United States cannot reach the market equilibrium described by Q2/P2. Every universal enrollment system amoung OECD nation has lower per capita healthcare costs and spends a lower percent of GDP on healthcare than the United States. Figure 9, from the Organization for Economic Cooperatio and Development (OECD), shows the relationship between Per Capita Health Expenditure on the y-axis and Per Capita GDP on the x-axis. The industrialized nations represented near the center of the graph all have universal enrollment healthcare systems. The United States, at the top of the graph with healthcare costs double the costs of other industrialized nations, does not have a universal healthcare policy. Figure 9.
 (View this graphic from the OECD site)
How do other nations contain healthcare costs? In the end it is just a different business model and universal enrollment is part of that model! *** The foregoing essay describes five mechanisms by which non-universal enrollment systems increase healthcare costs. Failure to implement a policy of Universal Enrollment:
-Increases the cost of screening high risk clients.
-Increases cost shifting from the short-term insured to the long-term insured.
-Increases the need for price differentiation.
-Increases the need for product differentiation.
-Increases the marginal cost of providing healthcare services.
Any universal enrollment plan will alter these effects. What makes Multi-payor Universal healthcare Systems different from single-payor systems? What exactly is a Multi-payor Universal Healthcare System? Which nations' have Multi-payor Universal Healthcare Systems? What policies do they share? Are those policies adaptable to the circumstances of the United States? The answers to these questions and others are in the book Chronic Crisis: Critical Care for America's Collapsing Healthcare System. | 
