Delivered October 18, 2006
ROBERT E. MOFFIT, Ph.D.: Right now in the United States,
we spend roughly $2 trillion on health care. We spend more than any
other country in the world per capita: One out of every six dollars
in your wallet is money that is going to the health care
system. Pretty soon it will be one out of every five
dollars, especially when the baby boomers retire.
Our health care system is in transition. It is unstable. It is
unstable economically, and it is unstable politically.
Economically, it is unstable because it is based on a system of
insurance which is grounded in employment, and employment-based
insurance in the United States is eroding. It is unstable
politically because survey after survey shows that the American
people are profoundly dissatisfied with the health care system, and
majorities--at least in terms of their responses to the
questions that are asked by the Kaiser Family Foundation or the
Commonwealth Fund--will say that they are in favor of a massive
overhaul in the system or major change in the system. Usually, the
implicit suggestion is that they would like a system that looks
like Great Britain or Canada or some other European country.
Roughly 50 cents out of every dollar that you spend on health
care now is spent by the government, but in a very short time the
baby boomers will start to retire. When the baby boomers start to
retire, the Medicare expansion will start to go into high gear. The
Medicaid expansion is already in high gear, and because Medicaid
pays so much for long-term care, once again with the rapid aging of
the American population, if there is no change in policy in
Washington and in the states, that will be another
massive expansion of government financing of the health care
There is the golden rule: He who controls the gold makes the
rules. If the gold is controlled by the government, the government
will make the rules, and you will do exactly as you are told.
That's how it works. It's a law of nature. It's like the law of
gravity: It's not something you can escape. That's the reality.
Dr. David Gratzer is a friend and a colleague-- a very good
friend and an outstanding colleague. He is a senior fellow at the
Manhattan Institute. He is Canadian by birth, and he is a physician
who has practiced in Canada. He has come as a prophet who has been
to the other side of the mountain and says we ought not to go
there; we ought to do something else. His interests include
Medicare and Medicaid, drug reimportation-- basically bringing
drugs across the border from Canada--FDA reform. Milton Friedman, a
Nobel Laureate and one of America's great economists, has said that
Dr. Gratzer is a natural-born economist. Well, if anybody
would know that, Milton Friedman would.
Dr. Gratzer is the author of Code Blue: Reviving Canada's
Health Care System. He's also a frequent contributor to the
Canadian publication the National Post. He's written for
The Wall Street Journal, the Weekly Standard,
the Los Angeles Times, National Review, and Time
Canada. He is, of course, a member of the medical profession
and also a senior specialist in health policy. He's a peer reviewer
for professional journals, including the Journal of Health
Politics, Policy and Law, the Canadian Medical
Association Journal,and the American Journal of
Medicine. He is married and the proud father of a new baby
Ladies and gentlemen, welcome my friend and colleague from
Canada, Dr. Gratzer.
Robert E. Moffit, Ph.D.,
is Director of the Center for Health Policy Studies at The Heritage
DR. DAVID GRATZER: Thank you very much for that overly
kind introduction. I'm reminded of why a colleague from years ago
had suggested that on paper I seemed like such an interesting
person. I also want to thank you, Bob, for your help as I was
putting together this book and for the help of your colleagues Nina
Owcharenko, Ed Haislmaier, and others, who've done such important
work. I very much appreciate your efforts here.
It was the best of American medicine; it was the worst of
American health care. What do I mean? A one-inch incision, a
28-minute procedure, generating a bill that was a foot and a
half long: That was my wife's experience with surgery in West New
York. I'd invited my wife on a conference trip I went to in the
mountains, and I thought this would be the most inexpensive trip of
my life: The plane ticket was covered; the hotel was covered; there
was really nothing to pay for.
Well, this turned out to be an enormously expensive
inexpensive ski trip because my wife ruptured a disk in her back on
the bunny hill. She needed some surgery. She was confined to the
couch. She was in incredible pain. She was not the person she
usually is: an active physician and mother.
So I decided to shop around and find a neurosurgeon in West
New York. I went to the Internet, where you can find out everything
about anything, it would seem, and found out practically nothing. I
resorted to cold-calling neurologists and asking their technical
opinion of a neurosurgeon. Finally, I found somebody who was
willing to provide me with a little bit of advice, and we found a
neurosurgeon. He offered us a choice of two hospitals; we had
information on neither. I think we eventually chose one because the
name sounded more reassuring; there was "Saint" in the title
or something of the sort. Nothing bad can happen to you in a
hospital with a Saint in the name, right?
The night before the surgery, we sat in a Hampton Inn that
we had selected through hotels.com. We had a rating system for the
hotel. We knew the price when we walked in. We knew everything
there was to know of significance about the hotel: the AM/FM radio
in the room, the fact that they had an outdoor pool--not that we
would be doing much swimming--and so on. And there I was in this
West New York hotel mulling the dark choice that lay ahead. Here
was the mundane decision I had perfect information on--the
hotel--and the big decision--who was going to cut into my wife the
following morning--I knew practically nothing about, nor the
hospital he worked in.
Then, of course, there was the bill, which was a foot and a half
long, and I was horrified. As a doctor, I can tell you I had
no idea what was on the bill. I simply couldn't understand it. So I
called up the hospital administrator and I said, "There seems to be
an exceptional amount of money. Can we talk about it?" And she very
reassuringly said, "Of course. Please consider this just a starting
point of negotiations." Where in America do you get a bill and they
start by telling you, "We don't even believe our own bill; don't
worry about it"?
Before, by the way, we got into negotiations, I started to
receive threatening letters from a collection agency. I called
up the hospital administrator and I said, "Listen, give me the list
price for Medicare. I'll add 10 percent and mail you a check
this afternoon," and she said, "I can't give you the list price for
Medicare." I said, "Why not?" and she said, "It's a secret."
Everyone I know has some story like this about American health
care. Maybe not involving your wife, maybe not involving a ski
slope, but involving the confusion--the prices that are
inscrutable, the ever-rising costs, the questionable quality, the
chaotic lack of information. That is the micro-level. Of
course, as Bob alluded to moments ago, the macro picture is equally
confusing. We now spend $2 trillion a year on health care in
the United States: 16 percent of GDP. It is awesome how much health
costs have gone up in just a short period of time-- not in the last
500 years, not in the last 50 years, but in the last five years.
The Kaiser Family Foundation recently released a report
showing that health insurance premiums have doubled since the year
Incidentally, the average American worker, while labor costs are
up, has not seen much increase in average family income, in part
because health costs are swallowing it up. What to do about this
problem? As you are well aware, some people are looking north
for answers or looking over to Europe. Seventeen states in the
last year have debated a single-payer option. California
legislatures actually passed a single-payer bill, eventually vetoed
by the governor.
That is the ongoing government temptation, and some people in
the corporate world, in academia, in the union halls of America are
looking north and seeing potential. Not me.
I learned my most important lesson in medical school not in the
classroom, but on the way to it. I grew up in Winnipeg, which is in
the middle of Canada. It's a city roughly the size of Indianapolis.
On a cold winter day in Winnipeg, it can drop to 40 below. Needless
to say, Winnipeggers are a hardy bunch, and all parking lots are
So I parked my car that February morning and walked to the
classroom. I wanted to take a shortcut because it was
blisteringly cold outside, and I decided to cut across the
emergency department as I had done before. I swung open the doors
and walked in, and I discovered the emergency room overcrowding
crisis that was plaguing so many Canadian hospitals in the
mid-1990s. I stood there, and I remember the smell: the smell of
sweat, the smell of urine, the smell of fear that hung in the air.
Elderly people had been waiting four, sometimes even five days to
get a bed. And I remember stepping into that emergency room
and thinking to myself, something is desperately amiss.
When I grew up in Canada, I was interested in getting into
medical school. If you had stopped me on the street when I was 16
or 17 and asked me about the Medical College Admission Test, I
could have given you a variety of very satisfying, unique
statistics on admission and so on. I didn't give a lot of thought
to health policy. When managed care was debated in the United
States, I remember vaguely thinking there was something good about
the idea: After all, government should be involved in health care.
I had never even been to Washington, D.C.
But when I stepped into that emergency room, it got me thinking.
Again, I was a Canadian. There are three things I absorbed from
that environment: One was a fondness for ice hockey, the second was
an ability to convert Fahrenheit to Celsius in my head, and the
third thing was a belief that if the government did it when it came
to health care, it must be compassionate.
Eventually, I began to think about these things. In Canada at
the time, there were really two schools of thought with regard to
health reform. There were the people who thought we should spend
more--I like to call them the spendthrifts--and the people who
thought we should just hire more administrators and make the system
work better--I like to call them the magicians. I started to think
about these things, and I became a spendthrift, and then I became a
magician, and then I became agnostic, and eventually I became an
atheist on health policy in Canada because I realized there was
something going on which was much more fundamental: that there was
a problem with a government-run system.
Maybe it was just the experiences I had, seeing a patient who
had a minor hernia repair and a neurofiber was caught and
needed to be referred to a pain clinic; unfortunately, there was a
two-year wait list. A gentleman with the classic symptoms of sleep
apnea needed to go to a sleep disorders clinic and get a test:
three-year wait list. My father, who could barely walk--classic
symptoms of spinal stenosis--was told he needed an MRI and told he
should wait eight or nine months.
These were the things I came into contact with, and I rethought
my beliefs. I started to write articles on this and the
problems in Canadian health care, but there's only so much you can
say in 700 words, so I started to write a longer piece. I told my
parents, and they were very supportive about the idea, but I'm not
sure they thought I would get my book published.
I initially approached 12 publishers and got 13 letters of
rejection. One publisher lost my sample chapters. They rejected the
proposal. Then they found the sample chapter, and it was just as
bad as they thought it would be, so they sent me another letter of
rejection. Eventually, I got the book published, and it went
on to win the Donner Book Prize, which is a prestigious award in
What I discovered was how many Canadians were realizing that
there was a problem in the system. Maybe our politicians weren't
willing to talk about it, but they themselves could appreciate that
something was not right in Canada. Eventually, people spoke out
about this. Canadian politicians are a very cautious lot and
continue to not really speak at great length about these things,
but the mood had suddenly shifted.
Today, things are very different than they were even a short
time ago. A private clinic opens up at a rate of about one a week
in Canada. One of the foremost critics of Canadian health care is a
doctor who was just elected president of the Canadian Medical
Association. Even the Supreme Court of Canada recognizes something
is desperately amiss; just last year, they ruled in a case that
access to waiting lists is not access to health care, and this
undermines some fundamental constitutional rights that Canadians
had, and they struck down key laws in the province of Quebec.
Canadians are beginning to rethink their system. You find the
same thing across Europe. Yet here's the irony: If Canadians are
willing to rethink things and embrace, at least to some extent,
some capitalism when it comes to health care, I find
increasingly that Americans are not. If Canadians are willing
to rethink these issues, Americans are also rethinking and
heading down the same lines that Canada once did. That's a terrible
mistake and part of my motivation for writing this book.
Let's shift gears for a moment and ask a simple question: Why
are there so many problems with American health care? Here is a
very simple answer: Americans are not underinsured; they are
overinsured. As a result of this, American health care is so
terribly expensive because it's so terribly cheap. I think can
explain to you everything about American health care in four dates,
touching on two people and one organ. Let me start on that.
February 12, 1941: the first clinical use of penicillin.
That is really where the era of modern medicine begins. I
think a lot of people tend to think of medicine as this ancient
tradition. Certainly, doctors like to play up that myth.
Doctors always emphasize the Hippocratic Oath. At the end of
medical school, one takes the Hippocratic Oath. My medical school
was particularly keen on Hippocrates; we took the Hippocratic Oath
twice--once at the beginning of med school and once at the end, in
case you'd lost your morality over the four years.
But medicine is a thoroughly modern creation, and it begins on
February 12, 1941. A lab in Britain, primarily for research
purposes in the heat of the war, decided to do something more
practical. They thought there was something up about
penicillin, a controversial idea, and they picked a
person who was dying of a simple infection: Alexander Albert
had reached down to pick up a letter off the ground and scraped his
face on a rose bush. It became infected, and within a few days he
was on the sepsis ward of the local hospital. Sepsis is the blood
infection that follows a superficial infection.
Mr. Albert was literally dying of this infection. They gave him
a dose of penicillin, and nothing happened. On day two they gave
him another dose; nothing happened. On day three they gave him a
third dose, and his fever broke. On day four he was up and eating
again; on day five he was palpably better. All we understand about
modern medicine really begins with this first day.
Dick Cheney, the Vice President of the United States, has had
four heart attacks, which, if you step back, is an incredible
number. One measure of how functional a heart is is to look at
ejection fraction. The heart is effectively a pump, and one can
look at how well that pump functions. I'm a relatively healthy
individual; probably the ejection fraction of my heart is about 70
to 75 percent. I've had a lot of espresso today; it's probably a
little bit less efficient as a result. The ejection fraction of
Dick Cheney's heart was 25 percent. Dick Cheney is running around
with less than half of a heart.
Isn't it remarkable that in such a short time, something like
heart disease could be revolutionized? Let me give you some
statistics. Death by cardiovascular disease has fallen by
two-thirds over the last 50 years. One of the people I spoke to as
I was writing this book is a cardiologist who is working at a
Harvard-affiliated hospital. He told me that the very nature of
heart disease has changed, that the person walking into the
emergency room today who has had a heart attack has probably had a
couple before; he's probably in his 70s. Just a short time
ago, that wasn't the case.
One thinks of the advances that have occurred in medicine and,
again, pauses and appreciates how recent they are. General Robert
E. Lee in 1863 has a heart attack on the battlefield. What is
state-of-the-art cardiac care in 1863 if you're a really
important guy in America at the time? Bleeding? Out of fashion
for at least 30 years. Bed rest? How long? Two weeks exactly.
Winston Churchill, shortly after the bombing of Pearl Harbor,
comes here and gives one of the greatest speeches of his prime
ministership. Then he gets on a train to go to Canada to give an
equally rousing speech in Parliament, but on the train he discovers
the window is stuck. He wants some fresh air, and he's straining
and straining. Suddenly, he gets crushing chest pain radiating to
his left arm. He's having a heart attack. What is state-of-the-art
medicine for the Prime Minister of Britain or anyone else in
1941? Bed rest. Six weeks. That is a century's worth of
medical progress: from two weeks' worth of bed rest to six weeks'
worth of bed rest. One can look at other prominent people: Dwight
Eisenhower and so on.
All of a sudden that changes in 1941 with penicillin. Had
we discovered nothing else in the 20th century, I'm still convinced
it would have been the century of medicine, but so much else
follows: steroids, beta blockers reducing cardiac mortality-- one
pill by 50 percent--antidepressants, antipsychotics. So many
things come about in such a short time that you can be a person
riding on a bunny hill and do severe damage to your back, and a few
months later you're back in the family doctor's office seeing
patients, as was the case with my wife.
So medicine is much better, and that's where most people end
their story. They say you're paying more than you've ever paid
before; progress costs money. Dick Cheney has a pacemaker plus in
his chest, which is a special type of pacemaker, and it costs about
50 times more than the average expenditure on health care in 1950.
Medicine has never been better. Medicine has never been more
expensive. People like David Cutler put forward that argument.
I don't buy it, because in every other aspect of the economy,
technological advancement has been accompanied by a fall in prices.
Look at unit price. Computers are much more sophisticated than they
were 10 years or 20 years ago. The computer on my desk is faster; I
can download stuff from the Internet--whatever I want. It's so
much more sophisticated, and yet it's so much cheaper. Look at
the macro level: Agriculture is much more sophisticated than
it was 50 years ago. We feed more people a more diverse amount
of food, and yet as a percent of GDP it has dropped.
Why is it that health care keeps rising year after year? Why has
cost doubled since 2000? I think, unlike so many of my colleagues,
the answer is because of the odd way we pay for health care in
How do you understand health policy? Two dates: October 26,
1943, and December 1, 1942.
October 26, 1943: possibly the most important day in health
policy in America. The Supreme Court does not issue a ruling;
Congress does not pass any legislation; FDR does not even give a
rousing speech. The IRS rules for the first time that
employers can provide health insurance and pay the premiums in
pre-tax dollars. That eventually gets codified in 1954.
How did this come about? Wage and price controls during the
Second World War. Everyone knows the story about price controls.
Perhaps some of the older members of this group have lived through
it; perhaps you simply heard stories from your aunt or grandmother
talking about rationing butter and so on. Everyone remembers the
price controls, which were quickly abolished; few remember the
consequences of wage controls. Employers all of a sudden needed to
attract employees but couldn't offer better wages. So they started
to offer benefits, and in particular, they offered health
insurance, something employers really hadn't done before the Second
World War; and what was a fringe benefit initially became the
mainstay of private insurance for Americans after October 26, 1943.
All of a sudden you could entice employees with health
Why did that make sense from an employer's point of view? Wage
controls. Now you could offer them a benefit in pre-tax dollars;
you got around wage controls. But for employees, it was also a good
deal. Think about it: If your boss offers you $1,000 in bonus, how
much are you really going to take home? Depending on what the
marginal tax rate is, depending on your bracket, you might only
take home $500. But he offers you $1,000 worth of health insurance,
and you could potentially take home $1,000 worth of benefits. That
is why, well into the 1970s and '80s, employers offered health
insurance and lots of it; why sunglasses, marital counseling, hair
transplants were all at one point in time covered by health
insurance. All of these things are important, but they aren't
really insurance as we understand it in other aspects of the
December 1, 1942: Lord Beveridge in London issues his report on
public health insurance, and he points out that the most
compassionate way of doing it--there's that word again--is a
zero-dollar insurance. Lord Beveridge obviously has huge influence
in Britain, but his ideas have resonance across the Atlantic. Part
of it is because the Democrats are floating their own ideas on
health insurance; part of it is that Lord Beveridge is an
enormously charming and persuasive individual. He goes on a
speaking tour across the United States. He persuades Members of
Congress, Senator Robert Wagner of New York, Senator Harry
Truman of Missouri. His ideas fall apart before Congress, but
eventually I think they gave the intellectual foundation for
Medicare and Medicaid, which also, at least in the American
experience today, is pretty much a zero-dollar insurance.
Medicare isn't quite like that in part B, but allow me a
little bit of latitude.
The end result of those two days 60 years later-- long after the
war has ended, long after Lord Beveridge has retired and gone
to his reward, long after wage controls have been abolished--is
that Americans are just hopelessly overinsured when it comes
to health insurance. For every dollar spent on health care in the
United States, only 14 cents comes out of pocket. That applies for
people on Medicaid, Medicare, privately insured, and that's why we
have such an upside-down universe when it comes to health care.
I alluded to the lack of transparency with hospital
pricing. I've actually found transparency in hospital pricing
in America. My daughter, who is rather young, has a fondness for
dolls, so I bought her an American Girl, the Itty Bitty Baby. As I
was recently on Fifth Avenue, I went into the American Girl store,
and on the second floor they have an American Girl hospital, and
they have a price list. If your American Girl doll needs a cast,
it's $25--no insurance taken, unfortunately--but that's really the
only price list one finds with hospitals in America.
So many other problems exist with regard to transparency
and prices. Why? Because Americans are uninformed. They don't ask
the same sort of questions they would ask with food, clothing,
How do I think we ought to proceed? There is a fourth date I
think you need to bear in mind: January 1, 2013. Why did I
pick this date? If you think we have problems with health care
today, you haven't seen anything yet. We spend about $2
trillion a year on health care in the United States; by 2013,
reasonable projections are that will rocket up to about $4
trillion: 16 percent of GDP today will rocket up to about 21
percent of GDP.
In other words, if companies like GM and many other companies
are having trouble paying for health care today, you ain't seen
nothing yet. 2013 is also remarkable, as Tommy Thompson recently
pointed out to me, because it's the year when Medicare starts
drawing from the Treasury instead of shedding dollars. So if you're
a government official, or you follow government officials like my
colleagues here at The Heritage Foundation do, then you know
that the Federal Treasury is a little bit strained already.
There's more trouble to come. Everything we know about American
health care is about to change.
I've only really found three choices for America. How can we
deal with this financial crisis? One: Go back to managed care.
Health spending largely plateaued in the mid-1990s. Sure,
people were upset, but we actually contained costs.
Option number two: socialized medicine. Every other Western
country has done it. You want to call it universal health care; you
want to call it single-payer; whatever you want to call it. Steffie
Woolhandler calls it the "cure." I don't.
Option number three: Let's try something we don't do a lot of in
health care policy in the United States: capitalism. Let's do
for health policy what we've done in the other five-sixths of the
What do I think about managed care? Overly paternalistic. I
don't think it jibes with American values. What do I think about
socialized medicine? You've already heard what I think about
socialized medicine. That really leaves us only with the third
option, something we have to move on now. How would that look in
terms of actual reforms? There are basically five steps that I
think we ought to take now and that Congress needs to act on and
the President needs to sign into law.
First of all, we need to make health insurance more like every
other type of insurance. As I've alluded to before, Americans are
overinsured because, in a sense, many insurances don't
discriminate between small items and large items. Imagine if
we did that for car insurance. It wouldn't just cover you if you
were in an accident, but it would cover you if you had a fender
bender or your tank of gas was running low or your wife couldn't
believe you bought a blue car and thought you should get a paint
job to make it a red car. Car insurance would be feverishly
expensive were we to adopt that approach. American health care is
so very expensive because we violated basic rules of insurance.
What does that mean? I think Congress took a good first step
with health savings accounts. I think they are overly rigid in
their structure: something that made sense for a tax committee of
Congress and not so much on Main Street of America. I think we
ought to expand HSAs; we ought to build in more flexibility. I also
think we ought to level the playing field so that if you're an
individual, you can get the same tax preferences as an
Idea number two: Government policy needs to foster competition.
It seems absurd to say that in America, but so much of our
philosophy has been "regulate first, ask questions later" for the
last 60 years. Let me just give you one example.
As you know, I'm affiliated with the Manhattan Institute.
Sitting in my office in New York, if I tried to buy myself health
insurance, I would pay four times more than I would pay for the
exact same insurance policy from the exact same company if I lived
in Connecticut. That's because New York State has thrown in so many
mandates--44 in all-- as well as guaranteed issue and community
rating, meaning you can buy health insurance in New York State
after you get sick, which is like buying home insurance after your
house has caught fire. We need to deregulate that and, in lieu of
that, allow out-of-state purchases.
Many federal and state laws also undermine competition: EMTLA, certification
of need laws, and so on. We need to reconsider that if you want
competition in the quality of innovation.
My third idea: We need to reform Medicaid. Medicaid has become
the great sleeper issue. We spent $5 billion in 1970; today, we
spend over $300 billion a year, in part because it is owned by
neither the state government nor the federal government and,
as a result, is probably the worst government-run program in
How to reform Medicaid? Turn it over to the states. I favor
block funding, much in the way we reformed welfare a decade ago.
Let the states experiment and innovate. Let's look forward to
one day having a Wisconsin for Medicaid the way we had a Wisconsin
for welfare reform.
Idea number four: We have to revisit Medicare. We've had a
lengthy and feverish discussion about a prescription drug benefit,
but we really haven't seriously reformed it in any way, shape, or
form. As Bob likes to point out, when the foundation of the house
is weak, we've built a gazebo and gotten a second mortgage for it.
I thought this debate was further ahead a decade ago when we were
talking about a menu of private insurance options modeled after the
Federal Employees Health Benefits Program. I don't think this is a
cure-all, but I don't think we can even look at solving our
Medicare crisis until we get away from wage and price controls,
which has been among the reform efforts of this Administration and
every other Administration since Medicare was created and Nixon
Finally, my fifth idea is we have to look at prescription
drug prices, which I think everyone can appreciate are too high.
The way to do that is to go back and reconsider the role of the
Food and Drug Administration. That's my plan.
For 30 years, we've dealt with rising health costs, and there
are two titans who have come out of this era. There is Wilbur
Mills, who championed Medicare and Medicaid and I think more
than anyone else got that through Congress, and Richard Nixon.
Wilbur Mills said expand government, and that will solve your
problems, and Democrats have dutifully followed. Richard Nixon said
we need to do something, and he preached a corporatization of
American health care, particularly like managed care, HMOs, which
before then were just a West Coast idea.
I don't think, fundamentally, those two visions are going to
work. I think the problems with American health care are going to
grow with time, and thus we need to look at that third option, that
crazy option that so few people are willing to embrace but that
we've embraced for the other five-sixths of the economy. That is
what I talk about in my book.
Questions & Answers
QUESTION: Could you discuss briefly the role of the FDA
and what you would like to see for the FDA?
DR. GRATZER: One has to look at the role the FDA plays in
terms of safety and efficacy and how they go about doing that. I
like some of the experiments that went on during the
Administration of the first President Bush, where they outsourced
to not-for-profit companies part of the FDA approval process. I
noticed that the approval times were shorter and the results were
the same as when handled by the FDA.
The FDA is a great turn of the 20th century American
institution; unfortunately, we're in the 21st century. If
another country approves a drug, does the FDA need to be as
diligent as they have been? Much focus on the FDA is safety.
Wouldn't it be refreshing if we had a Senate committee look into
slow drug approval? A drug comes to market, and the FDA
officials tell us this will save 10,000 lives a year, and it
took them seven years to approve the drug. Maybe some lives were
lost in the process.
Most Americans want a market for medical progress. They want
innovative drugs. Medicine has dramatically changed in the last
number of decades, and yet, as a practicing psychiatrist, I can
tell you the enormous frustrations of working today. With
schizophrenia, we have better drugs than we've ever had in our
history, and yet so many of my patients can't be helped. If you had
a relative who is aging, you know the horror of Parkinson's or
Alzheimer's. One could go through a host of other illnesses and
cancers, and so little progress has been made.
The FDA should go back to its original pre-1963 mandate of
certifying safety. I think the focus on efficacy is a mistake. That
rose out of the Thalidomide scandal--which, incidentally, had
nothing to do with efficacy standards of the FDA. It adds about 40
percent to the cost of a drug. I also think it gives us a host of
information that a lot of people don't use. In other words, if we
throw up all of these hurdles, and we're not getting any more
information, and it drives up costs by 40 percent, what are we
doing? I think ultimately what we're doing is creating a drug
cartel in America where seven or eight companies can bring a drug
to market. Ultimately, we're all losers for it.
QUESTION: Being a former civil servant and having an
excellent health care plan for my whole career and even after
retirement, like all civil servants and Members of Congress, we are
accustomed to paying very little and getting excellent care. It
seems there is a huge obstacle to overcome here. Until you get
beyond that and have Congress really understand that this
benefits them and only a small percentage of the public, I'm
not sure how you get that message across that things have to
change. It's so good for those who are making the laws.
DR. GRATZER: The Federal Employees Health Benefits
Program: We need to really study it. Bob Moffit has done masterful
work in this area. It's a model for better care and choice. Most
Americans have a choice of exactly one plan provided by their
employer. That's not a lot of choice. Federal employees have
DR. MOFFIT: Even more significantly, only 23 percent of
the American population has a choice of carriers. In other words,
you get a health plan at a place of work, and it's one health
insurer: You might have a choice of two or three plan options, the
standard HMO or PPO, but it's offered by the same company. So you
often have two or three flavors of vanilla, the same networks
of physicians and medical institutions. Federal employees have 11
carriers nationwide with 19 plans nationwide. So whether you're in
rural Montana or downtown Chicago, it doesn't make any difference;
you have access to those different plans.
DR. GRATZER: To get back to the larger question, if
Congress is so well served by this and there's been so much
gridlock in Washington, how are we going to get past this? I recall
Herb Stein's law of economics. He should have won the Nobel
Prize for economics for this simple observation: That which cannot
go on forever will eventually stop.
If health costs spiral from $2 trillion to $4 trillion,
there's going to be incredible pressure on Congress to act.
Sure, "Health Care Week" came and went this year in the Senate
without a single bill being voted on, but the cost pressures are
great and are going to be great whether or not we have a Republican
Congress or a Democratic Congress or a split Congress. The question
is only which of those three options we're going to embrace.
I don't think Americans want the paternalism of managed care;
socialized medicine is a disaster wherever it's been implemented. I
know. The only option is more choice and competition--like the
choice and competition that federal employees have.
QUESTION: People who favor the socialized, government-run
health care approach usually say that health care won't really work
as a market. They point to the fact that about 80 percent of health
care expenditures is consumed by about 20 percent of patients in
any given year and that so many costs are going for catastrophic
care that you can't really have the type of competition that leads
to innovation and keeping prices down. What is your response
DR. GRATZER: The 20/80 rule: 20 percent of the population
accounts for 80 percent of the cost. People say, "Look, that just
shows you that the minority are sick and they chew up all the
health care dollars." I don't interpret it that way. Let me give
you an example. My wife had a baby, so for that year, our health
expenses were very high; the following year, they were not. So I
don't think you're looking at chronic illness simply chewing up all
of the health dollars. That doesn't undermine the need for a
Second, competition and innovation and more catastrophic health
insurance is very important, even for people who are chronically
ill. Who is worst-served by the system where it's basically a black
box? If you're a diabetic, where do you take your health care
dollars? Today, there is so little information, and that serves
people with chronic illness so poorly. The people best served by
health savings accounts are going to be the people with chronic
Let me give you one example: Very shortly, one drug company is
going to have approved by the FDA an aerosolized insulin. It
changes the very nature of diabetic care: No more needles; you can
inhale your insulin through a puffer. I suspect that several
insurance carriers will not want to cover that in their drug plan,
but if you had a health savings account and you were a
diabetic, you could spend it where you please.
Innovation and competition are critical in this area, not
despite the chronically ill but because of the chronically ill. So
many of these statistics just confuse the issue. Forget about the
debate; look at the marketplace. Some companies like Whole Foods
are endorsing and embracing consumer-driven health care. Their
health inflation numbers are much lower than other companies'
QUESTION: With last year's Canadian Supreme Court ruling
and the new private clinics opening up in Canada, can you talk
about what form you would like private insurance to take in that
DR. GRATZER: Canada is going through incredible
changes. One sees that as well in Britain. What are some examples
of that? A private clinic opens at a rate of about once a week in
Canada. In Britain, a Labor Party that created socialized
medicine in Britain announced last year that they would
quadruple the number of surgeries contracted out to the private
sector. In Sweden, most primary care will now be contracted out;
the largest hospital in Stockholm is now privately run. Even in
Slovakia, which was previously a Marxist country, they are looking
at market reforms.
Things are changing dramatically. Whether you're in Stockholm or
in Slovenia, one sees the ideas of Adam Smith percolate.
How do I think these countries ought to go forward? The
economics there are not profoundly different from the economics
here. People are overinsured. In Canada, you pay practically
nothing to access primary care; you pay practically nothing to
access hospital-based care. Why do I say practically nothing? By
law, it should be nothing, but hospitals cheat. So you break your
leg, and you want something fancy like a cast, and they'll
charge you $20 as though that were medically unnecessary.
Those countries need to reconsider what's covered, when
they're covered, and whether or not there are co-pays and
deductibles. There's been progress in Canada. You can get a private
surgery in Quebec; you can go out to the west coast and get many
surgeries. But there's so much more work to be done, because the
concept of a user fee in Canada and Britain is still
unmentionable. Reform efforts are still pretty young.
QUESTION: In the House of Representatives about a month
ago, there was a discussion about proposing a block grant program
for the states. They had a person who obviously wanted a
single-payer system and also somebody who wanted a free market like
what you're advocating. Have you heard about that?
DR. GRATZER: Sure. You'd offer a policy "toolkit" to
the states, and they could experiment. I'm not opposed to that
idea. If a northeastern state wants to be an example of a
single-payer health care system, that might well be more
useful to the public than dozens of my speeches on the topic. The
states should have more flexibility. Congress has done so little to
The lowest-hanging fruit is Medicaid because of the cost crisis.
States now spend more on Medicaid than they do on K-12 education.
It would be relatively easy to block grant it. So many
governors, Republican and Democrat, are terrified of the costs of
long-term care. One wonders whether, if you took that out of the
equation, if that would be useful. So I'm in favor of
experimentation: at the employer level, at the individual level, at
the state level, and at the federal level.
Ultimately, the answers are going to be found in free-market
principles. If Maine wants to expand Medicaid and cover everyone
and anything, including domestic animals, I think they should
have the right to do it. I'm not sure the federal government
should subsidize it, but I think they should have the right to do
it. Likewise, if Arizona wants to take a free-market approach,
that's reasonable. As Sherlock Holmes once said to Dr. Watson,
"Eliminate all other factors, and the one which remains must
be the truth."
QUESTION: Socialized countries are trying to experiment
with more privatization in their systems. Why do you think
that there is such a lag among Americans catching on that these
socialized systems are actually turning to capitalism?
DR. GRATZER: It's one of the very few American
debates where prominent people are convinced that America's got it
wrong and other countries have it right. We don't look at France
and say, "High taxes seem to work for the French." Canada--cold,
high taxes, bilingual policy--we should embrace that?
Health care is one of those fields where everyone is
dissatisfied, and unfortunately, because there is a private sector
in America, some people have concluded that the problem is
really with the private sector rather than with the public sector.
I emphasize that this is not a private system. This is a
quasi-socialist system, as Bob noted, and for every dollar spent on
health care, roughly 50 cents comes from the government in one form
or another. With the tax subsidy, you could argue government
spending is even higher. And with regulations, the influence of
government, the shadow of government over the system, is even more
That is what we need to attack. The concept of consumer-driven
health care is quite exciting, and Congress took the right step
with health savings accounts. This is an exciting time, and this is
a very dangerous time. It's like a Latin American country voting
out their socialist party and voting in the capitalists. The
capitalists can do one of two things: They can embrace free-market
reforms, and the country will flourish. Or, more often than not,
they appoint their cousin to run the state pension plan; he steals
everything, and capitalism just means crony capitalism.
We need true free-market reforms, not free-market reforms in
name only. But I also think that just talking about what goes on in
those countries is useful.
QUESTION: Concerning the consumer-directed health
plans, a lot of the discussion seems to hinge on the idea that
insurance will continue to be provided by employers, but a lot of
people are starting to think that in 10 or 15 years that may not
necessarily be true. Even behind closed doors, labor unions and
people you wouldn't expect will say it quite frankly. In light of
that fact, how exactly would a reform program work?
DR. GRATZER: Most Americans still receive their private
insurance from their employer. The statistics already aren't very
good: Between 2000 and 2005, the percentage of companies offering
plans has dropped from 69 percent to 61 percent. Large companies
have not dropped coverage, and as a result, the total percentage
covered by an employer plan hasn't precipitously dropped.
This concept made sense when wage controls were implemented
during the Second World War, and people tended not to move a lot
between companies. You were born in Hershey, Pennsylvania, you
went to work for Hershey, you went to the Hershey swimming pool and
the Hershey Country Club--if you were in the higher echelons in the
company-- and you retired to your Hershey pension plan. You might
have even lived in a Hershey-built house. In such a day and such a
time, health insurance provided by the employer made a lot of
Most people in small and medium-sized businesses turn over
about once every 15 months, according to Labor Department
statistics. We have a much more mobile workforce. It shows you the
enormous limitations of health insurance that isn't mobile. Again,
health savings accounts somewhat address that, because the savings
you can take from job to job. In the short term, we need to build a
Concerning the employer-based system, one has to remember the
enormous indirect subsidies the system gets. The health tax
exclusion provided to employers for their employees is a larger tax
write-off than even mortgages. People talk about tax reform time
and again, and they don't talk about the health tax exclusion.
You're not talking about tax reform.
What do I think we ultimately need? Moving insurance away from
employers, having a simpler tax code, letting people get their
insurance maybe through their church or their synagogue or their
union. Those are all reasonable ideas.
Unfortunately, a lot of government law and regulation
stands in the way of proper pooling. Part of the reason the Federal
Employees Health Benefits Program works is that you've got a
lot of people enrolled: about 8 million people. If a union
wanted to sponsor health insurance or a church wanted to sponsor
health insurance and millions of people enrolled, good things would
happen. Those are the sorts of things we need to talk about,
because I don't think the existing system is going to survive.
QUESTION: What do you think about the actual number of
uninsured? As we try to estimate costs for proposals, it always
hinges on that number. That number is highly skewed for some
of the reasons that you just mentioned--a mobile force. They count
structural unemployment that might last a month or two as being
uninsured for the year.
DR. GRATZER: Those numbers are hopelessly skewed, but
they make for great sound bytes. There are really only two numbers
you need to know about American health care: 47 and 18.
Forty-seven million don't have health insurance; 18,000 die
every year according to the Institute of Medicine. But when you
look at the numbers close up, you realize how misleading they are:
47 million Americans don't have health insurance, and yet a
third of them have incomes of over $50,000 a year, a third of them
already qualify for Medicaid, and a third of those remaining turn
over quite quickly and gain coverage when they gain employment.
Am I suggesting that there is no problem with the uninsured? I
am not suggesting that. By the way, the Institute of Medicine
number is also misleading and unhelpful. We have to get the
diagnosis right in order to get the treatment right. If 47
million people don't have health insurance, that doesn't
automatically mean we need a government solution. You go down the
wrong path. If we say people fall through the cracks, we need to
reexamine that, but we need to be on the right path.
There is that core group of uninsured, the working poor,
who go year to year without insurance. When they get sick, there
are huge federal and state monies that are spent on them. We're
looking at about $40 billion a year. One thing I like about the
Massachusetts plan is that they turned some of that money over--the
disproportionate share money, to use the technical term--into a
state fund to help subsidize private insurance for the low-income
uninsured. We'll see what happens with that.
QUESTION: General Motors has been running around the Hill
trying to get the Congress to bail out their health care costs by
proposing a federal reinsurance program, and eventually some
insurance companies will jump on board because they have the
exposure. What are your thoughts on that?
DR. GRATZER: GM has enormous problems. George Will
recently wrote that GM is no longer a company; it's a welfare
state. GM is running into enormous problems because of the very
lavish benefits that they agreed to in union negotiations over
the years. There was, I think, a Mercer study suggesting that
if GM opted for a health plan, say, that Ford had, they would save
$1 billion a year. So we're not talking about scrapping their
health plan entirely, but just moving to another, frankly, lavish
plan, from their gold-plated plan to their silver-plated plan.
Don't get confused by saying that the problems of GM are the
problems of America. They negotiated those contracts; they'll
have to live with the consequences of that and their share
price too. And the solutions that they are focusing on are not
helpful. They just want someone else to pay for it.
You saw that dynamic already with the prescription drug
benefit. If you talk to people on the Hill close to that debate,
they will tell you that rank-and-file Republicans were never
bullish on the prescription drug benefit. They were afraid of
government cost overruns and the like--rightly so.
Pharmaceutical companies were never terribly excited about it
because they thought it's a back door to price controls. The
people who pushed it the most were big companies like GM who have
all these retiree benefits they can't afford. So what do you
do? You push the costs over to the federal government.
We need to resist that temptation. There is a coalition
growing in America, starting small but growing in its
momentum, of corporate CEOs who don't want to pay health costs,
union leaders who worry about health costs, and the activists and
analysts of the Left. They simply want someone else to pay the tab.
The obvious target is going to be the federal taxpayer. Be careful
of socialized medicine creeping up on you with the best of
QUESTION: I understand how a managed care system works,
how a single-payer system works, and how a universal insurance
system would work. I'm not clear yet how you would describe a
capitalist system in other than those three terms.
DR. GRATZER: We need to build on the principles of
individual choice and competition. In so much of American health
care, you don't see that. People need more choices of plans; we
need to move to more--and I hate using this term because it's now
overused--consumer-driven health care. Health savings accounts and
high-deductible plans are steps in that direction.
We also need to reframe government programs. Medicaid is a
classic example of what not to do. In Vermont today, a family can
earn $55,000 annually and still qualify with their kids for some
type of a Medicaid benefit. If you're in New York and you have a
clever lawyer and you're extraordinarily wealthy and have two
Mercedes in your driveway, you can still qualify for Medicaid
long-term care. This is silly public policy.
Look at other aspects of the economy and ask yourself: Why do
those work so well? Why are we not having a discussion today on the
crisis in food costs or the crisis in clothing? No, we're having a
discussion instead on the crisis in health care.
David Gratzer, M.D., is a licensed physician in the United
States and Canada and a Senior Fellow at the Manhattan Institute.
Dr. Gratzer is the author of Code Blue: Reviving Canada's
Health Care System (ECW Press, 1999) and the editor of
Better Medicine (ECW Press, 2002), a collection of essays from
leading health care thinkers in North America and Europe.
Medical Treatment and Active Labor Act, 42 U.S.C. § 1395dd.