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System failure

Healthcare has no shortage of convenient bad guys. But it's the system itself -- not those who exploit it -- that's ultimately to blame for our healthcare crisis.

(Bryce D. Harper/The New York Times)

FOR MOST OF THE PAST decade, overhauling America's healthcare system was a lot more popular with liberal policy wonks than it was with the public.

But that seems to be changing. Just this week, a new poll showed that two-thirds of us favor "profound" changes in the way we finance and deliver medical care. Ready to meet that demand are all the leading Democratic presidential candidates, plus maybe a Republican or two -- not to mention officials such as California Governor Arnold Schwarzenegger, who think they can create plans for near-universal coverage like the one that just took effect in Massachusetts.

Why the shift? There are a lot of reasons. But a big one, surely, is the growing outrage at corporations -- starting with America's insurance companies -- that seem to make more money while the people they serve get less health care.

And the outrage is understandable. Michael Moore's controversial new movie, "Sicko," is full of stories about people whose health insurance didn't cover their bills. Their stories frequently sound sensational -- like the one about the woman whose carrier refused to pay for her cancer treatments, because they claimed she'd failed to disclose a prior yeast infection, which qualified as a pre-existing condition. But after several years working on a book about health care, I have heard similarly troubling tales many times.

There was the story from Janice Ramsey, a self-employed real estate consultant in Florida, whose insurer canceled coverage once she was diagnosed with diabetes. The insurer claimed that she'd failed to disclose early signs of the disease, even though Ramsey says she had no idea she was sick when she bought the policy. And then there was the story of the family in Austin, Texas, who thought they had blue-chip health insurance -- until their HMO stopped paying for some of their son's cerebral palsy treatments, even though it was part of the standard regimen. The mother, Elizabeth Hilsabeck, spent two years fighting the insurer while she and her husband paid for the therapy themselves. Eventually, the insurer gave in -- but not before the couple had to sell their house.

Still, the crazy thing about stories like these is that, on some level, they make perfect sense. The world of American health care has no shortage of convenient villains, from insurers who deny coverage to employers who skimp on worker benefits to hospitals that sue indigent patients. But all of them showed more generous instincts once upon a time, until the pressures of competition made such behavior financially untenable. Their actions today are entirely rational given how the game is set up.

And therein lies a crucial lesson about health care reform. It's not enough simply to beat up on the bad guys. We have to overhaul the system that made them bad in the first place.

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When the first modern health insurance plans came into existence in the 1930s, they were run by hospitals, whose primary interest was in spreading coverage as widely as possible in order to create a larger population of paying patients. Although the hospitals focused on large groups, like employees from the same company or the members of fraternal organizations, they also made insurance available to individuals (like the self-employed) who wanted to buy coverage on their own. They offered "community rating," meaning that everybody in the community -- well and sick, rich and poor -- paid the same rates, or premiums. And they practiced "guaranteed issue," meaning anybody willing to pay the premiums would get coverage. That meant that even some people with pre-existing medical conditions could get insurance. These early plans evolved into the system of state-based Blue Cross plans, which by the late 1940s had enrolled tens of millions of people.

Alas, the success of the Blues also caught the eye of the commercial insurance industry, which until that time had largely avoided the business of medical bills on the theory that it wasn't profitable. Suddenly the insurance industry wanted in -- but only on its terms. Under community rating and guaranteed issue, people in relatively good health were paying above and beyond the cost of their own medical treatment, in order to subsidize the costs of people who were sick. So commercial insurers targeted those groups that were relatively healthy and sold to them almost exclusively. And the insurers who sold policies directly to individuals subjected them to strict medical underwriting -- the practice of gauging whether applicants have pre-existing conditions or high risk of future illness, then adjusting offers and premiums accordingly.

The commercial insurers had hit upon a bonanza, passing the Blue Cross plans in overall enrollment by the 1950s. The Blues, meanwhile, saw their patient population grow gradually sicker -- and their operating margins grow gradually thinner. One by one, they moved away from community rating and guaranteed issue, adopting the same underwriting practices as the private sector -- and, in many cases, converting outright to for-profit status. That is why, today, people with pre-existing conditions -- like Janice Ramsey and all those people in "Sicko" -- run into such trouble when they try to buy individual policies. Insurers will cover them only at much higher prices, if they are willing to cover them at all.

Employers, too, used to act differently. One reason employer-sponsored insurance worked for as many Americans as it did, for as long as it did, was that until the 1970s the large manufacturers dominating the American economy basically agreed on the desirability of providing their employees with coverage. Thanks to relatively inexpensive medical care, strong unions, and tax breaks favoring employer-sponsored benefits, insurance was a cheap way for companies to buy worker loyalty. It was, in other words, good business.

But in the 1970s, American manufacturers -- and, eventually, all American employers -- started to come under enormous pressure to cut their labor costs. And employee health benefits, which by then were far more expensive than they had been in the '40s and '50s, were an obvious place to start cutting.

Some companies restructured their labor forces so they could offer benefits to fewer workers; others started offering lesser benefits. And many that couldn't change their benefit programs simply downsized or went bankrupt, sometimes leaving both current and retired workers without coverage, while clearing the way for companies that followed a different corporate ethos. If General Motors, with its relatively lavish health insurance plans, was the prototype employer of the 1950s, today its counterpart is Wal-Mart, which has figured out how to offer skimpier benefits than the industrial behemoths of yesteryear -- and has forced its competitors, particularly in the grocery business, to follow suit or close up shop.

The behavior of hospitals hasn't changed as much as that of insurers and employers. Truth be told, hospitals were never that excited about treating the uninsured. But it was during the 1980s and 1990s, when the insurance companies began putting unprecedented pressure on them to reduce costs, that many changed their pricing structure -- in ways that transferred higher bills onto the uninsured -- and outsourced their collection work to specialized legal firms.

These efforts were supposed to improve operating margins and, in some cases, they did. But they also led to the highly publicized debt collection cases of recent years, in which even nonprofit hospitals have passed along exorbitant bills to the uninsured -- and then sued them when they failed to make their payments.

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So how do we change this? How do we fix the health care system so that it rewards benevolence, rather than penalizing it?

In the past, states have tried incremental reforms, like requiring insurers to practice community rating or guaranteed issue again. But while that may have helped marginally, by making coverage available to people who could never have gotten it before, it also raised costs dramatically and, in the process, kept many relatively healthy people from getting insurance altogether.

The real solution, then, is wholesale reform -- so that insurers can't game the system by picking out the healthiest people, so that employers can't gain an edge on their competitors by stiffing them on coverage, and so that hospitals can't offer lower prices simply by shirking the uninsured.

And there's only one way to do that: By creating a truly universal health care system, in which every single person has insurance, every business contributes fairly, and every insurer must play by the same rules for providing coverage -- if, indeed, private insurers even have such a big role anymore. A single-payer system, where the government insures everybody directly, as it does in Medicare, avoids the issue by circumventing private insurance for basic medical care -- which is one reason that option, or some variant on it, is appealing to so many people.

Of course, it so happens that the lobbying groups representing some of the industries involved -- particularly the insurers and the business community -- have historically opposed universal health care. And even to the extent that some now say they support the idea in principle, they continue to finance candidates and organizations that seek to preserve the status quo or something like it.

So as the debate over health care heats up, go ahead and bash the bad guys. They probably deserve it. Just remember that the bashing alone won't change the rules of the game.

Jonathan Cohn is the author of "Sick: The Untold Story of America's Health Care Crisis -- and the People Who Pay the Price" (HarperCollins). He is a senior editor at The New Republic and a senior fellow at Demos, a New York-based think tank.