Should America Copy the Dutch?

I wrote this a few months back for the Outlook section, but because of various scheduling issues, it never got published. But with Jon Cohn talking about the Dutch health-care system, and with risk adjustment and failed exchanges in the news, it seems worth posting. The basic story is that the Dutch run a health-care system that looks like a very sophisticated version of the Baucus plan. If we're going to rebuild in their image, we might want to take a closer look at what they've learned over the years.

"We're America," Max Baucus likes to say. "Which means we have to write a uniquely American solution." But the health-care solution that actually seems to be emerging in Congress -- which looks like the health-care solutions proposed by Barack Obama, Hillary Clinton and John Edwards during the campaign -- isn't all that unique. Not only does it look like another country's health-care system, but it also looks like a European country's health-care system. Quel Horreur!

In truth, it's seeming more and more likely that America is going to go Dutch. And that's not a bad thing. The Dutch have, by most measures, a high-performing, cost-effective health system. Every year since 2005, the Swedish consultancy firm Health Consumer Powerhouse has released the European Health Consumer Index. The EHCI compares Europe's 33 health-care systems against one another on a variety of patient-oriented measures. "During the past four years, the HCP has been unable to design an Index where the Dutch are not in the top three," marvels the group. In 2008, the Netherlands led not only the basic rankings, but, along with Estonia, the "bang for the buck" measure, which weights the system's performance against the amount of money the country spends. Closer to home, the respected journal Health Affairs published an article asking whether the Dutch system was "A Model For The United States?" The answer, basically, was yes.

And that's been borne out. The specifics of the Dutch approach will be broadly familiar to anyone following the American debate. Private health insurers dominate the system. An individual mandate forces everyone to purchase coverage from the providers of their choice. Insurers are not allowed to turn anyone away for basic coverage, nor can they discriminate based on preexisting conditions, age, sex or location. Individuals pay premiums, but the government provides subsidies tied to an individual's income. It sounds, basically, like what Max Baucus proposed in his much-touted white paper.

But for all the apparent similarities, there are some key differences beneath the hood.
The Dutch have recognized that the key to fostering productive competition between insurers is to keep them from competing unproductively -- that is to say, keep them from competing to deny coverage to the sick and cherrypick the healthy, as happens in the United States. To address this, the Dutch have developed a sophisticated "risk equalization" system. The Dutch estimate the health costs of individuals by tracking not just age and sex, but also historical use of pharmaceuticals and past hospital use. Insurers who cover riskier people are paid more by the government. Meanwhile, all insurers are forced to put part of their profits in a shared fund. The money is then distributed to insurers whose patients proved sicker than expected. Suddenly, kicking out the ill and ensuring only the healthy becomes less a viable business strategy for insurers and more a strange decision to opt in to a hefty tax. American politicians have talked a bit about risk adjustment, but nothing on this scale.

The other important difference is historical. In recent years, the Dutch system has been moving in a more market-oriented direction. But it still holds fast to certain crucial elements of yesteryear's more centralized regime. In particular, the government still sets the prices of most services. There is, unlike in America, a health-care budget. That's been the key to the Dutch health-care savings (they spend about $2,700 per capita, while America spends more than $6,000). Similarly, their physicians aren't paid on fee-for-service. They're given a lump sum every year, eliminating the financial incentive to overprescribe care. Together, these policies have done a very good job controlling prices but had certain adverse impacts on the responsiveness and consumer friendliness of the system. That's why the Dutch have spent the past decade or so building the managed competition model that now excites our policymakers.

America's problem is the opposite: We're starting from a free market position and trying to better control cost. Though the Dutch model has been a shift towards market-driven health care for the Netherlands, it would be a lurch towards government-driven health care in the United States. The concern, however, is that it won't take us far enough. We seem to be near copying the reforms the Dutch instituted to improve satisfaction with their system. We're ignoring, however, the hard cost controls -- the government spending cap -- that have historically kept the Dutch health-care systems’ costs at about half of what we pay. We may, in other words, be cadging the wrong part.

For more on the Dutch system, see this article by Ab Klink, Minister of Health, Welfare and Sport in the Netherlands. Pay particular attention to his discussion of pricing. For a lot more on the Dutch system, see this Health Affairs study.