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 SEVENTH EDITION

' .. : '. ·' ,.

l tl DI Hl ffil l • III!
Pl ! W!TPI :P0i'! l!'f 11

ACLINICAL APPROACH
THOMAS BODENHEIMER KEVIN GRUMBACH

i~l:. LANGE.
 a LANGE medical book

UN DERSTAN DI NG
HEALTH POLICY
A Clinical Approach
SEVENTH ED IT ~O N

Thomas Bodenhe imer, MD

Professor fmeritus
Departlrnent of Family & Community Medi:cine
LI niversity of Ca lifom ra, San Francisco

Kevin Grumbach, MD
Professor and Ch al r
Departrnent of Family & Community Medicine
lJ niversity of Ca lifom ia, San Francisco

--
New York Chicago San Fm nal sco lisbon lo:nd on Madrrd
Milan New Delhi Singapore Sydney Toronto
Mexico City
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 Contents
Preface

1. Introduction: The Paradox of Excess and Deprivation

2. Paying for Health Care
3. Access to Health Care
4. Paying Health Care Providers
5. How Health Care Is Organized—I: Primary, Secondary, and
Tertiary Care
6. How Health Care Is Organized—II: Health Delivery Systems
7. The Health Care Workforce and the Education of Health
Professionals
8. Painful Versus Painless Cost Control
9. Mechanisms for Controlling Costs
10. Quality of Health Care
11. Prevention of Illness
12. Long-Term Care
13. Medical Ethics and Rationing of Health Care
14. Health Care in Four Nations
15. Health Care Reform and National Health Insurance
16. Conflict and Change in America’s Health Care System
17. Conclusion: Tensions and Challenges
18. Questions and Discussion Topics
Index
 Preface
Understanding Health Policy: A Clinical Approach is a book about health
policy as well as individual patients and caregivers and how they interact
with each other and with the overall health system. We, the authors, are
practicing primary care physicians—one in a public hospital and clinic and
the other, for many years, in a private practice. We are also analysts of our
nation’s health care system. In one sense, these two sides of our lives seem
quite separate. When treating a patient’s illness, health expenditures as a
percentage of gross domestic product or variations in surgical rates between
one city and another seem remote if not irrelevant—but they are neither
remote nor irrelevant. Health policy affects the patients we see on a daily
basis. Managed care referral patterns determine to which specialist we can
send a patient; the coverage gaps for outpatient medications in the Medicare
benefit package affects how we prescribe medications for our elderly
patients; and differences in access to care between families on Medicaid and
those with private coverage influences which patients end up seeing one of us
in the private sector over the other in a public hospital. In Understanding
Health Policy, we hope to bridge the gap separating the microworld of
individual patient visits and the macrouniverse of health policy.

THE AUDIENCE
The book is primarily written for health science students—medical, nursing,
nurse practitioner, physician assistant, pharmacy, social work, public health,
and others—who will benefit from understanding the complex environment
in which they will work. Physicians feature prominently in the text, but in the
actual world of clinical medicine, patients’ encounters with other health care
givers are an essential part of their health care experience. Physicians would
be unable to function without the many other members of the health care
team. Patients seldom appreciate the contributions made to their well-being
by public health personnel, research scientists, educators, and many other
health-related professionals. We hope that the many nonphysician members
of the clinical care, public health, and health science education teams as well
as students aspiring to join these teams will find the book useful. Nothing can
be accomplished without the combined efforts of everyone working in the
health care field.

THE GOAL OF THE BOOK

Understanding Health Policy attempts to explain how the health care system
works. We focus on basic principles of health policy in hopes that the reader
will come away with a clearer, more systematic way of thinking about health
care in the United States, its problems, and the alternatives for managing
these problems. Most of the principles also apply to understanding health
care systems in other nations.
Given the public’s intense concerns about health care in the United States,
the book concentrates on the failures of the system. We spend less time on
the successful features because they need less attention. Only by recognizing
the difficulties of the system can we begin to fix its problems. The goal of
this book, then, is to help all of us understand the health care system so that
we can better work in the system and change what needs to be changed.

CLINICAL VIGNETTES
In our attempt to unify the overlapping spheres of health policy and health
care encounters by individuals, we use clinical vignettes as a central feature
of the book. These short descriptions of patients, physicians, and other
caregivers interacting with the health care system are based on our own
experiences as physicians, the experiences of colleagues, or cases reported in
the medical literature or popular press. Most of the people and institutions
presented in the vignettes have been given fictitious names to protect privacy.
Some names used are emblematic of the occupations, health problems, or
attitudes portrayed in the vignettes; most do not have special significance.

OUR OPINIONS
In exploring the many controversial issues of health policy, our own opinions
as authors inevitably color and shade the words we use and the conclusions
we reach. We present several of our most fundamental values and
perspectives here.

THE RIGHT TO HEALTH CARE

We believe that health care should be a right enjoyed equally by everyone.
Certain things in life are considered essential. No one gets excited if someone
is turned away from a movie or concert because he or she cannot afford a
ticket. But sick people who are turned away from a medical practice can
make headlines, and rightly so. A simple statement of the right to health care
reads something like this: All people should have equal access to a
reasonable level of appropriate health services, regardless of ability to pay.
In 2009, the United States entered into a fierce debate over whether health
care should be a right. The debate focused on President Barack Obama’s
campaign to enact universal health insurance. Following a year of public
ferment, Congress passed the Affordable Care Act, which moves in the
direction of guaranteeing health care as a right. Yet, at the time of writing this
edition of Understanding Health Policy, the controversy continues.

THE IMPERATIVE TO CONTAIN COSTS

We believe that limits must be placed on the costs of health care. Cost
controls can be imposed in a manner that does relatively little harm to the
health of the public. The rapidly rising costs of health care are in part created
by scientific advances that spawn new, expensive technologies. Some of
these technologies truly improve health, some are of little value or harmful,
and others are of benefit to some patients but are inappropriately used for
patients whom they do not benefit. Eliminating medical services that produce
no benefit is one path to “painless” cost control (see Chapter 8).
Reduction in the rapidly rising cost of administering the health care
system is another route to painless cost containment. Administrative excess
wastes money that could be spent for useful purposes, either within or outside
the health care sector. While large bureaucracies do have the advantage of
creating jobs, the nation and the health care system have a great need for
more socially rewarding and productive jobs (e.g., home health aides, drug
rehabilitation counselors, childcare workers, and many more) that could be
financed from funds currently used for needless administrative tasks.
There is a growing consensus that health care cost increases are bad for
the economy. Employers complain that the high cost of health insurance for
employees reduces international competitiveness. If government health
expenditures continue their rapid rise, other publicly financed programs
essential to the nation’s economy (e.g., education and transportation) will be
curtailed and the unsustainable government budget deficits will strain the
future of the nation’s well-being.
Rising costs are harmful to everyone because they make health services
and health insurance unaffordable. Many companies are shifting more health
care costs onto their employees. As government health budgets balloon,
cutbacks are inevitable, generally hurting the elderly and the poor.
Individuals with no health insurance or inadequate coverage have a far harder
time paying for care as costs go up. As a general rule, when costs go up,
access goes down.
For these reasons, we believe that health care costs should be contained,
using strategies that do the least harm to the health of the population.

THE NEED FOR POPULATION-BASED MEDICINE

Most physicians, nurses, and other health professionals are trained to provide
clinical care to individuals. Yet clinical care is not the only determinant of
health status; standard of living and public health measures have an even
greater influence on the health of a population (see Chapter 3). Health care,
then, should have another dimension: concern for the population as a whole.
Individual physicians may be first-rate in caring for their patients’ heart
attacks, but may not worry enough about the prevalence of hypertension,
smoking, elevated cholesterol levels, uncontrolled diabetes, and lack of
exercise in their city, in their neighborhood, or among the group of patients
enrolled in their practices. For years, clinical medicine has divorced itself
from the public health community, which does concern itself with the health
of the population. We believe that health caregivers should be trained to add
a population orientation to their current role of caring for individuals.

ACKNOWLEDGMENTS
We could not have written this book by ourselves. The circumstances
encountered by hundreds of our patients and dozens of our colleagues
provided the insights we needed to understand and describe the health care
system. Any inaccuracies in the book are entirely our responsibility. Our
warmest thanks go to our families, who have provided both encouragement
and patience.
Earlier versions of Chapters 2, 4, 5, 8, 9, and 16 were published serially as
articles in the Journal of the American Medical Association (1994;272:634–
639, 1994;272:971–977, 1994;272:1458–1464, 1995;273:160–167,
1995;274:85–90, and 1996;276:1025–1031) and are published here with
permission (copyright, 1994, 1995, and 1996, American Medical
Association).

CONCLUSION
This is a book about health policy. As such, we will cite technical studies and
will make cross-national generalizations. We will take matters of profound
personal meaning—sickness, health, caring for individuals in need—and
discuss them using the detached language of “inputs and outcomes,”
“providers and consumers,” and “cost-effectiveness analysis.” As practicing
physicians, however, we are daily reminded of the human realities of health
policy. Understanding Health Policy: A Clinical Approach is fundamentally
about the people we care for: the underinsured janitor with high-deductible
insurance enduring the pain of a gallbladder attack because surgery might be
unaffordable, or the retired university professor who sustains a stroke and
whose life savings are disappearing in nursing home bills uncovered by her
Medicare or private insurance plans.
Almost every person, whether a mother on public assistance, a working
father, a well-to-do physician, or a millionaire insurance executive, will
someday become ill, and all of us will die. Everyone stands to benefit from a
system in which health care for all people is accessible, affordable,
appropriate in its use of resources, and of high quality.
Thomas Bodenheimer
Kevin Grumbach
San Francisco, California
September 2015
 1

Introduction: The Paradox of

Excess and Deprivation
Louise Brown was an accountant with a 25-year history of diabetes.
Her physician taught her to monitor her glucose at home, and her
health coach helped her follow a diabetic diet. Her diabetes was
brought under good control. Diabetic retinopathy was discovered at
yearly eye examinations, and periodic laser treatments of her retina
prevented loss of vision. Ms. Brown lived to the age of 88, a success
story of the US health care system.
Angela Martini grew up in an inner-city housing project, never had a
chance for a good education, became pregnant as a teenager, and has
been on public assistance while caring for her four children. Her
Medicaid coverage allows her to see her family physician for yearly
preventive care visits. A mammogram ordered by her family physician
detected a suspicious lesion, which was found to be cancer on biopsy.
She was referred to a surgical breast specialist, underwent a
mastectomy, was treated with a hormonal medication, and has been
healthy for the past 15 years.
For people with private or public insurance who have access to health care
services, the melding of high-quality primary and preventive care with
appropriate specialty treatment can produce the best medical care in the
world. The United States is blessed with thousands of well-trained
physicians, nurses, pharmacists, and other health caregivers who
compassionately provide up-to-date medical attention to patients who seek
their assistance. This is the face of the health care system in which we can
take pride. Success stories, however, are only part of the reality of health care
in the United States.

EXCESS AND DEPRIVATION

The health care system in the United States has been called “a paradox of
excess and deprivation” (Enthoven & Kronick, 1989). Some persons receive
too little care because they are uninsured, inadequately insured, or have
Medicaid coverage that many physicians will not accept.
James Jackson was unemployed for more than a year but unable to
qualify for Medicaid because his state did not expand Medicaid under
the 2010 Patient Protection and Affordable Care Act. At age 34, he
developed abdominal pain but did not seek care for 10 days because he
had no insurance and feared the cost of treatment. He began to vomit,
became weak, and was finally taken to an emergency room by his
cousin. The physician diagnosed a perforated ulcer with peritonitis and
septic shock. The illness had gone on too long; Mr. Jackson died on the
operating table. Had he received prompt medical attention, his illness
would likely have been cured.
Betty Yee was a 68-year-old woman with angina, high blood pressure,
and diabetes. Her total bill for medications, which were only partly
covered under her Medicare plan, came to $200 per month. She was
unable to afford the medications, her blood pressure went out of
control, and she suffered a stroke. Ms. Yee’s final lonely years were
spent in a nursing home; she was paralyzed on her right side and
unable to speak.
Mary McCarthy became pregnant but could not find an obstetrician
who would accept her Medicaid card. After 7 months, she began to
experience severe headaches, went to the emergency room, and was
found to have hypertension and preeclampsia. She delivered a stillborn
baby.
While some people cannot access the care they need, others receive too much
care that is costly and may be harmful.
At age 66, Daniel Taylor noticed that he was getting up to urinate twice
 each night. It did not bother him much. His family physician sent him to
a urologist, who found that his prostate was enlarged (though with no
signs of cancer) and recommended surgery. Mr. Taylor did not want
surgery. He had a friend with the same symptoms whose urologist had
said that surgery was not needed. Since Mr. Taylor never questioned
doctors, he went ahead with the procedure anyway. After the surgery,
he became incontinent of urine.
Consuelo Gonzalez had a moderate pain in her back which was
relieved by over-the-counter acetaminophen. She went to an
orthopedist who ordered an MRI, which showed a small disc
protrusion. The doctor recommended surgery, after which Ms.
Gonzalez’ pain became much worse. She consulted a general internist
who told her that the MRI abnormality was not serious, that the surgery
had been unnecessary, and that physical therapy might help. After a
year of physical therapy, the pain subsided back to its original level.

•In February
Too Little Care
2015, a year after the Patient Protection and Affordable Care Act
was fully implemented, 26 million people in the United States remained
without health insurance, down from 41 million in 2013 (Carman et al.,
2015). In addition, many people with health insurance have inadequate
coverage. In December 2014, 46% of Americans surveyed reported having
trouble affording health care (Rosenthal, 2015).

•According
Too Much Care
to health services expert Robert Brook:
… almost every study that has seriously looked for overuse has
discovered it, and virtually every time at least double-digit overuse has
been found. If one could extrapolate from the available literature, then
perhaps one-fourth of hospital days, one-fourth of procedures, and two-
fifths of medications could be done without. (Brook, 1989)
A 2003 study found that elderly patients in some areas of the country
receive 60% more services—hospital days, specialty consultations, and
medical procedures—than similar patients in other areas; the patients
receiving fewer services had the same mortality rates, quality of care, access
to care, and patient satisfaction as those receiving more services (Fisher et al.,
2003a and 2003b). In 2012, waste in health care was estimated at between
$558 and $910 billion per year—from 21% to 34% of total health care
expenditures (Berwick & Hackbarth, 2012).

THE PUBLIC’S VIEW OF THE HEALTH CARE SYSTEM

Health care in the United States encompasses a wide spectrum, ranging from
the highest-quality, most compassionate treatment of those with complex
illnesses, to the turning away of the very ill because of lack of ability to pay;
from well-designed protocols for prevention of illness to inappropriate high-
risk surgical procedures performed on uninformed patients. While the past
decades have been witness to major upheavals in health care, one
fundamental truth remains: the United States has the least universal, most
costly health care system in the industrialized world (Commonwealth Fund,
2015).
Many people view the high costs of care and the lack of universal access
as indicators of serious failings in the health care system. In 2009, only 25%
of people in the United States believed that the system was working well,
well below the percentage in 14 other developed nations (Commonwealth
Fund, 2015).

UNDERSTANDING THE CRISIS

In order to correct the weaknesses of the health care system while
maintaining its strengths, it is necessary to understand how the system works.
How is health care financed? What are the causes and consequences of
incomplete access to care? How are physicians paid, and what is the effect of
their mode of reimbursement on health care costs? How are health care
services organized and quality of care enhanced? Is sufficient attention paid
to the prevention of illness, and what are different strategies for preventing
illness?
How can the problems of health care be solved? Did the Patient Protection
and Affordable Care Act enacted in 2010 provide the answer? Can costs be
controlled in a manner that does not reduce access? Can access be expanded
in a manner that does not increase costs? How have other nations done it—or
attempted to do it? How might the health care system in the United States
change in the future?

REFERENCES
Berwick DM, Hackbarth AD. Eliminating waste in US health care. JAMA. 2012;307:1513–1516.
Brook RH. Practice guidelines and practicing medicine. JAMA. 1989;262:3027–3030.
Carman KG et al. Trends in health insurance enrollment, 2013-15. Health Aff (Millwood).
2015;34:1044–1048.
Commonwealth Fund. 2014 International Profiles of Health Care Systems. January 2015.
Enthoven A, Kronick R. A consumer-choice health plan for the 1990s. N Engl J Med. 1989;320:29–37.
Fisher ES et al. The implications of regional variations in Medicare spending. Part 1: the content,
quality, and accessibility of care. Ann Intern Med. 2003a;138: 273–287.
Fisher ES et al. The implications of regional variations in Medicare spending. Part 2: health outcomes
and satisfaction with care. Ann Intern Med. 2003b;138:288–298.
Rosenthal E. Insured but not covered. New York Times. February 7, 2015.
 2

Paying for Health Care

Health care is not free. Someone must pay. But how? Does each person pay
when receiving care? Do people contribute regular amounts in advance so
that their care will be paid for when they need it? When a person contributes
in advance, might the contribution be used for care given to someone else? If
so, who should pay how much?
Health care financing in the United States evolved to its current state
through a series of social interventions. Each intervention solved a problem
but in turn created its own problems requiring further intervention. This
chapter will discuss the historical process of the evolution of health care
financing. The enactment in 2010 of the Patient Protection and Affordable
Care Act, commonly referred to as the Affordable Care Act, ACA, or
“Obamacare,” created major changes in the financing of health care in the
United States.

MODES OF PAYING FOR HEALTH CARE

The four basic modes of paying for health care are out-of-pocket payment,
individual private insurance, employment-based group private insurance, and
government financing (Table 2–1). These four modes can be viewed both as a
historical progression and as a categorization of current health care financing.

Table 2–1. Health care financing in 2013a

 Percentage of National
Type of Payment Health Expenditures, 2013

Out-of-pocket payment 12%

lnd:ividual private insurance 3%
Employment-based private insurance 30%b
Government finandng 47%

Other 8%

Total 100%
Percentage of
Principal Source ,o f Coverage Populat10n, 2013

Uninsured 13'%
lndiividual1private insurance 70Jo
Employment-ba.sed private insurance 47%
Government fin ancirng 33%
Total 100%

These figures precede implementation of most of the Affordable

Care Act.
Source: Data extracted from Hartm,an Met al. National heafth spend-
ing in 2013: growth sl1o ws, remains in step wrth the overall economy.
Health Aff 2015 ;34: 150- 160; US Census Bureau: Hea Ith Insu ranee
Coverage ln the United States, 2013. September; 2014.
0 Because private insurance tends to cover healthier people~the per-

centage of expenditures [s far less t han the percentage of population

covered. Pub l1ic expendrtures are far higher per popu ation because
t he elderly and disab ed are concentrated in the public Medicare and
Med icaid programs.
tJ-rhis includes private insurance obtained by federat state, and local
empil oyees which is in part purchased by tax funds.
• Fred
Out-of-Pocket Payments
Farmer broke his leg in 1913. His son ran 4 miles to get the
doctor, who came to the farm to splint the leg. Fred gave the doctor a
couple of chickens to pay for the visit. His great-grandson, Ted, who is
uninsured, broke his leg in 2013. He was driven to the emergency
room, where the physician ordered an x-ray and called in an
orthopedist who placed a cast on the leg. The cost was $2,800.
One hundred years ago, people like Fred Farmer paid physicians and other
health care practitioners in cash or through barter. In the first half of the
twentieth century, out-of-pocket cash payment was the most common method
of payment. This is the simplest mode of financing—direct purchase by the
consumer of goods and services (Fig. 2–1).

~
:,
-~-
~~--
-~-
~ ...,-
Individual Out=of=pocket Provider
payment
Figure 2–1. Out-of-pocket payment is made directly from patient to
provider.

People in the United States purchase most consumer items and services,
from gourmet restaurant dinners to haircuts, through direct out-of-pocket
payments. This is not the case with health care (Arrow, 1963; Evans, 1984),
and one may ask why health care is not considered a typical consumer item.

Need Versus Luxury

Whereas a gourmet dinner is a luxury, health care is regarded as a basic
human need by most people.
For 2 weeks, Marina Perez has had vaginal bleeding and has felt dizzy.
She has no insurance and is terrified that medical care might eat up her
$500 in savings. She scrapes together $100 to see her doctor, who finds
 that her blood pressure falls to 90/50 mm Hg upon standing and that
her hematocrit is 26%. The doctor calls Marina’s sister Juanita to
drive her to the hospital. Marina gets into the car and tells Juanita to
take her home.
If health care is a basic human right, then people who are unable to afford
health care must have a payment mechanism available that is not reliant on
out-of-pocket payments.

Unpredictability of Need and Cost

Whereas the purchase of a gourmet meal is a matter of choice and the price is
shown to the buyer, the need for and cost of health care services are
unpredictable. Most people do not know if or when they may become
severely ill or injured or what the cost of care will be.
Jake has a headache and visits the doctor, but he does not know
whether the headache will cost $100 for a physician visit plus the price
of a bottle of ibuprofen, $1,200 for an MRI, or $200,000 for surgery
and irradiation for brain cancer.
The unpredictability of many health care needs makes it difficult to plan
for these expenses. The medical costs associated with serious illness or injury
usually exceed a middle-class family’s savings.

Patients Need to Rely on Physician Recommendations

Unlike the purchaser of a gourmet meal, a person in need of health care may
have little knowledge of what he or she is buying at the time when care is
needed.
Jenny develops acute abdominal pain and goes to the hospital to
purchase a remedy for her pain. The physician tells her that she has
acute cholecystitis or a perforated ulcer and recommends
hospitalization, an abdominal CT scan, and upper endoscopic studies.
Will Jenny, lying on a gurney in the emergency room and clutching her
abdomen with one hand, use her other hand to leaf through a textbook
of internal medicine to determine whether she really needs these
services, and should she have brought along a copy of Consumer
Reports to learn where to purchase them at the cheapest price?
 Health care is the foremost example of asymmetry of information between
providers and consumers (Evans, 1984). A patient with abdominal pain is in a
poor position to question a physician who is ordering laboratory tests, x-rays,
or surgery. When health care is elective, patients can weigh the pros and cons
of different treatment options, but even so, recommendations may be filtered
through the biases of the physician providing the information. Compared with
the voluntary demand for gourmet meals, the demand for health services is
partially involuntary and is often physician rather than consumer-driven.
For these reasons among others, out-of-pocket payments are flawed as a
dominant method of paying for health care services. Because the direct
purchase of health services became increasingly difficult for consumers and
was not meeting the needs of hospitals and physicians to be reliably paid,
health insurance came into being.

• InIndividual Private Insurance

2012, Bud Carpenter was self-employed. To pay the $500 monthly
premium for his individual health insurance policy, he had to work
extra jobs on weekends, and the $5,000 deductible meant he would still
have to pay quite a bit of his family’s medical costs out of pocket. Mr.
Carpenter preferred to pay these costs rather than take the risk of
spending the money saved for his children’s college education on a
major illness. When he became ill with leukemia and the hospital bill
reached $80,000, Mr. Carpenter appreciated the value of health
insurance. Nonetheless he had to feel disgruntled when he read a
newspaper story listing his insurance company among those that paid
out on average less than 60 cents for health services for every dollar
collected in premiums.
With private health insurance, a third party, the insurer is added to the
patient and the health care provider, who are the two basic parties of the
health care transaction. While the out-of-pocket mode of payment is limited
to a single financial transaction, private insurance requires two transactions—
a premium payment from the individual to an insurance plan (also called a
health plan), and a payment from the insurance plan to the provider (Fig. 2–
2). In nineteenth-century Europe, voluntary benefit funds were set up by
guilds, industries, and mutual societies. In return for paying a monthly sum,
people received assistance in case of illness. This early form of private health
insurance was slow to develop in the United States. In the early twentieth
century, European immigrants set up some small benevolent societies in US
cities to provide sickness benefits for their members. During the same period,
two commercial insurance companies, Metropolitan Life and Prudential,
collected 10 to 25 cents per week from workers for life insurance policies that
also paid for funerals and the expenses of a final illness. The policies were
paid for by individuals on a weekly basis, so large numbers of insurance
agents had to visit their clients to collect the premiums as soon after payday
as possible. Because of the huge administrative costs, individual health
insurance never became a dominant method of paying for health care (Starr,
1982). In 2013, prior to the implementation of the individual insurance
mandate of the ACA, individual policies provided health insurance for 7% of
the US population (Table 2–1).

Individual Premium HeaJlth pllan Paymem Provider

(financing)
Figure 2–2. Individual private insurance. A third party, the insurance plan (health plan), is added,
dividing payment into a financing component and a payment component. The ACA added an individual
coverage mandate for those not otherwise insured and federal subsidy to help individuals pay the
insurance premium.

In 2014, Bud Carpenter signed up for individual insurance for his

family of 4 through Covered California, the state exchange set up
under the ACA. Because his family income was 200% of the federal
poverty level, he received a subsidy of $1,373 per month, meaning that
his premium would be $252 per month (down from his previous
monthly premium of $500) for a silver plan with Kaiser Permanente.
His deductible was $2,000 (down from $5,000). Insurance companies
were no longer allowed to deny coverage for his pre-existing leukemia.
The ACA has many provisions, described in detail in the Kaiser Family
Foundation (2013a) Summary of the Affordable Care Act and discussed more
in Chapter 15. One of the main provisions is a requirement (called the
“individual mandate”) that most US citizens and legal residents who do not
have governmental or private health insurance purchase a private health
insurance policy through a federal or state health insurance exchange, with
federal subsidies for individual and families with incomes between 100% and
400% of the federal poverty level ($24,250 to $97,000 for a family of four).
Details of the individual mandate are provided in Table 2–2.

Table 2–2. Summary of the Individual Mandate Provisions of the Affordable Care Act (ACA), 2015

U.S. citizens and legal residents are required to have health coverage with
exemptions available for such issues as financial hardship. Those who
choose to go without coverage pay a tax penalty of $325 or 2% of
taxable income in 2015, which gradually increases over the years.
People with employer-based and governmental health insurance are not
required to purchase the insurance required under the individual
mandate.
Tax credits to help pay health insurance premiums increase in size as
family incomes rise from 100% to 400% of the Federal Poverty Level.
In addition subsidies reduce the amount of out-of-pocket costs
individuals and families must pay; the amount of the subsidy varies by
income.
Under the individual mandate, health insurance is purchased though
insurance marketplaces called health insurance exchanges. Seventeen
states have elected to set up their own exchanges; the remainder of
states are covered by the federal exchange, Healthcare.gov.
Insurance companies marketing their plans through the exchanges offer
four benefit categories:
• Bronze plans represent minimum coverage, with the insurer paying for
60% of a person’s health care costs, with high out-of-pocket costs but
low premiums
• Silver plans cover 70% of health care costs, with fewer out-of-pocket
costs and higher premiums
• Gold plans cover 80% of costs, with low out-of-pocket costs and high
premiums
• Platinum plans cover 90% of costs, with very low out-of-pocket costs
and very high premiums
Most people who have obtained insurance through the exchanges have
picked Bronze or Silver plans, and 87% have received a subsidy. A
 family of four with income at 150% of the federal poverty level receives
an average subsidy of $11,000. At 300% of the federal poverty level the
subsidy is about $6,000.

Source: Kaiser Family Foundation. Summary of the Affordable Care Act. 2013. http://kff.org/health-
reform/fact-sheet/summary-of-the-affordable-care-act. Accessed March 12, 2015.

• Betty
Employment-Based Private Insurance
Lerner and her schoolteacher colleagues each paid $6 per year to
Prepaid Hospital in 1929. Ms. Lerner suffered a heart attack and was
hospitalized at no cost. The following year Prepaid Hospital built a
new wing and raised the teachers’ prepayment to $12.
Rose Riveter retired in 1961. Her health insurance premium for
hospital and physician care, formerly paid by her employer, had been
$25 per month. When she called the insurance company to obtain
individual coverage, she was told that premiums at age 65 cost $70 per
month. She could not afford the insurance and wondered what would
happen if she became ill.
The development of private health insurance in the United States was
impelled by the increasing effectiveness and rising costs of hospital care.
Hospitals became places not only in which to die, but also in which to get
well. However, many patients were unable to pay for hospital care, and this
meant that hospitals were unable to attract “customers.”
In 1929, Baylor University Hospital agreed to provide up to 21 days of
hospital care to 1,500 Dallas schoolteachers such as Betty Lerner if they paid
the hospital $6 per person per year. As the Great Depression deepened and
private hospital occupancy in 1931 fell to 62%, similar hospital-centered
private insurance plans spread. These plans (anticipating health maintenance
organizations [HMOs]) restricted care to a particular hospital. The American
Hospital Association built on this prepayment movement and established
statewide Blue Cross hospital insurance plans allowing free choice of
hospital. By 1940, 39 Blue Cross plans controlled by the private hospital
industry had enrolled over 6 million people. The Great Depression reduced
the amount patients could pay physicians out of pocket, and in 1939, the
California Medical Association set up the first Blue Shield plan to cover
physician services. These plans, controlled by state medical societies,
followed Blue Cross in spreading across the nation (Starr, 1982; Fein, 1986).
In contrast to the consumer-driven development of health insurance in
European nations, coverage in the United States was initiated by health care
providers seeking a steady source of income. Hospital and physician control
over the “Blues,” a major sector of the health insurance industry, guaranteed
that payment would be generous and that cost control would remain on the
back burner (Law, 1974; Starr, 1982).
The rapid growth of employment-based private insurance was spurred by
an accident of history. During World War II, wage and price controls
prevented companies from granting wage increases, but allowed the growth
of fringe benefits. With a labor shortage, companies competing for workers
began to offer health insurance to employees such as Rose Riveter as a fringe
benefit. After the war, unions picked up on this trend and negotiated for
health benefits. The results were dramatic: Enrollment in group hospital
insurance plans grew from 12 million in 1940 to 142 million in 1988.
With employment-based health insurance, employers usually pay much of
the premium that purchases health insurance for their employees (Fig. 2–3).
However, this flow of money is not as simple as it looks. The federal
government views employer premium payments as a tax-deductible business
expense. The government does not treat the health insurance fringe benefit as
taxable income to the employee, even though the payment of premiums could
be interpreted as a form of employee income. Because each premium dollar
of employer-sponsored health insurance results in a reduction in taxes
collected, the government is in essence subsidizing employer-sponsored
health insurance. This subsidy is enormous, estimated at $250 billion per year
(Ray et al., 2014).

Employee, Premium Health plan Payment Provider

employer (financirng)
Figure 2–3. Employment-based private insurance. In addition to the direct
employer subsidy, indirect government subsidies occur through the tax-free
status of employer contributions for health insurance benefits.
 The ACA made a change in employer-based health insurance, requiring
employers with 50 or more full-time employees to offer coverage or pay a fee
to the government; the fee is meant to discourage employers from dropping
employee health insurance, which they might be tempted to do since their
employees could buy individual insurance through the health insurance
exchanges (Kaiser Family Foundation, 2013b).
The growth of employment-based health insurance attracted commercial
insurance companies to the health care field to compete with the Blues for
customers. The commercial insurers changed the entire dynamic of health
insurance. The new dynamic was called experience rating. (The following
discussion of experience rating can be applied to individual as well as
employment-based private insurance.)
Healthy Insurance Company insures three groups of people—a young
healthy group of bank managers, an older healthy group of truck
drivers, and an older group of coal miners with a high rate of chronic
illness. Under experience rating, Healthy sets its premiums according
to the experience of each group in using health services. Because the
bank managers rarely use health care, each pays a premium of $300
per month. Because the truck drivers are older, their risk of illness is
higher, and their premium is $500 per month. The miners, who have
high rates of black lung disease, are charged a premium of $700 per
month. The average premium income to Healthy is $500 per member
per month.
Blue Cross insures the same three groups and needs the same $500 per
member per month to cover health care plus administrative costs for
these groups. Blue Cross sets its premiums by the principle of
community rating. For a given health insurance policy, all subscribers
in a community pay the same premium. The bank managers, truck
drivers, and mine workers all pay $500 per month.
Health insurance provides a mechanism to distribute health care more in
accordance with human need rather than exclusively on the basis of ability to
pay. To achieve this goal, funds are redistributed from the healthy to the sick,
a subsidy that helps pay the costs of those unable to purchase services on
their own.
Community rating achieves this redistribution in two ways:
1. Within each group (bank managers, truck drivers, and mine workers),
people who become ill receive benefits in excess of the premiums they
pay, while people who remain healthy pay premiums while receiving few
or no health benefits.
2. Among the three groups, the bank managers, who use less health care than
their premiums are worth, help pay for the miners, who use more health
care than their premiums could buy.
Experience rating is less redistributive than community rating. Within
each group, those who become ill are subsidized by those who remain well,
but among the different groups, healthier groups (bank managers) do not
subsidize high-risk groups (mine workers). Thus the principle of health
insurance, which is to distribute health care more in accordance with human
need rather than exclusively on the ability to pay, is weakened by experience
rating (Light, 1992).
In the early years, Blue Cross plans set insurance premiums by the
principle of community rating, whereas commercial insurers used experience
rating as a “weapon” to compete with the Blues (Fein, 1986). Commercial
insurers such as Healthy Insurance Company could offer cheaper premiums
to low-risk groups such as bank managers, who would naturally choose a
Healthy commercial plan at $300 over a Blue Cross plan at $500. Experience
rating helped commercial insurers overtake the Blues in the private health
insurance market. While in 1945 commercial insurers had only 10 million
enrollees, compared with 19 million for the Blues, by 1955 the score was
commercials 54 million and the Blues 51 million.
Many commercial insurers would not market policies to such high-risk
groups as mine workers, leaving Blue Cross with high-risk patients who were
paying relatively low premiums. To survive the competition from the
commercial insurers, Blue Cross had no choice but to seek younger, healthier
groups by abandoning community rating and reducing the premiums for
those groups. In this way, many Blue Cross and Blue Shield plans switched
to experience rating. Without community rating, older and sicker groups
became less and less able to afford health insurance.
From the perspective of the elderly and those with chronic illness,
experience rating is discriminatory. Healthy persons, however, might have
another viewpoint and might ask why they should voluntarily transfer their
wealth to sicker people through the insurance subsidy. The answer lies in the
unpredictability of health care needs. When purchasing health insurance, an
individual does not know if he or she will suddenly change from a state of
good health to one of illness. Thus, within a group, people are willing to risk
paying for health insurance, even though they may not use it. Among different
groups, however, healthy people have no economic incentive to voluntarily
pay for community rating and subsidize another group of sicker people. This
is why community rating cannot survive in a market-driven competitive
private insurance system (Aaron, 1991).
In a major reform contained within the ACA, insurers are severely limited
in using experience rating to set premiums; they can only vary premiums
based on family size, geographic location, age, and smoking status. The ACA
also limits how much premiums can differ between older and younger
individuals (Kaiser Family Foundation, 2013b).
The most positive aspect of health insurance—that it assists people with
serious illness to pay for their care—has also become one of its main
drawbacks—the difficulty in controlling costs in an insurance environment.
With direct purchase, the “invisible hand” of each individual’s ability to pay
holds down the price and quantity of health care. However, if a patient is well
insured and the cost of care causes no immediate fiscal pain, the patient will
use more services than someone who must pay for care out of pocket. In
addition, particularly before the advent of fee schedules, health care providers
could increase fees more easily if a third party was available to foot the bill.
Thus health insurance was originally an attempt by society to solve the
problem of unaffordable health care under an out-of-pocket payment system,
but its very capacity to make health care more affordable created a new
problem. If people no longer had to pay out of their own pockets for health
care, they would use more health care; and if health care providers could
charge insurers rather than patients, they could more easily raise prices,
especially during the era when the major insurers (the Blues) were controlled
by hospitals and physicians. The solution of insurance fueled the problem of
rising costs. As private insurance became largely experience rated and
employment based, persons who had low incomes, who were chronically ill,
or who were elderly found it increasingly difficult to afford private insurance.

• InGovernment Financing
1984 at age 74 Rose Riveter developed colon cancer. She was now
 covered by Medicare, which had been enacted in 1965. Even so, her
Medicare premium, hospital deductible expenses, physician
copayments, short nursing home stay, and uncovered prescriptions cost
her $2,700 the year she became ill with cancer.
Employment-based private health insurance grew rapidly in the 1950s,
helping working people and their families to afford health care. But two
groups in the population received little or no benefit: the poor and the elderly.
The poor were usually unemployed or employed in jobs without the fringe
benefit of health insurance; they could not afford insurance premiums. The
elderly, who needed health care the most and whose premiums had been
partially subsidized by community rating, were hard hit by the trend toward
experience rating. In the late 1950s, less than 15% of the elderly had any
health insurance (Harris, 1966). Only one program could provide affordable
care for the poor and the elderly: tax-financed government health insurance.
Government entered the health care financing arena long before the 1960s
through such public programs as municipal hospitals and dispensaries to care
for the poor and through state-operated mental hospitals. But only with the
1965 enactment of Medicare (for the elderly) and Medicaid (for the poor) did
public insurance payments for privately operated health services become a
major feature of health care in the United States. Medicare Part A (Table 2–3)
is a hospital insurance plan for the elderly financed largely through social
security taxes from employers and employees. Medicare Part B (Table 2–4)
insures the elderly for physician services and is paid for by federal taxes and
monthly premiums from the beneficiaries. Medicare Part D, enacted in 2003,
offers prescription drug coverage and is paid for by federal taxes and monthly
premiums from beneficiaries. Medicaid (Table 2–5) is a program run by the
states that is funded by federal and state taxes, which pays for the care of
millions of low-income people. In 2013, Medicare and Medicaid
expenditures totaled $586 and $450 billion, respectively (Hartman et al.,
2015).

Table 2–3. Summary of Medicare Part A, 2015

 Who Iseligible!
U~on reacnlng tne age of 6) fear~,people wno are ellglblefor )Ocial )ernrltf are automaUcall1 enrolled In Medicare Part Awnetner or not tner are retired.
Aperson wno ~as paid Into the ~oclal 5e(Unt~ SlStem for 10 ~ears and that pe~on1~ spouseare ell~lble for ~oclal ~ecurlfy. ~eopla who are not eligible for
~oclal~ecutlW can enroll InMeolcare Part Aoy paying amon!nlt p1emlum.
~eople under tne age of 65 ~ears wno are total! ~ana ~ermanentl~ disabled ma~ enroll in Medime ~art Aafter tn@~ nave oeen receiving )Ocial ~ecurtfy
di~aoilltf beneflB for i~ month~.~eo~le witn am~otro~nl( lateral ~dero~i~ (m) or ena-~tage renal dl~me re~ulrlng aial~~i~or atran~~lant are al~o
ellglole for Medicare ~art ~ wltnout aHearwaiting period.

How Is It financed?
financing,~tnrou~~ tne ~odal~ecurtcy s~stem.~m~lo~ers and em~lo1ee~ eacn ~~ lo Medicare 1.4~%of wage~ ana ~alarlet ~elf-emplo~ea ~eople pa~ B% .
ine 2010 Affordaole (are Act incream tne emplo~ee rate for nigner-lncome taxpayers (incomes ~reater tnan ~200,000 for lndMduals or ~250,000 for
cou~le~) rrom 1.4,%to2J~%~tarHn~ In 20B.

What services are covered1

Benefit Medicare Pays

Hospll~llzatlon first 60 aay~b Allbut a~1,260 aeductibleper bmm period

61st to 90tn oat All~ut ~J15/aay
91st to 150tn aat Mlbut ~630/day
~eyond ~O ~ays if lifetime remve cays areu~eo up NotMng

~~lllea nur~ln~ facility flrst io aa~s All

mt to 10mn aa1 Allbut~ 157.,0/oay
~eyond 100 days Nothln~

Home nealtn care MedicalI~nemsa~ care for nomebound people 100%for SKIiied care as defined by Medicare re~ulations

Hospice care AsIon~ asadoctor certifies person suffers from aterminal 100%formostmvices,copa~sfor out~aUent drugs and
IIInes~ rnlnmance for Inpatient respite we

Umtllled nursln~ nome care (am tnat Ismainly custodial Bnot covered Notnln~

aFor patients In Medicar Advantag plans, rnv red services and pa ient responsibility for paymen changes based on he specifics of each
Medicare Advantage plan.
bPart Ab nefits are provid dby each ben fi period ra her han for each year.Abene period begins wh nab ne clary en ers ahospital and
ends 60 days a~er discharge from the hospital or from askilled nursing facility.
1Beyond 90 days,Medicare pays for 60 additional days only once in alife ime (-life imereserve days').
Table 2–4. Summary of Medicare Part B, 2015

Who is eligible?
People who are eligible for Medicare Part Awho elect to pay the Medicare Part Bpremium of ~104.90 per month.Some low•income persons can receive finan•
cial assistance with the premium. Higher-income beneficiaries (over ~85,000 for individual! mo,000 for couple) have higher premiums related to income.
How is it financed?
Financing is inpart by general federal revenues (personalincome and other federal taxes) and inpart by Part Bmonthly premiums.
What services are coveredr

Services Benefit Medicare Pays

Medic-al expenses All medically necessary services 80% of approved amount after a~147 annual deductible
Physician services
Physical,occupational,and speech therapy
Medical equipment
Diagnostjc tests (no coinsurance for
laboratory services)

Preventive care Pap smears;mammograms; colorectal/prostate Included in medical expenses,and for some services the
cancer, cardiovascular and diabetes screening; deductible and copayment are waived
pneumococcal and influenza vaccinations;
yearlyphysical examinations

Outpatient medications Partially covered under Medicare Part D All except for premium, deductible, coinsurance, and
'donut hole,"which vary by Part Dplan

~ye refractions, hearing aids,dental Not covered Nothing

services

For patients in Medicare Advantage plans, covered services and patient responsibility for payment changes based on the specifics of each
0

Medicare Advantage plan.

Table 2–5. Summary of Medicaid Under the Affordable Care Act (ACA), 2015

Medicaid is a federal program administered by the states.

Eligibility
• From 1965 through 2014, Medicaid, while designed for low-income
 Americans, did not cover all poor people. In addition to being poor,
Medicaid had required that people also meet “categorical” eligibility
criteria such as being a young child, parent, pregnant, elderly, or
disabled, leaving out nonpregnant adults without dependent children.
Income eligibility for Medicaid varied by state; typically children were
covered up to 100%, adults to 61%, and the elderly or disabled to 74%
of the Federal Poverty Level. The federal government paid between
50% and 76% of total Medicaid costs; the federal contribution being
greater for states with lower per capita incomes.
• In 2015, Medicaid under the ACA varies widely between states
participating in the Medicaid expansion and those not participating. For
the latter states, the provisions summarized for the 1965 to 2014 period
still apply. Participating states must make all individuals with incomes
up to 138% of the federal poverty level eligible for coverage, with no
categorical eligibility criteria. To finance Medicaid expansion for the
participating states, the federal government pays 100% of the costs of
the newly eligible from 2014 to 2016, decreasing to 90% in 2020 and
beyond.
• Undocumented immigrants are not eligible for Medicaid.
State waivers
States can be granted waivers by the federal government to make
changes in which services they provide to Medicaid recipients and
whether recipients are required to receive the services through
managed care plans.

With its large deductibles, copayments, and gaps in coverage, Medicare

paid for only 58% of the average beneficiary’s health care expenses in 2012.
Ninety percent of the 50 million Medicare beneficiaries in 2012 had
supplemental coverage: Thirty-three percent of beneficiaries had additional
coverage from their previous employment, 19% purchased supplemental
private insurance (called “Medigap” plans), 24% were enrolled in the
Medicare Advantage program, and 14% were enrolled in both Medicare and
Medicaid (Kaiser Family Foundation, 2015a).
The Medicare Modernization Act (MMA) of 2003 made two major
changes in the Medicare program: the expansion of the role of private health
plans (the Medicare Advantage program, Part C) and the establishment of a
prescription drug benefit (Part D). Under the Medicare Advantage program, a
beneficiary can elect to enroll in a private health plan contracting with
Medicare, with Medicare subsidizing the premium for that private health plan
rather than paying hospitals, physicians, and other providers directly as under
Medicare Parts A and B. Beneficiaries joining a Medicare Advantage plan
sacrifice some freedom of choice of physician and hospital in return for lower
out-of-pocket payments and are only allowed to receive care from health care
providers who are connected with that plan. Two-thirds of beneficiaries with
Medicare Advantage plans are in health maintenance organizations (HMOs)
(see Chapter 6); the remainder are in private fee-for-service plans. In order to
channel more patients into Medicare Advantage plans, the MMA provided
generous payments to those plans, with the result that they initially cost the
federal government 14% more than the government paid for health care
services for similar Medicare beneficiaries in the traditional Part A and Part B
programs. The ACA reduced payments to Medicare Advantage plans with the
goal of saving the Medicare program $136 billion over the following 10
years. In 2012, HMO Medicare Advantage plans on average cost the federal
government 7% less than traditional Medicare while fee-for-service plans
cost 12% to 18% more than traditional Medicare (Biles et al., 2015).
Medicare Part D provides partial coverage for prescription drugs. In 2013,
73% of Part D was financed through tax revenues, and 75% of Medicare
beneficiaries had enrolled in the voluntary Medicare Part D program. Part D
has been criticized because (1) there are major gaps in coverage, (2) coverage
has been farmed out to private insurance companies rather than administered
by the federal Medicare program, and (3) the government is not allowed to
negotiate with pharmaceutical companies for lower drug prices. These three
features of the program have caused confusion for beneficiaries, physicians,
and pharmacists and a high cost for the program. Two-thirds of beneficiaries
on Medicare Part D are enrolled in one of the 1,001 stand-alone private
prescription drug plans and one-third receives their Part D coverage through a
Medicare Advantage plan. Sixty-three percent are enrolled in one of five
large companies. Different plans cover different medications and require
different premiums, deductibles, and coinsurance payments. The standard
benefit in 2015 has a $320 deductible and 25% coinsurance up to $2,960 in
total drug costs, followed by a coverage gap. During the gap, enrollees are
responsible for a larger share of their total drug costs until their total out-of-
pocket spending reaches $4,700. Thereafter, enrollees pay only a small
percentage of drug costs. The coverage gap, called the “donut hole,” is a
major problem for patients with chronic illness needing several medications.
The ACA gradually reduces the amounts beneficiaries must pay in the donut
hole (Kaiser Family Foundation, 2015b).
In 2009, the trustees of the Medicare program estimated that the Part A
trust fund would be depleted by 2017. The ACA, by raising social security
payments and reducing expenditures, extended Medicare’s solvency through
2030.
The Medicaid program is jointly administered by the federal and state
governments, with the federal government contributing at least 50% of the
funding to match state expenses for operating Medicaid programs. Although
designed for low-income Americans, not all poor people have traditionally
been eligible for Medicaid. In addition to being poor, until enactment of the
ACA Medicaid required that people also meet “categorical” eligibility criteria
such as being a young child, pregnant, elderly, or disabled.
The ACA (Table 2–5) eliminated the categorical eligibility criteria and
required that beginning in 2014, states offer the program to all citizens and
legal residents with family income at or below 138% of the Federal Poverty
Line—about $16,000 in 2015. The ACA did not change Medicaid policies
that continue to exclude undocumented immigrants from eligibility for
federal funding. The ACA intended that it be mandatory for states to expand
Medicaid eligibility, and provided states an incentive for expansion by having
the federal government pay almost all the cost of the increased Medicaid
enrollment (100% of the cost of expanded enrollment in 2014 to 2016,
phased down to 90% in 2020 and thereafter). However, in June 2012, the
Supreme Court ruled that the ACA’s Medicaid expansion was optional for
states. In February 2015, only 28 states plus the District of Columbia had
expanded Medicaid (Obamacare Facts, 2015; Kaiser Commission on
Medicaid and the Uninsured, 2015). Medicaid now covers one in six people
in the United States, making it the single largest health program in the nation.
Enrollment grew dramatically in recent years even before implementation of
the ACA in 2014, with enrollment increasing from 32 million to 60 million
people between 2000 and 2013 (9 million of whom were “dual eligibles”
receiving both Medicare and Medicaid). By the end of 2014, an additional 6
million people had enrolled in states participating in ACA Medicaid
expansion—falling short of the goal of 16 million new enrollees, if all states
had participated in the expansion (Rosenbaum, 2014).
 From 2000 to 2013, Medicaid expenditures rose from $200 billion to $450
billion. To slow down this expenditure growth, the federal government ceded
to states enhanced control over Medicaid programs through Medicaid
waivers, which allow states to make alterations in the scope of covered
services, require Medicaid recipients to pay part of their costs, and obligate
Medicaid recipients to enroll in managed care plans (see Chapter 4). In 2014,
more than half of Medicaid recipients were enrolled in managed care plans.
Because Medicaid pays primary care physicians an average of 58% of
Medicare fees, the majority of adult primary care physicians limit the number
of Medicaid patients they will see.
In 1997, the federal government created the State Children’s Health
Insurance Program (SCHIP), a companion program to Medicaid. SCHIP
covers children in families with incomes at or below 200% of the federal
poverty level, but above the Medicaid income eligibility level. States
legislating a SCHIP program receive generous federal matching funds. In
2012, 8 million children were enrolled in the program, some of whom are
transitioning to Medicaid under the expanded eligibility criteria enacted in the
ACA.
Government health insurance for the poor and the elderly added a new
factor to the health care financing equation: the taxpayer (Fig. 2–4). With
government-financed health plans, the taxpayer can interact with the health
care consumer in two distinct ways:
 1ft
Individuals ~' -.

Enrolllment :·
- ..... -

Public plan Payment Provider

Taxpayers

Figure 2–4. Government-financed insurance. Under the social insurance

model (e.g., Medicare Part A), only individuals paying taxes into the public
plan are eligible for benefits. In other models (e.g., Medicaid), an individual’s
eligibility for benefits may not be directly linked to payment of taxes into the
plan.

1. The social insurance model, exemplified by Medicare, allows only those

who have paid a certain amount of social security taxes to be eligible for
Part A and only those who pay a monthly premium to receive benefits
from Part B. As with private insurance, social insurance requires people to
make a contribution in order to receive benefits.
2. The contrasting model is the Medicaid public assistance model, in which
those who contribute (taxpayers) may not be eligible for benefits
(Bodenheimer & Grumbach, 1992).
It must be remembered that private insurance contains a subsidy:
redistribution of funds from the healthy to the sick. Tax-funded insurance has
the same subsidy and usually adds another: redistribution of funds from
upper- to lower-income groups. Under this double subsidy, exemplified by
Medicare and Medicaid, healthy middle-income employees generally pay
more in social security payments and other taxes than they receive in health
services, whereas unemployed, disabled, and lower-income elderly persons
tend to receive more in health services than they contribute in taxes.
The advent of government financing improved financial access to care for
some people, but, in turn, aggravated the problem of rising costs. The federal
government and state governments have responded by attempting to limit
Medicare and Medicaid payments to physicians, hospitals, and managed care
plans.

THE BURDEN OF FINANCING HEALTH CARE

Different methods of financing health care place different burdens on the
various income levels of society. Payments are classified as progressive if
they take a rising percentage of income as income increases, regressive if
they take a falling percentage of income as income increases, and
proportional if the ratio of payment to income is the same for all income
classes (Pechman, 1985).
What principle should underlie the choice of revenue source for health
care? A central purpose of the health care system is to maintain and improve
the health of the nation’s population. As discussed in Chapter 3, rates of
mortality and disability are far higher for low-income people than for the
wealthy. Burdening low-income families with high levels of payments for
health care (i.e., regressive payments) reduces their disposable income,
amplifies the ill effects of poverty, and thereby worsens their health. It makes
little sense to finance a health care system—whose purpose is to improve
health—with payments that worsen health. Thus, regressive payments could
be considered “unhealthy.”
Rita Blue earns $10,000 per year for her family of 4. She develops
pneumonia, and her out-of-pocket health costs come to $1,000, 10% of
her family income.
Cathy White earns $100,000 per year for her family of 4. She develops
pneumonia, and her out-of-pocket health costs come to $1,000, 1% of
her family income.
 Out-of-pocket payments are a regressive mode of financing. According to
the 1987 National Medical Care Expenditure Survey, out-of-pocket payments
took 12% of the income of families in the nation’s lowest-income quintile,
compared with 1.2% for families in the wealthiest 5% of the population
(Bodenheimer & Sullivan, 1997). This pattern is confirmed by the 2000
Medical Expenditure Panel Survey (MEPS, 2003). Many economists and
health policy experts would consider this regressive burden of payment as
unfair. Aggravating the regressivity of out-of-pocket payments is the fact that
lower-income people tend to be sicker and thus have more out-of-pocket
payments than the wealthier and healthier.
Jim Hale is a young, healthy, self-employed accountant whose monthly
income is $6,000, with a health insurance premium of $200, or 3% of
his income.
Jack Hurt is a disabled mine worker with black lung disease. His
income is $1,800 per month, of which $400 (22%) goes for his health
insurance.
Experience-rated private health insurance is a regressive method of
financing health care because increased risk of illness tends to correlate with
reduced income. If Jim Hale and Jack Hurt were enrolled in a community-
rated plan, each with a premium of $300, they would respectively pay 5%
and 17% of their incomes for health insurance. With community rating, the
burden of payment is regressive, but less so than with experience rating. Most
private insurance is not individually purchased but rather obtained through
employment. How is the burden of employment-linked health insurance
premiums distributed?
Jill is an assistant hospital administrator. To attract her to the job, the
hospital offered her a package of salary plus health insurance of
$6,500 per month. She chose to take $6,200 in salary, leaving the
hospital to pay $300 for her health insurance.
Bill is a nurse’s aide, whose union negotiated with the hospital for a
total package of $2,800 per month; of this amount $2,500 is salary and
$300 pays his health insurance premium.
Do Jill and Bill pay nothing for their health insurance? Not exactly.
Employers generally agree on a total package of wages and fringe benefits; if
Jill and Bill did not receive health insurance, their pay would probably go up
by nearly $300 per month. That is why employer-paid health insurance
premiums are generally considered deductions from wages or salary, and thus
paid by the employee (Blumberg et al., 2007). For Jill, health insurance
amounts to only 5% of her income, but for Bill it is 12%. The MEPS
corroborates the regressivity of employment-based health insurance; in 2001
to 2003, premiums took an average of 10.9% of the income of families in
between 100% and 200% of the Federal Poverty Line compared with 2.3%
for those above 500% of poverty (Blumberg et al., 2007). In 2012, employer-
sponsored health insurance premiums represented 58% of family income for
the bottom 40% of American families compared with 4% for the top 5%
(Blumenthal & Squires, 2014).
Larry Lowe earns $10,000 and pays $410 in federal and state income
taxes, or 4.1% of his income.
Harold High earns $100,000 and pays $12,900 in income taxes, or
12.9% of his income.
The progressive income tax is the largest tax providing money for
government-financed health care. Most other taxes are regressive (e.g., sales
and property taxes), and the combined burden of all taxes that finance health
care is roughly proportional (Pechman, 1985).
In 2009, 46% of health care expenditures were financed through out-of-
pocket payments and premiums, which are regressive, while 47% was funded
through government revenues (Martin et al., 2011), which are proportional.
The sum total of health care financing is regressive. In 1999, the poorest
quintile of households spent 18% of income on health care, while the highest-
income quintile spent only 3% (Cowan et al., 2002). Overall, the US health
care system is financed in a manner that is unhealthy.

CONCLUSION
Neither Fred Farmer nor his great-grandson Ted had health insurance, but the
modern-day Mr. Farmer’s predicament differs drastically from that of his
ancestor. Third-party financing of health care has fueled an expansive health
care system that offers treatments unimaginable a century ago, but at
tremendous expense.
Each of the four modes of financing health care developed historically as a
solution to the inadequacy of the previous modes. Private insurance provided
protection to patients against the unpredictable costs of medical care, as well
as protection to providers of care against the unpredictable ability of patients
to pay. But the private insurance solution created three new, interrelated
problems:
1. The opportunity for health care providers to increase fees to insurers
caused health services to become increasingly unaffordable for those with
inadequate insurance or no insurance.
2. The employment-based nature of group insurance placed people who were
unemployed, retired, or working part-time at a disadvantage for the
purchase of insurance, and partially masked the true costs of insurance for
employees who did receive health benefits at the workplace.
3. Competition inherent in a deregulated private insurance market gave rise
to the practice of experience rating, which made insurance premiums
unaffordable for many elderly people and other medically needy groups.
To solve these problems, government financing was required, but
government financing fueled an even greater inflation in health care costs.
As each “solution” was introduced, health care financing improved for a
time. But rising costs have jeopardized private and public coverage for many
people and made services unaffordable for those without a source of third-
party payment. The problems of each financing mode, and the problems
created by each successive solution, have accumulated into a complex crisis
characterized by inadequate access for some and high costs for everyone.

REFERENCES
Aaron HJ. Serious and Unstable Condition: Financing America’s Health Care. Washington, DC:
Brookings Institution; 1991.
Arrow KJ. Uncertainty and the welfare economics of medical care. Am Econ Rev. 1963;53:941.
Biles B et al. Variations in county-level costs between traditional Medicare and Medicare Advantage
have implications for premium support. Health Aff (Millwood). 2015; 34:56–63.
Blumberg LJ et al. Setting a standard of affordability for health insurance coverage. Health Aff
(Millwood). 2007;26: w463–w473.
Blumenthal D, Squires D. Do health care costs fuel economic inequality in the United States? The
Commonwealth Fund Blog, www.commonwealthfund.org/publications/blog/2014/sep/do-health-
costs-fuel-inequality. Published September 9, 2014. Accessed February 15, 2015.
Bodenheimer T, Grumbach K. Financing universal health insurance: taxes, premiums, and the lessons
of social insurance. J Health Polit Policy Law. 1992;17:439–462.
Bodenheimer T, Sullivan K. The logic of tax-based financing for health care. Int J Health Serv.
 1997;27:409–425.
Cowan CA et al. Burden of health care costs: businesses, households, and governments, 1987–2000.
Health Care Financ Rev. 2002;23:131–159.
Evans RG. Strained Mercy. Toronto, Ontario, Canada: Butterworths; 1984.
Fein R. Medical Care, Medical Costs. Cambridge, MA: Harvard University Press; 1986.
Harris R. A Sacred Trust. New York, NY: New American Library; 1966.
Hartman M et al. National health spending in 2013: growth slows, remains in step with the overall
economy. Health Aff (Millwood). 2015;34:150–160.
Kaiser Family Foundation. Summary of the Affordable Care Act. 2013a. http://kff.org/health-
reform/fact-sheet/summary-of-the-affordable-care-act. Accessed March 12, 2015.
Kaiser Family Foundation. Health insurance market reforms: rate restrictions, 2013b.
https://kaiserfamilyfoundation.files.wordpress.com/2013/01/8328.pdf. Accessed March 12, 2015.
Kaiser Family Foundation. Medicare publications, 2015a. http://kff.org/medicare. Accessed February
15, 2015.
Kaiser Family Foundation. The Medicare Part D prescription drug benefit. 2015b.
http://files.kff.org/attachment/medicare-prescription-drug-benefit-fact-sheet. Accessed February 15,
2015.
Law SA. Blue Cross: What Went Wrong? New Haven, CT: Yale University Press; 1974.
Light DW. The practice and ethics of risk-rated health insurance. JAMA. 1992;267:2503–2508.
Martin A et al. Recession contributes to slowest annual rate of increase in health spending in five
decades. Health Affairs. 2011;30:11.
Medical Expenditure Panel Survey. Health insurance coverage of the civilian non-institutionalized
population, first half of 2002. Agency for Healthcare Research and Quality, June 2003.
www.meps.ahrq.gov. Accessed November 11, 2011.
Obamacare Facts, February 2015. http://obamacarefacts.com/obamacares-medicaid-expansion
Pechman JA. Who Paid the Taxes, 1966-1985. Washington, DC: Brookings Institution; 1985.
Ray M et al. Tax subsidies for private health insurance. Kaiser Family Foundation, 2014.
http://files.kff.org/attachment/tax-subsidies-for-private-health-insurance-issue-brief. Accessed
February 15, 2015.
Rosenbaum S. Medicaid payments and access to care. N Engl J Med. 2014;371:2345–2347.
Starr P. The Social Transformation of American Medicine. New York, NY: Basic Books; 1982.
 3

Access to Health Care

Access to health care is the ability to obtain health services when needed.
Lack of adequate access for millions of people is a crisis in the United States.
Access to health care has two major components. First and most
frequently discussed is the ability to pay. Second is the availability of health
care personnel and facilities that are close to where people live, accessible by
transportation, culturally acceptable, and capable of providing appropriate
care in a timely manner and in a compatible language. The first and longest
portion of this chapter dwells on financial barriers to care. The second portion
touches on nonfinancial barriers. The final segment explores the influences
other than health care (in particular, socioeconomic status and race/ethnicity)
that are important determinants of the health status of a population.

FINANCIAL BARRIERS TO HEALTH CARE

• InLack of Insurance
1990, Ernestine Newsome was born into a low-income working
family living in South Central Los Angeles. As a young child, she rarely
saw a physician or nurse and was behind on her childhood
immunizations. When Ernestine was 7 years old, her mother began
working for the telephone company, and this provided the family with
health insurance. Ernestine went to a neighborhood physician for
regular checkups. When she reached 19 in 2009, she left home and
began work as a part-time secretary. She was no longer eligible for her
family’s health insurance coverage, and her new job did not provide
insurance. She has not seen a physician since starting her job.
 Health insurance coverage, whether public or private, is a key factor in
making health care accessible.
Historically, trends in health insurance coverage in the United States in the
modern era can be divided into three phases. The first phase, occurring
between the 1930s and mid-1970s, saw a large increase in the proportion of
Americans with health insurance due to the growth of employment-based
private health insurance and the 1965 passage of Medicare and Medicaid
(Table 3–1). The second phase, starting in the late 1970s, marks a reversal of
this trend; between 1980 and 2010, the number of uninsured people in the
United States grew from 25 to 50 million. The single most important factor
explaining the growing number of uninsured in this period was a decrease in
private insurance coverage. The number of uninsured peaked in 2010—the
year the ACA was signed into law–signifying the onset of the third phase in
this historical trend as the number of uninsured decreased from 50 to 41
million between 2010 and 2013 (Fig. 3–1). Because the major coverage
expansion policies legislated by the ACA did not take effect until 2014, the
decrease in the number of uninsured between 2010 and 2013 was largely
explained by states more actively enrolling individuals and families eligible
for Medicaid under the traditional eligibility criteria. In 2014, upon
implementation of the ACA’s private insurance mandates and voluntary state
Medicaid expansion, the number of uninsured individuals decreased further
from 41 to 26 million (Carman et al., 2015). Even if the ACA is fully
implemented, about 20 million people will remain uninsured due to states not
participating in Medicaid expansion, individuals opting out of the individual
mandate, individuals not enrolling in Medicaid even when eligible, and
undocumented immigrants remaining ineligible for Medicaid and insurance
subsidies.

Table 3–1. Estimated principal source of health insurance, 2013

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 CHAPTER II
THE GATEWAY TO EGYPT

I am again in Alexandria, the great sea-port of the valley of the

Nile. My first visit to it was just before Arabi Pasha started the
rebellion which threw Egypt into the hands of the British. I saw it
again seven years later on my way around the world. I find now a
new city, which has risen up and swallowed the Alexandria of the
past.
The Alexandria of to-day stands upon the site of the greatest of
the commercial centres of antiquity, but its present buildings are as
young as those of New York, Chicago, or Boston. It is one of the
boom towns of the Old World, and has all grown up within a century.
When George Washington was president it was little more than a
village; it has now approximately a half million inhabitants.
This is a city with all modern improvements. It has wide streets as
well paved as those of Washington, public squares that compare
favourably with many in Europe, and buildings that would be an
ornament to any metropolis on our continent. It is now a city of street
cars and automobiles. Its citizens walk or ride to its theatres by the
light of electricity, and its rich men gamble by reading the ticker in its
stock exchange. It is a town of big hotels, gay cafés, and palaces
galore. In addition to its several hundred thousand Mohammedans, it
has a large population of Greeks, Italians, and other Europeans,
among them some of the sharpest business men of the
Mediterranean lands. Alexandria has become commercial, money
making, and fortune hunting. The rise and fall of stocks, the boom in
real estate, and the modern methods of getting something for
nothing are its chief subjects of conversation, and the whole
population is after the elusive piastre and the Egyptian pound as
earnestly as the American is chasing the nickel and the dollar.
 The city grows because it is at the sea-gate to Egypt and the
Sudan. It waxes fat on the trade of the Nile valley and takes toll of
every cent’s worth of goods that comes in and goes out. More than
four thousand vessels enter the port every year and in the harbour
there are steamers from every part of the world. I came to Egypt
from Tripoli via Malta, where I took passage on a steamer bound for
India and Australia, and any week I can get a ship which within
fifteen days will carry me back to New York.
One of the things to which Alexandria owes its greatness is the
canal that Mehemet Ali, founder of the present ruling dynasty of
Egypt, had dug from this place to the Nile. This remarkable man was
born the son of a poor Albanian farmer and lived for a number of
years in his little native port as a petty official and tobacco trader. He
first came into prominence when he led a band of volunteers against
Napoleon in Egypt. Later still he joined the Sultan of Turkey in
fighting the Mamelukes for the control of the country. The massacre
of the Mamelukes in 1811 left the shrewd Albanian supreme in the
land, and, after stirring up an Egyptian question that set the Powers
of Europe more or less by the ears with each other and with the
Sultan of Turkey, he was made Viceroy of Egypt, with nominal
allegiance to the Turkish ruler. When he selected Alexandria as his
capital, it was a village having no connection with the Nile. He dug a
canal fifty miles long to that great waterway, through which a stream
of vessels is now ever passing, carrying goods to the towns of the
valley and bringing out cotton, sugar, grain, and other products, for
export to Europe. The canal was constructed by forced labour. The
peasants, or fellaheen, to the number of a quarter of a million,
scooped the sand out with their hands and carried it away in baskets
on their backs. It took them a year to dig that fifty-mile ditch, and they
were so overworked that thirty thousand of them died on the job.
Ismail Pasha, grandson of Mehemet Ali, made other
improvements on the canal and harbour, and after the British took
control of Egypt they bettered Alexandria in every possible way.
It has now one of the best of modern harbours. The port is
protected by a breakwater two miles in length, and the biggest ocean
steamers come to the quays. There are twenty-five hundred acres of
safe anchorage inside its haven, while the arrangements for coaling
and for handling goods are unsurpassed.
These conditions are typical of the New Egypt. Old Mother Nile,
with her great dams and new irrigation works, has renewed her
youth and is growing in wealth like a jimson weed in an asparagus
bed. When I first saw the Nile, its valley was a country of the dead,
with obelisks and pyramids as its chief landmarks. Then its most
interesting characters were the mummified kings of more than twenty
centuries ago and the principal visitors were antiquity hunters and
one-lunged tourists seeking a warm winter climate. These same
characters are here to-day, but in addition have come the ardent
dollar chaser, the capitalist, and the syndicate. Egypt is now a land of
banks and stock exchanges. It is thronged with civil engineers,
irrigation experts, and men interested in the development of the
country by electricity and steam. The delta, or the great fan of land
which begins at Cairo and stretches out to the Mediterranean, is
gridironed with steel tracks and railroad trains, continuing almost to
the heart of central Africa.
I find Egypt changing in character. The Mohammedans are being
corrupted by the Christians, and the simple living taught by the
Koran, which commands the believer to abstain from strong drink
and other vices, has become infected with the gay and giddy
pleasures of the French. In many cases the system of the harem is
being exchanged for something worse. The average Moslem now
has but one wife, but in many cases he has a sweetheart in a house
around the corner, “and the last state of that man is worse than the
first.”
The ghouls of modern science are robbing the graves of those
who made the Pyramids. A telephone line has been stretched out of
Cairo almost to the ear of the Sphinx, and there is a hotel at the base
of the Pyramid of Cheops where English men and women drink
brandy and soda between games of tennis and golf.
 Cotton warehouses and docks extend for a mile along the Mahmudiyeh Canal
connecting the port of Alexandria with the Nile River, and the prosperity of the city
rises and falls with the price of cotton in the world’s markets.
 Nubian women sell fruit and flowers on the streets of Alexandria to-day, but once
their kings ruled all Egypt and defeated the armies of Rome. They became early
converts to Christianity but later adopted Mohammedanism.

The Egypt of to-day is a land of mighty hotels and multitudinous

tourists. For years it has been estimated that Americans alone spend
several million dollars here every winter, and the English, French,
and other tourists almost as much. It is said that in the average
season ten thousand Americans visit the Nile valley and that it costs
each one of them at least ten dollars for every day of his stay.
When I first visited this country the donkey was the chief means of
transport, and men, women, and children went about on long-eared
beasts, with Arab boys in blue gowns following behind and urging
the animals along by poking sharp sticks into patches of bare flesh,
as big as a dollar, which had been denuded of skin for the purpose.
The donkey and the donkey boy are here still, but I can get a street
car in Alexandria that will take me to any part of the town, and I
frequently have to jump to get out of the way of an automobile. There
are cabs everywhere, both Alexandria and Cairo having them by
thousands.
The new hotels are extravagant beyond description. In the one
where I am now writing the rates are from eighty to one hundred
piastres per day. Inside its walls I am as far from Old Egypt as I
would be in the Waldorf Astoria in New York. The servants are
French-speaking Swiss in “swallow-tails”, with palms itching for fees
just as do those of their class in any modern city. In my bedroom
there is an electric bell, and I can talk over the telephone to our
Consul General at Cairo. On the register of the hotel, which is
packed with guests, I see names of counts by the score and lords by
the dozen. The men come to dinner in steel-pen coats and the
women in low-cut evening frocks of silk and satin. There is a babel of
English, French, and German in the lounge while the guests drink
coffee after dinner, and the only evidences one perceives of a land of
North Africa and the Moslems are the tall minarets which here and
there reach above the other buildings of the city, and the voices of
the muezzins as they stand beneath them and call the
Mohammedans to prayer.
The financial changes that I have mentioned are by no means
confined to the Christians. The natives have been growing rich, and
the Mohammedans for the first time in the history of Egypt have
been piling up money. Since banking and money lending are
contrary to the Koran, the Moslems invest their surplus in real estate,
a practice which has done much to swell all land values.
 Egypt is still a country of the Egyptians, notwithstanding the
overlordship of the British and the influx of foreigners. It has now
more than ten million people. Of these, three out of every four are
either Arabs or Copts. Most of them are Mohammedans, although
there are, all told, something like eight hundred and sixty thousand
Copts, descendants of the ancient Egyptians, who have a rude kind
of Christianity, and are, as a body, better educated and wealthier
than the Mussulmans.
The greater part of the foreign population of Egypt is to be found in
Alexandria and Cairo, and in the other towns of the Nile valley, as
well as in Suez and Port Said. There are more of the Greeks than of
any other nation. For more than two thousand years they have been
exploiting the Egyptians and the Nile valley and are to-day the
sharpest, shrewdest, and most unscrupulous business men in it.
They do much of the banking and money lending and until the
government established banks of its own and brought down the
interest rate they demanded enormous usury from the Egyptian
peasants. It is said that they loaned money on lands and crops at an
average charge of one hundred and fifty per cent. per annum.
This was changed, however, by the establishment of the
Agricultural Bank. The government, which controls that bank, lends
money to the farmers at eight per cent. to within half of the value of
their farms. To-day, since the peasants all over Egypt can get money
at this rate, the Greeks have had to reduce theirs.
The Italians number about forty thousand and the French twenty
thousand. There are many Italian shops here in Alexandria, while
there are hundreds of Italians doing business in Cairo. They also
furnish some of the best mechanics. Many of them are masons and
the greater part of the Aswan Dam and similar works were
constructed by them.
There are also Germans, Austrians, and Russians, together with a
few Americans and Belgians. The British community numbers a little
over twenty thousand. Among the other foreigners are some Maltese
and a few hundred British East Indians.
 Sitting here at Alexandria in a modern hotel surrounded by the
luxuries of Paris or New York, I find it hard to realize that I am in one
of the very oldest cities of history. Yesterday I started out to look up
relics of the past, going by mile after mile of modern buildings,
though I was travelling over the site of the metropolis that flourished
here long before Christ was born. From the antiquarian’s point of
view, the only object of note still left is Pompey’s Pillar and that is
new in comparison with the earliest history of Old Egypt, as it was
put up only sixteen hundred years ago, when Alexandria was already
one of the greatest cities of the world. The monument was supposed
to stand over the grave of Pompey, but it was really erected by an
Egyptian prefect in honour of the Roman emperor, Diocletian. It was
at one time a landmark for sailors, for there was always upon its top
a burning fire which was visible for miles over the Mediterranean
Sea. The pillar is a massive Corinthian column of beautifully polished
red granite as big around as the boiler of a railroad locomotive and
as high as a ten-story apartment house. It consists of one solid block
of stone, standing straight up on a pedestal. It was dug out of the
quarries far up the Nile valley, brought down the river on rafts and in
some way lifted to its present position. In their excavations about the
pedestal, the archæologists learned of its comparatively modern
origin and, digging down into the earth far below its foundation,
discovered several massive stone sphinxes. These date back to old
Alexandria and were chiselled several hundreds of years before
Joseph and Mary brought the baby Jesus on an ass, across the
desert, into the valley of the Nile that he might not be killed by Herod
the King.
This city was founded by Alexander the Great three hundred and
thirty-two years before Christ was born. It probably had then more
people than it has to-day, for it was not only a great commercial port,
but also a centre of learning, religion, and art. It is said to have had
the grandest library of antiquity. The manuscripts numbered nine
hundred thousand and artists and students came from all parts to
study here. At the time of the Cæsars it was as big as Boston, and
when it was taken by the Arabs, along about 641 a.d., it had four
thousand palaces, four hundred public baths, four hundred places of
amusement, and twelve thousand gardens. When Alexander the
Great founded it he brought in a colony of Jews, and at the time the
Mohammedans came the Jewish quarter numbered forty thousand.
At Alexandria St. Mark first preached Christianity to the Egyptians,
and subsequently the city became one of the Christian centres of the
world. Here Hypatia lived, and here, as she was about to enter a
heathen temple to worship, the Christian monks, led by Peter the
Reader, tore her from her chariot and massacred her. They scraped
her live flesh from her bones with oyster shells, and then tore her
body limb from limb.
Here, too, Cleopatra corrupted Cæsar and later brought Marc
Antony to a suicidal grave. There are carvings of the enchantress of
the Nile still to be seen on some of the Egyptian temples far up the
river valley. I have a photograph of one which is in good preservation
in the Temple of Denderah. Its features are Greek rather than
Egyptian, for she was more of a Greek than a Simon-pure daughter
of the Nile. She was not noted for beauty, but she had such
wonderful charm of manner, sweetness of voice, and brilliancy of
intellect, that she was able to allure and captivate the greatest men
of her time.
Cleopatra’s first Roman lover was Julius Cæsar, who came to
Alexandria to settle the claims of herself and her brother to the
throne of Egypt. Her father, who was one of the Ptolemies, had at his
death left his throne to her younger brother and herself, and
according to the custom the two were to marry and reign together.
One of the brother’s guardians, however, had dethroned and
banished Cleopatra. She was not in Egypt when Cæsar came. It is
not known whether it was at Cæsar’s request or not, but the story
goes that she secretly made her way back to Alexandria, and was
carried inside a roll of rich Syrian rugs on the back of a servant to
Cæsar’s apartments. Thus she was presented to the mighty Roman
and so delighted him that he restored her to the throne. When he left
for Rome some time later he took her with him and kept her there for
a year or two. After the murder of Cæsar, Cleopatra, who had
returned to Egypt, made a conquest of Marc Antony and remained
his sweetheart to the day when he committed suicide upon the report
that she had killed herself. Antony had then been conquered by
Octavianus, his brother-in-law, and it is said that Cleopatra tried to
capture the heart of Octavianus before she took her own life by
putting the poisonous asp to her breast.
 CHAPTER III
KING COTTON ON THE NILE

The whole of to-day has been spent wandering about the cotton
wharves of Alexandria. They extend for a mile or so up and down the
Mahmudiyeh Canal, which joins the city to the Nile, and are flanked
on the other side by railroads filled with cotton trains from every part
of Egypt. These wharves lie under the shadow of Pompey’s Pillar
and line the canal almost to the harbour. Upon them are great
warehouses filled with bales and bags. Near by are cotton presses,
while in the city itself is a great cotton exchange where the people
buy and sell, as they do at Liverpool, from the samples of lint which
show the quality of the bales brought in from the plantations.
Indeed, cotton is as big a factor here as it is in New Orleans, and
the banks of this canal make one think of that city’s great cotton
market. The warehouses are of vast extent, and the road between
them and the waterway is covered with bales of lint and great bags
of cotton seed. Skullcapped blue-gowned Egyptians sit high up on
the bales on long-bedded wagons hauled by mules. Other Egyptians
unload the bales from the cars and the boats and others carry them
to the warehouses. They bear the bales and the bags on their backs,
while now and then a man may be seen carrying upon his head a
bag of loose cotton weighing a couple of hundred pounds. The
cotton seed is taken from the boats in the same way, seed to the
amount of three hundred pounds often making one man’s load.
Late in the afternoon I went down to the harbour to see the cotton
steamers. They were taking on cargoes for Great Britain, Russia,
France, Germany, and the United States. This staple forms three
fourths of the exports of Egypt. Millions of pounds of it are annually
shipped to the United States, notwithstanding the fact that we raise
more than two thirds of all the cotton of the world. Because of its
long fibre, there is always a great demand for Egyptian cotton, which
is worth more on the average than that of any other country.
For hundreds of years before the reign of that wily old tyrant,
Mehemet Ali, whose rule ended with the middle of the nineteenth
century, Egypt had gone along with the vast majority of her people
poor, working for a wage of ten cents or so a day, and barely out of
reach of starvation all the time. Mehemet Ali saw that what she
needed to become truly prosperous and raise the standard of living
was some crop in which she might be the leader. It was he who
introduced long-staple cotton, a product worth three times as much
as the common sort, and showed what it could do for his country.
Since then King Cotton has been the money maker of the Nile valley,
the great White Pharaoh whom the modern Egyptians worship. He
has the majority of the Nile farmers in his employ and pays them
royally. He has rolled up a wave of prosperity that has engulfed the
Nile valley from the Mediterranean to the cataracts and the
prospects are that he will continue to make the country richer from
year to year. The yield is steadily increasing and with the improved
irrigation methods it will soon be greater than ever. From 1895 to
1900 its average annual value was only forty-five million dollars; but
after the Aswan Dam was completed it jumped to double that sum.
 Though cotton is the big cash crop of Egypt, small flocks of sheep are kept on
many of the farms and the women spin the wool for the use of the family.
 Sugar is Egypt’s crop of second importance. Heavy investments of French and
British capital in the Egyptian industry were first made when political troubles
curtailed Cuba’s production.

The greater part of Upper and Lower Egypt can be made to grow
cotton, and cotton plantations may eventually cover over five million
five hundred thousand acres. If only fifty per cent. of this area is
annually put into cotton it will produce upward of two million bales
per annum, or more than one sixth as much as the present cotton
crop of the world. In addition to this, there might be a further increase
by putting water into some of the oases that lie in the valley of the
Nile outside the river bottom, and also by draining the great lakes
about Alexandria and in other parts of the lower delta.
Egypt has already risen to a high place among the world’s cotton
countries. The United States stands first, British India second, and
Egypt third. Yet Egypt grows more of this staple for its size and the
area planted than any other country on the globe. Its average yield is
around four hundred and fifty pounds per acre, which is far in excess
of ours. Our Department of Agriculture says that our average is only
one hundred and ninety pounds per acre, although we have, of
course, many acres which produce five hundred pounds and more.
It is, however, because of its quality rather than its quantity that
Egyptian cotton holds such a commanding position in the world’s
markets. Cotton-manufacturing countries must depend on Egypt for
their chief supply of long-staple fibre. There are some kinds that sell
for double the amount our product brings. It is, in fact, the best cotton
grown with the exception of the Sea Island raised on the islands off
the coasts of Georgia and South Carolina. The Sea Island cotton has
a rather longer fibre than the Egyptian. The latter is usually brown in
colour and is noted for its silkiness, which makes it valuable for
manufacturing mercerized goods. We import an enormous quantity
of it to mix with our cotton, and we have used the Egyptian seed to
develop a species known as American-Egyptian, which possesses
the virtues of both kinds.
There is a great difference in the varieties raised, according to the
part of the Nile valley from which each kind comes. The best cotton
grows in the delta, which produces more than four fifths of the
output.
A trip through the Nile cotton fields is an interesting one. The
scenes there are not in the least like those of our Southern states.
Much of the crop is raised on small farms and every field is marked
out with little canals into which the water is introduced from time to
time. There are no great farm houses in the landscape and no barns.
The people live in mud villages from which they go out to work in the
fields. They use odd animals for ploughing and harrowing and the
crop is handled in a different way from ours.
Let me give you a few of the pictures I have seen while travelling
through the country. Take a look over the delta. It is a wide expanse
of green, spotted here and there with white patches. The green
consists of alfalfa, Indian corn, or beans. The white is cotton,
stretching out before me as far as my eye can follow it.
Here is a field where the lint has been gathered. The earth is
black, with windrows of dry stalks running across it. Every stalk has
been pulled out by the roots and piled up. Farther on we see another
field in which the stalks have been tied into bundles. They will be
sold as fuel and will produce a full ton of dry wood to the acre. There
are no forests in Egypt, where all sorts of fuel are scarce. The stalks
from one acre will sell for two dollars or more. They are used for
cooking, for the farm engines on the larger plantations, and even for
running the machinery of the ginning establishments. In that village
over there one may see great bundles of them stored away on the
flat roofs of the houses. Corn fodder is piled up beside them, the
leaves having been torn off for stock feed. A queer country this,
where the people keep their wood piles on their roofs!
In that field over there they are picking cotton. There are scores of
little Egyptian boys and girls bending their dark brown faces above
the white bolls. The boys for the most part wear blue gowns and dirty
white skullcaps, though some are almost naked. The little girls have
cloths over their heads. All are barefooted. They are picking the fibre
in baskets and are paid so much per hundred pounds. A boy will
gather thirty or forty pounds in a day and does well if he earns as
much as ten cents.
The first picking begins in September. After that the land is
watered, and a second picking takes place in October. There is a
third in November, the soil being irrigated between times. The first
and second pickings, which yield the best fibre, are kept apart from
the third and sold separately.
 After the cotton is picked it is put into great bags and loaded upon
camels. They are loading four in that field at the side of the road. The
camels lie flat on the ground, with their long necks stretched out.
Two bags, which together weigh about six hundred pounds, make a
load for each beast. Every bag is as long and wide as the mattress
of a single bed and about four feet thick. Listen to the groans of the
camels as the freight is piled on. There is one actually weeping. We
can see the tears run down his cheeks.
Now watch the awkward beasts get up. Each rises back end first,
the bags swaying to and fro as he does so. How angry he is! He
goes off with his lower lip hanging down, grumbling and groaning like
a spoiled child. The camels make queer figures as they travel. The
bags on each side their backs reach almost to the ground, so that
the lumbering creatures seem to be walking on six legs apiece.
Looking down the road, we see long caravans of camels loaded
with bales, while on the other side of that little canal is a small drove
of donkeys bringing in cotton. Each donkey is hidden by a bag that
completely covers its back and hides all but its little legs.
In these ways the crop is brought to the railroad stations and to the
boats on the canals. The boats go from one little waterway to
another until they come into the Mahmudiyeh Canal, and thence to
Alexandria. During the harvesting season the railroads are filled with
cotton trains. Some of the cotton has been ginned and baled upon
the plantations, and the rest is in the seed to be ginned at
Alexandria. There are ginning establishments also at the larger
cotton markets of the interior. Many of them are run by steam and
have as up-to-date machinery as we have. At these gins the seed is
carefully saved and shipped to Alexandria by rail or by boat.
 The Nile bridge swings back to let through the native boats sailing down to
Alexandria with cargoes of cotton and sugar grown on the irrigated lands farther
upstream.
 A rainless country, Egypt must dip up most of its water from the Nile, usually by
the crude methods of thousands of years ago. Here an ox is turning the creaking
sakieh, a wheel with jars fastened to its rim.

Egypt is a land that resists change, where even the native ox, despite the
frequent importation of foreign breeds, has the same features as are found in the
picture writings of ancient times. He is a cousin of the zebu.
 The Egyptians put more work on their crop than our Southern
farmers do. In the first place, the land has to be ploughed with
camels or buffaloes and prepared for the planting. It must be divided
into basins, each walled around so that it will hold water, and inside
each basin little canals are so arranged that the water will run in and
out through every row. The whole field is cut up into these beds,
ranging in size from twenty-four to seventy-five feet square.
The cotton plants are from fourteen to twenty inches apart and set
in rows thirty-five inches from each other. It takes a little more than a
bushel of seed to the acre. The seeds are soaked in water before
planting, any which rise to the surface being thrown away. The
planting is done by men and boys at a cost of something like a dollar
an acre. The seeds soon sprout and the plants appear in ten or
twelve days. They are thinned by hand and water is let in upon them,
the farmers taking care not to give them too much. The plants are
frequently hoed and have water every week or so, almost to the time
of picking. The planting is usually done in the month of March, and,
as I have said, the first picking begins along in September.
I have been told that cotton, as it is grown here, exhausts the soil
and that the people injure the staple and reduce the yield by
overcropping. It was formerly planted on the same ground only every
third year, the ground being used in the interval for other crops or
allowed to lie fallow. At present some of the cotton fields are worked
every year and others two years out of three. On most of the farms
cotton is planted every other year, whereas the authorities say that in
order to have a good yield not more than forty per cent. of a man’s
farm should be kept to this crop from year to year. Just as in our
Southern states, a year of high cotton prices is likely to lead to
overcropping and reduced profits, and vice versa. Another trouble in
Egypt, and one which it would seem impossible to get around, is the
fact that cotton is practically the only farm crop. This puts the
fellaheen more or less at the mercy of fluctuating prices and
changing business conditions; so that, like our cotton farmers of the
South, they have their lean years and their fat years.
Egypt also has had a lot of trouble with the pink boll weevil. This
pestiferous cotton worm, which is to be found all along the valley of