Evans On The Economy -- Curtail Costs Of Health Care With Choice

Prices would stabilize if consumers called the shots.

Any way you add up the numbers, surging health-care costs threaten to swamp the system. After a hiatus during the 1990s, medical-care cost increases have returned with a vengeance, rising 13% last year and projected to rise 15% this year. But the problem will never be solved by ever-more convoluted methods of "controlling" health-care costs, such as reducing fees to physicians, requiring patients to switch to generic drugs or any other of the plans favored even by those who really do want to bring health-care costs under control. Health care is obviously an important part of life. But so are food, housing, clothing and transportation. No one has "food insurance," which presumably would allow people to go to the supermarket, wait for an hour and a half, fill out a bunch of confusing forms, and then pick out their groceries. Ah, but some poor people do have food stamps. Which is exactly my point. Food stamps work because people make their own spending decisions. Of course, there are some differences between health care and food, housing, clothing and transportation. No one ever had an emergency attack of starvation; yet an unexpected appendectomy can set you back tens of thousands of dollars. Health insurance should work like home insurance. With home insurance, you call in the insurance company if your roof collapses, but you don't call the insurance company if the garbage disposal gets stuck. Homeowners or landlords pay such routine maintenance bills out of their own pockets. With health-care insurance, people should pay for routine visits and medications and use the insurance only for catastrophic illness. You would never know it from the current political brouhaha over Medicare, but when the original legislation was proposed, that was precisely the idea. And that's why prescription drug costs aren't currently covered by that legislation. However, many older people claim that the cost of doctors, hospitals and medications has risen so much that they now are forced to choose between food or medical care when spending their Social Security checks. And in many cases, they're right. The reason is that the U.S. Labor Department's Consumer Price Index grossly understates the cost of living for the elderly. A one-time adjustment is needed to put those payments back to the point where they actually cover the average market basket of goods and services they buy. But with that adjustment must come an ironclad agreement that government aid for medical care should be used only for major costs associated with catastrophic illness, not routine care. When drug companies, hospitals and physicians find that consumers are spending their own money, they will then work out more reasonable price schedules -- or they won't get paid. If people are spending their own money, they'll be buying goods and services at the lowest possible cost. Just as not everyone can live in the most expensive neighborhood, not everyone can afford to see the most expensive doctor. As these lower prices start to work their way through the system, employers who offer health-care benefits will find their financial situation also will benefit because costs incurred by employees will rise less rapidly. In the long run, even though the initial effect will be to boost government spending, the net result will be lower medical-care costs, smaller government outlays and a greater chance that at least some manufacturing firms will be able to remain in the U.S. instead of being forced to move to countries where labor costs are much lower. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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