Evans On The Economy -- Our Incurable Disease

Dec. 21, 2004
Neither government nor business can pay for runaway health-care costs.

Question: If medical care costs rise 15% per year at the same time that wages rise 3% per year, and medical care currently accounts for 16% of total consumption, how many years would it take before medical-care costs account for more than 50% of total consumption? Answer: 10 years. Now, you and I know that the average consumer is not going to be handing over 50% of his or her total income for medical care 10 years from now. But there's nothing wrong with the compound arithmetic. So the answer must be elsewhere. Medical-care costs, which have been growing at 15% per year for the past five years, are rising because people are using more medical care. That's partly because people are living longer, partly because new "miracle" drugs and treatments are available, and partly because the medical profession has convinced a gullible public that it ought to be taking all sorts of expensive medicines that it really doesn't need on a regular basis. Who pays? One possibility is to have the government fund the big increases in medical-care costs. That would be quite a step up for the Feds. During the past five years -- while most of the big cost increases have occurred in private health-care plans -- federal Medicare expenditures have risen a fairly modest 5% per year, and Medicaid outlays have risen 11% per year. The Feds could step in, but I don't think so. The reasons are in the numbers. For fiscal year 2003, the government accounting year that ended Sept. 30, estimated expenditures for Medicare and Medicaid were $473 billion. If those outlays grew at 15% per year instead of 8%, the difference by 2013 would be some $894 billion each year. Democratic presidential hopeful Howard Dean, a medical doctor, thinks we can pay for all this and more simply by rescinding Bush's upper-income tax cuts. But not many agree. How about the private sector? Private employers simply are not going to pick up the burden. It would put most of them out of business. Again, consider the numbers. If government medical care expenses are $473 billion this year, and total medical care expenditures are about $1,450 billion this year, the private sector is paying, directly or indirectly, about $1,000 billion. If that outlay grows at 15% per year, by 2013 the private sector would be shelling out $4,000 billion, an increase of $3,000 billion. Assuming that corporate profits keep pace with GDP, pretax profits will be about $1,400 billion in 2013. The numbers don't work. People are going to have to start using less medical care. There are two ways to accomplish this. The government can decide, or the private sector can decide. Within the private sector, the decisions can be made by HMOs and PPOs, or by private individuals. The latter would happen when legislators decide to give each individual a set amount to spend on medical care, and let them decide how best to spend their dollars; whatever is left can be carried forward. Included in this option is a two-tier pricing system, with the cost of the physician and the hospital at one level if you waive your right to sue, and a higher level if you retain that right. I don't know which, if any, of these changes is likely to occur in the next several years. However, I do know one thing: Medical-care costs cannot continue to rise at 15% per year. And when something cannot continue to rise indefinitely, it eventually reverses course. 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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