The Economy

Dec. 21, 2004
Litigation against HMOs could dent economy

The two stupidest groups of people in the country are baseball owners and HMO executives. Many years ago, baseball players were subject to the reserve clause, which meant they could not sign with another team without receiving their outright release. Andy Messersmith wanted to change teams, so he sat out a year in order to become a free agent. The owners refused to accept his interpretation, so the ballplayers' union went to court and won. At that time, Marvin Miller, head of the union, told the ballplayers they could win far bigger victories in the courts, but at the time they simply wanted to challenge the reserve clause. At first, salaries remained reasonable, but eventually they started to escalate. So the owners got smart and refused to bargain with any free agents above a certain price. That was such an obvious collusion that the owners lost in court again, which is when baseball salaries went through the roof. None of this would have happened if the baseball owners had shown even a modicum of flexibility, but, as I say, they were too stupid to realize this. What does all this have to do with the economy? Recently, California Gov. Gray Davis signed a bill allowing patients to sue HMOs for punitive damages. The lame excuse he gave was that Texas has had a similar law for two years and there has been no flood of multimillion-dollar lawsuits. That is, not yet. Just like the baseball players' situation, it takes time for the really big settlements to surface, although the time horizon here may be foreshortened as leading trial lawyers who cleaned up with billions of dollars from the tobacco industry are now targeting HMOs as their next blockbuster. Humana Inc. apparently is Target No. 1. Furthermore, now that laws of this sort have been passed in California and Texas, it is only a matter of time before similar legislation is adopted in every major state, which will completely wipe out the recent slowdown in health-care costs and send cost increases back into the double digits. The HMOs could have avoided such legislation if their executives had shown the slightest tendency to be human beings. Instead, they stiffed patients at every stage of treatment, setting up phone systems that were designed never to be answered, harassing physicians into prescribing inadequate care, and stonewalling on treatments that were covered in the contracts. Their behavior became so egregious that even those politicians who are not anxious to run up health-care costs felt they had no option but to vote for this legislation. Total health-care expenditures for the U.S. will be approximately $1.06 billion this year, or $3,871 per person. However, older people spend about four times as much on medical care, so the figures are about $2,800 per person for those under 65 and about $11,200 per person for those over 65. Soon those figures will once again begin to rise at about 10% per year. Since it is obvious that most older people can't afford these stratospheric amounts, we the taxpayers will be invited to chip in. After all, only 25% of Medicare payments are covered by the so-called contributions to Social Security. The rest of the money comes right out of general revenues. With the forthcoming explosion of class-action litigation and punitive-damage awards in the billions of dollars, the HMO industry as we know it will soon disappear. All because their executives were so shortsighted. What will replace HMOs? To a certain extent, it depends on who wins the 2000 election, by which I mean not only the Presidency but also the Congress. However, the most likely answer is that the burgeoning government surplus will soon be entirely dedicated to higher and higher medical-care costs, as opposed to better medical care for the masses. I have previously discussed in these columns what should be done with that surplus, which would continue to grow by at least $50 billion per year if current spending programs and tax rates remained unchanged. Now we know where the funds will go -- to billionaire lawyers. Michael K. Evans is president of the Evans Group and professor of economics at the Kellogg School of Business, Northwestern University, Evanston, Ill. His e-mail address is [email protected].

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