The Economy

Dec. 21, 2004
Rising health care costs could infect the economy.

Two years ago I wrote about the trend toward unionization of physicians. That article was a little ahead of its time, but events have now caught up. Last month, the American Medical Assn. met to debate the merits of precisely this development. The AMA board has always been against unionization, but the matter now has been turned over to the 494-member House of Delegates, which is likely to recommend such a step. Physicians and other medical-care personnel who favor collective bargaining invariably claim lofty reasons, especially better health care for the patients. It is certainly true that HMOs have reduced the personalized attention that patients used to receive and enjoy and that, in some cases, health care has been denied to the needy by irrational bureaucrats. However, as is usually the case in these adversarial relationships, the argument is about money. One of the major reasons for the current robust state of the economy has been the sharp decline in the growth of health-care expenditures. That has been one of the major contributing factors to the budget surplus, while in the private sector smaller increases in premiums have boosted business profits and provided consumers with more spendable income. In the decade before Clinton, Medicare expenditures rose at an average annual rate of 10% per year. During Clinton's first term, they continued to rise 10% per year, but in the past three years (including revised budget estimates for FY 1999) the rate of growth has been cut almost in half, to 5.6% per year. A similar dramatic decline has occurred in Medicaid expenditures, with the growth rate slowing from 12.6% per year in the decade before Clinton to 7.4% in the first Clinton term and 6.2% in the second term. The growth in private-sector health care also has declined from about 10% to 5% per year. Considering that total consumption rose 5.7% in 1998, consumers spent less of their total expenditures on health care for the third straight year. The inflation rate for medical care, at least as measured by the consumer price index, also has declined dramatically, falling from 9.6% in 1990 to an average of 3.1% per year for the last three years. If medical-care costs had continued to rise at their 1990 rate throughout the decade, total medical-care expenditures next year would have soared to a whopping $1.7 trillion, compared to the current estimate of $1.1 trillion. Of that $600 billion difference, approximately $200 billion would have been paid for by the federal government. The budget still would be in deficit instead of boasting a $120 billion surplus. However, the 3% annual inflation rate for medical-care costs is about to explode like a Christmas piata. The average gain in health-care premiums this year has been 6%, with many HMOs and PPOs demanding and receiving increases as high as 10%. Meanwhile, health care continues to deteriorate. The main problem is that the reduced growth in health-care costs was not accomplished by increasing efficiency, but by reducing the amount of care that patients receive and by reducing the compensation received by physicians and other medical-care employees. Even worse, the government prices set for Medicare and Medicaid payments have caused health-care resources to shift to areas that are relatively well compensated from those that are undercompensated. The longer this continues, the more the over-all health-care system will be distorted. The only way to solve the problem is to reduce the inefficiencies that have been bred into the system by excessive paper-shuffling. While major operations and other substantial medical-care bills still will be funded by private insurance or government transfers, smaller expenditures should revert back to market sector forces that work so well for the rest of the economy. When people have to spend their own money, the entire pricing structure suddenly becomes much more rational. Unless that happens, the nation's medical-care bill soon will start to spiral out of control again. 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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