Battle Over Medical Costs Isn't Over
Many people think that the monster of health-care inflation has been licked or at least driven back into its cave. As early as July 1984, for example, then Secretary of Health and Human Services Margaret Heckler proclaimed that the Reagan administration had "broken {its} back." This assessment seems to be widely shared within the business community. And this July, headlines announced that "spending on health care in 1985 rose at the lowest level in two decades." Unfortunately, rumors about the defeat of the "health-care monster" may be vastly exaggerated.</br></br>How did the health-care cost spiral start? During the 1960s and 1970s the American people implicitly signed a social contract with the nation's providers of health services that was so open-ended as to be almost incredible. Under this contract, the providers would be left alone to determine how best to treat the illnesses of their patients. As compensation they were issued keys to sundry health-insurance treasuries, there to recoup whatever auditable costs they had incurred (if they were hospitals) or to fetch whatever fees they deemed "usual, customary and reasonable" (if they were physicians). Only very mild and generally ineffective limits were ever placed on the sums taken by individual physicians or hospitals from these insurance treasuries. Not surprisingly, prices varied widely and often capriciously among providers, and overall outlays on health care climbed.</br></br>This benificent contract was written at a time when most experts thought the nation was short of both doctors and hospital beds, so that health-care providers largely dictated the terms of the contract. Inevitably, however, the very generosity of the deal drew into the medical profession legions of educated baby-boomers eager to do well by doing good. By the late 1970s, an erstwhile sellers' market had thus transformed itself into a buyers' market with surplus capacity all around.</br></br>More than two-thirds of all health services or products are paid at point of service, not by the patient, but by some third party -- either a private insurance carrier or the public sector. As early as the late 1970s, these third-party payers began attempting to control escalating health-care costs. After Ronald Reagan's election in 1980, a two-pronged attack was made upon the health-cost monster.</br></br>The first came from the business community, which pays for about a third of all health-care expenditures through employer-paid health-insurance premiums. It sought to control the rise in its premiums by forcing employees to share a greater proportion of their health-care bills at point of consumption, and by encouraging them to join so-called Preferred Provider Organizations (PPOs) or Health Maintenance Organizations (HMOs). Under a PPO a business firm (and/or its insurance carrier) seeks price concessions from a limited set of doctors and hospitals who render care on a fee-for-service basis. In return for these price concessions, the firm offers its employees financial inducements to seek health care only from providers within the PPO network. Under the HMO contract, a network of physicians and hospitals contracts to provide a firm's employees all necessary health care in return for a flat, prepaid annual fee. The HMO thus has every incentive to minimize the costs of treating patients.