`A Crisis Of Medical Success'

Greedy doctors. Litigious patients. Risk-averse insurers. Piles of paperwork. Unnecessary tests. Excessive care for the aged and the terminally ill.

Take your pick. Just about everybody has their pet explanation for why the nation's health-care bill is growing by leaps and bounds, headed beyond $900 billion this year. It's true that the price of medical services is rising faster than the general inflation rate, in part because nurses' and physicians' wages are growing faster than other wages. It's also the case that waste, fraud, and abuse are inflating health-care costs. And demographic forces, such as an aging population with a longer life expectancy than ever before, are also boosting expenditures.

But the biggest force driving costs ever higher is at once more benign and harder to control--technological advances in the practice of medicine. After allowing for all the other factors, there's still anywhere from 30% to 40% of the real, or afterinflation, growth in spending left unexplained, observes Judith R. Lave, professor of health economics at the University of Pittsburgh. And experts such as Lave believe technology is the missing factor. A panoply of new procedures and products, from magnetic resonance imaging (MRI) to hip replacement, didn't exist or wasn't widely diffused a couple of decades ago. Meanwhile, a host of new ones are on the horizon. Says William B. Schwartz, professor of medicine at the University of Southern California: "The health-care crisis is a crisis of medical success."

NO BLESSING. It's no mystery how this happened. While only 10% of the population was insured after World War II, today 85% is insured. Insurance has aided and abetted the development of the most sophisticated medical technologies in the world. At the same time, having someone else to pay the bills buoyed both the demand for and the supply of medical care. And economics teaches that demand for medical services rises as incomes rise, so one would expect the world's most advanced nation to spend a great deal on health care.

That doesn't mean the U.S. is spending the money in the best way possible or that it might not be better to rein in the rapid growth in spending. For one thing, technology is not always an unalloyed blessing. The appropriate use of a single procedure can be hotly debated by a roomful of physicians. Further, the supply of new technologies is constantly being replenished. So the "intensity" of use of medical services--most of them technologically advanced in nature--has grown (chart), pushing the health-care bill up 5% to 6% in real terms each year.

Today, most health economists agree that it is the high-tech, low-benefit component of health care--the 2,000 MRI tests, for example, that yield but one finding of an aneurysm or a tumor, for a total cost of $2 million--that is most costly for the nation. Whatever Hillary Rodham Clinton and her husband propose in the way of managed competition will presumably address that issue. But health experts stress that it's not just the cost of medicine, it's efficacy that must come under tougher scrutiny. Robert H. Brook, a physician at Rand Corp. in Santa Monica, Calif., calls for "clinical reform"--the evaluation of the appropriateness of various procedures on medical, rather than financial, grounds.

EASY TARGETS. Health-care providers and insurers have been able to cut costs, but not for long. After a while, the gains have been swamped by new cost increases. In 1983, the government introduced a system for pricing hospital services paid for by medicare, which did cut costs. But it also shifted costs onto the private sector. The drive by many companies to push employees and their families into preferred provider organizations (PPOs) and health maintenance organizations (HMOs), while generally successful in cutting costs in the early years, may not hold down the long-run growth rate in costs, experts say. That's because it's easy to achieve big gains initially by cutting back on the number of hospital days. Eventually, however, HMO costs tend to grow in line with economywide increases in medical costs as HMOs come under pressure to provide advanced care and top medical talent.

With cost containment so difficult, the easier targets are tempting and popular. Waste and fraud rank high on the list, as does price-gouging. The trouble is, the savings aren't easy to accomplish. And while they may lower the absolute level of health-care spending, the cuts will do little to affect the long-run growth rates associated with the diffusion of new technologies. Take drug prices, for which President Clinton recently lambasted the pharmaceutical industry. It's true that the industry has been raking in profits on both new drugs and copycat drugs (BW--Mar. 8).

But drugs account for a small portion of overall health costs--about 7%--and often, even at high prices, they substitute for more expensive medical care. Victor Fuchs, health economist at Stanford University, argues that if drug-company profits were slashed in half, health-care expenditures would fall by less than 1%, or $9 billion a year.

Wages may become another target for cost control. The median net income of physicians rose from $75,000 in 1981 to $130,000 in 1990, according to the American Medical Assn., for an annual gain of 6.3%. Median weekly earnings of full-time registered nurses also grew steadily in the 1980s, climbing from $396 in 1983 to $662 a week in 1992, according to the BLS. But nurses' wages climbed in direct response to shortages, so it would hardly be wise, observes USC's Schwartz, "to cut wages and degrade skills." And Stanford's Fuchs observes that a 20% cut in the net incomes of physicians would reduce the total health-care bill by only 2%, or $18 billion. "The potential savings from elimination of excess returns to suppliers of care are small," he concludes.

DOUBLE-COUNTING. Similarly, the contention that malpractice concerns are driving up costs appears to be overdone. Henry J. Aaron, director of economic policy at the Brookings Institution, argues that "direct liability costs are a drop in the ocean" and that the indirect costs of "defensive medicine"--overuse of tests and spending more time with patients to protect against malpractice suits--while difficult to measure, are unlikely to be large. "My guess is that excess services, including featherbedding, amount to $25 billion at most," says Aaron.

Administrative costs are also a prime target for cuts. A recent study by Steffie Woolhandler and David U. Himmelstein of the Harvard Medical School estimated that if the U.S. used a single-payer system, such as Canada's, it could save more than $70 billion a year. And eliminating fraud and abuse by medical practitioners might save another $70 billion, the General Accounting Office suggested in a 1992 report.

The push to find such savings is necessary, and the cuts proposed above appear to yield savings of $200 billion. But there is a large amount of double-counting in these estimates, and there is no way all those cuts could be made. Brookings' Aaron contends that "at most we could squeeze one year or 18 months' worth of growth in health-care spending out" of the system. After such cuts, the growth in spending would resume, thanks largely to the march in technology.

So some experts are focusing on the demographic factors driving cost as a more fertile area for savings. Baby boomers are aging, and there is already a tendency for more medical care to be dispensed to the aged. Approximately 21% of medicare's 1993 budget of $145 billion, or $30 billion, will go toward medical care for persons in the last six months of their lives, according to estimates by the Health Care Financing Administration. That share could climb as the population ages. Currently, about 12% of the population is over 65 years of age and by 2010 it will rise to 15%, according to David J. Weinschrott of the Hudson Institute.

There is already a sharp concentration of spending on medical care by a small group of people. In 1987, the latest year for which such figures are available, the top 1% of health-care spenders in the country accounted for 30% of total health spending (excluding nursing-home expenditures). That's up from 27% a decade earlier and 17% in 1963, according to Alan C. Monheit, an economist at the Agency for Health Care Policy & Research, an agency of the Health & Human Services Dept. Just under half of the big spenders were elderly.

Economists are increasingly questioning such spending, especially when it appears to be going toward patients who will shortly die. "There's an enormous use of resources for people who are large users," observes Allan Meltzer, economist at Carnegie Mellon University. "It may be humane, but it's not productive. We need to think about how we allocate society's resources."

Health experts caution against the suggestion that costs can and should be controlled by withholding care to those who are deemed likely to die. First of all, it's impossible to know for sure who will die and who will live. Furthermore, argues Joseph P. Newhouse, professor of health policy and management at Harvard, "the data offer little support for the notion that society is wasting an ever-larger share of resources in a fruitless attempt to save those who are about to die." While spending on terminally ill patients consumes a large share of medicare's budget, preliminary estimates based on the National Medical Expenditure Survey for 1987, by the Agency for Health Care Policy & Research, found that only about 6.6% of total medical expenditures in that year went toward care for non-institutionalized people who died in that year. That's equivalent to about 0.5% of gross domestic product.

All Americans, even to some degree the uninsured, have benefited from a generous and highly advanced medical system. Yet in that vast market of medical services that will shortly cost the nation $1 trillion a year lies an enormous gray area of high-cost care with uncertain benefits. Having applied great ingenuity and innovation to developing new medical technologies, Americans now need to develop exacting standards for dispensing those technologies where they will do the most good. No other cost-cutting strategies will be nearly as effective.

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