Health Care Costs: Don't Be Too Quick With The Scalpel

The numbers are staggering. The nation's medical tab will be $900 billion this year, up from $250 billion in 1980. The 14.4% of gross domestic product the U.S. spends on health care is significantly higher than any other industrialized nation. And the worst is yet to come, we are told. Current projections show U.S. health expenditures rising to more than 18% of GDP by 2000 and 22% by 2010--if nothing is done.

The President has promised swift reform, and Hillary Rodham Clinton is heading the attack. There's no question the system needs fixing. U.S. health-care spending is about 25% higher than in other major industrial countries, after adjusting for GDP and population differences. Billions could be saved by eliminating administrative waste, cutting down on low-benefit medical procedures, and introducing more competition into the medical business. To curb rising technology costs, some high-tech services must be rationalized around the country. Most important, the patchwork quilt of private and public systems is in need of repair, especially with 37 million Americans going without coverage.

Yet lost in all the recent rhetoric about cost containment, global health budgets, and greedy drug companies is the fact that rising health-care spending is not quite the devil it's made out to be. The increased spending has improved the quality of life--especially for older people--and generated a lot of economic growth to boot. And as medical advances open up new cures and the population ages, Americans may well want to spend more of their GDP on health care--not less.

HIP HOORAY. Despite legitimate complaints, Americans have gotten a healthy return on money spent for health care. For instance, in 10 years, from 1980 to 1990, life expectancy at birth for women rose from 77.4 to 78.8 years, and for men the improvement was larger--70 to 71.8 years. And for women who reach age 65 in 1990, the average life expectancy had increased to 84, vs. 80 in 1950. Perhaps more important, advances in medical technologies, from coronary angioplasty to hip replacements, have relieved pain and made it easier for people to live normal lives.

New medical technologies cost big bucks. But these innovations are almost always developed by America's most globally competitive businesses, such as pharmaceuticals, which spur U.S. economic growth. Ditto for the biotech industry, which didn't even exist two decades ago. Biotechnology sales are expected to rise from $6 billion last year to $50 billion by the turn of the century. And since about half the world's medical research is conducted in the U.S., medical breakthroughs and new treatments are sure to keep the U.S. in the forefront of new health-care businesses.

Health care is also a big employer, with almost 9 million workers. The industry has been generating lots of jobs recently--512,000 jobs alone in the first 22 months of the current economic recovery. Without these hires, payroll employment would be down by 14,000. Health care is a big source of minority employment in many parts of the country, too. Nationally, from 1987 to 1992, health care accounted for 53% of job gains by blacks and 44% by women.

How much a country spends on health care also depends on its GDP per capita--and America's is by far the world's highest. Simply put, when living standards rise, people spend a bigger slice of their incomes on health. Indeed, the claim that we can no longer afford to spend so much of our GDP on health care largely reflects the fact that productivity growth, and therefore real incomes, has been slow for over a decade. Since 1973, productivity has expanded at about a 1% annual rate, far below the 2.5% annual rate of the previous quarter century. Had productivity kept up with its earlier pace, today's GDP would be a lot higher and health-care costs far more affordable.

It's still critical to wring out waste and achieve efficiencies where possible. But it will be a lot easier to deal with the health-care problem if productivity averages annual gains of 2% to 3% in the 1990s, as many economists expect. The Clinton Administration is already trying to spur productivity growth. Now, as it embarks on a concerted effort to reform the nation's health-care system, it should avoid overzealous cost-containment measures that could cut into the system's muscle.