What's Causing The Deficit Disease? Health Care

President Clinton has made commendable progress in bringing down the budget deficit. This fiscal year (1995), the deficit is just 2.3% of gross domestic product, down from 4.8% in the FY 1993 budget that Clinton inherited from George Bush. But as deficit hawks note ominously, the deficit is projected to trend upward again after 1998.

The Congressional Budget Office forecasts a rise to 2.9% of GDP by the year 2000, and 3.6% by 2004--rebounding back by 1.3 percentage points to a level where the national debt grows faster than the economy. These projections have led to fresh fiscal alarm and a new round of proposed extreme remedies, ranging from constitutional amendments requiring a balanced budget to rigid spending caps to cuts in Social Security.

A closer look at the budget statistics, however, reveals that the entire deficit problem boils down to one area: health care. Medicare, all by itself, is slated to go up by 1.4 percentage points over the next decade--from 2.5% of GDP to 3.9%--or more than the entire deficit increase. Medicaid is projected to rise an additional 0.9% from 1.4% to 2.3% of GDP. If we could just hold Medicaid and Medicare at their present fraction of GDP, allowing their outlays to increase with economic growth, the federal deficit would actually fall to 1.3% of GDP, or roughly the deficit ratio of the 1950s. The great deficit crisis would be over.

Medicare and Medicaid costs are increasing because of a health-care system that is out of control. The budget crisis is the fiscal reflection of the larger health-care crisis. Other categories of government spending are coming down. Non-health-care outlays by the federal government will actually decline by 1.4% of GDP over the next 10 years, from 17.7% of GDP this year to 16.6% in the year 2004.

SHELL GAMES. Containing health-care costs without compromising care is achievable only in a universal system. In the fragmented system that we have, profits in the health industry are maximized by maximizing reimbursable costs, not by controlling them. In response, health-care providers, businesses, and insurance companies each try to cut their own costs by shifting them to other players in the system. Insurers spend billions on selective marketing and underwriting and case-reviewing--outlays that would not exist in a universal system. Doctors and hospitals spend needless billions filling out forms or taking the time to argue with case reviewers.

Until the health-care system is comprehensively reformed, it will continue to have the worst of all worlds: escalating costs, more insurance reviewers getting themselves between doctor and patient, more inappropriate medical procedures to maximize provider reimbursements, more premature discharges to minimize insurer costs, more underwriting to discriminate against patients who might have the effrontery to get sick, more people losing their insurance, and more--much more--red tape.

MUDDLING ALONG. After the collapse of efforts that were aimed at comprehensive reform, a closely divided Congress will now turn to piecemeal action. This agenda includes requiring greater standardization ("community rating") of insurance charges and prohibiting discrimination based on preexisting medical conditions.

In a universal system, standard rates and nondiscrimination are simply built in because everyone is covered automatically. But if we tack on community rating and nondiscrimination to the present, fragmented system, the reforms will backfire. If insurers were prohibited from discriminating against the sick, many people wouldn't buy insurance until they became ill. Premiums would have to rise because the insured population would be smaller and sicker. More healthy people would then drop their coverage because of the increased costs. Many employers, facing rate hikes, would likewise drop the coverage they now provide. Ever fewer insured people would pay ever higher rates.

We will succeed in controlling costs and eliminating waste only when everyone is in the same system. In the absence of reform, companies and private insurers will respond to their rising costs by whittling away at insurance coverage, thus passing along costs to the public sector. Meanwhile, Medicaid and Medicare will continue to ravage the federal budget.

In other words, health-care reform is budget reform. The longer we delay, the more serious the problem becomes. While Congress failed to enact universal coverage and cost-containment in 1994, the issue will not obligingly fade away. Look for it to resurface early next year, even in a deeply divided Congress. We might say: Health reform is dead, long live health reform.

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