Why does it cost so much for health care?

USA Today (Society for the Advancement of Education), March, 1995 by Stan Liebowitz

THE PERCENTAGE of the gross national product devoted to health care has been rising for several decades. That fact figures prominently in the claim that health care is devouring too many of America's resources and, therefore, the health system needs to be overhauled.

The focus on the share of GNP devoted to health care seems somewhat unusual. For example, there does not appear to be any concern over the share of wealth devoted to shoes, automobiles, or housing. Moreover, there are many products, such as recreational activities, whose share of GNP rises as wealth increases, yet there is no concomitant clamor to reduce expenditure on them, as there is on health care. The burgeoning share of GNP devoted to health care, by itself, is not evidence that the system is in need of repair.

More telling are attributes of health care delivery that make it inefficient, foremost among which is the reliance on third parties-insurance companies and the government--to pay most medical costs. Because patients pay an average of 23 cents on each dollar of medical expense, there is only a weak linkage between consumers' use of medical resources and the payments made by them. When the direct linkage between use of medical facilities and payment is broken, consumers lose their incentive to economize.

Analysis indicates that the high medical costs are the result of various government policies that have removed patients as purchasers in the medical marketplace. While that may be no more than the unlucky result of misguided policies, it is detrimental to the health of medical markets and eventualy may prove deadly to the health of many Americans.

The proper diagnosis of medical problems has been obscured by the demonizing of certain components of the medical industry. For instance, the Clinton Administration at various times has blamed the pharmaceutical industry, medical specialists, and health insurance companies for causing high prices and excessive medical expenditure. Such charges miss the underlying reasons for the current poor health of the medical delivery system and diminish the ability to repair it. The failure to understand the causes of higher medical costs also was apparent in the Clinton proposal to revamp the nation's health care system, which would have increased reliance on government and third-party payments.

Several competing proposals have been suggested. Among them are some that adopt, at least in part, the medical savings accounts and tax-law changes proposed by John Goodman and Gerald Musgrave in Patient Power. Central to that approach is the weakening of third-party payment mechanisms and the re-establishment of the patient as both the consumer and purchaser of medical services. By putting consumers back in control of their money, it is possible to restore the vitality of the medical sector.

The excessive costs of the current medical system can be classified into three major categories: The first, and by far the largest, is due to overuse of medical resources by consumers who do not have to pay the entire cost of the medical services they utilize. The causes of those excess costs are Medicaid, Medicare, and tax laws that provide incentives for individuals to have their employers purchase their medical care in the form of private health insurance.

The second consists of administrative and paperwork expenses that are unnecessary for the provision of health care, but have come into existence because of the current patchwork of third-party payers and their attempts to control their increasing costs by closely monitoring the behavior of doctors and patients. These cost-containment activities do not seem to have succeeded very well.

The third is associated with the fear of malpractice suits. Administering medically unnecessary tests and procedures helps to insulate doctors and hospitals from the potential wrath of patients or their families when inevitable accidents occur in medical treatment or when treatments do not work.

Each of those costs has been brought about by the retreat from a market-based system of medical delivery. The first two could have been avoided if patients had been given incentives to make their own choices about medical care. The third could have been controlled if the courts had allowed patients and medical providers to use market contracts to detail liability in case of unforeseen accidents.

Largely ignored in much of the current debate over health care is the excessive use of medical resources by ordinary Americans. No politicians are giving speeches blaming the average citizens of the country for overusing medical care. There are no fireside chats with the President asking citizens to stop seeing doctors so often, parents to have their children "tough it out" and not see the doctor for every little scratch, and/or the elderly to give up that extra year or two of life. Politicians are not that foolish.

Nevertheless, turning a blind eye to the consumption of medical resources is a mistake. If the nation is overusing them, patients must bear responsibility. Medical expenditures can not be cut without reducing consumption. The political will to solve the problem is not easily come by, though, and the Clinton Administration seems to prefer to make empty promises to reduce costs while at the same time increasing medical services.