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TIMES BOARD OF ECONOMISTS / ALLAN H. MELTZER

Quality of Health Care Is Bound to Get Worse as Government Intervenes

April 18, 1993|ALLAN H. MELTZER | ALLAN H. MELTZER is John M. Olin Professor of Political Economy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute

Before starting to reorganize the health care industry, based on President Clinton's proposal or any other, we ought to look at a few facts. This is a primer on health care that focuses on what is at issue and why we are where we are.

There are two basic problems. One is redistribution. Voters everywhere have chosen to redistribute the costs of health care so that the elderly and low-income families and individuals have part or all of their costs paid by taxpayers. The second is catastrophic care--treatment of long and costly illnesses.

Since the mid- 1960s, the U.S. government has taken an increased role in redistributing the costs of health care. For every dollar the U.S. government spent on health care in 1967, it now spends $125. Adjusted for general inflation, the figure is still staggering--$30 now for every dollar spent earlier. And more spending is about to be added as the federal government moves to extend health insurance to the 35 million uninsured.

As is often the case, the government misrepresents what it does. Government cannot provide health care. It takes resources such as capital (hospitals, X-ray machines, etc.), and labor (doctors, nurses, technicians) and intermediate products (medicines, bandages) to produce that product or service.

Government has no special advantage in organizing these resources. If it did, the Department of Veterans Affairs and military hospitals would be exemplary. In fact, the most esteemed hospitals and medical centers in the United States are affiliated with medical schools, many of them private.

What government has done, and will do more, is redistribute the cost of providing health insurance.

Much medical service is routine treatment of common problems--flu, infections, measles, appendicitis, broken arms or legs. If this were all there was, most of us could pay for our own health care as our grandparents did. But as medical technology advanced, the list of common treatments grew longerand more expensive. Infection, a major killer at the turn of this century, is now often a minor problem because of antibiotics. People survive and live long enough to acquire ailments that can be treated only at great cost.

One of the main problems with most health care plans is that they hide the costs from the users of the service. Most of the cost--70% to 75%--is now paid by private insurance companies or by government programs. Individuals pay the rest out-of-pocket. Thirty years ago, the numbers were very different--56% paid out of pocket and the rest by government and private insurance.

Redistribution shifts the costs to upper-income groups. It also increases the demands for service and the costs of providing it.

Some users pay less than full cost and some pay nothing, so the demand for medical services increases. Once they pay their deductible, users have no incentive to be concerned about the cost effectiveness of the treatments they get. Why not "the best"? The problem spreads. Producers of health care products have no incentive to design cost effective systems, because neither doctors nor patients have much reason to care about cost effectiveness. And with the danger of lawsuits always present, doctors have a positive incentive to use costly treatments--even if they are not cost effective.

Treatment of expensive and prolonged illnesses using better methods has raised costs but has also extended lives and helped an aging population to function better for longer periods.

Despite demagogic attacks on doctors, hospitals and drug companies, the share of spending on doctors and hospitals has remained about the same for decades, while the cost of drugs and appliances has grown at a slower than average rate.

During the campaign, President Clinton talked about reducing health costs and spending by eliminating administrative costs. Between 1960 and 1990, administrative costs increased from 5% to 9% of total spending. Even in the unlikely event that these costs were cut in half, the saving would not pay for the cost of including 35 million additional people.

The basic fact is that there are two main ways to control long-term spending. One reduces quality, the other reduces consumer demand. A third way that is often mentioned and will probably be used--controlling prices and doctors' incomes--will yield some short-lived savings, but the long-term effect will be reduced quality and quantity of health care.

Doctors will spend less time with patients. Patients will spend less time in the hospital. They will be told to wait for expensive treatment or, as in many other countries where government has a dominant role, they will be denied treatment because of their age or the type of ailment.

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