Home » Uncategorized » Under The Knife

Under The Knife

A 50/50 sharing of costs would make employers careful shoppers for their health insurance and employees careful shoppers for their medical care.

Medical care costs in the U.S. have tripled over the last 10 years and are growing rapidly. Costs are rising to about $1.25 billion a day, or more than $2,000 annually for every person in the U.S. And the surge in medical care costs, fed by open-ended reimbursement by government programs and insurers, continues despite the fact that U.S. costs for many years were higher than those of any other country. Over the past 25 years spending on health care has increased in all the industrialized countries at a faster rate than Gross National Product (GNP).

The inflation of U.S. health care prices make it the highest spending nation per capita, but not the highest in real terms. Based on exchange rates, in 1980 and today, the U.S. had the highest per capita dollar spending on health. But when the data are adjusted using the ratio of high U.S. health care prices to the average health care pricing of an international group-the Organization of Economic Cooperation and Development (OECD)-the U.S. drops to eighth place, with Norway, France, the Netherlands, Finland, Japan, Austria and West Germany ranking higher.

The rise in the U.S. price of medical care above the prices of other goods and services over the last decade, also helps to explain why the U.S. spends so much on health care. Recent analysis of the OECD data on 24 industrialized countries (mostly in Europe but including Japan and the U.S.), points out that “if the 2.2 percent annual increase in health expenditures resulting from excess health care inflation [in the U.S.] had not occurred, nominal spending during the period 1975-1987 would have increased by 9.3 percent per year instead of 11.7 percent, resulting in 1987 expenditures of $390 billion instead of $500 billion.” The excess health care inflation bill was more than $100 billion, and the total inflation bill much higher.

Among seven major countries (Canada, France, Germany, Italy, Japan, U.K. and U.S.), the U.S. leads with an annual compound rate of 2.2 percent above overall inflation. The next highest excess inflation rate was 2 percent in Canada, and France is the only country showing a negative rate of -1.1 percent. Although international comparisons are difficult and have faults, it is clear that U.S. medical care providers lead the world in their relative economic costs.

The increase in U.S. health care costs pushes up the cost of production and prices charged for services in the international marketplace. While average hourly earnings-subject to income tax-have not kept up with inflation since 1977, paid, non-taxable employee health insurance premiums have surged. This, in the initial period of their incredible rise, has made it difficult for U.S. products to compete abroad. On average, health insurance rates rose a disastrous 20 percent or more each year, in 1988 and 1989.


Expenditures of the Department of Health and Human Services-which is responsible for Medicare and Medicaid-now total more than $150 billion annually. The 1988 Catastrophic Health Insurance bill would have, if enacted, resulted in the largest expansion of Medicare since it began in 1965. The Act was repealed in late November 1989.

The bungled legislation did not address the real issues. The proposed bill’s only innovative measure was its financing: that would have required middle- and upper-income elderly to pay for the benefits. Even though the government’s prospective costs were badly underestimated, the proposed redistribution of income created by taxing higher income elderly to pay the bill for all elderly spelled the legislation’s eventual defeat.

U.S. physician net income averages over five times average worker net income. In no other country except Japan and West Germany are physicians’ incomes that high. The practice of “unbundling” has increased as physicians try to increase their incomes when allowable reimbursement levels do not keep pace with cost increases. The new expenditure targets, which would move upwards and apply only to government paid services, will not control health care costs in the 1990s. The costs paid by insurers and the employers who pay the premiums will escalate to make up for new provider “losses” on Medicare patients. The unbundling of physician services and procedures will continue to raise the volume of services and thus costs of medical care.


Because of the inflation in health care costs, a drive for national health insurance within the U.S. has intensified. Although nearly 12 percent of the GNP is spent on health, 31 million people are without private health insurance, Medicaid or Medicare benefits.

The argument for the U.S. to adopt some form of national health insurance, however, is based on more than surging costs and comparative mortality rates. There are increasing gaps in private health insurance coverage stemming from the shifting of employment towards services and away from manufacturing, and a greater use of temporary and part-time workers. In addition, expensive technology, the spread of drug abuse and AIDS add to the problem. Would national health insurance reduce the impact or size of these causes? The answer, except possibly for the price level, is no.

The U.S. does not lead the industrialized countries in life expectancy at birth, and even if the U.S. had national health insurance, it is very unlikely that the infant mortality rate would fall faster than it has from 29.2 per thousand live births in 1950, to now just under 10 per thousand live births. Improved nutrition, clean water supplies, greater general cleanliness and immunizations have lowered infant mortality rates, while greater drug abuse has increased them. The U.S. has a more diverse racial and ethnic society than do other industrialized countries.

The complicated legislation will not stop calls for a simple national health insurance plan, possibly patterned after Canada‘s. But why should the U.S. spend about 12 percent of its GNP on health care and other countries, such as Canada, only 9 percent-and others even less?


The Canadian health care system is financed from federal and provincial government tax revenues. Canada‘s lower health care costs are due to lower administrative costs, lesser intensity of hospital services, lower prices and wages, lower malpractice costs, and higher hospital occupancy rates, resulting from their use by long-term care patients. Canada has relatively more primary care physicians and general nurse practitioners than does the U.S.

Multinational U.S. firms with plants in Canada find that their costs for employee health benefits are much less than in the U.S., even though benefits are similar. Ninety-five percent of Canadian employees have employer supplemental plans, but on average, these cost less than Cdn. $1,000 in premiums yearly. The Canadian budget deficit for health care is higher than in the U.S. and increasing. Cost control is maintained by negotiating physician fees and limiting the resources available for health care. This allows the government to avoid making direct decisions over who gets what, while forcing physicians and other health care providers to make such decisions.

Broadened government mandates requiring employers to provide basic insurance benefits have emerged as a substitute program to national health insurance. The U.S. Bipartisan Commission on Health Care (Pepper Commission) recommended this route for employers with 100 or more employees. But these costs to employers would act as a payroll tax and are likely to restrain employment growth and depress wage rates. The estimated federal cost to provide health insurance to those workers who do not already have it will be $23.4 billion, with employers paying an additional $20 billion!

U.S. business is calling for “cooperation” with the government to “manage health care inflation.” It is not a call for federal national health insurance. Congress and the executive branch will not support national health insurance because of the size of the deficit and because too few voters want to pay the taxes for such a program. Additionally, many doubt its viability in the U.S. culture and point to higher percentage government deficits in many countries with such plans.


More hospitals will close nationwide primarily because of low occupancy rates, which averaged only 52 percent in 1988.

Some hospitals will merge and surviving hospitals will become more specialized. Patients requiring treatment that can be offered by centralized facilities will be concentrated. Concerns over the high numbers of “unnecessary” procedures which do not benefit patients more than non-invasive alternatives (coronary bypass, endarterectomy) will continue.

There is an oversupply of surgeons who through various means try to maintain their skills and income levels. New tools such as the magnetic resonance imager (MRI) reduce the need for diagnostic surgery, effective drugs for ulcers replace intestinal surgery and other medical advances mean that some surgeons, to keep busy, are practicing primary care and some overtreat their patients. Medicare’s new reimbursement rates will hasten the decline in surgical fees that competition has started. Federal grants to assess diagnostic and surgical procedures will rise to $50 million in fiscal year 1990 and $148 million in 1994. California, Oregon and Massachusetts have enacted different policies for the employed uninsured, but have not implemented them, while Hawaii did in 1975.

Hawaii‘s percentage of uninsured fell from nearly 12 percent in 1974 to about 5 percent of its population today. Suggestive of the law’s effect is that Hawaii‘s average annual wage per employee in 1986 fell to being the fourteenth lowest among the 50 states, whereas it was the twenty-fifth lowest in 1975. Additionally, Hawaii‘s rate of job growth, 1980-1986, was only about 9 percent compared with 13 percent for all U.S. and 20 percent for the U.S. Pacific area.

The Health Insurance Association of America has also suggested incremental changes. In March 1990, it proposed that all states have a pool for uninsurables with a private reinsurance mechanism, and that employers with fewer than 25 employees not be denied insurance or their rates not be exorbitantly raised if one or more of their employees become high risk or uninsurable. By April 1990, expanded Medicaid coverage will provide care for children up to age six (increased from age one), in families with incomes up to 133 percent of the federal poverty level.


Some health insurers have begun to make money. The 74 plans of Blue Cross and Blue Shield that lost $1 billion in 1988 and $2 billion in 1987 are expected “to end 1989 with a $1 billion gain.” Insurance profits depend on the past year’s total premiums exceeding total costs.

Business will continue to shift costs to employees by increasing deductibles and co-payments, eliminating dependent coverage and transferring existing employee insurance coverage to managed plans with utilization reviews and pre-admission certification. These actions have already resulted in new, sizable enrollment in employer-supported, prepaid group health care plans, health maintenance organizations (HMOs) and preferred provider organizations (PPOs), both of which have annual fixed, per capita charges. However, relatively higher Medicare reimbursement to primary care physicians could squeeze prepaid group arrangements that save money in part by limiting patients’ self-referral access to specialists.

One very established HMO, for example, Kaiser Permanente, announced a 19.6 percent increase in its 1990 rates in Northern California while insurers in the same area announced increases in premiums averaging 20 percent. Further comparative savings from prepaid groups may result only from cutting quality.


Business has underestimated the future cost of retiree health benefits. The average age of retirement has dropped to 61.5 years; many large firms pay retiree health benefits as early as age 60 years. That is five years before Medicare covers some of retiree medical bills.

According to A. Foster Higgins’ prepared survey of 1,600 companies, the average cost of medical care for retirees under 65 years of age was $2,400 in 1988, 11 percent higher than for active employees, and 75 percent higher than for retirees at 65 years who have some Medicare coverage.

Personal health care expenditure per capita for all ages was $1,776 in the U.S. in 1987, but for those 65 years or over, it was $5,360, and for those 85 years or over, $9,178. And women, who at 55 years live on average four years longer than men, are an increasing portion of the labor force.

The proposed Financial Accounting Standards Board’s (FASB) new rule would require companies to carry as accrued liabilities on their books the potential liability of future health insurance premiums and benefits already promised to current and future retirees. This potentiality has shaken the retiree health plans of many companies. The General Accounting Office (GAO) estimates that existing, total, accrued liabilities of business for their current retirees who are 60 years and over was $112 billion in June 1989. Pressure for tax-free trust funds to pay these benefits continues, and some companies are using employee stock ownership plans (ESOPs), where they may have a 50 percent tax deductibility of interest on loans to the ESOP.

A few companies have announced that after a transition period they will reduce or stop subsidizing medical care premiums for future retirees. Unions at NYNEX, Lockheed, and Pittston mining struck to protest worker health benefit cutbacks in this form, higher deductibles, and cost control.

The repealed Medicare Catastrophic Coverage Act spurred companies to reduce retiree health benefits. Business believed that the federal government would be taking over payment of the elderly’s “excess” medical bills, and even, eventually, 80 percent of bills for prescription drugs over a $600 annual deductible. Business could, with clear conscience, save on future retiree health care costs because the federal government had preempted them.

Federal bungling of the repealed Medicare Catastrophic Act has increased predicted premiums for “medi-gap” health insurance benefits. These are estimated to rise on average by 20 percent in 1990. In Massachusetts, Blue Cross Blue Shield applied for a 76 percent increase in medigap premiums. Private medi-gap insurance premiums range up to $1,300 annually. Nowhere is health care cost escalation under control.


To contain rising medical costs I propose the following: Gradually reduce the expensing of 100 percent of premiums by business to 50 percent, while exploring how to strip back to basic care. We could reduce 100 percent cost by 10 percent every two years until only 50 percent of premiums can be expensed. This would help stop the substitution of increases in tax-exempt benefits for increases in taxable wage rates.

Controlling surging medical care costs in the U.S. in the next decade will come down to rationing. Most consumers do not pay close attention to the basic costs of the medical resources they use. Medical care for the poor and aged is understandably subsidized.

Employers pay more than $150 billion annually in health insurance premiums and benefits that also act to subsidize the consumption of medical care by most workers. Although these costs are in lieu of wages, their impact is somewhat different. Costs of employer-paid insurance and benefits escape corporate and personal income taxes resulting in a government subsidy of many billions of dollars annually.

As long as the consumer does not pay the full cost of resources devoted to medical care, the demand for medical care will outstrip supply and create a need for some rule-unless “waiting” and “price” are acceptable to distribute or ration medical care. If the resources for medical care are artificially restricted, providers, primarily physicians, will be forced to do most of the rationing. Alternatively or complementarily, the government can, through regulations, limit entitlement to medical benefits. For example, the state of Oregon denies Medicaid payments for organ transplants.

The public is not sufficiently informed about the costs and benefits of medical treatments and government regulations to discuss the questions of allocation already being decided by the courts. Indeed, the courts recently upheld micro-management by Medicare that denies patients from personally paying amounts above the Medicare authorized payment. The courts argued this would “create a two-class system, since poor people who are dependent on insurance couldn’t buy the service themselves.” The reopening of the debate over national health insurance cannot avoid the recognition of realistic cost-containment as the critical issue.

No society has a “perfect” health care system. For informed patients paying their own way and for informed government and employers paying premiums, the essence of supply and demand is already working.

Economist Rita Ricardo-Campbell is a senior fellow at the Hoover Institution at Stanford University. She is a recognized authority on the health care sector, and economic and political problems of the social security system.

About rita ricardo-campbell