Concern continues to be expressed about the rapid rise of health care costs in the United States, its present impact, implications for the future, and alternative policies aimed at moderating the increase. For example, a 1990 survey of 821 chief executive officers of businesses in Wisconsin revealed that 67 percent perceived health costs as "substantially out of control" with 96 percent responding that these costs are either substantially or somewhat out of control. A subset of these figures for Central Wisconsin CEOs illustrate a similar response. (William M. Mercer Meidinger Hansen, Inc., 1990).
 

COST INCREASES
 

The extent of medical cost increases can be illustrated in several ways. First, medical cost increases regularly exceed more general price increases in the U.S. as illustrated in Figure 1 (see appendix). In 1988, for example, all items excluding medical care had an increase of 3.9 percent while medical care services, including hospital care, had a 6.5 percent increase. Prescription and non‑prescription drugs and medical supplies had an even larger increase of 6.9 percent. Table 1 shows that all medical increases exceeded other key CPI items.

TABLE 1

Comparative Costs Increases 1986‑88

Item                                                            1986                    1987                        1988

Consumer Price Index                             1.9                        3.7                            4.1

All Items except Med.                              1.6                        3.4                             3.9

Housing                                                     5.5                        4.7                            4.8

Energy                                                   ‑13.2                       0.4                             0.8

Medical Care‑Total                                 7.5                        6.6                             6.5

Physician Services                                  6.4                        6.6                             6.7

Hospitals                                                   6.0                        6.9                             9.3

Prescription Drugs                                   8.6                        8.0                            7.9
 

Source: Health Care Financing Review, Fall, 1989.

Another perspective on cost escalation is the percent of the GNP that medical care represents. Currently, health care takes about 12 percent of GNP, representing a steady increase and double the GNP percent (6%) for healthcare prior to the adoption of Medicare and Medicaid in 1965. In comparison to other nations, U.S. health care takes a significantly larger percent of GNP. Using 1987 data, Table 2 shows comparative heath care percents of GNP of OECD nations, illustrating both the differences between the U.S. and other nations as well as the increasing divergence over the years.

Despite this disparity, morbidity and mortality are not lower in the U.S. than in many Western industrialized nations which spend less. In a Center for Disease Control study of death rates from all causes in 33 nations from 1984 to 1987, the U.S. ranked near the middle of the group. The U.S. rate was 828.4 deaths per 100,000 people while Japan, the best of the 33, had a 628.8 rate. Similarly, life expectancy in the U.S. of 75 years is 17th among the 33 nations, trailing the leader Japan with 79.9 years. Canada and Great Britain, countries used frequently in comparison to the U.S., had life expectancies of 76.5 and 75.3, respectively. 

TABLE 2

Health Care as a Percent of GNP

Nation                    1960        1965      1970     1975      1980      1985         1987

Canada                  5.5           6.1          7.2        7.3          7.4          8.4             8.6

Denmark                3.6           4.8          6.1        6.5          6.8          6.2             6.0

France                    4.2           5.2          5.8        6.8          7.6          8.6             8.6

West Germany       4.7           5.1          5.5        7.8          7.9          8.2             8.2

Italy                          3.3           4.0          4.8        5.8          6.8          6.7             6.9

Japan                      2.9           4.3          4.4        5.5          6.4          6.6             6.8

Sweden                  4.7           5.6          7.2        8.0          9.5          9.4             9.0

Great Britain          3.9           4.1          4.5        5.5          5.8          6.0             6.1

United States         5.2           6.0          7.4        8.4          9.2          10.9          11.2

OECD Average     3.8           4.5          5.3        6.5          7.0          7.4             7.5

Source: Schieber and Poullier (1989) 

Another view of health care costs relates to the percent of the government budget devoted to health care. Currently government pays about 40 percent of all personal health care, including over half of all hospital and nursing home care. The percent of Federal and state budgets devoted to health care, excluding research dollars, has continued to escalate. In the last 15 years, Medicare, the largest government program, has increased spending for physician services by 15 to 26 percent per year. Hospital expenditures saw a similar increase, but have moderated after 1983 with the adoption of the cost control program, Prospective Payment System, providing a fixed sum to hospitals based upon the patient's diagnosis (Diagnosis Related Groups‑DRGs).
 

THE PROBLEMS OF COST INCREASES
 

Obviously, health is very important. Often it is said that without health there is nothing. Nonetheless, the cost increases have significant impacts that need to be examined, especially given that expenditure increases do not correlate highly with improvements in health. The U.S., with the greatest spending per capita, does not have better health than many other developed nations. Increases in recent years have not significantly reduced infant mortality or increased the availability of medical care in our inner cities and rural areas.
 

Increases in health care as a percent of GNP and of government budgets represent a redistribution of resources to the health sector. Other important societal goals that may be neglected include the following: private sector investment in plant and equipment to increase productivity; public sector social programs, including poverty services, and drug addiction prevention; and industrial safety. These activities may have as important an impact on the health of a population as additional expenditures for health care. The question that arises is what is the appropriate level of expenditures for health care when taking into account the marginal gains from increased health spending versus similar benefits from spending in other needed areas.
 

Increased cost, with its concomitant increased health insurance premiums, has added significantly to personnel cost and ultimately to the cost of products. Joseph Califano, former Health, Education, Welfare secretary, on the board of Chrysler Motors, has detailed the impact of those cost increases in his book. One result is that U.S. products become less competitive with those of other nations. Another consequence is that the percent of employers offering health insurance as a benefit has been decreasing, resulting in the growth of the employed uninsured who do not qualify for Medicaid. Even where health insurance is provided, firms are reducing benefits, restricting access to health care of their employees, and passing a larger share of both insurance and direct health care cost to the employees. The consequence is that the number of uninsured has increased to 13.5 percent of the U.S. population, or 31.5 million people. Further, after decades of service expansion more limitations are being imposed on those covered by insurance resulting in a decline in health services available to this portion of the population. Lastly, some hospitals are shouldering a larger amount of uncompensated care, although some hospitals refuse admission to patients without insurance.
 

The elderly, the group with the largest health care expenses, have been hardest hit. Medicare's adoption in 1965 provided significant medical coverage to the elderly. But recent increases in their out‑of‑pocket expenses associated with Medicare premium increases, deductibles, and balanced billing by physicians not accepting Medicare assignment has been significant. The Federal catastrophic program to assist the elderly was repealed before implementation because of opposition to its method of financing ‑a tax surcharge on middle and upper class elderly. Cost of prescriptions and long term care hit older Americans particular hard. Cost and controversies over method of financing make a workable solution difficult to adopt as shown by the negative reactions to the report of the Pepper Commission, chaired by Jay Rockefeller. Federal deficits, administration opposition to tax increases, and recent state tax increases (Wisconsin being an exception) constrain action. 

ASSESSMENT OF HEALTH COST INCREASES

The escalation of health costs can be attributed to multiple causes. First and most significantly is technological change. New technologies in medicine have added tests and procedures, frequently not resulting in cost savings. Equipment such as Magnetic Resonance Imaging used for diagnosis or lithotripsy used for non‑surgical treatment of kidney stones (other applications currently in limited use) and beneficial procedures such as bone marrow or kidney transplants are very expensive. Not only is the equipment costly, but studies have revealed overuse of new technologies; and in diagnostic areas, the frequent dual use of the old and new tests. Hospitals typically do not compete in terms of price but by acquiring the latest technologies. Consequently, we have duplication of underutilized equipment.

Several recent studies have concluded that a significant number of tests ordered in hospitals were either inappropriate, redundant with other tests, or unnecessary in adding information to make a diagnosis or to improving treatment. Repeated studies have shown wide variation in the testing and surgical procedures in different regions of the nation, even in neighboring states. Aggressive testing and treatment is particularly questionable for those where there is not a reasonable prospect of extending quality life. This area evokes a host of ethical questions relating to how much care do we give in these instances and the conditions under which withholding care makes more sense ethically as well as for resource allocation.
 

We are concerned for both cost and efficiency reasons that what is done is beneficial. Procedures have been used whose effectiveness has been questioned. Currently, outcomes research to determine treatment efficaciousness is a high priority on the research agenda.

The Hill‑Burton Program, enacted after WWII to build and modernize hospitals, was a laudable policy, making significant improvements in medicine's physical plant. Nonetheless, we overbuilt and many hospitals currently have lower than optimal occupancy rates. With the necessity to cover fixed costs, the expense of a hospital stay increased. Smaller hospitals that have been unable to spread their costs over many patients have closed.
 

The incentives in the medical system have not been oriented to cost savings. Individuals are charged a fee for each service, hence an incentive to increase services. Although the literature has reported mixed results, a recent study shows that financial incentives do impact physicians decisions (Hemeneway, et.al, 1990). This incentive could be tempered if the consumer had an opposite incentive to minimize services and costs. But this is not the situation. Lacking the medical knowledge to make an independent choice, consumers rely on the physician provider to determine service acquisition. Cost enters the determination less than other services because of the dominance of third party payers (insurance companies or the government) in making payment. Further, in the case of health, the consumer wants the best, a decision that may be tempered by cost in other purchases. Only recently has there been an emphasis on cost‑effectiveness decision making in the medical literature.
 

Rising malpractice insurance premiums have impacted the costs involved in some specialties. Although the cost of malpractice insurance affects all physicians and hospitals, specialties with the greatest suit risk have seen the greatest increase, such as obstetrics, and had the most significant impact on the cost passed on to the patient. Defensive medicine, an outgrowth of enhanced concern over malpractice suits, where tests are run less for diagnosis and more for the record, contributes to cost increases.
 

ALTERNATIVE APPROACHES TO COST CONTAINMENT

The era of physicians making decisions unencumbered by external concerns is concluding. The consumer, his insurance company, his employer, and the government are all concerned about cost. Thus cost constraints are being introduced. We can examine these constraints in two categories‑‑a market competitive model and the government regulation model‑‑recognizing that the two approaches are not mutually exclusive.
 

Market reforms attempt to restrain the traditional forces of supply and demand to restraint the price (See Greenberg, 1988). Suppliers need to be competitive, resulting in a restraint in price, while consumers must include cost considerations in health care decisions. For patients, it is often their agent, whether private insurance company or government, who introduces cost considerations.
 

There are many types of market reforms. The use of Health Maintenance Organizations was considered to be a leading market oriented reform based on the notion that HMOs would compete for patients, charge a yearly fee, and change the providers incentives from maximizing of services under fee‑for‑service to cost containment. HMOs do save money, especially on reduced hospitalizations, but some are criticized as providing insufficient care. Preferred Provider Plans are fee‑for‑service based, and often give a discount to organization selecting them.
 

Incentives and cost controls can be introduced in other ways. To reduce use of services and make patients themselves more cost conscious, increased deductibles and co‑payments are being introduced. Whether patients significantly over utilized services and these enhanced cost sensitivities will have an important impact in moving to an appropriate level of care is doubtful (Pfaff, 1990, p.21). Nonetheless, deductibles and co‑payments reduce the cost of insurance to employers and make insurance plans to insurance companies more profitable. Further, insurance companies are requiring their insurers to obtain a second opinion for many surgeries and pre‑admission approval to enter a hospital with the intention to reduce unnecessary procedures and hospitalization. It may be suggested that the rate of divergence of surgical opinions and denial of hospital admissions, which has been small, is inadequate in assessing their impact for these administrative procedures may result in physicians making less costly recommendations in the first place. Currently, utilization management, focusing primarily on hospitalization, has its cost savings offset by higher outpatient costs and greater administrative expenditures incurred. A report by the Institute of Medicine, though, believes these programs will have greater future effectiveness as medical outcomes studies produce practice guidelines.
 

The most notable market‑oriented reform was instituted by the National Government regarding Medicare hospitalizations. Beginning in 1983 Medicare pays a flat fee to hospitals for treatment of Medicare eligible patients based upon the illness for which they were admitted. The fee is tied to the average cost of treating each illness, classified into Diagnostic Related Groups. Prospective Payment Plan, as this reform is known, is intended to change the hospitals incentives to cost containment. Results to date show a dramatic impact as the average number of days in a hospital fell significantly, the number of outpatients procedures rose greatly and the hospital occupancy rate declined. Charges that patients have been released from the hospital earlier than medically appropriate have been made by patients and some physicians. Reimbursement rates, especially urban‑rural differentials, have been attacked by hospitals. They charge that the closing of some smaller hospitals, which typically have a larger Medicare mix, may be partially attributed to the rates. The urban‑rural payment difference, however, has been narrowed in recent budgets and cost data for Medicare clearly show that the PPS reform has had a moderating effect.
 

Another approach to cost containment is through government regulation. Many states, including Wisconsin, have used hospital rate setting, an effective device, to restrain cost increases. When the Wisconsin legislature allowed the rate setting law to expire, the immediate result was steep increases (Goddeeris,et al., 1988, p. 227). Some expected these but thought that much smaller increases would follow in subsequently years. But this hasn't been the case. Between January 15, 1989, and April 9, 1990, the state's hospitals increased rates 8.5 percent. Hospitals counter that not only have they faced inflation, but Medicare's rates have only increased a small amount, necessitating them to shift costs to other patients.
 

Another regulatory device that has been used is known as Certificate of Need. Based on the idea that acquisition of technology is a major cost, analyst say that we need to in essence ration the allocation of costly equipment to ensure that we avoid duplication, resulting in the equipment being underutilized and hence more costly to each patient. Studies have demonstrated that hospitals compete less on the basis of cost and more on the technology available, resulting in expense to society. Certificate of Need, although working in other nations, has never significantly restrained costs in the U.S. because, it appears, allocations made by planning boards were easy to obtain. The Reagan administration dropped the requirement that states have Certificate of Need reviews, and Wisconsin repealed its CON requirement.
 

A new regulatory device is now being launched. Concerned that while Part A of medicate, which pays hospitals, was being restrained, Part B, paying physicians, was seeing massive increases, the Congress adopted the Resource Based Relative Value Scale (RBRVS), which will set the rate that physicians are paid by Medicare for each service. The purpose is also to realign prices since it is argued that some charges, such as for surgical services, are higher than they should be relative to other procedures, while others, especially those not involving interventionist procedures‑‑known as contemplative services‑‑receive less than they deserve. An example of the latter would be office visits. Physicians will be limited in the amount they can charge patients beyond the allowable sum. Additionally, a total yearly target expenditure is to be used to restrain physicians from increasing the number of services by making future increases dependent upon meeting the targets, an approach vigorously opposed by the American Medical Association. Although it is anticipated that the RBRVS will be cost neutral in its first year, the regulatory approach's designers are hopeful of future restraints on cost.
 

All of these reforms have introduced managed care, appropriate care mindful of cost consideration. The U.S. also has a multiple payment system with government, insurance companies, and individuals being charged. Both managed care and the multiplicity of payment sources result in administrative costs well beyond other nations. See Figure 2 in the appendix for a comparison between the U.S. and Canada.

In conclusion, the health care system in the U.S. faces major cost problems impacting the rest of the economy. Cost containment efforts to date, while having some restraint on cost increases, have not reined in the escalation which has been well beyond increases in our GNP. Although pundits frequently argue that only the painful prescription of health care rationing will have a notable effect, this conclusion may be short‑sighted. A significant change in our patchwork health care financing system is needed. A change based upon private insurance will tie premiums to the health status of individuals or groups. But a public insurance or tax based system could be a progressive, income elastic one (Pfaff, 1990, p. 21). Adoption of either approach requires a comprehensive health policy, currently lacking in the U.S. 

WORKS CITED 

Goddeeris, John, et al. 1988. "Hospital Rate Setting: National Evidence and Issues for Wisconsin." Pp. 208‑228 in S. Danziger and J. Witte, eds., State Policy Choices: The Wisconsin Experience. Madison: University of Wisconsin Press.

Greenberg, Warren, ed. 1988 "Special Issue on Competition in the Health Care Sector: Ten Years Later." Journal of Health Politics, Policy, and Law. 13 (Summer, 1988). 

Evans, Robert G. 1990. "Tension, Compression, and Shear: Directions, Stresses, and Outcomes of Health Care Cost Control." Journal of Health Politics, Policy and Law. 15:101‑128. 

Health Care Financing Review. 1989. 11 (Fall).  

Pfaff, Martin. 1990. "Differences in Health Care Spending Across Counties: Statistical Evidence." Journal of Health Politics, Policy and Law. 15‑1‑67.

William M. Mercer Meidinger Hansen, Inc., 1990. "Health Care Survey."

Schieber, G. J. and J.‑P. Poullier. 1989. "Trends in International Health Care Expenditure Trends: 1987. Health Affairs." 318:169‑177.