Clinton’s Key Play at the Plate Is Bid to Control Health Costs

Every once in a while, in the national economy as in sports, there’s a play that changes the game. In the 1980s, the key play was Ronald Reagan’s offensive against the air traffic controllers’ union. New to the White House in 1981, Reagan took a stance against striking air controllers that signaled wage inflation would not continue. He thus set the tone for a disinflationary decade.

The comparable play for the ‘90s is Clinton’s attack on drug prices, launched as soon as he was elected last fall. By whipping the pharmaceutical companies, the new President was saying that medical costs--the ballooning exception to the disinflationary trend--would not continue rising.

Both Presidents were politically astute, picking up on trends already underway. Unions had lost public support before Reagan confronted them, and one of the big reasons voters elected Clinton was to corral medical costs.

And both were playing into an economic trend that has only gathered strength--the loss of pricing power by one industrial sector after another, from energy producers and automobile makers to airlines and consumer goods producers and now medical providers.

Note those words--loss of pricing power. Their implications are profound for business and government. To begin with, they mean low inflation and low interest rates--one reason bond and stock markets are rejoicing just now. As we’ll see, it’s important for the Clinton Administration’s economic plans that interest rates stay low.

But first, investors, employees and managers should understand how powerful a trend this is: Loss of pricing power means rearrangement of industries. Think of automobiles when global competition came to Detroit; think of oil when the bottom fell out in the mid-80s.

Airline deregulation lowered prices for air travel and is still doing so--despite fears by some experts that deregulation would lead to monopoly. Today’s reality is that small, no-frills airlines are giving the big ones fits. Acknowledging that, Robert Crandall--chairman of American Airlines, the world’s largest--said last week: “If the only comparison is cost, we can’t compete” with such carriers as Southwest Airlines on short-haul routes. On longer routes, American offers more connections and grander service and holds its own. But Crandall recognizes that the trend is challenging.

And we haven’t seen anything yet. In the years ahead, “defense and medicine--just about 20% of the U.S. economy--are going to be reshuffled,” notes Francis Kelly, a director of Putnam Investments.

Cutting defense will feed disinflation, but getting hold of medical costs will do even more. Health care costs have gone up eight-fold in the last 30 years, double the rate of general inflation. And costs have accelerated in the ‘90s, growing 2 1/2 times as fast as other consumer prices. Reaction was inevitable, and pharmaceutical prices are already coming down under pressure from insurers and government agencies, which dictate that prescriptions be filled with less-expensive generic compounds.

Clinton’s health program, coming out in early May, will make bigger changes. Educated guesses about the program are plentiful; typical are the thoughts of medical investor Larry Feinberg in Barron’s. Feinberg predicts an immediate price freeze on medical care and changes in health insurance that will force some providers of medical treatment and equipment out of business and ultimately make doctors salaried employees.

It will be a challenge to contain costs while bringing 35 million uninsured Americans into the health system. But Clinton is counting on doing so.

In the federal budget for fiscal 1994, released last week, the Administration’s assumption is that interest on 10-year Treasury bonds will be 6.4% in 1998, slightly lower than the rate on 10-year bonds today. That forecast implies low inflation and the success of Clinton’s deficit-reduction program.

So far, skeptical investors are giving Clinton the benefit of the doubt. “The budget’s assumptions are reasonable,” says economist John Silvia of Kemper Financial Services. “But I wonder where financing for Clinton’s programs is to come from.”

“Health is key,” says William Gross, strategist at Pacific Investment Management of Newport Beach, a major bond investor. “Depending on how Clinton pays for it, the health program has the potential to be good for the economy or to be like Lyndon Johnson’s Great Society,” which in tandem with the Vietnam War lit the fuse for the terrible inflation of the 1970s.

Clinton has set his play. In the national economy, as in sports, execution and follow-through will be critical.

Running a Fever

Inflation in the cost of medical care, with rare exceptions, has been greater than general inflation for the last three decades--and more than double general inflation in recent years. One key top the economy of the 90’s, and to the Clinton Administration’s hopes, is that medical inflation will now come to a halt.

Medical Inflation 1992: 7.4%

Consumer Price Index 1992: 2.9%

Source: Bureau of Labor Statistics