Health-Care Costs: Not Much Wiggle Room : Policy: An understanding of today’s costs will make it easier to accept the more ‘expensive’ forms of change.

Much of the current interest in health-care reform focuses on how much it will “cost”and how it will be financed. There has been plenty of hype, but little attention to the fact that most of the bill for reform will be substituted for what we already pay, not added on top of it. And we already pay, from one source or another, a double-digit chunk of national income for health care.

A recent Times headline speculated: “Health Plan May Call for 12% Payroll Tax on Firms.” As reported, the 12% estimate was for the “most generous of the three possible benefit packages” presented to President Clinton. The suggestion was that less generous plans would “cost” less, maybe 7% to 9% of payroll.

Let’s compare these proposed payments into a new national system to the way we currently pay for medical care. 1. What We Paid Last Year First, put the speculative proposals in context: Total U.S. gross domestic product $5,978.5 billion Health-care portion of GDP $840 billion 14% of GDP Total U.S. payroll $2,923.5 billion Health-care payments from employers (premiums and taxes) $412 billion 14% of payroll Source: Economic Report of the President, January, 1993 2. Where Health-Care Money Comes From The $840 billion of spending on health care in 1992 comes out to about $3,330 for every man, woman and child in the United States. (That would mean $13,000 per year for the hypothetical average family of four.) But payment for the bill comes from several sources: Figures for 1991: Medicaid (federal): 7% Medicaid (state): 4% Other government: 13% Private health insurance: 35% Other private: 4% Out of pocket: 20% Medicare: 17% Source: Congressional Budget Office, “Managed Competition and Its Potential to Reduce Health Spending.* 3. How It’s Paid Current financing is a jumble of payers. Any national plan must start from this state of affairs: In billions Business Taxes: $147 Premiums: $265 Citizens and taxpayers Taxes: $219 Premiums: $34 Private Insurance: $299 Out of Pocket $175 Government $366 Total: $840 billion 14% of GDP Sources: Estimates based on data from Health Care Financing Admin., Commerce Dept. and Congressional Budget Office 4. Who Uses Medical Care Dollars The amounts spent on behalf of individuals, of course, differ radically. For example, 1% of the population accounts for 30% of health-care expenditures; half of the population uses almost no health-care dollars. This is another way of saying that most of us are not seriously sick most of the time and that insurance-private or public-redistributes burdens from the well to the sick , and sometimes, from the rich to the poor. Health-care expenditures: 30% Population percentiles by expenditure: Top 1% of users Health-care expenditures: 41% Population percentiles by expenditure: Top 2% Health-care expenditures: 58% Population percentiles by expenditure: Top 5% Health-care expenditures: 72% Population percentiles by expenditure: Top 10% Health-care expenditures: 91% Population percentiles by expenditure: Top 30% Health-care expenditures: 97% Population percentiles by expenditure: Top 50% Remaining 3% of expenditures are distributed among the remaining 50% of the population. Source: Berk and Monheit. “The Concentration of Health Expenditures: An Update,” Health Affairs (Winter, 1992) 5. Health-Care Costs As A Percentage of Income On the other hand, the higher their income, the lower the proportion of their income that Americans pay for medical care. Families in the bottom 10% (incomes below $6,000 a year) spent a whopping 27% of their money on medical care (including the portion of taxes that goes to government health programs). By contrast, the figure was 15% for families with incomes of $22,000 to $27,000 and only 10% for families with incomes above $93,000. Any effort to have all Americans pay a comparable proportion of their incomes for universal health insurance will obviously produce winners and losers, no matter what the precise nature of the benefit package. Source: Rosell et al, Economic Policy Institute, briefing paper, April, 1993, based on 1987 data 6. Cutting Up The Medical Dollar This chart illustrates the confusion created by focusing on the “costs” of various reform plans, some of them more generous than others. Just because a plan excludes some service does not mean that the service or its cost would disappear. Where health-care funds are spent: Hospitals: 38% Physician’s services: 19% Nursing homes: 8% Drugs and nondurables: 8% All others: 27% Source: Congressional Budget Office. “Managed Competition and Its Potential to Reduce Health Spending,” May, 1993

Conclusion: Costs Can Be Controlled, but Not By Wishing Them Away Imagine a White House proposal that excluded hospital care in its “least generous” plan. Would hospital care not be provided, its costs not incurred? Not on your life. The costs would just be in different accounts and in somewhat different amounts.

So, what benefits are “covered” influences but does not determine what is spent or by whom. Yes, private insurance companies currently estimate costs by what what is covered in a particular plan. For them, more extensive benefits necessarily mean greater costs. But this is accounting, not economics, and certainly not public finance economics.

Another way of proceeding, employed in much of the developed world, is to set a national medical budget, cover what ordinary Americans regard as medical care, then let the medical professionals, within that budget, allocate care to the sick.

With 14% of our national income allotted to medical care, we spend more than any other society on earth. To expand insurance coverage to all, with a broad range of services eligible for payment, is certain to mean we will not spend less than that, at least initially. But there is no reason to believe we must spend 14% or more forever. And there is even less reason, given the level of current expenditure, to regard 12% of payroll as an astounding amount. If our total outlays are very large, the component parts of our financing will have to be large. The only way to reduce those outlays is to pay less for the care we give, give less care, pay less for administration or do some of all three.

Limiting benefits to only some of the procedures that are widely regarded as ordinary medical care in order to control costs would be very short-sighted. Even the costs of a “generous” package of benefits are controllable by a combination of budgeting, negotiation and regulation.

That is the lesson of reforms in Hawaii, Maryland and New York--not just Canada, Germany, and Japan. And surely it is this sort of reform that Americans want--not some misbegotten effort at fiscal prudence that “saves” dollars by drawing artificial boundaries between covered and uncovered medical care.