Health Reform Prognosis: Pain in Early Stages

When President Clinton pledged to reform the health care system, he promised that his efforts would improve U.S. economic competitiveness in the world by slowing the growth in medical costs.

Yet, with the President’s proposal still being drafted at the White House, there is evidence that health care reform will bring slower growth, fewer jobs and smaller profit margins long before it pays the economic dividends that Clinton has promised.

In anticipation of health care reform, some companies are already deferring hiring, hospitals and drug companies are laying off workers, managed-care companies are declining to sign up new specialists and the pharmaceutical industry’s stock prices are in a tailspin.

Such hardships are to be expected, according to some economists, whenever the government sets out to revamp an industry as vital to the economy as health care.

Mark Zandi, an economic consultant in West Chester, Pa., likened the economic effect of Clinton’s health care reform plan to the decline in gasoline prices in the 1980s. While it ultimately proved to be a boon to the economy, it brought considerable short-term hardship, especially in oil-producing states.

“In the long term, health care reform is an unambiguous positive,” Zandi said. “But initially, certain elements of the health care industry, and those employers who are going to pay for it, are going to suffer negative consequences.”

While the President’s plan for reform will not be unveiled at least until September, the plan’s general outline is already known: Clinton favors using a combination of free-market forces and price controls to restrict health care spending and provide coverage for all Americans.

In the long term, Clinton’s proposal is expected to ease the pressures that have fueled a nearly sevenfold increase in U.S. medical expenditures in the last three decades. By some estimates, it could trim health care spending by more than $700 million by the year 2000.

If those estimates are correct, reform not only would help dampen inflation and slow the rising federal budget deficit, it would also ease the tremendous impediment that high health care costs have put on U.S. employers as they compete with the Japanese in world markets.

Most economists say they agree with the principal goal behind Clinton’s plan. As the President has stated repeatedly: “We will never revive our economy or cope with the deficit until we get health care costs under control.”

In the first two years after enactment of health care reform, however, some economists predict that the economic disruption it causes could shave between 0.2% and 0.5% off the nation’s annual economic growth rate and deprive the economy of as many as 750,000 new or existing jobs.

Hardest hit would be the Northeast and Midwest, whose economies are more dependent on the health care industry, the economists said. In the South and Southwest, where a higher percentage of employers do not now offer health coverage to their workers, the cost of doing business would increase.

While health care reform is supposed to dampen demand for expensive medical services in the long run, some economists predict that it will increase demand for medical services initially as 35 million currently uninsured people are provided with coverage. Increased demand could, in turn, fuel a surge in inflation in the first few years after reform.

“Initially, it means a giant increase in demand and a lot more money going into the industry. . . ,” said John Shiels, a health care economist for Lewin-VHI, a consulting firm in Alexandria, Va. “The increase in demand will also create bottlenecks, causing price increases in areas where there are shortages.”

Estimates vary widely on how reform will affect overall health care spending in the first few years. According to a summary of economic forecasts published recently by Congress’ Office of Technology Assessment, some analysts foresee an initial annual savings of nearly $22 million under Clinton’s reform plan, while other forecasters predict a nearly $50-million increase.

Audrey Freedman, a well-known labor economist in New York City, cautioned that, even though 35 million more people would be insured under Clinton’s plan, demand will not increase as dramatically as those numbers suggest.

Freedman said many uninsured people now receive treatment but often not until they need high-priced emergency care. Thus, while the demand for routine services surely will increase once these people are insured, she predicted, the demand for emergency care is likely to decline.

Yet despite an anticipated increase in demand, many sectors of the health care industry are girding for leaner times because they expect the President’s plan to impose a new cost-cutting discipline on them.

“The health care industry has been growing in recent years in anticipation of rising prices as far as the eye can see,” Zandi said. “Now, they know they are going to have to control growth in costs.”

Hospital officials say they expect to feel the crunch almost immediately, especially if Congress also follows through on a plan to cut Medicare payments. Hundreds of hospitals are likely to close in the next few years under pressure to eliminate excess capacity, according to the American Hospital Assn., and many of those that remain open will be forced to scale back their operations.

Layoffs already are spreading through the hospital industry. At Rush-St. Luke’s Hospital in Chicago, for example, the management recently announced plans to lay off about 800 employees.

Likewise, some economists predict that Clinton’s health care plan will cause hundreds of small insurance companies to go belly up. The plan favors the big insurers that already are abandoning high-priced indemnity health insurance in favor of establishing more economical managed-care networks of physicians.

“It will wipe out many small insurance companies and wreak havoc on the free-standing hospitals and the free-standing clinics that are not part of a vertically integrated network of providers,” said Uwe E. Reinhardt, a health care economist at Princeton University.

Lewin-VHI has estimated that the system advocated by Clinton could save more than $11 million a year in insurers’ administrative and paperwork costs. But that also means some insurance company employees involved in billing and administration can expect to be out of work.

Like hospitals, manufacturers of pharmaceuticals and medical devices are also beginning to lay off workers as part of cost-cutting moves prompted by Clinton’s criticism of their earlier price increases, according to the Pharmaceutical Manufacturers Assn. Drug industry stock prices are down 15% so far this year.

Under the system of managed care that is fast supplanting indemnity health insurance across the nation, primary-care physicians are supposed to act as the “gatekeepers” who control patient access to high-priced specialists. But insurers reported that there is already a critical shortage of primary-care physicians and a surplus of specialists.

A recent survey conducted by Group Health Assn. of America, a trade group, and the U.S. Public Health Service, found that more than half of the nation’s health maintenance organizations are finding it increasingly difficult to recruit primary-care physicians.

If the shortage of primary-care physicians continues, as expected, Reinhardt predicts that market forces will quickly boost pay for lower-paid general practitioners and lower wage scales for high-priced specialists. Soon, he said, physician salaries in excess of $300,000 a year will be rare.

Well-positioned to benefit from the shortage of general practitioners are nurses and physician assistants, who are widely deemed to be capable of performing many of the less complex procedures usually carried out by doctors. But some economists said many nurses are likely to be laid off by hospitals before their occupation benefits from the changes wrought by health care reform.

Not all of the economic turmoil caused by reform will occur within the health care industry, of course. Because Clinton aims to require all employers to provide health care coverage, proprietors of many struggling enterprises have predicted that they will be forced out of business by health care reform.

The National Federation of Independent Business, which opposes a mandate on employers to provide insurance, recently published a list of as many as 18 million jobs that would be “at risk” if Clinton were to ask all small-business owners to foot the bill for covering their employees.

Many economists say they are skeptical of the federation’s projections. Reinhardt predicted that no more than 100,000 small-business jobs would be lost because of a mandate; Shiels said the figure would not exceed 60,000.

Even many big employers that already provide health insurance are nervous, fearing that a proposed new payroll tax to fund health care reform could exceed their current outlays. Only in the auto industry, where health care accounts for about 20% of total payroll costs, are employers confident that they will be paying less under the President’s plan.

Many employers are frightened by Shiels’ prediction that reform could increase the aggregate costs of health care to U.S. corporations by as much as $132 million. But until Clinton decides on a financing scheme, these estimates are speculation.

Whatever the increased cost of reform, Shiels predicted, it will result in lower pay for workers. “The only thing that Karl Marx managed to get right,” he said, “is that in the end the worker pays all of the bills.”

While health care reform certainly will require some sacrifice in all of these areas, experts were quick to note that Americans also will pay dearly if Clinton and the Congress fail to agree on a plan. Unrestrained, health care costs can be expected to continue to erode profits and add to the federal deficit.

As Freedman put it: “Leaving the system alone is a decision too, and an expensive one.”