Medical Industry Responds to Market’s Tonic Dose

As the big health care debate enters the home stretch in Congress, many particulars of the Clinton health plan--regional alliances, health boards, employer mandates--are mostly dead.

Yet a dramatic slowdown in medical cost inflation, a stated goal of the whole exercise, is being realized as the industrialization of medicine proceeds apace.

For the record:
12:00 AM, Aug. 05, 1994 For the Record
Los Angeles Times Friday August 5, 1994 Home Edition Business Part D Page 2 Column 6 Financial Desk 2 inches; 36 words Type of Material: Correction
Kaiser Permanente--The health maintenance organization has forged a key alliance with PM Group Life Insurance Co., a unit of Pacific Mutual. Kaiser Permanente does not have a joint venture with PacifiCare, as was incorrectly reported in Sunday’s editions.

Medical costs are rising roughly 5% to 6% this year after more than a decade of double-digit increases. And the trend is toward further cost containment.

The medical field is getting a dose of what already has happened in the pharmaceutical industry, where benefit managers simply order lower prices on the drugs they buy for corporate health plans.


Now insurance companies and corporate health plan buyers are saying bluntly just how much they will pay for medical procedures. And, like steel mills and auto parts suppliers before them, hospitals, research labs and medical practices are merging and forming alliances, seeking economies of scale to lower the cost of services.

Prices are coming down. Some hospitals that do a large volume of operations are offering open heart surgery for $17,000 as opposed to $45,000, the going rate in recent years.

A lot of cost reduction is coming out of doctors’ wallets. Incomes of specialists--the higher-paid 60% of America’s 650,000 physicians--are said to be dropping, although definitive statistics from the American Medical Assn. have not yet been published for 1993-94.

Consumers are picking up more of the tab. The hottest item in the medical marketplace is an insurance plan called point of service that allows consumers to choose their own doctors if they shoulder higher deductibles or co-payments. Thus, consumers are asked to pay for something--choice of physician--that used to be taken for granted and paid for by all insurance plans.


The trend has been building for a few years, so where we’re headed is pretty clear. When and if a health bill is passed in August, U.S. medical care will continue to be financed through employers and insurance companies, with physicians at their financial mercy.

The risk of rising costs used to fall on employers, in days when doctor and hospital bills were not questioned. Now the balance of power has shifted, and pools of medical service purchasers--big companies and coalitions of small and medium-sized businesses--are taking advantage of an oversupply of hospitals and doctors to dictate terms.

Clinton’s plan, which in theory was to be consumer-dominated, might have been easier on doctors. Under the plan, regional alliances would have formed buying groups of 1 million or more individuals to wield market power. But doctors and hospitals might have had a better chance arguing costs with them than with the business world’s sharp-eyed purchasing managers.

In any case, the Clinton plan, which was hatched in some secrecy, was dead almost before it arrived. The public didn’t believe White House claims of low costs but found the insurance industry’s Harry and Louise commercials warning of bureaucracy to be credible. The American Medical Assn. failed to get behind Clinton’s plan early and even now says it is only “nonpartisan.”

But there should be no regrets, because the marketplace revolution we do have may bring good health care at lower costs.

Gresham’s law--of bad driving out good--is not working in health care. Rather, the superior organizations in U.S. medicine are likely to improve with reform, as the best companies--Ford, Hewlett-Packard, Shell Oil and such--have improved as their industries have constantly restructured.

Premier institutions such as Mayo Clinic and Cleveland Clinic are making alliances nationwide. The Scripps Institute of Medicine and Science in San Diego has formed alliances with major hospitals in its area and is talking about merging hospital operations with UC San Diego. Kaiser Permanente, a pioneer of managed health care, has formed a joint venture with PacifiCare, a major health maintenance organization.

Institutions don’t have to be large to succeed. One of the most efficient operations in the country is Mercy Hospital in Janesville, Wis., southwest of Milwaukee, which serves as the critical care facility for a four-county area extending to Rockford, Ill.


Technology is playing a big role. The Marshfield Clinic in central Wisconsin is hooked into 65 localities via computers and telecommunications. Rural communities are no longer isolated from superior medical care.

In large cities, hospitals are specializing--one will concentrate on heart surgery, another on kidney transplants--achieving greater skill as well as economy. Productivity will rise in the medical field as it has in manufacturing and agriculture.

Change was inevitable for the economics of some medical practices. AMA statistics show incomes of some specialists--surgeons, obstetrician-gynecologists--almost doubling from 1982 to ’92. Nothing wrong with earning more, but you have to expect countervailing influences to arise in our market economy.

Analyst Kenneth Abramowitz of Sanford C. Bernstein, a New York research firm, captures the outlook in a major new report. “Ten years from now, this revolutionary change will lead to far more cost-effective hospital, pharmaceutical and medical supply industries to the benefit of the most innovative companies,” he writes.

“However,” he adds, “the odds do not favor a painless transition.”

For the long term, Abramowitz recommends major HMOs, such as FHP International and PacifiCare, and also United Health Plans, which serves the Southeast. And he calls Johnson & Johnson the best positioned health care company in the world.

Dr. Schumarry Chao, who formerly headed a clinic at County-USC Medical Center and the medical practice of Aetna Life & Casualty, sees export opportunity--especially in China, where she was born. “With China’s policy of one child per family and rising affluence, the demand for the best medical care will grow,” she said. “And U.S. care is the best.”

The year of debate has not been in vain. It has focused attention on the real challenge in U.S. medical care, which is to rein in costs without impairing quality.


To meet that challenge, the Clinton Administration thought government had to remake the system. Instead the marketplace is adjusting, at a lot lower cost. It wasn’t Harry and Louise who defeated the White House, but its own lack of understanding of how the country works.