The Unmanaging of Health-Care Costs

Uwe E. Reinhardt is professor of political economy at the Woodrow Wilson School of Public and International Affairs at Princeton University.

The General Electric workers' strike over relatively mild additions to their health-care costs -- $200 to $400 per employee per year -- shows once again what a young country the United States is when it comes to health care.

Not young as in "youthful" but young as in "juvenile."

Over the long haul, economists know, the cost of fringe benefits is shifted backward to employees in the form of lower wage increases. Douglas Fraser, past president of the United Auto Workers union, once remarked: "When they [companies] pay an admittedly horrendous amount for health care, that's money that can't be spent for higher wages or higher pensions or fringe benefits." He offered this thesis in the late 1980s, when the premiums for employer-provided health care rose, on average, by 18%.

The Congressional Budget Office concurred, writing in 1992 that "the rising cost of employer health insurance can explain why workers' inflation-adjusted cash wages have hardly grown over the past two decades."

Corporate employee benefit managers, most of them kindly social workers in Republican garb, desperately searched for ways to protect the paychecks of their wards. Having been told by policy analysts that the American health system was driven almost completely by a cash-hungry supply side with little countervailing power on the demand side, the benefit managers seized on the concept of managed care, coupled with managed competition among health maintenance organizations, regulated either by employers or by government.

The idea was to make employees choose from a menu of competing HMOs that would contract only with doctors, hospitals and pharmacies willing to negotiate over prices and to observe certain clinical practice guidelines about things like access to dubious medical procedures and unnecessary referrals to specialists.

Between 1993 and 1997, this approach seemed to control spending. By the mid-1990s, the insurance premiums paid by employers rose by only the low single digits. The percentage of gross domestic product going to health care, which had skyrocketed during the 1980s, stayed flat for most of the decade. By 2000, Americans spent $370 billion less on health care than had been forecast by the Congressional Budget Office for that year.

As the labor market tightened during the boom economy of the 1990s, however, emboldened employees insisted on ever-wider networks of doctors and hospitals and the removal of their insurers' utilization controls. They were encouraged by physicians who had seen their incomes cut by managed care. Thus was launched a managed-care backlash that was eagerly embraced by politicians and the media. By the end of the decade, the market power of managed care had been clipped to the point that it was declared dead. Managed care never really had a chance to learn from its early mistakes and improve.

For Americans, the bounty from this "victory" will be double-digit premium increases and greater cost sharing by patients as far as the eye can see. The bounty is well deserved. In referendum after referendum, Americans have shown their distaste for the single-payer approach, such as Canada's, that can control health spending while protecting people from bankruptcy over medical bills with rationing of some high-tech care. Americans showed equal disdain for the Clinton health plan, which sought to control spending more gently with privately managed care, regulated by government.

Now Americans have defeated managed care by employers, virtually the only cost-effective quality approach left for employees.

What Americans want is really quite simple: all the health care they or their doctors can imagine, virtually free, without added taxes for health care and without higher out-of-pocket costs for their "employer-provided" health insurance. That's all. Call it part of the American dream.

As the dreamers watch health care chewing up their paychecks, and as their out-of-pocket payments for health care rise inexorably, the dreamers will stomp their booties in despair and look for a culprit. They need not look beyond the mirror.

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