Those Sky-High Health Costs

By John Greenwald

Feverishly rising medical bills spread the inflation disease to everyone

In January of 1979, as the century's worst blizzard howled outside, George and Jeanine Loulousis of Mokena, Ill., hovered anxiously over the bed of their three-month-old son Jonathan, watching his sudden and unexplained fever rise steadily higher. Three years later, Jonathan was dead of a rare and incurable form of colitis, leaving his emotionally shattered parents to face an equally catastrophic economic woe: a staggering $400,000 in medical bills incurred in the futile fight to save their son.

From big metropolitan medical centers to the smallest of rural community hospitals and clinics, such horror tales of runaway medical costs are becoming all too common. As medical technology keeps improving and advancing, bringing steady torrents of new and ever more exotic and sophisticated equipment and practices to market, the already high cost of medical care has been rising faster than ever. In the process, the U.S.'s $285 billion-a-year business of curing the ill and diagnosing the diseased has become an inflationary juggernaut that is literally laying siege to the entire economy.

Not even the recession is succeeding in containing the inflationary runup in health care. Last week the Labor Department reported that June unemployment held firm at 9.5% of the labor force, continuing an employment slump that has helped to ease inflationary pressures throughout much of the economy. Even so, health-care costs have just kept on surging ahead without letup. Nearly 10% of the U.S.'s gross national product is now spent on medical care of one sort or another, compared with only 5.4% in 1960.

Throughout the country, medical charges last year jumped by a record 12.5%, the largest gain for any major consumer item, and are still rising at about the same breathless clip. Says Federal Reserve Chairman Paul Volcker: "We appear to have turned the corner on most of inflation, but health costs have shown very little sign of improvement."

Uncontrolled medical costs are like an illness that infects prices everywhere. General Motors spent an average of $3,270 per employee in health insurance premiums last year, or double the 1976 outlay. GM estimates that its health-care bill added about $370 to the cost of producing a car in 1981.

Payments for insurance claims have shaken the nation's insurance companies. In 1981, losses on medical coverage totaled $290 million at the Prudential Insurance Company of America, the country's largest private health insurer, and last December the company abruptly announced that it would stop issuing health insurance policies to individuals.

The runaway cost of health care has played havoc with the federal budget, which has seen outlays for federally financed medical coverage under the Medicare and Medicaid programs rise from $26 billion in 1976 to $56 billion in 1981. In a desperate effort to slash expenditures and trim a projected overall budget deficit of at least $103.9 billion for the fiscal year that begins in October, Congress agreed to slice $15.2 billion off projected spending of $270 billion for the programs over the next three years.

Health-care costs are climbing be cause the industry has little if any incentive to hold them down. Though the U.S. remains one of the few industrial nations without a comprehensive national health program, upwards of 85% of all Americans are covered by medical insurance of some sort, either through the federal Medicare and Medicaid plans, which provide coverage for the elderly and the poor, through nonprofit organizations like Blue Cross/Blue Shield, or through company-sponsored plans for employees.

Most such packages offer what amounts to almost open-ended coverage. In a typical plan, doctors can provide the most advanced--and expensive--tests and treatment programs available. Afterward, the patient can count on receiving automatic reimbursement of up to 75% or more of the charges. Says Kenneth Abramowitz, a health-care industry analyst for the New York investment banking firm of Sanford C. Bernstein & Co.: "Everyone perceives the system to be, in effect, free. All the incentives are to provide very high-quality service at a very high cost."

By far the most rapidly growing health expense is the price of a hospital stay, which currently averages more than $250 a day, vs. only $133 in 1975. Part of the rise reflects the escalating cost of constructing new buildings. But equipping the complexes with such state-of-the-art units as burn centers, microsurgery operating rooms and computer-controlled intensive-care wings can add tens of millions of dollars more to the price.

In New York City, for example, Mount Sinai and Presbyterian hospitals are planning modernization programs that when completed are projected to cost a combined total of more than $1 billion. Officials at the Mayo Clinic in Rochester, Minn., the nation's largest privately operated group medical complex, offer the startling calculation that, nationwide, it costs as much as $9 million to add a year of life to the seriously ill patient through such ultramodern technologies as kidney dialysis and organ transplants.

In a number of states, and in private and community hospitals, efforts are under way to curb costs as much as possible. At the Nashville-based Hospital Corporation of America, which operates some 360 hospitals across the U.S., officials now cut costs by buying everything from adhesive bandages to building steel in train-and truckload bulk quantities. For H.C.A.'s average 200-bed hospital, that means annual savings of $400,000 to $500,000 in operating costs.

Many communities are trying out so-called health maintenance organizations, or HMOs. These charge patients an annual membership premium of perhaps $1,900 and set strict fee schedules that participating physicians must abide by to get reimbursed (see box).

One of the most promising cost-containment ideas now under way is New York State's six-year-old "prospective reimbursement" program. In it, state officials examine the prior year's operating budget for any hospital that participates in the state-administered Medicaid programs and Blue Cross/Blue Shield. The examiners then add a special cost-of-living index, and decide how much the hospital will be reimbursed in the coming twelve months. Result: annual hospital costs in the state have risen between 8% and 10% since 1976, while the U.S. figures have jumped 12% to 16%.

Ultimately, the solution to the nation's health-care woes must come from Washington, which alone has the power to deal with a dilemma that far transcends individual states or health organizations. Congress, however, has been unable to agree on a plan of attack. In 1978, the legislators rejected a cost-containment drive led by former Health Education and Welfare Secretary Joseph Califano. More recently, President Reagan himself campaigned on promises to curb health-care costs by 1982, but his Administration still has not produced a comprehensive program.

Over the long term, there is no prospect of success in the fight against skyrocketing health-care costs unless the Congress and the Administration work together to give the problem the priority it deserves. So far, that has not happened, and the longer the subject is postponed, the worse it seems destined to get. The fact is that as long as the fever of rising costs burns in the business of medical science, the economy can never be totally cured of inflation. --By John Greenwald. Reported by Ken Banta/Chicago and Jeanne Saddler/Washington

With reporting by Ken Banta/Chicago, Jeanne Saddler/Washington

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