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The search for affordable health care.

Article Excerpt
>From the Editor: The cost of health care has again risen to the top of the national agenda, with the latest data only confirming the long-term trend of an ever-larger share of our national income being devoted to health expenses. The latest upward trajectory began in 1997 and has been attributed to the decline in popularity of managed care and its cost-control measures.

For consumers, the major consequence of this trend has been double-digit percentage increases in the cost of premiums for health insurance. This can undoubtedly strain a family's or an individual's budget. Indeed, various statistical reports indicate a growing problem of health-care unaffordability that is driving people into the ranks of the uninsured.

Few now advocate a return to managed care--which for many people is synonymous with denied care--as a solution to the problem; but proposals do abound. In particular, all the major presidential candidates, and the National Academies' Institute of Medicine, as well as public-interest groups, have put forth numerous plans that supposedly address the affordability problem.

Further, a national "Cover the Uninsured Week" is currently planned for May 10-16. The group pro-rooting the event features former Presidents Gerald Ford and Jimmy Carter as co-chairs, and actor Noah Wyle, (who's not a doctor but does play one on TV's "ER") as spokesman.

Before any solution is embraced, however, consumers should know the facts: What is the magnitude of the cost increases? How many are uninsured and for how long? What is the consequence of being uninsured? Most important, what is the real cause of rising health care costs?

One frequent contention is that, since health care is a much more technology-intensive service than it used to be, increasing costs are to be expected. In 1996, an official commission examining inflation statistics found that medical inflation is likely to be even more overstated than the rest of the consumer price index. Failure to account for the quality improvements that new technologies provide was identified as a major source of error in the official statistics, and that factor is even more pronounced in the medical sector. The CPI currently stands at 1.9%, while medical inflation is at 3.7%; the difference of 1.8 percentage points is actually less than the gap the commission suggested results from underestimating the impact of technology. What these data indicate is that increasing costs are often accompanied by increases in quality. We spend more because we can and we get more.

Still, there is no denying that spending more and more on health care each year can make it difficult for some to find coverage. Is it possible that we suffer from too much "quality?" This and other questions are addressed in the articles that follow so readers may sort out what could be one of the top issues in this election year.

RELATED ARTICLE: Why Are Health-Care Expenditures Going Up?

By Douglas Holtz-Eakin

Health care is a large and growing sector of the economy. The United States spent $1.6 trillion on health care in 2002, an amount more than five times as great in real (inflation adjusted) terms as that spent in 1970. Per capita spending increased from about $1,300 in 1970 (in 2002 dollars) to about $5,450 in 2002, for an average rate of real growth of 4.5% per year.

Health spending as a percentage of gross domestic product has more than doubled, from 7.0% in 1970 to 14.9% in 2002. The mid-1990s saw a brief slowdown in real spending growth per capita (the rate was 2.6% per year from 1992 to 1997), but higher rates of growth have since returned: from 1997 to 2002, real per capita health care spending grew at an average annual rate of 4.6 percent--which is similar to its long-term rate of increase.

Recent growth in real spending on prescription drugs has been especially rapid--at more than 14% per year on average from 1997 to 2002, making it the fastest growing category of health spending during the period. Despite the recent rapid increase in spending for prescription drugs, they currently account for only about 10% of all national health expenditures. That relatively small (but growing) share of expenditures should be kept in mind when evaluating whether drugs are a major driver of increasing costs.

Federal spending on health care, principally Medicare and Medicaid, is subject to the same cost pressures facing the system as a whole. Total federal health spending as a percentage of GDP was 1.7 in 1970 and 4.8 in 2002. If the recent rate of growth in spending persists, federal outlays on health care will continue to increase as a proportion of GDP. To put those estimates in perspective, the entire federal budget currently consumes 20%...

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