December 20, 2002
A Tale of Two Economies
The economy today, as all of us know, is not what it used to be. Except in health care. We’ve come through a recession that has battered profits, and brought gains in employment to a screeching halt. Except in health care. Unemployment has risen, and the days of labor shortages seem far behind us. Except in health care. One of the few bright spots has been price inflation, which has practically fallen off the map as a policy problem. Except in health care.
That pesky asterisk that we have to put at the end of every sentence we write about the economy keeps getting more important. For some, like the businesses, individuals, and governments who shoulder its growing costs, health care is a major concern. For consumers who benefit from its rapid technological advance, it is a wonder. And for investors, entrepreneurs, and economic developers, it is an opportunity. With every other bet on technology coming up sour, cities and regions across the country are awakening to the realization that the emerging “life sciences” industry might be a good horse to ride into the future.
Whatever it is, it is growing. In a twelve month span that has seen no net job growth in the overall economy, the health services industry has added 280,000 new jobs. But that growth has not come without cost. The last year that government health care spending was under control was 1997, when it grew by only 3.2 percent. Its acceleration since that time has been nothing short of astonishing. Beginning in 1999, government health care spending has successively galloped ahead by 8.2, 9.4, 14.3, and a projected 20.0 percent in 2002. Businesses, through their contributions to health insurance plans for their workers, have traveled much the same road.
And it’s no wonder that the health care industry marches to its own beat. The rules that govern the rest of the private economy are so distorted by the so-called health insurance system that every fix to the system seems to make it worse.
The fact that we collectively pay for goods and services from the health care industry that we consume individually is the root of the problem in health care. I am a reasonably benevolent person, but your regular use of expensive medications, diagnostic, and surgical procedures really does nothing for me. Yet, if we are in the same benefits pool, your consumption costs me money, through the higher insurance premiums that I pay.
This disconnect between what we consume and what we pay for has fueled price increases in health care beyond anything that an ordinary marketplace would support. Just think what would happen to an ordinary business, like a carpet cleaning service, that tried to charge prices two or three times as high as its competition. Its workers would soon be looking for jobs. But a maker of, say, blood pressure medication can thrive and prosper charging a price ten times as high as its competition, simply because the ultimate consumer is shielded from paying the price.
The health care system has devolved into a competition of sorts -- but it is one between health care providers and health care insurers to see who can acquire the most monopoly power. In the mid-1990's, the push for managed care gave that power to the buyers of health care -- insurance companies and HMO's -- who used their size to force fragmented providers into accepting lower prices and fees. But now the consolidation in hospitals and care-givers has swung that power over to providers in many areas, such that buyers again have no choice but to accept higher costs.
As managers of the health care financial network make their projections of future costs -- as they must do to set premiums -- they foresee an eventual end to the rapid acceleration we've experienced since 1997. That seems reasonable, since at the current pace of growth the entire economy would be nothing but health care in a very short time. But how will that correction come about? Right now, no one seems to know.
About the Author
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