Health care spending expected to continue increasing Health care spending has been projected to increase to $660 billion, over 11 percent of the GNP, by 1990. 44 According to 1984 estimates made by researchers at Johns Hopkins University and Georgetown University, health care expenditures could reach nearly $2 trillion by 2000,* or about 14 percent of the GNP. 45 The future status of the Medicare program is a good example of the impact of continued increases in health care expenditures. Projections of future outlays and income for the Medicare Trust Fund indicate serious financing problems by the mid to late 1990's. The projected deficit is so large that continued solvency will require either large outlay reductions or substantial revenue increases. Therefore, some strategy to deal with the continued increases in medical expenditures will have to be part of any long-term solution to Medicare's financing problems. Comparison of health care expenditures in other industrialized countries with the United States The high rates of growth in health care spending are not unique to the United States. A study of health care spending in 10 industrialized countries found that, with the exception of Canada, spending consumed an increasing percentage of the GNP.47 Table 5 shows the trends in health care spending based on the GNP for 1970 and 1977 for the countries studied. *Forecasts of health expenditures are extremely sensitive to changes in macroeconomic variables, particularly the rate of inflation. Although Canada experienced no increase during the study period, a Canadian official told us that health spending as a percentage of GNP increased to 8.4 percent in 1982. The official said that the increase resulted from a decline in the GNP while health care expenditures continued to rise.48 As a result of increasing concern with rising health care expenditures, one European official told us that during the past few years, several European countries have taken action to constrain this continued rise. These actions have included steps to (1) control the growth of health manpower, (2) curtail health facility construction or expansion, (3) control the supply of high technology equipment and procedures, (4) control prices through setting budgets and fee and rate negotiations, and (5) increase consumer cost-sharing.49 Controlling expenditures in Britain: an example of rationing Britain has been cited as an example of an industrialized country that has managed to slow the growth of health care spending relative to the growth of the GNP.50 This is significant since Britain operates a national health insurance program and nearly all of the funding for hospitals and physicians is provided through the National Health Service (a government agency). To illustrate the slow growth, health care spending as a percentage of the GNP remained at 5.2 percent from 1977 through 1979.51 The question then arises as to how Britain has managed to control the level of spending, and what impact this has had on quality of and access to care. Since 1948, Britain has operated a national health insurance arrangement. Under this program, each British resident enrolls with a physician who is responsible for the patient's care. Medical care services are financed primarily and controlled by the British government. Hospitals are given a set budget allocation on which to operate. Physicians are generally paid on a capitated basis. Budget limits place physicians in the position of having to decide which patients shall receive services, that is, to ration services.52 A study published in 1984 described the rationing of certain health care services by the National Health Service. The study compared the ways in which selected services were provided in Britain and the United States. These services included: computed tomographic (CT) scanning, cancer chemotherapy, bone marrow transplantation, long-term dialysis, treatment of hemophilia, coronary artery surgery, hip replacement, diagnostic X-ray examinations, radiotherapy, and total parenteral nutrition. The results of the study showed that treatment of hemophilia, radiotherapy, and bone marrow transplantation services were provided in Britain at essentially the same level as in the United States.53 The other services were provided at a substantially lower rate. For example, compared with the United States, British providers: --Provided dialysis to one-third the patients (although there is very little difference in the rate of kidney transplants). --Spent less than one-fourth as much on total parenteral nutrition treatments. --Performed 55 coronary artery bypass operations per million in 1977 (compared with 490 per million in 1979 in the United States). --Performed only half as many X-ray examinations. 54 In addition, Britain has only one-fifth the CT scanning capabilities and one-fifth to one-tenth the number of intensive care beds available per capita as the United States.55 Some experts have pointed out that this indicates excess utilization in the United States. The impact of this has been that (1) patients frequently wait for long periods for services, (2) patients may seek care outside the National Health Service, or (3) patients do not receive certain services.56 WHY HAVE HEALTH CARE Researchers at the Health Care Financing Administration (HCFA) use five economy-wide and health care-specific components to explain why health expenditures have increased. The economy-wide components--general inflation and aggregate population growth--are conditions that affect all sectors of the economy, not just the health care sector. The health care specific components relate only to the demand for and supply of health care services. These include medical care price increases in excess of general inflation, increases in the per capita consumption of health care services, and changes in the mix and content of services and supplies per visit or day. 57 Economy-wide factors accounted for about 65 percent of the increase in health care spending between 1972 and 1982,58 (latest data available). However, the health care-specific factors (representing about 35 percent of the increase) 59 accounted for the increasing percentage of the GNP consumed by health care. 60 It is also the health care-specific factors that appear most likely to be controlled through changes in the health care system. Economy-wide components General inflation, while accounting for almost 58 percent61 of the health care expenditure growth between 1972 and 1982, is caused by many nonhealth care related factors. Although health care is generally viewed as both a victim and a cause of inflation, general inflation cannot be controlled solely through changes in the health care system. Reductions in general inflation that can be accomplished through the health care system will be the result of efforts to control health carespecific factors. Similarly, the other economy-wide factor, aggregate population growth (accounting for about 8 percent of the expenditure increases), 62 cannot be controlled through changes in the health care system. While the health care system has influenced aggregate population growth through decreases in infant mortality and increased life expectancy, the desirability of decreasing population growth and the means of achieving any desired reduction, such as birth control and changes in immigration laws, are largely matters for public policy debate. Accordingly, this report will not dwell on such issues. However, it does discuss the use of alternative and possibly more cost-effective methods of providing medical care to certain persons, including the ever-increasing elderly population. Health care-specific components Generally, numerous factors contribute to spending increases in the health care-specific components. The major economic factors include market imperfections that prevent the competitive market from achieving efficient outcomes. Other factors affecting health care expenditures include the aging of the population, public financing of health care services, and changes in medical technology. Major factors Health economists believe that a major factor contributing to rising health care expenditures is the economic inefficiency that characterizes the health care market. Economic theory holds that in competitive markets, the pricing mechanism allocates scarce resources efficiently. This means that health services of a given quality would be provided at the lowest cost to society. The conditions necessary for competition, however, have not been met in the past in the health care market. Market imperfections precluding competition have occurred in both the demand for and supply of health care services. 63 On the demand side, extensive insurance coverage and government and employer subsidies have insulated consumers from the financial costs of medical care. Because insured consumers have been relatively insensitive to price, they have tended to undervalue the real costs of health care services. Consequently, this 64 might lead to increased consumption of health care services. Moreover, private and public third-party coverage of health care services has reimbursed predominantly on an actual cost basis. Such reimbursement practices have neither rewarded efficient providers nor penalized wasteful providers. Instead this has created perverse incentives to provide health care services in many instances without regard to costs or benefits. Another market imperfection that affects the demand for health care is the quality and availability of information in the market. The uncertainty inherent in many medical decisions and the complex nature of treatment often results in limited ability on the part of consumers to make decisions regarding the appropriate provision of medical care. care.65 In this situation, economic decision making in the health care market is frequently transferred from the patient to the provider. According to some health care experts, physicians have generally been in a position of being able to create their own demand because consumers have had difficulty making fully informed choices with respect to medical need, diagnosis, and treatment alternatives.66 Information on prices and quality of care has also been inadequate in the health care market.67 To a large extent, price information in the past has been restricted by state |