regulations banning advertising.68 Fully insured consumers, moreover, have had little incentive to shop for less costly providers and consequently are less likely to be well-informed about the prices of services.69 Furthermore, provider-specific data on the quality of services rendered has generally not been available. From such a position of ignorance, consumer leverage in the market to improve provider efficiency has been very limited.

This situation, however, is changing. In 1982, the U.S. Supreme Court affirmed a court of appeals decision that providers could not be precluded from advertising information on 70 prices, services, and other aspects of medical care. Further, the Tax Equity and Fiscal Responsibility Act of 1982 (Public Law 97-248) established the Utilization and Quality Control Peer Review Organization (PRO) program. Among other things, PROS are to generate information on the quality and appropriateness of health care services provided to Medicare beneficiaries; publish the existence of such information; and make available certain information on patients, practitioners, and institutions, subject to certain limitations.71

On the supply side, economists believe that certain. restrictions in the mobility of resources have also contributed 72 to inefficient market performance. For example, government regulation through certificate-of-need laws has created entry barriers which have limited the growth of potential competitors to hospitals. This may result in consumers having fewer alternative choices when in need of services. In addition, it may be easier for some providers to raise prices because of limits on competition.73

Other health care experts believe that increasing the supply of health care resources will not necessarily result in more competition and lower prices. They believe that whatever the amount of health services available, they tend to be utilized.74 Therefore, these experts attribute rising expenditures to physicians generating their own demand and hospitals acting on incentives to fill empty beds.

Other factors

Public financing of health care services, the aging of the population, and technological advances have also been cited as increasing health care expenditures.

The establishment of the Medicare and Medicaid programs in 1965 and the expansion of eligibility for Veteran's

Administration (VA) health care benefits to any veteran age 65 or older has led to a significant increase in demand for health care services by the elderly and the poor. Expenditures in the public financing and direct delivery programs are also affected by the economic factors discussed earlier.

Because of their predominant role in paying for health care services, the financing programs offer one of the best opportunities for controlling health care expenditures. For example, primarily though the Medicare and Medicaid programs, the federal government is the largest single payer of hospital services. These two programs paid for about 37 percent of all hospital care in 198375 and hospitals have to react to Medicare's and Medicaid's policies in order to participate. Similarly, Medicaid and other public programs financed about 48 percent of nursing home care in 1983,76 giving the government significant leverage in the nursing home market. Through changes in eligibility, covered services, and reimbursement methods and by consumer cost-sharing and encouraging alternative delivery methods, the financing programs have substantial potential to influence how providers deliver care. (See pp. 185 to 214 for a more detailed discussion of the financing programs.)

This

The aging of the American population has continued. aging will result in increased demand for health care services since the elderly spend about 3-1/2 times as much per capita on medical care as younger population groups, This increased 77 demand, in turn, will raise expenditures. While it is important to understand the effect the aging of the population will have on future health care expenditures, it is not a factor subject to control. (See pp. 27 to 30 for a more detailed discussion of the effects an aging population has on health care expenditures.)

Technological change has also been cited as a factor causing higher health care expenditures. However, the overall impact of technology has been difficult to estimate.

According to some health experts, the use of more complex and sophisticated technologies has accounted for a significant percent of the increase in prices beyond inflation. Examples of such advances which have fundamentally altered the nature of the health care product are the CT scanner, intensive and neonatal care units, coronary bypass surgery, artificial hips, and organ transplants. Although many technological advances have been cost-beneficial, some health care literature indicates that the overall effect of some medical technologies has been to make treatments more expensive. Cost increases have been attributed to more frequent use of specialists and diagnostic tests in addition to the more expensive nature of medical and surgical procedures.78 However, technological advances in other areas, such as the development of antibiotics and vaccines, offset the costs of treatment-oriented technology. The magnitude of the offset, though, is difficult to determine.79 Thus, the overall impact of technology on health care expenditures has been mixed. (See pp. 95 to 103 for a more detailed discussion of the impact of technology on health care expenditures.)

WHAT STRATEGIES ARE AVAILABLE TO
CONSTRAIN HEALTH CARE EXPENDITURES?

In considering strategies to constrain health care expenditures, policymakers have a variety of options from which to choose. Since the 1970's, Since the 1970's, many public and private sector strategies aimed at constraining expenditures have been employed.

Public sector strategies have ranged from regulating the health care market to allowing competition to restructure the market. Public policymakers generally have employed an array of options that typically combine features of both the regulatory and competitive approaches. Private sector strategies, which have ranged from more stringent claims review to promoting alternative modes of care, have been undertaken by the health insurance industry, self-insured corporations, for-profit health care companies, and business coalitions.

It is clear from the debate in the health care costcontainment arena that there is no certain way to constrain the growth in health care spending and simultaneously ensure an equitable and efficacious health care system. It is also clear that the multiplicity of competing interests disagree about the potential advantages and disadvantages of various costcontainment strategies. Moreover, the health system is now undergoing major changes that further complicate the situation. Therefore, careful attention to and analysis of the changes underway in the health care system are essential to assess the effectiveness of different cost-containment strategies and to plot a future course of action.

Public sector strategies

Public sector cost-containment strategies fall along the spectrum ranging from economic regulation to encouraging increased competition in the market. Past efforts have been primarily regulatory in nature.

Regulatory approaches

Advocates of the various regulatory approaches for controlling health spending maintain that the health care industry is inherently anticompetitive.80 In response, the public sector has adopted such measures as:

--Planning controls on hospital capacity through certificate-of-need programs that require prior approval before hospital expansion can be undertaken.

to 88.)

(See pp. 87

--Utilization controls of hospital services by requiring hospitals to develop utilization review programs and by creating a national system of PROS to review the appropriateness of hospital care financed by the Medicare and Medicaid programs. (See pp. 162 to 165.)

--Limits on physician fees under Medicare and Medicaid.

--Controls over hospital spending through a variety of means, such as limits to health reimbursements under Medicare and Medicaid, hospital rate-setting, and budget review programs in various states. (See p. 191.)

Attempts have been made in recent years to modify or repeal some of these regulatory programs for many reasons, including what is believed by some to be their burdensome regulatory aspects and their apparent ineffectiveness in controlling expenditures. Others, however, believe that more effective regulation rather than less regulation is necessary to control health care spending, at least until some systemwide changes are made in the present health care system.

Most recently, in 1983, the Congress enacted a prospective payment system (PPS) for hospitals treating Medicare patients. PPS is a regulatory scheme designed to infuse into the hospital sector economic incentives that encourage efficient

performance.

When fully implemented, hospitals will be reimbursed the average cost, nationwide, for treating Medicare patients, according to certain medical classifications, known as diagnosis related groups (DRGs). Subject to certain adjustments, all hospitals will be paid the same amount for treating a Medicare beneficiary classified in a given DRG. Under PPS, hospitals that perform efficiently are rewarded financially because they are entitled to keep the difference between their costs and the prospective rate of reimbursement. (See pp. 192 to 193 for a further discussion of PPS.)

Some health care experts view PPS as an incremental step toward global budgeting in the hospital sector.81 Under such a system, total resources would be allocated prospectively and providers would be expected to work within that budget. Some health economists, on the other hand, view PPS as a step toward greater market competition.82 Under this system, market forces would determine the optimal allocation of resources in the hospital sector.

Competitive approaches

Critics of the regulatory strategies contend that they have failed to constrain expenditures and have actually increased costs to the consumers. What is needed, in their view, is a major restructuring of the American health care system along 83 competitive lines.

Competitive strategies focus on market reforms that increase consumer price-sensitivity and encourage competition among health care providers. These reforms are designed to make the health care system operate more like a properly functioning economic market. In such a market, providers (or sellers) of goods and services are responsive to the choices that price-sensitive consumers (or buyers) express through their willingness to pay for health care.

Advocates of market reform strategies have recommended major changes in (1) the taxation of health benefits and (2) the design and financing of private employment-based health benefits programs. Market reformers have also proposed measures to encourage consumer awareness of both the costs and quality of services purchased with the health care dollar.

Proponents of market reform believe that health insurance purchases should not be subsidized by federal tax policy. Proposed tax law changes include "caps" or limits on the maximum amount of employer contributions for health benefits. Any amount in excess of the cap would be taxable as personal income to employees. Employees would seek out the most competitively priced coverage available in the marketplace under this 84

approach.

In regard to the design and financing of health benefit programs, market reformers support legislation that would, among other things, offer consumers (1) the opportunity to periodically enroll in any one of several health care plans and (2) a fixed dollar amount toward the purchase of a health plan. Persons choosing more costly coverage would pay the extra costs themselves.85

Competitive strategies also address the need for patients to have access to information on the prices and quality of health care services so that they can be more actively involved in medical decisionmaking. Recent PRO regulations attempt to correct for the failure of the current market to provide adequate information by requiring publication of providerspecific data on quality of care. Better information on hospital-specific mortality rates, for example, would be expected to sharpen competition in the area of quality of care and to aid consumers in the process of shopping for health care providers. In addition, initiatives by the Federal Trade Commission to remove the professional ban on advertising of physician and other services should help to promote price competition in the health care market.