Why does it cost so much for health care?

• Author: Liebowitz, Stan

THE PERCENTAGE of the gross national product devoted to health care has been rising for several decades. That fact figures prominently in the claim that health care is devouring too many of America's resources and, therefore, the health system needs to be overhauled.

The focus on the share of GNP devoted to health care seems somewhat unusual. For example, there does not appear to be any concern over the share of wealth devoted to shoes, automobiles, or housing. Moreover, there are many products, such as recreational activities, whose share of GNP rises as wealth increases, yet there is no concomitant clamor to reduce expenditure on them, as there is on health care. The burgeoning share of GNP devoted to health care, by itself, is not evidence that the system is in need of repair.

More telling are attributes of health care delivery that make it inefficient, foremost among which is the reliance on third parties-insurance companies and the government--to pay most medical costs. Because patients pay an average of 23 cents on each dollar of medical expense, there is only a weak linkage between consumers' use of medical resources and the payments made by them. When the direct linkage between use of medical facilities and payment is broken, consumers lose their incentive to economize.

Analysis indicates that the high medical costs are the result of various government policies that have removed patients as purchasers in the medical marketplace. While that may be no more than the unlucky result of misguided policies, it is detrimental to the health of medical markets and eventualy may prove deadly to the health of many Americans.

The proper diagnosis of medical problems has been obscured by the demonizing of certain components of the medical industry. For instance, the Clinton Administration at various times has blamed the pharmaceutical industry, medical specialists, and health insurance companies for causing high prices and excessive medical expenditure. Such charges miss the underlying reasons for the current poor health of the medical delivery system and diminish the ability to repair it. The failure to understand the causes of higher medical costs also was apparent in the Clinton proposal to revamp the nation's health care system, which would have increased reliance on government and third-party payments.

Several competing proposals have been suggested. Among them are some that adopt, at least in part, the medical savings accounts and tax-law changes proposed by John Goodman and Gerald Musgrave in Patient Power. Central to that approach is the weakening of third-party payment mechanisms and the re-establishment of the patient as both the consumer and purchaser of medical services. By putting consumers back in control of their money, it is possible to restore the vitality of the medical sector.

The excessive costs of the current medical system can be classified into three major categories: The first, and by far the largest, is due to overuse of medical resources by consumers who do not have to pay the entire cost of the medical services they utilize. The causes of those excess costs are Medicaid, Medicare, and tax laws that provide incentives for individuals to have their employers purchase their medical care in the form of private health insurance.

The second consists of administrative and paperwork expenses that are unnecessary for the provision of health care, but have come into existence because of the current patchwork of third-party payers and their attempts to control their increasing costs by...