Here's to Your Health

Either we take steps to halt the escalation of health care costs or we make plans for the higher bills to be paid.
June 2002
John E. Petersen
By John E. Petersen  |  Columnist
John E. Petersen was GOVERNING's Public Finance columnist. He was a Professor of Public Policy and Finance at the George Mason School of Public Policy.

The economic slowdown of last year demonstrated yet again that the state and local government sector does not float above the private sector. That reality is rearing its head now with health costs and the increasing inability to either contain them or at least finance them.

This is true not just for Medicaid and other public health programs but, more to the point, for employee insurance.

For states and localities, the unhealthy numbers run this way: There are some 15 million full-time state and local workers. Their annual wages add up to about $600 billion. In addition, they receive benefits, including health insurance, which alone equals about 10 percent of wages. So the health costs to states and localities are in the area of $60 billion. Since public employees, just as those in the private sector, usually contribute to health insurance benefits, the entire sum spent on health insurance is more on the order of $100 billion. That cost is now increasing by double digits and will continue to do so.

The growth comes on the heels of a period of relative calm. One of the great--if temporary--victories in achieving low inflation rates in the early 1990s was the containment of health care costs. The key solution was the adoption of managed care--letting insurance entities such as health maintenance organizations use their leverage to force down health-provider fees and limit patient use of services. But after helping make drastic cuts in health care expenditures from 1993 through 1997, the approach ran into popular and political opposition. HMOs lost much of their ability to check increases, and they are currently operating on thin margins.

Now, the cost of health services is rising again. In one sense, it is part of a trend that reaches back nearly 20 years. To get an idea of the relentlessness of the growth curve, the overall cost-of-living index grew in the period from 1983 to 2001 by 75 percent. For some things such as shoes and clothing, prices grew by only 15 to 20 percent. But medical-care prices grew by 177 percent overall, with drugs and hospitals moving up by a heart-stopping 207 and 250 percent, respectively. Medical expenditures now represent more than 15 percent of consumption spending, and the share grows every year.

The causes for the most recent increases are manifold, ranging from the aging of the population to the rapid development of new medical technologies and the increased use of drugs. But the root cause is the political difficulty of either doing something to halt the trend or, if the rising cost is accepted, then planning for the higher bills to be paid.

Although a huge number of people are uninsured, the American approach is to leave the provision of medical services as much as possible in the private sector and to subsidize it--even if selectively, as with Medicaid and Medicare--from the public sector. Freedom of choice of service and freedom from having to pay for it are the twin lodestones of popular demand.

But who will pay for those demands? When health care costs first started to rise faster than inflation in the late 1990s, state and local governments were in a strong fiscal position, with salary levels in check. The health care increases could be absorbed. Now, in a slower economy, things are different. Health care insurance premiums rose at a rate of more than 10 percent in 2000, and by more than 12 percent in 2001. According to estimates by health care providers, premiums will rise by 12 to 15 percent this year. For many governments, especially small ones, the rise could run to 25 percent or more. In fact, you don't have to be small to see big increases in premiums. CalPERS, the giant California pension fund, which has health care programs for 1.25 million employees and retirees, is projecting a 25 percent increase in premiums. How much those premiums will be divided between the employer and employee will be a key question.

It is not a foregone conclusion that the nation's preference for health spending is a bad thing. People want health protection, and there is economic evidence that it brings substantial benefits. Public employees are well justified in seeing health care as a valuable benefit.

The difficulty is the monumental reluctance to present the health bill to the public. Costs are buried, and the subject is avoided. The rapid disappearance of the federal surplus, not to mention the budget woes of states, amply demonstrates that it is unwise to adopt policies (including multi-year tax cuts) based on a few good years as opposed to long-term trends. As David Walker, the U.S. comptroller general, has pointed out, members of today's relatively large workforce must increase savings and thereby increase future productivity. In future years, their ranks will diminish, while those of dependents will increase. Hard decisions need to be taken now to avert the future crises of a rapidly aging nation that wants good health but refuses to pay the bill.