With its continuing faith in the power of government to supersede economic forces, the Carter Administration sponsored a bill to force hospitals to cut costs by threatening them with federal controls. The House Commerce Committee, apparently unconvinced that federal controls on hospital costs would solve the problem any better than price controls on other commodities, gutted the Carter bill this month and passed a watered-down version.
As approved by the committee, the bill now asks hospitals to cut their inflation by two percent this year and another two percent next year. It also provides for federal aid to states to set up their own cost control plans and for a presidential commission to monitor cost-cutting efforts.
While the committee deserves kudos for rejecting federal controls, its alternative misses the boat. The soaring cost of hospital care is a national problem, but it won’t be solved by federal controls or moral suasion. Neither Carter’s plan nor the committee’s substitute bill addresses the economic forces underlying the escalation in hospital costs.
Unlike competitive business enterprises, most hospitals are nonprofit organizations. The consumer (the patient) has only imperfect knowledge of the product (medical care) and little basis for comparative evaluations.
Efficient, competitive conditions are also hampered by the financial structure of hospital-care delivery. For one thing, most hospital services are covered by government or private health insurance or same other type of prepayment. The patient has little financial incentive to refuse extra medical care, since the bills will go to Medicare, Medicaid, or an insurance company.
Secondly, most of these third-party payers reimburse hospitals on the basis of their reported costs. This practice, writes noted health economist Victor Fuchs, “appears to be an open invitation to inefficiency.” Not only does the patient lack an economic incentive to go home as soon as possible, but the hospital profits by keeping him in bed and performing tests and services that are not strictly necessary.
Other noncompetitive features of the hospital industry include the rigid medical job categories which prevent assistants from performing many simple tasks now limited to physicians.
Some people try to blame the high cost of health care on the doctors. Although physicians have a high average income, they must prepare themselves by the longest, most expensive, and most rigorous training period of any profession. Even so, doctors’ fees amount to less than 20 percent of total health-care costs. The bulk of the expenditures goes to cover hospital expenses exclusive of payments to physicians.
The unique structure of the hospital system demands a solution that offers an economic incentive to at least one of the parties involved in health transactions — the hospital, the patient, or the insurance program -—- in order to keep costs down and to limit hospital care to what is essential.
One possible alternative to the current cost basis of reimbursement by insurance companies or the government is to calculate a reimbursement schedule based on the average costs of hospitals of similar characteristics throughout a region. Hospitals of below-average efficiency would be forced to cut costs to survive, while more-efficient hospitals would profit by the extra income. As the hospitals introduce cost-cutting measures, the average costs would gradually decline and the reimbursement schedules would be adjusted appropriately.
Blanket federal controls by an ever-expanding bureaucracy and pleas for self-policing, such as those included in different stages of the bill now in Congress, have never successfully reduced prices. It is time we try containing costs by incorporating incentives in the financial end of hospital care.
