Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, January 11, 1994 TAG: 9401260012
SECTION: EDITORIAL PAGE: A5 EDITION: METRO
SOURCE: JAMES K. GLASSMAN
DATELINE: LENGTH: Long
The Labor Department says health-care prices rose just 5.5 percent in the 12 months ending in November 1993 - the smallest increase since 1973.
Not just prices are slowing. Personal expenditures on medical care rose only 5 percent during the first three quarters of 1993, compared with more than 8 percent in 1992.
While these figures - and others like them - are good news for the economy, they may be bad political news for the president and his wife, Hillary Rodham Clinton.
The notion that health-care costs are soaring wildly is the foundation of the Clintons' plan.
The text of the presidential report issued in October states: ``After years of attempting to slow the frightening rate of increase in health-care costs by tinkering with the existing system, it is clear that only comprehensive reform will work.''
But something else is already working - the free play of supply and demand. It's a phenomenon we've seen repeatedly: When the government moves to intervene to solve a market problem, that problem is well on the way to being solved.Remember synthetic fuels?
Here's the way market forces seem to be working in health care: Private firms are putting intense pressure on insurance companies to freeze or cut premiums, and the insurance companies are putting pressure on hospitals, doctors and pharmaceutical makers.
Employers also are limiting the choices their workers can make about health care, guiding them into HMOs and other managed-care groups.
They're also making employees pay a little more of their health bills themselves.
These steps cool a demand that has been artificially heated by the immense tax advantages that employer-paid insurance enjoys.
The result: A new U.S. Chamber of Commerce study of 1,100 corporations found that the average cost to employers for medical and dental insurance actually dropped between 1991 and 1992 - from $2,811 to $2,754 per worker.
On the other side of the supply-demand equation, more and more firms have entered the health-care business in search of big profits.
But as supply has increased, margins have dropped. Earnings at U.S. Surgical, the high-flying medical equipment manufacturer, fell 71 percent last year.
Look at the drug industry. Today, it's a free-for-all, with aggressive generic manufacturers, mail-order pharmacies and biotech companies battling for a share of a $70 billion business that's expected to grow by just 3.5 percent next year.
According to data in Forbes, return on equity dropped last year for each of the six most profitable drug companies, the median decline being 47 percent.
Eli Lilly and Co. notes that the top five drug companies now account for only 30 percent of the market, while the top five beer companies account for 90 percent and the top five automotive companies, 80 percent.
So it's hardly surprising that the new consumer-price-index figures show prescription-drug prices rising just 3.3 percent in 1993, compared with 5.7 percent in 1992 and 9.4 percent in 1991.
The results of this new supply-demand equation are turning up in health premiums paid by smaller companies.
Peter Corbino, a partner in the Business Insurance Group Ltd. in Arlington, said that one of the insurance firms he represents has not raised rates on ``a single client of mine'' in a year. In the past, double-digit hikes were common.
Average premiums charged by private insurers were up just 3 percent this year for the 9 million government workers who participate in the highly competitive Federal Employees Health Benefits Program.
For the Clinton administration, the timing couldn't be worse.
In about two weeks, just as Congress is reconvening, the Labor Department will issue its final health-inflation figures for 1993, and attention is certain to focus on the lowest rise in two decades.
``These numbers are going to be discussed a lot this year,'' said Henry Aaron, director of economic studies for the Brookings Institution. ``A lot of people are going to be saying, `This is under control, not to worry.' ''
Aaron himself does worry. He believes that even if competition is forcing medical costs down, repairs still need to be made. He and other experts also think the recent moderation may be partly due to the increased scrutiny health providers are getting from the government and the public.
``Jawboning'' is the word used by William Custer, director of research of the Employee Benefits Research Institute.
Steve Raetzman, of the consulting firm Towers Perrin, calls it an ``anticipatory effect.''
Maybe. But I suspect that the health-care industry - which grossed $900 billion last year - is too big and diverse to conspire to hold down prices until the threat to its independence blows over.
Shareholders tend to object to this sort of thing.
Besides, the slowdown in health costs began three or four years ago, when Bill Clinton was generally known only as a long-winded orator from a small state.
In fact, the explanation for the slowdown is fairly simple: The cost of anything just can't keep going up forever.
As obvious as this principle is, it's often ignored by policy experts, who conclude that if it rained yesterday and it rained the day before, then it will rain for the next year.
Left to its own devices, the market will almost certainly bring health-care costs into line. But do politicians have the courage to leave the market to its own devices? We'll soon find out.
\ James K. Glassman is former publisher of the Atlantic Monthly.
\ The Washington Post
by CNB