June 19, 2002
In the early 1990s, general inflation slowed following the surge in oil prices during the Gulf war. Medical inflation, by contrast, showed dramatic acceleration. Hospital costs were rising by double digits, doctors' fees were soaring three times general inflation, and pharmaceutical costs were rising twice as rapidly as general inflation.
Not surprisingly, a political fire storm developed which was only quelled by fear that government involvement, through Hillary Clinton proposals, would be even worse than the medical inflation. Private initiatives also changed the way by which medical services were purchased. Improved administrative costs and more medical resource management by HMO's and PPO's also lowered medical inflation.
A nurse shortage was transformed into a glut as outpatient and drug therapies reduced hospital time per patient. Indeed, medical inflation largely disappeared by the middle of the decade.
Inflation in the doctors' offices remains modest as new technology has lowered some administrative costs. Unfortunately, pharmaceutical prices have skyrocketed while hospital fees have soared almost 9 percent in the past twelve months alone.
Anyone buying pharmaceuticals abroad is aware of huge price discrepancies between the U.S. and the remainder of the world. Bus trips cross the Canadian border to pharmacies that allow people to buy maintenance drugs in bulk at a discount of a third to more than a half of the U.S. price.
In effect, U.S. customers are subsidizing the world as we pay the research while other parts of the world pay only the production and distribution costs of drugs.
Another political fire storm appears to be brewing in pharmaceuticals. With Medicare, Medicaid, state medical aid and government retirement programs purchasing more than 42 cents of every medical dollar spent in the States, government involvement appears to be inevitable.
Yet, no one is sure that any solutions will resolve the medical inflation problem.
Most medical plans already have shifted to the administratively more efficient HMO or PPO structures. There is not another lower cost medical provider out there.
Some surveys indicate that doctors are spending a third of their time dealing with third party providers, whether they are government or private fund disbursers. Emergency rooms are flooded with people, not because they need immediate medical help, but because any other delivery system will not be reimbursed by their, usually government, provider.
By trying to reduce fraud, the reporting needed to get reimbursed for medical services actually raises transactions costs by more than fraud is reduced. Second opinions now are raising costs as most of the unnecessary medical services have long since been discontinued.
In short, administration and transactions costs of providing medical services once again are rising. Furthermore, the shift to drug therapies and outpatient activity are virtually done. As a result, the current nursing shortage cannot be eased merely by changing medical processes.
Also, tougher immigration screening is reducing the ready access to the Irish, Indian, and Philippine nurses that have helped ameliorate earlier shortages.
After dropping from 16 cents to less than 12 cents of administration and transactions costs for every dollar of medical services in the mid 1990s, those costs have now jumped to more than 14 cents.
We also have ignored the tort reform that would allow doctors to treat low risk problems with adequate equipment and practices rather than best equipment. We have not adequately addressed the issues of dying (40 cents of every Medicaid dollar is disbursed for the last 6 months of life). The training of medical personnel also remains expensive and, sometimes, abusive.
In Germany, medical training is paid by the government. As a result, heavy debt does not follow the new physician. They do not feel compelled to charge high fees for their services, and the cost of medical services in Germany is less than two-thirds the U.S. costs per patient.
The last time I wrote a column about some of the inadequacies in the medical sector, I received a letter from an AMA official. His appeal was how much I would be willing to pay for my loved one. My reply was why should my sick loved one exhaust my resources so my children cannot be educated, my spouse cannot be adequately clothed, housed and fed, and my community cannot be adequately protected.
Let us get over asking what we would pay for the health of a loved one. We do not have enough resources to pay for the best of everything that I would wish to provide for my loved ones. Instead, let's begin asking why I am paying more than I should.