Health Cost: What Limit?

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New York .Hospital: "The system is set up to pay for the most expensive means of treatment, rather than the most efficient or economical. It's crazy."

Strange, no doubt, even frightening, but not really crazy. Medical costs do follow a kind of logic, based on two factors that make medicine an economic anomaly:

> Medicine is inherently a sellers' market. The customer (patient) has no bargaining power; he initiates only one decision—to see a doctor. The sellers (doctors and hospitals) then take over; they decide what services the patient needs, and do not ask but order him to buy. Unable to diagnose his own illness, the patient has little choice but meekly to obey.

> In American medicine, government and insurance payments have removed all effective limits on demand, and thus price. Though sellers' markets always tend to rapid inflation, they usually are subject to at least one rough check: prices cannot rise so high that the buyers simply become unable to pay. That used to be true of medicine, too, in the now dimly remembered days when patients paid nearly all the bills out of their own pockets. No more: the saddest irony of the medical inflation is that it has been triggered largely by an effort to bring quality medical care within everyone's reach.

Starting with Blue Cross in the 1930s, and continuing through the post-World War II trend for employers to provide medical insurance for their workers, private insurers have picked up a giant chunk of hospital-doctor bills. In 1965 Congress chipped in, providing Medicare payments for those over 65 and Medicaid assistance for the poor. There are still gaps in the coverage: the 20% or so of the bill that the typical Medicare patient must pay can be a severe burden; the long illness that exhausts inadequate insurance benefits is a terror to the middle class. Nonetheless, the system of "third-party payments" has become so comprehensive that patients today pay directly a mere 6% of hospital bills and 39% of all physicians' fees. The government picks up 55% of hospital bills and 24% of doctor bills; private insurers pick up 37% of each. (The other 2% of hospital revenues comes from charity and other miscellaneous sources.)

Unquestionably, this system has saved innumerable lives and improved the nation's health by encouraging people to seek medical care that they could not otherwise afford (few could without insurance: total payments to doctors and hospitals will work out to more than $3,500 this year for a typical family of four). But the system could hardly have been better designed to fan inflation than if that had been its purpose. It has in effect repealed for medicine the last vestiges of the law of supply and demand, a free market equivalent of the law of gravity, and made health care a market of weightlessness: what goes up keeps going up.

Patients now are asked to produce their insurance or Medicare cards before they state their symptoms; once satisfied that they are covered, they rarely even ask what the treatment will cost. Thus demand expands no matter what happens to the national income. Increases in supply do not hold down costs, as they would in a conventional market, quite the opposite. Hospitals build more beds than there are patients available to occupy them: some 25% of the more than 1 million hospital beds in the U.S. are unused