Health Cost: What Limit?

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on any given day. Then the hospitals must charge more than ever to cover the cost of maintaining those empty beds. A case in point: New York City spent $200 million on its ultramodern 510-bed Woodhull Hospital in Brooklyn, then found it had a city wide surplus of some 3,000 beds. But since the city would have to spend $20 million a year to mothball the "dream hospital," it plans to put it into operation eventually, at a cost now estimated as high as $400 per bed per day.

The supply of doctors has increased gradually to 2 per 1,000 population from 1.5 in 1960. But to the chagrin of classical market theorist, no competitive fee cutting has occurred. Indeed, one physician calculates gloomily that every time a new doctor begins practice the nation's medical bills go up another $250,000 a year. Reason: the typical physician generates that much additional business in the tests and hospital admissions.

That might not be the case if the insurers and government bureaucrats who pay the bills kept a sharp eye on costs. But they do not. The Blue Cross movement, which affiliated with the American Hospital Association in 1937, has not rigorously questioned hospital bills until recently. Congress, when legislating Medicare and Medicaid, tacitly agreed to forget about cost controls as part of a bargain to keep the medical profession from opposing the program. Instead, one of the ways the Government reimburses hospitals for the care of Medicare-Medicaid patients is on a "cost plus" basis, and it asks few questions about the cost. Blue Shield and commercial insurers generally pay "usual, customary and reasonable" physicians' fees (U.C.R. in medical jargon). That gives doctors an incentive to charge all patients top dollar, so that they can establish those fees as U.C.R.

The few fumbling attempts to contain costs have not worked. In Massachusetts, for example, Blue Shield has established maximum fees for various medical procedures but so far has refused to tell doctors what the maximums are, lest everybody charge them. Many doctors do anyway. A Boston specialist's secretary explains: "Suppose we charge $45 for a service and then we learn that another doctor is being paid $65 for the same service. We then cannot ask $65 even though we may be as good or perhaps better. Blue Shield permits us to raise our prices by a small percentage from time to time, but we will never reach the maximum allowable. So the answer is to charge the insurance people well over the maximum. For a biopsy, we may put $110 on the insurance form. If the insurance company returns us $90, we know that is their maximum, and we then charge accordingly."

Some insurance practices operate directly to drive up costs. Many insurance companies will pay for lab tests only if they are done in a hospital on a supposedly sick patient. The result is to encourage hospitalization of untold thousands of people who could be diagnosed and/or treated at far less cost in a doctor's office. Says one Houston physician: "Say a man in his late 30s to early 40s complains of chest pains. I tell him he needs a thorough physical. In the office my fee would be $45, the tests $250, for a total of $295. But I have to put the patient in the hospital, so his insurance will pay for it. Everything is slow in the hospital, so figure he will be there three days. The cost increases