Health Economics Outlook: Two Theories of Health Economics

By Musgrave, Gerald L. | Business Economics, April 1995 | Go to article overview

Health Economics Outlook: Two Theories of Health Economics


Musgrave, Gerald L., Business Economics


Annual U.S. Health care expenditures will be approximately $1 trillion at the end of 1995, compared to an expected Gross Domestic Product of approximately $7.1 trillion. If the exponential growth of health care were to continue as an ever-larger share of our economy, even with the most recent slowing of health care costs, the year 2058 would be historic.

By then, our whole GDP would be health care! This is, of course, impossible. The first important conclusion is that health care costs will be contained. The issue is, how will they be controlled? Will health care costs be controlled primarily through markets or primarily via politics? Another preliminary point is that, on a macroeconomic level, health care is not only a use of our national output (where the money goes), it is equally a source of our national output (where the money comes). Reducing the growth in health care services would have the same macroeconomic impacts as reducing growth in automobile sales or the production of financial services.

The next sections present a brief overview of the health care industry. Then I will explain why we have so much trouble with health care policy. And finally, I will present an innovation that I think will be at the center of health care reform - if there is health care reform.

INDUSTRY PROFILE

Figure 1 displays the source and amount of health care funds for 1995. Private health insurance will pay for about one-third of the total and the two major government programs (Medicare and Medicaid) will pay another third. Smaller government programs such as the Indian Health Service, Dept. of Veterans Affairs, DOD, Public Health Service, County Hospitals, etc. will spend about 13 percent. Out-of-pocket expenses, including copayments and deductibles as well as direct payments, will account for only 17 percent of the $1,043 billion total.

The uses of health care funds for 1995 are shown in Figure 2. Hospitals will receive the largest share of the pie, a little more than one-third of the total. Physicians will receive about one-fifth and long-term care will receive about one-twelfth of the total. Almost one-quarter of the payments will go to smaller sectors, such as glasses, pharmaceuticals, home health care and dentistry. More than 6,000 short-term hospitals have 35 million admissions each year. Nine million people are directly employed in the industry, with at least 4 million others indirectly employed. Employment growth will be in the range of 4 percent based on hours worked and about 7.7 percent annual growth measured by nominal payrolls.

In terms of current earnings that health care providers receive, 46,000 chiropractors earn a median of $70,000 each, and 183,000 dentists have median earnings of about $90,000. Physicians, 450,000 in number, earn a median of $150,000 each. (The number 450,000 for physicians might surprise you, because 600,000 is often printed in the newspapers. The latter represents all living physicians, the former represents those physicians actually delivering patient care. The difference represents those in retirement, in management, selling real estate and other activities not directly delivering patient care.) There are large differences in wages, such as nurses vs. nurses aids, family practitioners vs. cardiac surgeons, and hospital CEOs vs. department managers. Business economists at $80,000 are fight between chiropractors and dentists.

As shown in Figure 3, only 4 percent of the public is covered by traditional unmanaged fee-for-service care; 96 percent of coverage is managed. The largest single component, 41 percent, continues to be fee-for-service, called indemnity in the figure. However, those plans contain many of the restrictions and incentives of better known managed care plans, such as health maintenance organizations (HMOs). They include mandatory second opinions, prior authorization, utilization review, year-end bonuses and "hold backs" based on cost goals.

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