US health programs: the budget's unruly sibling. Given the rising costs of medical care, some experts say reforms are needed to control costs

Health-care spending is the unruly kid brother of the United States budget. It is now the fourth-largest budget category, behind defense, social security, and interest on the national debt. And it is growing fast -- during the Reagan years it has increased 41 percent, to $93 billion.

There are spots where federal health spending can be trimmed, experts say. But the skyrocketing costs of health care means this budget item will just keep getting bigger by the year.

``Once I was in David Stockman's office,'' says a health-care expert who wishes to remain anonymous. ``He asked me what to do about medicare costs. I said, `Order more checkbooks.' ''

Washington's multibillion-dollar involvement with the health care of US citizens dates from the days of the mid-1960s, when $100 billion deficits were only a speck on the horizon. That's when the medicare and medicaid programs were approved by Congress.

Medicare, financed largely by its own tax, pays health benefits to a broad section of the US electorate, including most elderly and many disabled people. Medicaid, on the other hand, is a welfare program, run jointly with states, that this year will defray health costs for some 23 million poor Americans. Together, medicare and medicaid account for some 90 percent of the category labeled ``Health'' in the US budget. The balance goes for research, education, and work health programs.

(There are, in addition, large health-care sums tucked into the defense budget: The Pentagon spends some $10 billion on health care for military personnel. Veterans Administration hospitals cost $9 billion annually.)

The rambunctious growth of federal health spending is in part caused by the fact that more people have become eligible for the programs over the years. Medicare had 21 million enrollees in 1966; today there are some 30 million. In addition, health care has become more expensive: Since 1970 health costs have risen some 35 percent more than general inflation.

An item this large and fast-growing is bound to catch the eye of budget-cutters, and in fact Congress has been taking some serious whacks at health spending. Medicare physician fees have been frozen, medicaid funds capped, and some beneficiary fees increased; altogether, some $14 billion has been saved since 1981.

Most important, Congress voted to change the way medicare pays hospitals. The new ``prospective payment'' system allots hospitals a fixed fee for each medicare patient, based on that patient's diagnosis. It's a tough tool for the tough job of holding down medicare costs.

``Passing prospective payment was a minor miracle,'' says Louise Russell, a Brookings Institution senior fellow in health care.

Further health-care cuts lie ahead. In the short term, legislators are liable to tweak the federal health system in an effort to shrink awesome deficits; in the long term, Congress must do something to keep medicare from going bankrupt. Medicare will run dry in 10 years, its board of trustees estimates, unless its payroll taxes are raised, or benefits changed.

Health-care cuts that may be considered in the near future include:

Medicare hospital payments. Hospital fees make up two-thirds of medicare spending, and are the place Washington may look for ``quick savings,'' notes a congressional health-budget expert.

One way these savings might be accomplished: holding down prospective payment's fixed-fee schedule. These fees are adjusted to reflect inflation each year; a relatively small increase could save billions by keeping spending below projected levels.

``You could certainly squeeze the hospitals more,'' says U. E. Reinhardt of Princeton University, who studies the health-care delivery system. By international standards, Professor Reinhardt claims, US hospitals are overstaffed, and with present medicare rates ``make a pretty penny.''

Hospital trade-association officials, on the other hand, assert that their industry has already been squeezed by the imposition of prospective payment, and that it is someone else's turn to take the rap.

Medicare doctor payments. Payments to doctors account for about one-third of medicare outlays. They would be somewhat more difficult to cut than hospital expenditures, experts say.

Last June, Congress slapped a 15-month freeze on medicare doctor fees, for an estimated savings of some $2 billion. This freeze could be extended in an effort to save more money. But experts are not sure it is really working, since doctors are free simply to perform more services for each patient.

One way to plug this loophole would be to change medicare's doctor fee structure, and pay physicians a flat fee for each patient, instead of paying them for each service performed, as is now the case. Such a change could eventually save billions, and is being studied by the Reagan administration. But such a drastic change probably will not happen this year, say sources.

Medicare cost-sharing. Requiring medicare beneficiaries to shoulder a greater share of their medical costs could also trim the giant health program.

Currently, medicare beneficiaries pay a deductible equal to the average cost of one day's stay in the hospital -- $356 last year -- when they check in for treatment. Doubling this deductible, and charging it for each hospital stay instead of once a year, would save almost $2 billion annually. In addition, raising the deductible for medicare's supplementary medical insurance from $75 to $86 would save $200 million.

Medicaid. Since 1982, Washington has been gradually cutting back its contribution to the joint federal-state medicaid program. If Congress continued this trim, lopping off 3 percent annually, $1.3 billion could be saved over the next three years.

Tax employer-paid health insurance. Currently, employees do not pay taxes on income received as employer-paid health insurance.

If employer health-plan contributions of more than $200 a month for families and $80 a month for individuals were treated as taxable income, $24 billion could be raised over five years. In addition to all these trims, a few dollars might yet be squeezed out of the ``miscellaneous'' portion of the health budget, which includes health-research funding.

``Cutting'' the federal health budget in the ways suggested above would help trim the deficit, as government spending would be kept lower than projected levels. But the health budget itself will inevitably keep getting much larger. All the changes would do is slow its rate of growth.

Medicare is the main engine of this increase. In fact, unless changes in its structure are made, medicare is projected to go broke sometime in the early 1990s.

One reason is that it must pay for an increasing number of beneficiaries, as the US population ages. But the main reason medicare is getting more expensive is that per-patient medical costs, in general, continue to run wild.

The cost of individual medical services, such as operations and tests, is rising faster than the rate of general inflation.

In 1984, health-care inflation was 6.3 percent; the consumer price index overall went up 4 percent. And each US patient is using more and more medical services, as well. The use of intensive care has mushroomed since the 1960s, experts note; once-rare techniques such as open-heart surgery and kidney dialysis are now commonplace.

The best way to hold down federal health spending, then, might be to attack the root causes, instead of the symptoms, and enact policies aimed at slowing the rise in all health costs, note experts. But this involves extremely difficult choices. Should we devote fewer resources to spectacular, but expensive, procedures such as the artificial heart? Will health care have to be rationed?

``My view is that [health-care cuts] definitely affect the quality of care. They have to -- that's essentially the choice we're going to have to make,'' claims Louise Russell of the Brookings Institution.