Is Health-Care Reform Having Effect on Costs?

THE latest figures on the rise of medical prices in the United States raise again the issue of whether the health-care industry can reform itself, or whether Congress should eventually pass major reforms.

In August, at the peak of this year's national debate on health care, medical prices rose at half the pace of three years ago. They were 4.6 percent higher than a year earlier, a figure that has held steady for several months now.

In the past, medical costs have slowed their climb when Congress was debating major health-care legislation. When the debate ended, costs began to climb again.

Medical costs are generally the fastest-growing expenses these days for both state and federal budgets and are becoming increasingly burdensome on businesses as well. But the rise of medical inflation has fallen off sharply in the past few years from 9.6 percent in 1990 to 5.4 percent in 1993.

The current 4.6 rate is the lowest level in more than 20 years, although it is still about 1.7 percentage points above general inflation.

Almost all the slowing of medical inflation, says Deborah Shollet of Alpha Center, a health-policy research organization, can be attributed to ``the health care industry minding its P's and Q's while Washington debates its fate.''

Yet this time, a major reordering of the health-care system is under way without direct action from Washington. Businesses are aggressively trying to hold down their costs and forcing health-care providers to organize themselves for more economic efficiency.

``A lot of things are happening, and they are happening at a very rapid pace,'' says John Sheils of Lewin-VHI, a health-insurance research firm in Vienna, Va.

The share of Americans in health-maintenance organizations was 16 percent in 1987. Now it is 25 percent, and another 25 percent are in networks of physicians and hospitals that agree to lower rates for the business of an insurer. At this rate of growth, by the end of the century 75 percent will be in organized systems of care, according to Mr. Sheils.

``I don't see any reason why it won't continue,'' he says. ``It's being driven by cost pressures.''

LEWIN-VHI has found that managed-care plans on average are saving 4 to 7 percent over traditional fee-for-service health insurance just on lower or more efficient use of medical services. That saving alone, Sheils notes, is enough to pay for most of the uninsured in the country.

In addition, managed-care plans typically negotiate discounted fees from doctors and hospitals. Many of those discounts, however, are shifted onto higher fees charged to the remaining traditional insurers.

Sheils says that Lewin has measured a lower rate of spending growth in managed-care plans than under traditional insurance, perhaps because of more cost-conscious ways of introducing new technologies - a major driver of medical inflation.

As managed-care plans squeeze the many inefficiencies out of the system, then health care may hit the steep upward cost curve again. ``I don't think the success that a lot of businesses have gotten with managed-care plans is likely to continue,'' says John Holahan, director of health policy at the Urban Institute, a research organization.

The underlying causes of medical-care inflation are incredibly expensive new technologies, general inflation in the economy, and even higher inflation of compensation in the medical field. Even a very efficient industry is vulnerable to those pressures, notes Dr. Holahan.

Even the most optimistic views of medical inflation acknowledge that overall health-care spending will continue to rise faster than general inflation.

Major reasons include an aging population and an increasing use of medical services.

As the market becomes more efficient, Americans will still need to face more fundamental questions than they have in debating health-care reform, says Gail Wilensky, former administrator of the Health Care Financing Administration, which runs Medicare and Medicaid.

``Are we willing to do things in a different way or not?'' she asks. ``Do we want easy access to new technologies and specialties or do we want to moderate costs?''

The number of people outside the system - the uninsured - also continues to rise, and that poses a problem as the looseness in the system is squeezed out and those people are harder to pay for.

``We need to decide what to do about the poor and uninsured,'' says Dr. Wilensky.

If Washington does not reform the health-insurance system, then some states will step in.

Most states have already enacted some form of insurance reform, and a few states - Washington, Oregon, and Minnesota - have enacted significant changes in their health-insurance systems.

But they need Congress to waive legal barriers before they can take effect.