Hospital costs - the prime concern at today's hearings have been among the major sources of the health-care cost Since 1966, again excluding the period of wage explosion. and price controls, the cost of a semi-private room has Sharply rising medical costs have also placed a major strain on the Federal budget. Federal government outlays for health care have been growing at 20 percent per year since 1967. In the 1967 fiscal year, when Medicare and Medicaid were first introduced, the Federal contribution to these programs was only $3.3 billion. By 1978, this had risen to $39.1 billion, an average increase of 25 percent a year. Total Federal spending on health care in 1978 will be about $54 billion, or 11 percent of total Federal expenditures. The sources of this massive escalation in medical care costs are complex. One of the important sources has been the separation of the usage of medical services from payment for them. The percentage of medical costs paid for out-of-pocket by patients has been steadily declining, even though the nation has been devoting a progressively greater share of its output to medical care. Today, consumers spend 3.3 percent of their income directly on health care, 1 percentage point lower than the share of personal income devoted to health care in 1964. Meanwhile, the percentage of hospital and other medical care costs paid for by third parties - private insurance companies, or Federal, state or local government agencies has been rising steadily. Currently, all government payments combined account for 55 percent of all hospital revenues. Private insurers pay another 37 percent of the nation's hospital bill. The weakening of the link between a patient's demand for medical services and the amount he must pay for them has greatly reduced the incentives to hold down costs and prices. The result has been spiraling inflation within the health system. Over the past year, we have enjoyed some improvement in the medical care cost situation. Over the 12 months ending this past June, the medical care component of the consumer price index rose 8.1 percent, compared with 10.2 percent in the previous twelve months. The reasons for this moderation are not clear, but they may be closely linked to the primary concern of today's hearings: efforts by the President and the Congress to enact hospital cost-containment legislation. There is good reason to believe that much of this year's improvement in health care inflation stems from the success some states are enjoying with mandatory programs to control hospital costs, and to the prospect that the President and the Congress will enact effective cost-containment legislation during this session. The Burden of Medical Care Inflation The rapid increase in health-care costs imposes significant direct and indirect burdens on the American consumer. Based on the most recent Consumer Expenditure Survey, the average The direct effects of rapidly rising health care costs on consumers is obvious. I need not belabor them further. But what is not so obvious is the large number of ways in which rising medical care subtly and indirectly add still further to inflation. Let me first list these and then briefly discuss some of the more important: O Increases in medical care prices raise the cost and hence the premium for automobile and similar O Rising medical care costs increase the payroll tax rate required to pay for Medicare. The employer share of these taxes is a direct cost of doing business, and the rise is passed on to consumers that tends to be passed on in higher prices. O These direct and indirect effects of rising medical care costs are fed through into higher prices, which in turn give rise to still further - escalator clauses in wage contracts and the general impact of rising prices on the size of wage bargains. This process gives rise to still further price increases, and so the initial impetus is consumer spending. As medical care costs escalate, so does this additional component of living costs. The Medicare Program is financed by a payroll tax of 2 percent today compared to a 0.7 percent rate when the program was inaugurated. An important part of this increase stems from the fact that hospital care costs have risen much more rapidly than inflation generally. Half of these taxes are paid by employers and 33-644 - 78-3 treated as a cost of doing business. This rising payroll tax rate thus adds to cost and price inflation. Business costs have also been increased by the rise in insurance premiums paid by employers. become a major fringe benefit for American workers. In the mid-1950s, employers paid the full cost of their workers' health insurance in only 10 percent of group health plans. By 1970, the proportion had risen to 40 percent. In manufacturing, employee health benefits account for 8 percent of production costs. The importance of health insurance payments to employer costs has grown remarkably in recent years. As an example, the U.S. automobile industry today spends more on health insurance for its employees than it does on steel to build cars. In other words, a 1 percent rise in health care costs has more impact on the price of a car than an equivalent rise in steel prices. Health insurance premiums are the fastest rising component of employer costs. For American industry as a whole, employer payments for health and life insurance rose 100 percent from 1966 to 1972, while wages rose only 47.7 percent. Within the economic profession, there is no clear consensus on the extent to which the higher cost of fringe benefits results in higher prices. On the one hand, new |