US Health Costs Are Dropping - Before `the Plan'

SOME of the transformations that the Clinton administration wants to take the health-care system through show signs of occurring anyway.

The runaway escalation of medical costs that is driving the push for political action is slowing down substantially, according to Bureau of Labor Statistics data released last week. Health-care costs are still running ahead of general inflation, but the 4.9 percent annualized growth rate in the third quarter of this year was the lowest in 20 years.

Also, the trend toward managed care, which the Clinton plan would promote, has been accelerating since 1990 without government help.

But the marketplace is losing ground on the point that President Clinton has set as the primary goal of his health-care policy - achieving universal coverage. Government figures released this month show that the number of people without health insurance at any one time has risen by about 1.5 million this year to reach almost 38.5 million.

One theory for explaining the slowing growth of health-care costs is that providers of health services are restraining their prices because of the prospect of major health reform. The White House promotes this view, noting that medical inflation also dropped during previous attempts to effect major policy changes on health care during the Nixon and Carter years.

The implication of this theory is that if the reforms designed under Hillary Rodham Clinton's direction are thwarted, medical inflation will spiral upward again - devouring greater shares of business, personal, and government budgets.

Health-care consultants, who are shepherding many changes under way in the business structure of health care, do not discount this theory, referred to as ``the Hillary effect.''

Anticipation of national reform is accelerating the change in the health-care landscape - both businesses and providers of health care are banding together to form larger, more cost-efficient and survivable groups, says John Quinn, a senior manager at Ernst & Young.

But Mr. Quinn and other consultants say that the prospect of reform is not as powerful an incentive in holding down costs as more immediate market pressures.

``Many providers [like doctors and hospitals] realize they must be more cost-conscious,'' says Richard Ostuw, chief actuary for health and welfare business at Towers Perrin, an employee-benefits consultant. Large employers are more ``proactive'' in demanding managed care at competitive rates, he says.

``We're seeing a concerted effort on the part of employers to bring down the cost of benefits,'' Quinn adds. ``They're playing hardball.''

Managed care is set up in different ways, but it generally involves a package of health services with some sort of traffic cop to direct people to cost-effective treatments. The purest form of managed care is the health-maintenance organization, which provides medical services directly but is paid like an insurance firm, so it has strong incentives to keep treatments economical.

HMOs grew fastest between 1983 and 1987, as health care was beginning to emerge as a major business expense. The competitive pressures grew so intense on rates that many HMOs went out of business, and the growth in HMO enrollment dropped. But since 1990, the growth in HMOs has been accelerating again. Enrollment grew 4.3 percent in 1991, 6.4 percent in 1992, and 4.5 percent in the first part of 1993 alone, according to Interstudy Publications, a Minnesota firm that tracks HMOs.

HMO enrollment is now at 41 million people, and the HMOs are bigger and stronger than they were in the 1980s. Compared with 1987, there are 20 percent fewer HMOs today, but they enroll far more people than they did then.

HMO enrollment is no guarantee of cost savings over traditional fee-for-service medicine. A new study by Mathematica Policy Research, the New York Times reported Dec. 27, found that Medicare paid 5.7 percent more for patients enrolled in HMOs than it would have if those patients had been treated under the traditional Medicare fee schedule.

But the problem was with how Medicare set its payment rate for HMO patients. The healthiest people tend to enroll in managed-care programs, while those who use the most medical services tend to stay in traditional arrangements where they pay for what they use. Medicare now pays HMOs about 5 percent less than what the average Medicare patient costs under fee-for-service payment. But the Mathematica study found that the patients who enrolled in HMOs were so much healthier than average that their cost based on fees for service would have been more than 10 percent less than average.

The Clinton administration will have to resolve problems such as these before it can achieve the savings it seeks under its health plan.