by Robert R. Ebert, Buckhorn Professor of Economics
October 2003
This debate and concern comes at a time when benefits of the U.S. health care system are quite apparent: medical research with consequent diagnostic, pharmaceutical, and treatment strategies enables health care providers to work more effectively with patients to manage illnesses.
• Life expectancy for someone born in 1990 is seven years longer than for someone born 40 years earlier.
• The mortality rate for coronary heart disease has declined 40% since 1980.
• The rate of disability among senior citizens has declined 20% in the last twenty years (CEA 2002, 145).
In spite of this progress in health care, challenges remain. This article endeavors to survey the major issues confronting the U.S. health care system in the early 21st Century. No attempt is made to cover any single issue in depth. However, policy alternatives will be explored where appropriate.
The Major Issue: Uncertainty
Uncertainty is pervasive in the health care field. Random events (accidents, sudden illness,etc.) bring people in contact with health care providers. Individuals are concerned they may have an illness. Providers face uncertainty in prescribing appropriate treatment. Patients may be uncertain regarding their physician’s approach to a medical problem (Phelps, 5-7).
Uncertainty also exists in terms of what to expect in health care costs in the future. As the population ages, there are likely to be more demands on the health care system. Will that push up costs? As technology advances, will that create still more cost pressures? What trade-offs between the adequate provision of health care and costs can be made?
Health Care Costs
Figure 1 demonstrates
that health care costs have been rising more rapidly than the general cost of living index (as measured by the Consumer Price Index for all Urban Consumers) since the mid-1980s. The President’s Council of Economic Advisors attributes rising medical expenditures to innovations that have improved the quality of medical care. Because of the expanding capabilities of medical care, the U.S. spends 13.4% of Gross Domestic Product on health care. Forecasts suggest health care costs as a share of the GDP will grow to nearly 16% by 2010 (CEA 2002, 145-146).
The rising cost of health care raises the question of affordability. Almost 17% of Americans lack health insurance. Those with health insurance are concerned about price versus value of their health insurance plans. Whereas per capita nominal Disposable Personal Income grew 193% from $8869 to $25957 from 1980 to 2001, per capita expenditures on health care grew 369% over the same period from $931 to $4370. However, out-of-pocket payments accounted for 16.6% of health care expenditures in 2001 compared to 27.1% in 1980. Third-Party payers, therefore, are now picking up 83.4% of health care costs compared to 72.9% two decades ago (CEA 2003 and CMS, Table 4).
Does health insurance create what economists call a “moral hazard” problem? There is concern that since insurance reduces the out-of-pocket health expenses of consumers, they will consume increased amounts of medical care. The increased demand raises the price of medical care. The “moral hazard” problem is that health care demands by insured persons may go beyond the point where the benefits of the care are justified by the increased costs (Phelps, 336-338).
The “moral hazard” problem raises interesting questions. For example, should Medicare and Medicaid be expanded? Should the U.S. adopt a government sponsored universal health insurance program covering all persons? How much would society be willing to pay for such a program and what would the trade- offs be?
One of the responses to rising health care costs in the 1990s was the development of controversial Health Maintenance Organizations (HMOs). Some studies show that in routine management of chronic illnesses and provision of preventive care, HMOs perform better than fee-for-service health care/insurance programs. However, other studies show that in managing patients with complex illnesses, fee-for-service plans do better than HMOs. The public perception has been that overall HMOs provide worse care than fee-for-service plans. As a result, in the 1997-2002 period employee enrollment in traditional HMOs declined from 31% to under 23% while employee enrollment in preferred provider plans increased from 42% to 70% (CEA 2002, 151- 152).
The Council of Economic Advisors suggests that a system of tax credits for health insurance 
premiums be developed to enable persons with limited means and/or high health care needs to participate in mainstream health plans (CEA 2002, 185). It would not be surprising to see some sort of tax credit system developed during the next few years. The Bush Administration has proposed $89 billion of tax credits over a decade to help individuals buy insurance. Democratic plans are even larger with one requiring employers to offer health insurance to workers and gives employers a tax credit worth 60% of their share of the costs. One of the obstacles to enactment of any of these plans, of course, is the rising federal deficit (McGinley, A4). Nevertheless, the debate over the prescription drug benefit plan and the advancing of proposals for tax credits indicate that politicians from both sides of the political spectrum see the health care cost issue as a priority.
Surplus to Shortage
During the 1990s, pressure from Medicare, HMOs, and other third party payers combined with an emphasis on outpatient care caused hospitals to reduce capacity. Figure 2 shows summary data for admissions, number of hospital beds, and outpatient visits. Data that are available from more recent years suggest that inpatient admissions have continued to be in the 35 to 36 million per year range while the number of beds has not increased significantly since 2000 (AHA).
The Health Care Advisory Board (HCAB) cites the following as key drivers of the increasing demand for hospital services (Advisory Board, 40-41):
• Large population growth during the past decade, in part due to immigration with the result being a greater number of uninsured patients
• Population aging with the baby boomers entering the 55 to 65 age range
• Consumer expectations
• New clinical diagnostic techniques
• Liberal employer health benefits.
As these trends play out in the health care market place, they have caused some challenging problems including a shortage of clinical staff. In 2002, the national vacancy rate for Registered Nurses was 11%, and 18% for radiology technicians (Advisory Board, 72).
The nursing shortage is the most visible problem to most health care consumers. How serious the shortage of RNs is a matter of some debate among health care analysts. The HCAB points out that the number of nurses employed at hospitals increased modestly but steadily during the 1990s from 1.04 million in 1989 to nearly 1.3 million in 1999. And, in spite of nurses’ concerns with inflexible work schedules, low compensation, and general working conditions, the turnover rate for nurses is 15% compared to 19% labor turnover in all industry and 27% in service industries in general (Advisory Board, 78-79).
The American Association of College Nursing (AACN), however, points out that between 1995 and 2002 the number of U.S. educated nursing school graduates who sat for the national licensure exam for RNs decreased from 96,438 to 66,286. The AACN also notes that by 2010 more than a million new and replacement nurses will be needed because of increased health care demands and retirements. The average age of working RNs in 2000 was 43.3 years compared to 42.3 in 1996 and the proportion of under age 30 RNs declined from 25% in 1980 to 9% in 2000 (AACN).
The Health Care Advisory Board, though, remains cautiously optimistic that a combination of new graduates entering the RN work force and older nurses working longer will offset the potential nursing shortage (Advisory Board, 80-81).
Concluding Observations
The health care challenges facing the U.S. have many dimensions including the following:
• How much of the population can and will we cover with health care insurance?
• What are the private sector vs. public sector trade-offs and what is the role of competition in the health care marketplace?
• Can costs be contained and yet have an environment that provides incentives for new technologies and pharmaceuticals that improve the length and quality of life?
This article has not presumed to offer solutions to these critical challenges. However, what is clear is that the national debate on health care is one of the key issues confronting American society in the early 21st Century. It also is clear that how the country responds to these challenges is as likely to be driven by political imperatives as by strictly economic factors.
Works Cited
Advisory Board (The). The Economics of Care. Washington, DC: The Advisory Board Company, 2001.
American Association of College Nursing (AACN) “Nursing Shortage Fact Sheet” accessed at <http://www.aacn.nche.edu/media/Backgrounders/shortages/shortage facts.htm> on June 17, 2003.
American Hospital Association (AHA) “Fast Facts on U.S. Hospitals.” Accessed at <http://www.hospitalconnect.com/aha/resource_center/fastfacts/fast_facts_US_hospitals/html>, on July 16, 2003.
Centers for Medicare and Medicaid Services (CMS). National Health Expenditures Tables, accessed at <http://cms.hhs.gov/statistics/mhe/historical/>.
Council of Economic Advisors (CEA). Economic Report of the President 2003. Washington, DC: United States Government Printing Office, 2003. Council of Economic Advisors (CEA). “Promoting Health Care Quality and Access,” Economic Report of the President 2002. Washington, DC: United States Government Printing Office, 2002, pp. 145-186.
McGinley, Laurie. “Democratic Hopefuls Bash Medicare Plan.” Wall Street Journal, July 8, 2003, p. A4.
Phelps, Charles E. Health Economics, 2nd ed. Reading, Massachusetts: Addison Wesley, 1997.
Statistical Abstract of the United States: 2002. Washington, DC. U.S. Census Bureau, 2002.
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Robert R. Ebert, Buckhorn Professor of Economics Dr. Robert R. Ebert is Professor of Economics and holder of the Buckhorn Endowed Chair in Economics. |
A 1965 graduate of B-W ( B.A. in Economics and History), Prof. Ebert received the M.A. and Ph.D. in economics from Case Western Reserve University. His specialties include the subjects of international economics, industrial economics and microeconomics. He has published two books and over 25 articles on the international and domestic motor vehicle industry and the pipe organ industry. In 2003 Prof. Ebert was awarded the Strosacker Prize for Excellence in Teaching. In 2002 he received B-W’s Faculty Leadership Award. Other awards include B-W’s Gigax Prize for outstanding research and involving students in research and the College’s Bechberger Award for working with students outside of the classroom. He also is a recipient of the Karl Benz Award for the outstanding article in the field of automotive history from the Society of Automotive Historians. He is a trustee and chair of the Quality Management Committee of Fairview/Lutheran Hospitals of the Cleveland Clinic System, director of the Society of Automotive Historians and vice president and member of the executive committee of Omicron Delta Epsilon International Honor Society in Economics.
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