Chapter Six. Skyrocketing Costs

FINANCIAL NEEDS While the medical schemes are new and UNLIMITED fresh the difficulties are expected to be smoothed out in due course. Instead, they tend to grow more serious as time passes. The oldest in Germany and Austria have acute troubles to face, as have the latest in Belgium and Britain (and the very latest in this country, Mr. John L. Lewis' own little Welfare State). Re markable is the similarity of the problems in sIJite of all dif ferences in national temperament, historical and political background, legislation and administration, personnel and institutions. Whether the plan is drawn up as governmental ized insurance based on payroll taxes levied on employers and employees, as an overall security scheme carried by the general taxpayer, or a compromise form, skyrocketing costs seem to be a curse that cannot be banned unless the doctors are thor oughly curbed and/or the functions of the scheme are pro foundly curtailed.

Old age and disablement pensions, death (funeral) benefits, family allocations, accident compensations, even unemploy ment insurance and cash sickness benefits cover more or less definable, if not always calculable, risks which can be and usu52 53 ] SKYROOKETING COSTS ally are limited in financial terms. "Medical care" is an elusive concept. Medicine is a science without scientific-· i.e., ob jective and non-controversial - standards applicable in a mechanical, automatic fashion. Once the principle of neces sary health care is accepted and the access to it is opened at little or no charge, the sky is the limit. The deferred time relationship of cost and benefits, the basis of rational insurance, is eliminated. So is all rationalrisk calculationand risk control, contrary to the practice in commercial insurance. Distinct from any other field of social security legislation, governmentalizedhealth care means direct intervention by the authorities into a large sector of business activities and private lives. Consequently, subjective judgment enters into the ad ministrativepicture at almost every step, opening the door to arbitrary decisions and to bureaucratic red tape and encroach ments, to say nothing of conscious and greedy manipulations.

A quest for elaborate and costly management and controls arises, of a complexity and an intricacy with no parallel in any other field of social security, pouring its own fuel on the fire of financial troubles. LLOYD GEORGE, In Great Britain Lloyd. Georg~'s National THE BEGINNER Health Insurance of .Blsmarcklan p~ttem seemed to keep down costs effectIvely. Employees .with less ·than £1,700 annual income were "in_ sured." A· skilled worker did not receive more than about one-fifth to one-fourth of his·wage in·the form of cash benefits. No hospitalization had to be provided nor any aid given to the family of the insured. Part of the pharmaceutical· costs was deductible. Only about one-half of all insured-depending on the panel to which they belonged-were entitled to dentistry expenses, to which they had to contribute as much as 40 per cent. In the case of eye glasses, 44 per cent was deductible.

The schemewas organizedin independentand self-administer ing panels, thus maintaining the· principl~·· of competitive incentive. . • That scheme, with one-half of the panels' outlay coming out of the worker's pay checks, was stingy as compared with almost any in present-day Western Europe. The more remark able it is that, even under such circumstances,the per capita COMPULSORY MEDICAL CARE AND THE WELFARE STATE [54 cost of the service doubled in the six years between 1922 and 1927, a period of virtually stable prices. THE COST OF Presently, Beva~'~ ."free m~dicine" to UNLIMITED SERVICE all, even the VISItIng f?reIgners, has entered the scene at a Jump, accom panied by the greatest drum-beating any scheme has enjoyed since Bismarck's. It started on July 5, 1948, with total cost, including the nationalized hospitals, set at' $800,000,000-at the then valid rate of $4 to the pound-for the first nine months of operation. By February, 1949, the sights had to be raisedto over $1,100,000,000, well over $20 per capita of the total population. The Parliamentary debate over the supple mentary estimate brought out that the Minister had under estimated in an irresponsible fashion the demand for medical services when available free of charge-or maybe he did so intentionally to overcome the initial resistance against his pet project. In the first year of operation, while the potential patients have just about doubled, from 47 per cent of the population under the old scheme to 95 per cent under the new, the number of prescriptions has almost trebled, and their average cost has risen from over 20 to more than 31 pence.! Compared with the annual demand previous to July 1948, the number of eye glasses requested has risen fourfold.

The number of people appealing for dental care has grown suddenly from 8 per cent of those entitled under the old scheme to 20 per cent under the new. The unit cost of ophthalmic, dental and hospital services went up spectacu larly, too. At a time when commodity p'ices were practically stabilized, the price of a pair of spectacles was found to have risen by 50 per cent, from 40-45 shillings to 65 shillings 6 pence, while the weekly hospital ward rates jumped from 4 pounds per bed to 8 pounds, 10 pounds, and more. For fiscal 1949-50, $1,410,000,000 is the budgeted cost of the new health scheme, just about 75 per cent more than what the brilliant Minister had figured nine months earlier, and a good third'" over what the Beveridge Plan estimated-for 1955. There is no sign so far that the cost curVe will flatten out, to say nothing of descending, in spite of some cuts such as in dentists' honoraria and in the capital budgets of the hospitals, unless the system is deflated. Actually a supplementary $4 55 ] SKYROCI{ETING COSTS millions for dental care had to be granted only three months after passage of the 1949-50 budget. On the other hand, if the scheme should be carried· on along its present lines, both the general practitioners and the specialists are expected to· get raises, and·the vastly increased demand for hospitalization will necessitate huge investments. At this writing there is little doubt left that another good-sized sUPElemental estimate will have to b~ presented to Parliament before the current fiscal year is over. And that is not the end of it.

The new British health scheme is so constructed that a great many expenses do not appear in the budget. In England 'and Wales alone, the local administrative agencies employ ·more than 30,000 salaried clerks, but under the actual management of approximately 10,000 unpaid voluntary workers. A very large share of the routine is taken care of by the general and dental practitioners, who are not paid for ·this extra function. Thanks to such unpaid services, voluntary and forced, the ad ministrative cost-not counting hospital administrations-so far has been kept down to about 4 per cent of the total outlay, which is probably the lowest managerial cost ratio of any Euro pean scheme. But this "economy" is more apparent than real, as we shall see. FRANCE: OPEN Different as the French scheme is from the AND HIDDEN British, it is confronted with the same finanSUBSIDIES cial "trap." It is being financed by pay~roll deductions, partly at the worker's expense, amounting to: 2.80% in 1938-under the old panel system; 4.80% in 1946-first year of the new scheme; 5.44% in 1947, and 6.16% in 1948.

But the more than doubling of forced contributions is not enough. In 1948, the scheme-. not including farm labor that comes under the securite agricole and has its own worries ran a 10 per cent deficit over and above the 6.16 per cent imposed upon every paycheck up to an annual income of nominally about $1,200.

COMPULSORY MEDICAL CARE AND THE WELFARE STATE [ 56 To appreciate the full significance of this financial weakness one must realize that a large slice of the costs, and a growing one at that, is being shifted onto other shoulders. The scheme is supported by hidden subsidies. One of them is paid in effect by the beneficiaries themselves, who are supposed to assume 20 per cent of the cost of medical, pharmaceutical and hospital service, except in the case of maternity and of longue maladie. In reality, so far as doctors' honoraria are concerned, the patients pay much more than 20 per cent. Another source of hidden subsidies is the contributions to the cost of hospital ization by local authorities and charitable organizations. Fur thermore, large firms subsidize the nationalized health pro gram by taking over a great deal of its paper functions at their own. expense. Part of the administrative and bookkeeping work: of collecting, checking and reimb~rsing on sick tickets is being taken care of by the employers. Businesshas to assume responsibility for the first 30 days of sick pay of white collar employees. Also, every major firm maintains a more or less fully equipped infirmary, and has to retain the services of a doctor who facilitates the control work of the scheme.

To cite the many ways in which the operating cost·of the French system, as of others, outruns the official "visible" data would tax the reader's patience. To mention one or two more: hospital patients, ambulatory and hospitalized, enjoy the serv ices of outstanding French specialists at nominal fees. A large slice of the cost of ~edical service to the scheme patient is thus shifted onto the private patients, if not onto the doctors. And the national "preventive" health policy is financed largely by a separate Ministry of Health at no cost to the panels. Despite all this unbudgeted and unadvertised subsidy thrown into the bargain, the French scheme runs a deficit year after year. The administration (Ministry of Labor) consoled itself until recently by blaming it on the inflation. But the 3D-foldinflation of retail prices from 1935 to the end of 1948, or even the 35-fold rise of the less relevant wholesale index, can scarcely explain a nearly 70-fold rise of total costs (not count ing the hidden subsidies), not even if the extension of coverage to about 20 per cent more persons is taken into account. Costs were upward bound before the wartime and post-war infla tion occurred and they are rising after the price inflation has 57 ] SI(YROCKETING· COSTS slowed down to a trickle. The •.·1948 average monthly outlay amounted to 4,602,000,000 francs. In 1949, the assurance maladiespent: 2 5,323,000,000 frs. in January; 6,439,000,000 frs. in February, and 7,146,000,000 frs. in March. ~ Between late 1948 and the middle of 1949, the official French price index receded by 5 per cent, but the medical scheme produced fresh "visible" deficits. They are being cov ered by recourse to the reserves which. the sickness panels of the Laval scheme (called caisses de repartition) accumulated prior to 1945-before the comparatively restrained and decen tralized Bismarckian type of Social Insurance was widened into an ambitious Social Security alaLenin.

FALLACY OF This . i~ the. system which the Fre~ch SELF.SUPPORTING ~dministrati0!1 p~oudly. boa~ts ~s beIng COMPULSION •self-suppo~tl~g. .The cla~ I~ fallaCIOUS, even if ItS hidden subSIdies and the technique of ,camouflagingits deficiencies-by· eating up its own reserves-were disregarded. It is highl~ misleading to use a terminology that conveys the false appearance of finan cial self-reliance wherever the cost of a scheme comes out of payroll taxes "only." As if levying a payroll tax on the em ployer would not be just as much of a tax-one that almost invariably is shifted on the consumer I-as is the raising of revenues by income taxes .and excises! As if subsidizing the beneficiaries at the expense of their employers would be any different in nature from subsidizing out of the general tax payer's pocket! By the way, the governmentalized "insurance" plans in herited the tradition of their predecessors, the free panels, and used to build up reserves equivalent to at least one year's expenditures. The idea was to protect the organizations against the impact of epidemics or other emergencies. The new, com prehensive security schemes have abandoned the pretense of financial self-reliance by scrapping this policy of reserve accumulation. They live from hand to mDuth, relying on the taxpayer.

COMPULSORY MEDICAL CARE AND THE WELFARE STATE [ 58 PROGRESSIONOF A few "coefficie~ts" may s~ffice to show FRENCH ILLNESS where th<: financIa~ tro~ble In th~ Fre~ch scheme hes. TakIng Into consIderatIon that the number of persons "insured" has risen since 1938 from 7 million to 812 million, this is the picture, in index numbers, of per member expenditures by major categories, 1938 as base: 1938 1947 1948 3,400 4,000 2,880 9,600 4,800 3,600 1,920 2,400 1,520 5,120 2,400 Medical expenses per member. . . . . . 100 Surgical expenses per member. .. . . . 100 Pharmaceutical expenses per member 100 Dentistry per member. . . . . . . . . . . . . 100 Hospitalization per member. . . . . . . . 100 Cash benefits per member. . . . . . . . . . 100 Index of doctors' fees (paid by the panels). • . . . . . . . . . . . . . . . . . . . . . . 100 1,100 Index of surgeons' fees. . . . . . . . . . . . . 100 750 Index of pharmaceutical prices. . . . . . 100 1,500 It should be clear at once why a 21'4-fold increase of con tributions on a 20-fold augmented payroll is needed. The largest rise occurred in the per capita dentistry costs-just as in Britain under Bevan. Note that in the French system these costs still keep rising; the urge for new teeth does not seem to quiet down.

Or take the medical expenses. Doctors' honoraria, which the panels refund, have risen in a decade about 11-fold. But the per capita medical expenses of the scheme jumped 34-fold. Obviously, people go to the doctor three times more often per insured, mind you-than they used to under the previous, more limited panel system. Less exciting is the rise in pharmaceutical costs per insured, due to the fact that prices are controlled. Even so, a 15-fold rise of the latter contrasts with a 29...fold increase of the former. The index of surgeons' fees (paid by the panels) has risen barely 8-fold. But average surgical expenses went up 40-fold. Could it be that the average Frenchman goes under the knife five times more often than before? This fantastic expansion of services may be due in part to a larger number of dependents about whom no statistics are available. But even if the 1Y2million additional members 59 ] SKYROCKETING COSTS ~ have more children· each than the previous 7 millions, that could not account for the difference, still less for the vast increase· of .disbursements in the single year 1948, which was substantially greater than in proportion to the price inflation of that year. One of threeexplanation8,'is feasible: either the compulsory system is a failure (instead of curing people, it makes ,them sicker); the new members brought in belong· to "higher" classes of society which demand more than the aver age amount of medical service; or the services may be misused under one pretext or another by malingerers and cheaters.

One spiraling cost element certainly has nothing to do with the size of families. I am referring to the 36-fold rise, in ten years, of cash benefits per insured.. After a waiting period of three days - thirty days for white collar employees - the insured Frenchman receives a half-pay indemnity for lost income, and 66.66 per cent after 29 days. On the average, wages have risen 20-fold. That leaves a huge residual of unex plained rise in paid-for per capita sickness -days. Something must be basically wrong with the scheme. COST OF The health schemes' administrative costs account .for as much as four-fifths to BUREAUCRACY • •• fi h f h · I h d fve-sixt sot e managerla over ea 0 the respective countries' total social security management. Within the health schemes, the bureaucracy absorbs "nor mally" around 8 per cent of total outlay, which is appreciably higher than in commercial health insurance, disregarding the expenses of the latter on advertising and on customer solicita tion. However, generally speaking, the managerial cost is higher in centralized schemes and in large units than in decen tralized systems and in smaller panels. This seems to be con tradicted by the fact that the lowest cost ratio obtains in Britain.

The Bevan plan, the most centralizedone next to the Russian, manages to get along on less than 4 per cent administrative costs. But its outlays per capita are so much higher than in any other scheme that the comparison losesvalidity. Since socialized medicine costs "austere" Britain per beneficiary roughly three times what the French payout-and about 50 per cent more than the panels of rich Switzerland disburse at present, or those of a prosperous Nazi Germany did before the last War-the COMPULSORY MEDICAL CARE AND THE WELFARE STATE [ 60 4 per cent cost ratio is in fact equivalent to one of about 8 per cent. Besides, the British plan shifts a higher share of the administrative burden onto the doctors and voluntary admin istrators than does any other. Also, it keeps its managerial cost down by omitting the customary controls. Thereby it permits the medical benefits to skyrocket without even the modest limi tations applied on the Continent.

As scheme bureaucracies go, the French prob PO~~~ ably is Europe's costliest at present. Some CORRUPTION primary panels' administrative costs run as high as 20 per cent of their total outlay, with an average ratio around 12 per cent. One reason for this high cost is the centralized system which eliminates competition between .panelsand the incentive to low cost operation. In fact, the French panels are not responsible to their members, and it makes no difference how extravagandy they operate. The excessive costs of one panel are covered by the surpluses of others, thereby in effect penalizing good management. This holds for the Belgian system as well. And the French bureau cratic set-up is exposed to political corruption as perhaps is no other, unless the Spanish and the Portuguese. It is over-staffed with personnel put in by the political parties and the trade unions. It does not permit economies by dismissal of the inefficient. The primary panels, the organs of the sickness security, counted 16,000 payrollers at the end of 1946 and well over 25,000 by early 1949. They grow at a faster rate than does the number of insured. This unrelenting "lateral"

growth is typical of a centralized system in which the impetus of expansion emanates from "above." In France, 80 to 85 per cent of the administrative cost is paid out in salaries and wages. But the capital expansion cost is by no means negligible. Visiting a workman's suburb of Paris one is struck with the unrelieved monotony and decay present-gray, dilapidated, dank housing facilities, the lot of proletarian existence. One building, however, stands out in the midst of this desolation, like an angel's statue in a ceme tery of decaying tombstones. It is the brand new, clean, shining white, modernistic structure of the local panel's branch office. The scheme administration plans an office for every 2,000 clients, to bring its function to their doorsteps as does 61 ] SKYROCKETING COSTS the post office. At mid-1946, Paris had 30 branches. There were 140 at the beginning of 1949, and new ones are under way.

But the post office is satisfied with simple surroundings. Yet the most remote branch of the sicknessscheme needs abuilding of its own, with spaciollSwaitingrooms,':rrIodern medical instal lations,. and attractive offices for the distinguished precinct politician in charge. Panel constructions are a rich source of orders to contractors and suppliers of proper political orienta tion. Similar capital expansion in the earlier days by the German and Austrian panels had been greatly criticized in the respective·countries. One more remark about average administrative costs. Their .long-run trend in most countries is either a slow rise or a remarkable steadiness·in terms of percentage of total expendi tures. But with rising total disbursements, the administrative expenses should decline percentage-wise. The fact that (out side Switzerland) these costs ~arallel or even outrun the increase in spending indicates one of two things: either the bureaucratic apparatuses keep expanding unnecessarily or their attempts at control increase costs to an amount greater than is saved by the efforts. At any rate, in both the French and the British systems the bureaucrats actually outnumber the doctors working for the respective schemes. A.witty French journalist quipped that "more nurses and less secretaries" should be the administrative device of his country's sickness plan. .Inci dentally, in France as almost everywhere else, the salaries scheme officialspay themselves are far more generous than the rates they are willing to concede to the practitioners working for tJ:le scheme.