Health wounding wealth

Spending on US health care accounted for more than 14 per cent of total US economic output last year. This unexpectedly large gain puts a severe constraint on president- elect Bill Clinton's strategies to reinvigorate the economy.

According to the latest figures from the US Commerce Department, health care spending ballooned to dollars 838.5bn ( pounds 544.5bn) last year and is expected to continue to rise to 15 per cent of total US output over the next five years unless there are significant changes. If the latest estimates prove accurate, it will exceed one trillion dollars in 1994 - more than double the OECD average per capita without any discernible evidence that Americans are healthier or better cared for.

Indeed, the big losers in a system in which 35 million Americans have no insurance cover are US businesses. They currently pay one third of total US health costs in a trend that has become a competitive drag on the economy's ability to perform. It is estimated, for example, that health-care costs add as much as dollars 700 to the price of every car produced in America.

Underscoring the burden on businesses was the announcement last week by EI Du Pont, the chemicals company, that it would take an after-tax charge of dollars 5bn against 1992 earnings to cover the expected cost of providing mandatory health care for retired employees and their survivors. This apparently means that Du Pont will report a loss for the year, since analysts had estimated its total 1992 profits at dollars 2bn.

Du Pont said that rocketing health-care costs were hitting the company's ability to compete. 'There was a time when increased health-care costs could be made up through increases in the prices of our products. In the new order of international markets, this is no longer possible,' said Edgar Woolard, Du Pont's chairman.

These stark new estimates highlight the magnitude of the challenge facing the Clinton team, which has promised new legislation in the first 100 days to curb costs and expand coverage to include all Americans. This campaign pledge lacks flesh, however, and will face formidable obstacles in its passage through Congress. For example, federal spending on Medicaid, a sacrosanct programme for low- income people, rose more than 29 per cent in the latest fiscal year in a trend that could bankrupt some states which share the cost. Last week, Governor Lawton Childs of Florida said he could no longer wait for the federal government to act and would move forward with a revolutionary programme to overhaul the state's health-care system. Florida is currently paying dollars 21bn annually for health care and yet large segments of the state's population are uncovered, meaning they have no access to any care.

IT IS clear that drastic change is needed if the American economy is to remain competitive. The US is the only major industrialised country that saddles its private sector with huge costs that must be passed on. In contrast to the 14- 15 per cent of gross product accounted for by US health care, Britain spends only 6.1 per cent, Japan 6.5 per cent, Germany roughly 9 per cent and France and Canada about 8 per cent. In none of these countries do private companies foot the bill.

Mr Clinton's big problem is that there is no national consensus on how to overhaul the system. There are sharp disagreements among the disparate constituencies in a huge national industry that encompasses hospitals, highly paid private physicians, and drug, private insurance and hi-tech equipment companies, along with other health care providers and state and local governments.

Despite relatively stagnant employment in most US industries over the last four years, private employment in the health-care sector rose to 10 million in 1992, a 43 per cent gain during the same period. Analysts say this suggests an escalation of administrative waste. Rocketing costs are not just down to overmanning and underperformance. They reflect an ageing US population, the emergence of deadly epidemics such as Aids, and the costly treatment of other diseases such as cancer. Critics also point to the uncontrolled use of hospitals and emergency rooms and the incomes of US physicians, who are expected to earn dollars 175.2bn this year, a gain of 11.5 per cent over 1992.

Mr Clinton has proposed a form of universal coverage under a system based on 'managed competition'. Consumers would be encouraged to form into groups sponsored by employers or the government to buy basic health services from rival providers. The theory is that physicians and hospitals will simply go out of business if they are overpriced. Another popular proposal is a pay-or- play scheme, whereby employers could either offer and finance group plans or subscribe to a public plan through a payroll tax.

No matter what programme is enacted, the Clinton administration will have to find a creative way to pay for it. The US federal deficit was estimated last week to be running out of control, to more than dollars 300bn by fiscal 1997. Some Clinton advisers are considering treating health care as a separate segment of the federal budget that must be paid for upfront through enactment of a special tax. This would be a promising start, freeing federal resources for the other daunting tasks facing the new administration.