In the wake of the Carter administration's recent misadventure with the Health Care Cost Containment bill, we remain faced with the major problem of containing health-care costs. Neither public- nor private-sector approaches have worked well. Witness the continuing 12 percent to 18 percent annual increases in hospital costs since the 1960s. Still, significant progress could be made with a minimum of legislative action.
A long history of government decisions has led to today's frenzied demand for tax-exempt bonds by nonprofit hospitals. Back in 1946, a well-meaning Congress passed the Hill-Burton Act to finance construction of hospitals in service-deprived areas throughout the United States. These capital resources, however, were controlled -- both by congressional appropriation and by expenditure limited to underserved areas.
The obvious success of the Hill-Burton program perhaps prompted the Internal Revenue Service in 1963 to create a tax-exempt bond market available to all non-profit hospitals. I think it's important to note that the IRS -- not the Department of Health, Education and Welfare -- took that action. As a matter of fact, most governmental regulatory policies that have shaped our health-care costs today have been based on considerations other than health status. Anyway, the action that created tax-exempt bonds opened the floodgates of hospital construction capital from less than $1 billion in 1963 to about $5 billion a year now -- despite the fact that there are now some 50,000 too many hospital beds according to federal guidelines.
In support of the argument that easy capital -- not reimbursement -- is the principal stimulus to health-care cost inflation, it should be noted that the sharp upswing in hospital costs began in 1965, almost a year prior to implementation of Medicare and Medicaid. It is only fair to say that under Medicare and Medicaid the federal government's cost reimbursement policy did spur still more duplication of beds by encouraging amortization of these bonded debts with money originally intended for health care.
This policy, in effect, removed risk from the shoulders of hospitals and established an atmosphere in which build, expand and modernize became the operating style of the late '60s and '70s.
With this bonanza of capital funds, reimbursed through Medicare and Medicaid, came an inverse pyramid of regulations -- just the paper work proved to be a major expense to health consumers. The legacy of regulation that began with Hill-Burton came home to roost. It is astounding to realize that an estimated 25 percent of all hospital costs are now attributed to complying with government regulations. The task also consumes about 24 percent of all hospital staff man-hours.
Along with these heavy regulatory expenses has come the fulfillment of a health economic policy whereby supply creats demand. For it is indeed necessary for hospitals to make the greatest possible use of their facilities now -- yes, even excessive use -- to bring in the revenues they need to cover their capital indebtedness. And excessive utilization of hospital facilities drives health-care costs up still further -- a merciless and relentless cycle.
So, we had government -- recognizing the folly of what it had done to create soaring health costs -- turning to still more regulation to try to correct its mistakes. Comprehensive health planning of the '60s gave way to health system agencies of the '70s. But neither solved the problem of excessively high annual inflation of hospital costs.
But if the availability of the principal and the interest of capital resources had been regulated by the free market -- however harsh that regulation may have been in the short haul -- we would not be facing today's cost-containment problem in its present severity. That is the key point to remember.
It has not been the marketplace -- but interference with the marketplace -- that has sent health-care costs soaring at a rate almost double that of the inflation of the gross national product.
We have had government, not the marketplace, compounding the problem by steering tax-free investment toward non-profit hospitals -- and seriously depriving other segments of our economy of badly needed capital.
One of the important points for the business community to realize is that the influx of capital into hospital construction and expansion is contributing to a shortfall of capital in other areas of our economy. Capital growth within the hospital industry has been running about 3 percent a year over the past two decades, compared with about 1.5 percent now for the general economy. There are some who would say that this indicates that the health-care industry is a dynamic factor in our economy. In fact, through subsidization, tax-exempt bonds contribute to higher interest rates due to increased demand for a shrinking supply of capital.
As long as hospitals pull a growing share of available capital from other segments, we will be heading toward a no-growth economy across the board. So while in the short view, tax-free capital may be an attractive way of financing hospital construction, it may in the long run prove economically disastrous.
We must now decide whether we want tax-exempt bonds to be used to continue to inflate the cost of health care. If we don't, we could ask our legislators to place a moratorium on tax-exempt bonds for hospital constructionn and modernization. On the other hand, continued availability of a wide variety of capital resources -- whether through mortgage loans, taxable bonds, philanthropy or federal grants and loans -- would permit orderly growth in the health-care industry consonant with the American economy.
Unless the health-care establishment endorses this kind of action and accepts a legislative mandate to tighten up on the availability of easy capital to the health-care system, the government will eventually succeed in capping the industry through further regulation, most likely at the federal level. I am convinced that to move in that direction would simply result in increased costs -- the folly of excessive regulation.