Phase II for Health Care

It is no accident that President Nixon's Price Commission waited four weeks after the beginning of Phase II to set federal policy for medical and hospital costs. The economics of health care is exceedingly complex and in recent years has been one of the largest balloons in inflation. While the consumer price index has gone up 38% since 1960, health costs have more than doubled, and were increasing at an annual rate of 12.9% before the Phase I freeze took effect in August. Last week the Price Commission finally announced its goal: to cut that 12.9% "by at least one-half." The catch is that the stringent restrictions imposed by the commission on practitioners and institutions of all kinds will be even more difficult to enforce than the limits being dictated in other fields.

Those classified by the commission as "noninstitutional providers"--doctors, dentists, osteopaths, laboratories, blood banks and even birth control clinics--will be limited to fee increases of 2.5% a year. Hospitals may not raise their aggregate charges by more than 6%. They are being given more leeway because they are far more vulnerable to the pressure of operating costs than doctors are. Even hikes below the ceilings will have to be justified by increased costs in doing business.

Exemptions Unlikely. The rules demand that price lists covering all basic services be drawn up and made available to patients on request. The Internal Revenue Service, which polices Phase II, must be given the fee tables on request and must be informed of increases above 2.5% by hospitals. All rises above the commission figures must have prior approval of the IRS. Few exemptions are likely to be granted.

The amount of extra overhead that may be passed on to consumers is limited. No hospital may make patients pay for wage increases of more than 5.5%, an increase in the cost of goods and services exceeding 2.5%, and more than 1.7% a year in higher expenditures for new equipment. The commission also specified that neither doctors nor hospitals may use increased rates to widen their profit margins.

Ineffective Enforcement. Recognizing the difficulty of enforcing its rules, the commission will rely upon specially designated state advisory boards, which can be either existing hospital commissions, Medicaid boards, or planning agencies, to screen all applications for increases before they get to the IRS. The IRS may prove ineffective, however, when it comes to policing the fees charged by the nation's more than 300,000 practicing physicians. Differences between medical procedures are often hazy at best, making determination of the charges a highly subjective matter.

Many physicians are accustomed to flexibility in their billing. Establishing the pre-freeze base prices to which increases are keyed can be an intricate business. And patients are often in no position to go comparison shopping or to object to cost.

One crucial factor in health-service costs--insurance--was not covered in last week's action. What the insurance companies will allow in benefits weighs heavily in medical prices and patients' ability to pay them. The Price Commission is still working on rules governing health-insurance premiums, which have risen 165% since 1960. Blue Cross, the nation's leading provider of health-care coverage, recently asked the commission for permission to raise its rates on policies for federal employees by another 34%.

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