Cover Story Condition: Critical

By Janice Castro

There are two kinds of prices in America today: regular prices and health- care prices. The first kind seems to follow some sensible laws of supply and demand. But America's medical bills are something else. They flow from a surreal world where science has lost connection with reality, where bureaucracy and paperwork have no limit, where a half-hour tonsillectomy costs what an average worker earns in three weeks. The prices, like the system that issues them, are out of control. Examples:

-- Annual dose of human growth hormone for a child with a severe deficiency: $20,000.

-- Coronary bypass surgery for a 50-year-old man: $49,000.

-- Cost of a Bufferin tablet for a patient in a psychiatric hospital: $3.75.

-- Price of a modified radical mastectomy: $7,900.

-- One day's intensive care for a crack baby: $2,000.

-- A 50-minute session with an elite psychotherapist: $160.

-- Delivery of a baby by Caesarean section: $7,500.

Americans spend $23,000 a second on medical care, more than $2 billion a day, $733 billion a year. That is nearly twice what they spent seven years ago, including annual increases of 10% during the past two years. For the Federal Government, medical costs have become the fastest-growing major item, increasing at more than 8% annually at a time when inflation is only about 5%. For corporate America, health care has become a crippling expense. General Motors laid out $3.2 billion last year, more than it spent on steel, to provide medical coverage for 1.9 million employees, dependents and retirees. Unchecked, the U.S. medical bill will more than double in the next 10 years, to $1.6 trillion, crowding out spending for other urgent needs. "Health-care costs have created an American state of siege," says Florida Governor Lawton Chiles. "It's going to break us."

Suddenly health care is becoming the litmus test of American politics. It was a central issue in this month's senatorial race in Pennsylvania. Little- known Democrat Harris Wofford, who called for a health-care plan that would cover all Americans, easily defeated former Governor Dick Thornburgh. As the 1992 presidential campaign gathers steam, every Democratic candidate is putting universal health care at the top of his agenda. While Nebraska's Bob Kerrey proposes a comprehensive plan that would require substantial new taxes, others, including Bill Clinton and Tom Harkin, are fashioning less costly approaches that emphasize preventive care. Says Harkin: "We don't have to spend a nickel more. We just have to spend it smarter." Congressional Republicans, sensing that the White House is moving too slowly on the issue, offered their own plan earlier this month to provide basic care for uninsured Americans.

How did America's health care slip into such a critical condition? It's all so paradoxical. We're the medical miracle workers. We're the picture of health. We live decades longer than we did before. We've harnessed the body's natural defenses with antibiotics, defeated plagues and diseases, learned how to make spare parts for almost every organ except the brain.

We got what we wished for, a medical miracle system -- but all its perilous side effects too. Medicine's amazing new tools have made decent health care a rich man's privilege, too expensive for the working poor and even many middle- class people. Moreover, America may be shackling its economy by investing too much in one industry. The U.S. currently devotes 12.3% of its gross national product to health care, up from 9.4% in 1980. At this rate, within 20 years Americans will be spending a third of all their resources on medicine. Says Daniel Callahan, the director of the Hastings Center in Briarcliff Manor, N.Y.: "We have let ourselves be seduced by the idea that there is no such thing as enough health care."

Yet we accomplish less and less. Doctors may waste more than $100 billion a year on overzealous testing and unnecessary surgery, among other things. Insurance companies say patients, hospitals, doctors and thieves are cheating them out of $60 billion or more. Meanwhile millions of Americans are starving for care in the midst of plenty. Doctors have migrated away from rural areas across America, leaving families in dread fear of the tractor accident, the heart attack, the sudden illness. Another problem: the health-care system devotes so much of its resources to last-minute miracles that it neglects the more mundane realm of preventive medicine, where many terrible illnesses could be halted sooner or avoided altogether. "We have to rearrange how the dollars are being spent and refocus them on earlier stages of illness," says Jeff Goldsmith, a health-care adviser to the accounting firm Ernst & Young.

Americans used to take health care for granted. But now they can see the cracks in the system -- and those gaps scare them. The prospect of an additional 30% increase in medical costs next year has prompted many employers to cut their work force, reduce health benefits, or both. At the same time, insurance companies are raising premiums to nigh unaffordable levels. Millions of workers are terrified of losing their coverage.

Until now, attempts at reform have run into a gridlock of powerful constituencies: giant corporations, doctors, hospitals, insurance companies and the highly organized senior-citizens lobby. But popular opinion may break the impasse. In a TIME/CNN poll of 1,000 adults surveyed by Yankelovich Clancy Shulman, 91% said that "our health-care system needs fundamental change." Most of those polled, 75%, said costs are much higher than they should be, and 83% said they would cut costs by limiting doctors' fees. Two-thirds said health care is a right, and 70% said they would be willing to pay higher taxes to ensure that all Americans have coverage. Last week the National Leadership Coalition for Health Care Reform, a group of big companies and labor unions, put forth a proposal to require all employers either to provide health insurance or to pay a new 7% federal payroll tax to fund public coverage.

The U.S. can do a much better job with the money it is spending by balancing compassion with realistic notions of what can be done. It is not possible to offer unlimited medical care to everyone, nor fair to cushion the well-to-do with vast public-health-care subsidies while millions of American children and their parents go without. It's time for a cure.

On the following pages, TIME looks at 10 of the most important problems in the American way of medical care. Here are some suggestions on how to fix them.

1. THE BASICS

About 1 out of 9 American working families, a total of 37 million people, has no health insurance at all. Most of the uninsured are the families of workers in small firms that do not offer such coverage. Among the uninsured are an estimated 8 million American children growing up without adequate medical and dental care. About 17% of all Americans suffering from diabetes and high blood pressure are going without treatment, according to Robert Blendon of the Harvard School of Public Health.

Medicaid is supposed to insure those who cannot pay for coverage, with each state making that determination according to its own means test. But even this voracious state-and-federal system -- which cost $2.3 billion in 1967, the first full year after it was launched, and now costs 69 times as much -- can barely afford to help 40% of the poor. In 1980 the figure was 65%. As hard- pressed states have found it increasingly difficult to pay for the program (they put up 68% of the total money), they have tightened eligibility standards. As a result, more and more working Americans earn too much money to qualify but too little to afford care. In Alabama a family of four cannot qualify for Medicaid if it earns more than $16,584 a year.

SOLUTION: Establish a universal health-care plan covering basic preventive treatment for all Americans who cannot pay for their own insurance. Nearly two-thirds of the 500 senior executives surveyed last summer by the consulting firm Noble Lowndes said they support such a plan. To help pay for it, Congress should eliminate the $53,400 income cap on the payroll tax that funds Social Security. While this would sharply increase payroll taxes for the wealthiest, such a change represents a more equitable way of apportioning the burden, which now falls more heavily on lower-income workers. Removing the cap would provide an estimated $25 billion in new funds for the universal plan. Congress should then shift the entire federal Medicaid budget to the universal-health program, which would give it a generous $115 billion in its first year.

To control costs, care must be delivered through tightly managed private systems, such as a network of health-maintenance organizations (HMOs) or cost- conscious doctors and hospitals that provide moderately-priced services. Patients must have a financial stake in making sensible use of the system. They would benefit based on their ability to pay; deductibles and co-payments would sharply rise as one's income increased. High-cost medical procedures would be closely screened for their anticipated value in extending life and health.

2. MEDICAID

The fastest-growing spending program in the U.S., Medicaid will dispense $158 billion in federal and state funds this year to provide health care to 27.3 million Americans. Costs are careering out of control. Medicaid pays for half of all nursing-home patients -- or 250,000 Americans -- at an average annual cost of $34,000 a person. Medicaid also looks after the 158,000 severely impaired crack babies born every year ($1.8 billion a year), the 35,000 AIDS victims who have run out of money, the poor single mothers and pregnant teens, the hardest-pressed Americans.

It doesn't do a very good job because the rules governing the delivery of care are unrealistic and wasteful, often requiring hospitalization, for example, where out-patient treatment would suffice. Moreover, many doctors refuse to treat Medicaid patients because of rock-bottom reimbursement and the snarl of bureaucratic rules. The program is also a sitting duck for thieves because of poor administration. Medicaid pays billions in fraudulent insurance claims for nonexistent patients.

SOLUTION: Shut it down. Medicaid patients can receive better care, and the federal contribution would be better spent, under the simplified universal plan proposed above.

3. MEDICARE

This $110 billion program -- which started out 26 years ago with a budget of $5 billion -- was designed to provide decent care for the elderly. But the program gives the same benefits to those who are well-off as to the elderly poor. Though the elderly do pay some of the costs -- and staunchly resist bearing more of them -- nearly 90% of Medicare funds come from payroll taxes on workers. As a result, the burden falls partly on laborers who have no health insurance of their own and may have trouble making ends meet.

The burden on younger Americans is growing more onerous as the U.S. population ages, bringing with it the responsibility of caring for millions of elderly with enormously expensive medical needs. There are now about seven Americans under the age of 65 for every person over that threshold, compared with 11 to 1 in 1960. One of those younger Americans is unemployed, and two are children. That leaves about four workers to support each elderly American. And one of those doesn't even have his own health insurance.

SOLUTION: To slow its runaway growth, return the program to its original goal: taking care of people who need financial help. People who can afford to pay more for their own health care should do so. In addition, subsidies should be more carefully rationed when it comes to extremely complex and costly medical procedures for very old patients. "Most of the elderly would probably accept that idea," says Dr. Perry Stafford, a surgeon at Bethesda Naval Hospital in Maryland. "It is usually their families who have this tenacious hold on anything that will prolong life. It is hard for people to see that at some ) point, you are prolonging death, not life."

4. FRAUD AND ABUSE

How does an insurance company know whether a patient really got the care for which it picks up most of the tab? Doctors and hospitals are on the honor system, but some of them cheat. Fraud may account for as much as $75 billion of annual U.S. health-care expenditures, according to the National Health Care Anti-Fraud Association. Last June California officials uncovered the biggest single medical fraud to date, a $1 billion rip-off carried out by thieves operating clinics on wheels. Investigators say the clinics offered patients free tests and exams, then used their insurance information to generate a huge number of fake bills. In a similar scam in New York City, a doctor billed Medicaid for $50,000 worth of lab tests for a single patient.

Innumerable smaller crimes are committed daily in labs, hospitals and doctors' offices to inflate the costs of care, often under the guise of doing patients a favor by circumventing cumbersome insurance regulations. Some doctors and dentists give patients inflated bills in exchange for slightly higher than normal fees. The patient collects his own kickback in the form of a bigger insurance refund. Some hospitals and doctors bill for treatment they did not provide. In a survey of Aetna Life & Casualty customers, 4 out of 10 consumers said their doctors had cheated insurance companies.

Physicians also have conflicts of interest that contribute to vast waste, reformers say. In a study released in August, Florida officials reported that doctors owned 93% of the diagnostic-imaging centers surveyed, 78% of the radiation-therapy centers, 60% of the clinical labs and 38% of the physical- therapy and rehabilitation centers. Miami doctors prescribe MRI scans (cost: $800) and various lab tests about twice as often as doctors in Baltimore, where very few own the equipment. Lab charges are more than twice as high at facilities owned by doctors.

SOLUTION: Tougher enforcement. Insurance companies and public authorities should pool information on fraud via computer networks. At the very least, this would prevent thieves from simply repeating their crimes later in fresh territory, as many now do, thanks to lax record keeping by program administrators. In addition, physicians and hospital officials must police their own ranks and blow the whistle on dishonest billing practices. Stricter policing will cost more, but it should pay for itself many times over.

At the same time, doctors should be required to disclose to patients their investments in testing centers and laboratories and offer an alternative in which the doctor does not have a financial interest. (That proposal has already been recommended by the American Medical Association's Council on Ethical and Judicial Affairs.)

5. DISAPPEARING DOCTORS

More than 570,000 physicians practice medicine in the U.S. today, almost double the number 20 years ago. Yet huge areas -- 18 counties in Texas alone -- have none. Rural America, like many inner cities, is facing a crisis in primary care. Communities need about 35,000 more general practitioners, according to most estimates. Doctors typically prefer more lucrative practices as specialists and surgeons (who can earn more than $300,000 a year, compared with the average family practitioner's income of $96,000). The shortage of general practitioners leads to wasteful use of medical resources. Without a family doctor to keep track of their overall health, people are left to find their way through a costly medical system ache by ache, often seeking high- priced help where the skills of a generalist would more than suffice.

SOLUTION: Federal money pays for half of graduate medical education. Redirect as much as 50% of that $3.6 billion federal contribution to students who aim to practice primary medicine.

Expand a three-year pilot project authorized by Congress last year. The program provides up to $50,000 in matching funds for communities that finance medical education for physicians (cost of training: about $75,000) as well as other medical professionals. This plan was prompted by the experience of Dr. Roger Pelli. A resident of Ashland, Me. (pop. 1,800), a town without a doctor, Pelli promised in 1982 to care for the people in the Ashland area if they would help send him to medical school. Six local towns raised $15,000 a year for his education. Today Pelli takes care of 3,000 people scattered over the surrounding area, making house calls, handling everything from chain-saw injuries and cardiac arrest to births and vaccinations. Says Ashland town manager Nancy Farris: "He's always there, and he always greets his patients with a smile, no matter how tired he is. The only thing is, he's working too darned hard."

Pelli's emotional commitment is all the greater because his patients are his friends. Not long ago, a young woman in town was fatally injured in an auto accident. Recalls Pelli: "I couldn't revive her. All the time I was trying, I could hear her two young children, her husband and her parents crying. It was just heartbreaking." Says selectman Ray Beaulier, who doubles as the town mail carrier: "Roger is as close as you can get to the old country doctor."

As an additional incentive for doctors who have already finished school, waive taxes on the first $40,000 in income for those who treat patients in designated neglected areas. Expense to the U.S. Treasury: approximately $9,000 a year for an unmarried doctor with no dependents. As well as being worthwhile in itself, this investment in basic medicine would also produce other kinds of savings by preventing unchecked chronic disease and producing healthier and more productive citizens.

6. PHYSICIAN COMPENSATION

Back when doctors were paid out of patients' pockets, there were natural brakes on the amount of medical service prescribed and the charges levied. For one thing, doctors knew their decisions could devastate a family's finances. And patients who paid their own bills yelped at high prices. But concerns over costs diminished over the past 40 years as vast insurance pools were created through company benefits plans and the huge Medicaid and Medicare systems.

Under the circumstances, insurance is like a blank check. Research has shown that doctors paid in fee-for-service programs order 50% more electrocardiograms (about $27.50 each) and 40% more X rays ($62 for a frontal- lateral chest X ray) than physicians in managed-care groups. Says Edmund Kelly, group president of Aetna: "The problem with our medical financing system is that most doctors get paid for doing things to people, not for keeping them healthy."

Medicare and insurance companies have tried to make sense of medical charges by establishing maximum fees for hundreds of surgeries, tests and procedures. But the medical establishment is winning the accounting war. Some doctors attend seminars on "creative billing," learning how to describe medical treatment in terms that will yield the highest prices. A $2,900 gastrectomy, the removal of all or part of the stomach, can be billed a la carte as several procedures for a total of $6,900. When auto-repair shops or lawyers do that, we call it padding the bill. Doctors call it "unbundling." Some maintain that they do it in the spirit of Robin Hood, overcharging people with good insurance in order to charge less for the treatment of poorly covered patients.

SOLUTION: Managed care. Providers of group insurance should insist that doctors treating their patients be paid salaries or flat fees. Such a system is already employed by many HMOs, which charge group-insurance plans an annual fee for treatment and produce often dramatic savings. Treating 40 million Americans last year, HMOs cost an average of $2,683 per person, 17% less than the $3,214 cost of traditional indemnity plans, according to a survey conducted by the Foster Higgins consulting firm. Doctors bound by such strictures would still be free to earn extra income by treating other, higher- income patients in private practice.

7. UNNECESSARY CARE

Fear of malpractice lawsuits drives doctors to perform many extra procedures to protect themselves against accusations of negligence. The A.M.A. estimates that defensive medicine adds $21 billion to the U.S. health-care bill every year. Other experts, including former U.S. Surgeon General C. Everett Koop, believe the cost is several times that high. Some reformers think juries in malpractice cases share the blame by punishing doctors not only for shoddy practice but also for their human limitations. "Medical care is not always successful," says Aetna's Kelly. "But that doesn't mean the doctor should have to pay huge awards for pain and suffering."

Then again, many doctors and hospitals overtreat patients simply because they have a blank check to do so under many insurance programs. As much as 20% of all medical procedures and treatment is completely unnecessary, contends Dr. Robert Brook, director of health sciences for the Rand Corp. Cost of the waste: $132 billion a year. Aetna estimates that as much as 30% more ($198 billion) is discretionary care that may not solve the problem under treatment.

Rand studies have found that in some regions of the country as many as 44% of coronary bypass surgeries and 64% of artery-clearing carotid endarterectomies were either unnecessary or highly questionable. In a separate review for the Philadelphia Professional Standards Review Organization, Dr. Allan Greenspan found that about 25% of heart-pacemaker implants performed in the Philadelphia region were inappropriate. Many doctors challenge such findings, arguing that it is better to err on the safe side.

In the same vein, some extremely expensive technologies are used even before it is clear that they're needed. That may be the case with at least one new biotech drug, Centoxin, which is available on a limited basis to treat hospital-acquired infections that can cause fatal septic shock (estimated cost: $3,800 a dose). Trouble is, since the condition can kill so quickly, doctors will have to decide whether to administer the drug before they are sure the patient needs it.

SOLUTION: For malpractice cases, cap noneconomic awards for factors like pain and suffering at about $250,000. California placed a limit on such awards in 1975, and it now has some of the lowest malpractice premiums in the U.S. One reason: ambulance-chasing lawyers have less incentive to bring questionable claims.

Another wise investment: devote more research to finding out which procedures and drugs are most effective. If doctors can be supplied with better, consensual guidelines about what works in treating various ailments, they will feel less pressure to do things on a just-in-case basis. They also will be better protected against unwarranted litigation. It is important, though, that such standards be viewed as guidelines, rather than rules that might impinge upon a doctor's best sense of what a patient needs. "Judgment is an important factor in medicine," says Dr. Robert Heyssel, president of the Johns Hopkins Hospital. "Doctors disagree all the time about whether a carotid endarterectomy or a coronary bypass will offer a patient the best shot at recovery. There are no absolutes around these things."

Finally, set maximum reimbursement levels for high-cost pharmaceuticals. Drug firms are among the most profitable in the U.S. And $3,800 a dose is too much.

8. THE HOSPITAL GLUT

America has too many hospitals. On average, U.S. hospitals are operating at 64.5% capacity. To fill their beds, some hospitals buy physicians' practices and then pay the doctors under so-called census-based compensation, which is geared to the number of patients the physicians send to the mother ship and the number of procedures they perform. Some hospitals pay doctors in other ways -- through honorariums or appointments to hospital boards -- as a reward for referring patients.

SOLUTION: Remove the more blatant conflicts of interest governing the relationships between doctors and hospitals. Outlaw census-based compensation for doctors. Require physicians to disclose their financial relationships with the hospitals to their patients.

Companies as well as federal and state programs should encourage doctors to refer those patients who do not need the full range of hospital services to less costly outpatient clinics. Simple fractures, for example, often can be treated in this way. Pay doctors and hospitals less for clearly wasteful practices.

Eliminate tax subsidies for underused and obsolete hospitals. Together with the discipline of managed care and physician disclosure requirements, this change will help weed out vestigial institutions so that taxpayer support for health care can be put to better uses.

9. FAIRNESS

Taxpayers, even those who have no insurance, spend an estimated $84 billion a year to subsidize medical care for mostly middle- and upper-class Americans. That is because companies can write off every dollar they spend on health care as a business expense, which may help explain why corporate America did so little to contain the costs until they got out of hand. At the same time, employees who enjoy generous benefits plans pay no taxes on the thousands of dollars in health-care coverage that their companies provide for them.

SOLUTION: Reduce the corporate write-off for medical costs. And impose a tax on employee health benefits at a moderate rate for well-compensated workers.

10. WASTE

The U.S. has more than 1,500 different health-insurance programs, each with its own marketing department, complex forms and regulations. Doctors, nurses and clerks are buried in the paperwork needed to keep track of whom to bill for every aspirin tablet. It's a massive waste of time. U.S. health-care providers will spend as much as $90 billion this year on record keeping, according to a Harvard study.

SOLUTION: Standardize insurance fees. Maryland did so 20 years ago. Partly as a result, the cost of a hospital stay at top-rated Johns Hopkins in Baltimore, which was 25% above the national average before the system was put in place, is now 7% below the average. Louis Sullivan, the Secretary of Health and Human Services, proposed a national plan earlier this month to standardize health- insurance forms. If his program is carried out by the end of the decade, Americans could save as much as $20 billion a year. Just as important, eliminating wasteful paperwork would leave doctors and nurses more time and resources to care for patients.

Cleaning up the health-care system will be an epic adventure in compromise. No one wants to give up his share of medicine's glittering promise, whether it comes in the form of pills or paychecks. But the problems won't wait: health care has emerged as the most important domestic issue of the '90s. "At some point," says Missouri Congressman Richard Gephardt, "no one will be able to afford health care. We have got to act."

While no treatment manual for American medicine should focus purely on its price, controlling costs is critical. If the medical experts are right, the U.S. could save at least $200 billion a year simply by curbing fraud and unnecessary practice. We know where the problems lie. Doing something about them is at the very least our moral duty and is profoundly in our self- interest as a nation. Depriving millions of Americans of health care is wrong. Wasting billions of precious medical dollars on paperwork, dead-end procedures and outright theft is stupid. Undermining the health of our workers and children for lack of political gumption is suicidal. It is time to make the hard choices.

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With reporting by Mary Cronin/New York, Barbara Dolan/Chicago and Hays Gorey/Washington, with other bureaus