LAST October President Clinton kicked off the health-care debate by insisting that "only comprehensive reform will slow the frightening rate of increase in health-care costs." From day one even those who rejected his remedies agreed on the nature of the problem: soaring costs, which led in turn

The latest numbers on inflation in health-care costs could not have arrived at a more inconvenient time for the White House. Statistics collected by the U.S. Department of Labor show that health-care inflation is slowing dramatically. This collides squarely with the premise underlying the push for a radical overhaul of our current health-care system.

The Labor Department reports that in the first six months of 1994 health-care costs grew at an annual rate of just 4.5 per cent, the smallest rise in twenty years. Even the real rate of increase in health-care costs has dipped from 4.4 per cent in 1990 and 1991 to a predicted 1.9 per cent this year.

Virtually every component of health-care inflation is on a downward path--hospital costs, physician services, drug prices. Employers are starting to report that increases in their medical-insurance costs are slowing down. The real rate of increase in employer-health-plan costs was 5 per cent last year. That's nothing to celebrate, but it is half the rate of increase in the late 1980s and early 1990s, according to the Employee Benefit Research Institute. The Chamber of Commerce reports in its most recent member survey that medical-insurance premiums were up by only 1 per cent in 1992.

Some of the reduction in health-care inflation is a dividend from lower overall inflation. But that's not the whole story. Although health-care costs continue to outpace consumer prices in general, in the last few years the difference between health-care inflation and overall inflation has been chopped in half.

Some say that it is jawboning by the Clintons and the mere threat of price controls that have driven down prices. There probably is some truth to the notion that just the specter of the economically muddle-headed Clinton and Clinton Lite plans has accelerated self-reform in medicine. But health-care inflation started tumbling in late 1990, long before Bill and Hillary came to Washington.

Competitive forces, not government controls, are the key. "Markets self-correct, and this one is well into that process," says Mitchell Daniels, vice president of Eli Lilly. "As usual, the politicians are miles behind the market." A recent analysis of the medical marketplace by business writer James Glassman of the Washington Post concurs. Glassman writes that "the free play of supply and demand is already working.... Private firms are putting intense pressure on insurance companies to freeze or cut premiums, and the insurance companies are putting pressure on hospitals and doctors and pharmaceutical manufacturers." Other factors contributing to the slowdown in cost increases include the move toward generic drugs and greater reliance on health-insurance policies that require patient cost sharing.

The Medicaid Nightmare

THERE IS one sector of the health-care industry where "rampant inflation" can still be labeled a crisis, and that is government programs. Even with overall health-care inflation declining, Medicaid remains a nightmare of stampeding costs. In 1989 the program's costs increased by 13 per cent, in 1990 by 18 per cent, in 1991 by 30 per cent, in 1992 by 21 percent, and in 1993 by 20 per cent. Since 1989 Medicaid has grown at five times the rate of the CPI. Even the Washington Post's recent feature on the history of Medicaid notes wistfully: "It seems clear the Federal Government has lost control of this program."

The person most responsible for this fiscal black hole is Representative Henry Waxman (D., Calif.), nicknamed the Trillion-Dollar Man to signify the long-term impact of his Medicaid expansions. Waxman openly boasts that he has spent the past 15 years converting Medicaid into a de facto national health-insurance program. Twenty-four separate Medicaid expansions were instituted in the 1980s, thanks mostly to him. They have added nearly $20 billion to Medicaid's price tag for this year alone. The program is now so generous that in some states a family of four can have an income of up to $40,000 and still qualify. The history of Medicaid expansions, concedes Ron Wyden (D., Ore.), a member of Waxman's Subcommittee on Health and the Environment, is that "costs were always greater than anticipated." It's not surprising that most Americans are reluctant to give people like Waxman and Wyden the responsibility for cost containment under a Clinton Lite health-care system.

Although both Bill and Hillary Clinton have at various times blamed the health-care inflation crisis on |greedy' drug companies, insurance companies, and private hospitals, the truth is that government programs, principally Medicare and Medicaid, have been the engine of health-care inflation for more than a quarter-century. From 1950 to 1965-the 15 years before Medicare and Medicaid--health-care costs grew at 3.5 per cent a year. But since 1966, the health-care inflation rate has more than doubled, to 7.8 per cent.

This is not just coincidental. Since 1966 private-sector health costs have grown by about 7 per cent a year, while government programs have grown by roughly 15 per cent a year--despite a series of laws passed by Congress in the 1980s and early 1990s to "control government costs" through price controls and other measures.

The performance of Medicare and Medicaid makes one thing clear: any health-care legislation that expands government programs will almost certainly fuel inflation. 'Over the last quarter-century," admits Senate Finance Committee Chairman Daniel Patrick Moynihan (D., N.Y.), "we have all been wrong on the costs of entitlements." This is a vast understatement. The Hospital Insurance program was supposed to cost $9 billion in 1990. Instead it cost $67 billion--a 600 per cent forecasting error. The propensity to underestimate the cost of new entitlements is not something unique to Medicare. A recent Citizens for a Sound Economy report shows that Social Security now costs six times as much as was projected as recently as 1965; federal disability insurance costs nine times as much as originally predicted.

Even with overall health-care inflation slowing, reform of government health programs is necessary. Medicare is already teetering on the brink of bankruptcy. By 1998 the program's expenditures will begin to outpace payroll-tax revenues, and the deficit will widen rapidly. For the program to remain financially viable, the payroll tax would have to rise from 2 per cent of taxable payroll today to a staggering 24 per cent by 2020, according to calculations by Haeworth Robertson, former chief actuary of the Social Security Administration.

These numbers underscore the absurdity of the current reform proposals. House Majority Leader Richard Gephardt's bill would create "Medicare Part C," almost doubling the number of Americans on this nearly insolvent program. If there are truly 37 million uninsured Americans, and even if it takes only $2,000 a year to cover each one, this would cost taxpayers about $75 billion a year.

The Clinton Lite plans do not solve the essence of the health-care problem, which is that the vast majority of Americans are overinsured, not underinsured. As economist Stan Liebowitz of the University of Texas at Dallas writes in a new Cato Institute study: "The major culprit in the seemingly endless rise in health-care costs is the removal of the patient as a major participant in the financial and medical choices that are currently being made by others." Since 1960 the share of medical bills paid by patients has dropped from 58 to 20 per cent, while the share paid by government has risen from 22 to 42 per cent; 95 per cent of hospital bills are now paid through government or private insurance. Not surprisingly, hospital fees have long been the fastest growing component of health-care costs.

The quick and simple way to fix the system, slow inflation further, and make health insurance more affordable is through Medical Savings Accounts. These accounts would essentially force patients to be cost-conscious consumers. Each American could put $3,000 a year into a personal health account similar to an IRA. Any unused money would eventually be rolled over into a personal IRA to be spent at retirement. This approach not only cuts out the insurance and government middlemen for minor expenses but gives consumers an incentive to seek low-cost care.

If Congress continues to resist these sensible changes, it should at least follow the Hippocratic injunction: "First, do no harm." The self-reforms transforming the medical marketplace are far more promising than the proposals moving through Congress. The real looming crisis in health care today is the possibility that Congress will manage to pass "broad-based reform" after all.

Mr. Kudlow is NR's economics editor. Mr. Moore is director of fiscal-policy studies at the Cato Institute.