Medical care, of course, is merely one component of our overall health. Nutrition, exercise, education, emotional security, our natural environment, and public safety may now be more important than care in producing further advances in longevity and quality of life. (In 2005, almost half of all deaths in the U.S. resulted from heart disease, diabetes, lung cancer, homicide, suicide, and accidents—all of which are arguably influenced as much by lifestyle choices and living environment as by health care.) And of course even health itself is only one aspect of personal fulfillment, alongside family and friends, travel, recreation, the pursuit of knowledge and experience, and more.
Yet spending on health care, by families and by the government, is crowding out spending on almost everything else. As a nation, we now spend almost 18 percent of our GDP on health care. In 1966, Medicare and Medicaid made up 1 percent of total government spending; now that figure is 20 percent, and quickly rising. Already, the federal government spends eight times as much on health care as it does on education, 12 times what it spends on food aid to children and families, 30 times what it spends on law enforcement, 78 times what it spends on land management and conservation, 87 times the spending on water supply, and 830 times the spending on energy conservation. Education, public safety, environment, infrastructure—all other public priorities are being slowly devoured by the health-care beast.
It’s no different for families. From 2000 to 2008, the U.S. economy grew by $4.4 trillion; of that growth, roughly one out of every four dollars was spent on health care. Household expenditures on health care already exceed those on housing. And health care’s share is growing.
By what mechanism does society determine that an extra, say, $100 billion for health care will make us healthier than even $10 billion for cleaner air or water, or $25 billion for better nutrition, or $5 billion for parks, or $10 billion for recreation, or $50 billion in additional vacation time—or all of those alternatives combined?
The answer is, no mechanism at all. Health care simply keeps gobbling up national resources, seemingly without regard to other societal needs; it’s treated as an island that doesn’t touch or affect the rest of the economy. As new tests and treatments are developed, they are, for the most part, added to our Medicare or commercial insurance policies, no matter what they cost. But of course the money must come from somewhere. If the amount we spend on care had grown only at the general rate of inflation since 1970, annual health-care costs now would be roughly $5,000 less per American—that’s about 10 percent of today’s median income, to invest for the future or to spend on all the other things that contribute to our well-being. To be sure, our society has become wealthier over the years, and we’d naturally want to spend some of this new wealth on more and better health care; but how did we choose to spend this much?
The housing bubble offers some important lessons for health-care policy. The claim that something—whether housing or health care—is an undersupplied social good is commonly used to justify government intervention, and policy makers have long striven to make housing more affordable. But by making housing investments eligible for special tax benefits and subsidized borrowing rates, the government has stimulated not only the construction of more houses but also the willingness of people to borrow and spend more on houses than they otherwise would have. The result is now tragically clear.
As with housing, directing so much of society’s resources to health care is stimulating the provision of vastly more care. Along the way, it’s also distorting demand, raising prices, and making us all poorer by crowding out other, possibly more beneficial, uses for the resources now air-dropped onto the island of health care. Why do we view health care as disconnected from everything else? Why do we spend so much on it? And why, ultimately, do we get such inconsistent results? Any discussion of the ills within the system must begin with a hard look at the tax-advantaged comprehensive-insurance industry at its center.
Health Insurance Isn’t Health Care
How often have you heard a politician say that millions of Americans “have no health care,” when he or she meant they have no health insurance? How has a method of financing health care become synonymous with care itself?
The reason for financing at least some of our health care with an insurance system is obvious. We all worry that a serious illness or an accident might one day require urgent, extensive care, imposing an extreme financial burden on us. In this sense, health-care insurance is just like all other forms of insurance—life, property, liability—where the many who face a risk share the cost incurred by the few who actually suffer a loss.
But health insurance is different from every other type of insurance. Health insurance is the primary payment mechanism not just for expenses that are unexpected and large, but for nearly all health-care expenses. We’ve become so used to health insurance that we don’t realize how absurd that is. We can’t imagine paying for gas with our auto-insurance policy, or for our electric bills with our homeowners insurance, but we all assume that our regular checkups and dental cleanings will be covered at least partially by insurance. Most pregnancies are planned, and deliveries are predictable many months in advance, yet they’re financed the same way we finance fixing a car after a wreck—through an insurance claim.
Comprehensive health insurance is such an ingrained element of our thinking, we forget that its rise to dominance is relatively recent. Modern group health insurance was introduced in 1929, and employer-based insurance began to blossom during World War II, when wage freezes prompted employers to expand other benefits as a way of attracting workers. Still, as late as 1954, only a minority of Americans had health insurance. That’s when Congress passed a law making employer contributions to employee health plans tax-deductible without making the resulting benefits taxable to employees. This seemingly minor tax benefit not only encouraged the spread of catastrophic insurance, but had the accidental effect of making employer-funded health insurance the most affordable option (after taxes) for financing pretty much any type of health care. There was nothing natural or inevitable about the way our system developed: employer-based, comprehensive insurance crowded out alternative methods of paying for health-care expenses only because of a poorly considered tax benefit passed half a century ago.
In designing Medicare and Medicaid in 1965, the government essentially adopted this comprehensive-insurance model for its own spending, and by the next year had enrolled nearly 12 percent of the population. And it is no coincidence that the great inflation in health-care costs began soon after. We all believe we need comprehensive health insurance because the cost of care—even routine care—appears too high to bear on our own. But the use of insurance to fund virtually all care is itself a major cause of health care’s high expense.
Insurance is probably the most complex, costly, and distortional method of financing any activity; that’s why it is otherwise used to fund only rare, unexpected, and large costs. Imagine sending your weekly grocery bill to an insurance clerk for review, and having the grocer reimbursed by the insurer to whom you’ve paid your share. An expensive and wasteful absurdity, no?
Is this really a big problem for our health-care system? Well, for every two doctors in the U.S., there is now one health-insurance employee—more than 470,000 in total. In 2006, it cost almost $500 per person just to administer health insurance. Much of this enormous cost would simply disappear if we paid routine and predictable health-care expenditures the way we pay for everything else—by ourselves.
theatlantic.com
There’s No One Else to Pay the Bill
Perhaps the greatest problem posed by our health-insurance-driven regime is the sense it creates that someone else is actually paying for most of our health care—and that the costs of new benefits can also be borne by someone else. Unfortunately, there is no one else.
For fun, let’s imagine confiscating all the profits of all the famously greedy health-insurance companies. That would pay for four days of health care for all Americans. Let’s add in the profits of the 10 biggest rapacious U.S. drug companies. Another 7 days. Indeed, confiscating all the profits of all American companies, in every industry, wouldn’t cover even five months of our health-care expenses.
Somebody else always seems to be paying for at least part of our health care. But that’s just an illusion. At $2.4 trillion and growing, our nation’s health-care bill is too big to be paid by anyone other than all of us.
theatlantic.com
The Strange Beast of Health-Care Technology
One of the most widely held pieces of conventional wisdom about health care is that new technology is relentlessly driving up costs. Yet over the past 20 years, I’ve bought several generations of microwave ovens, personal computers, DVD players, GPS devices, mobile phones, and flat-screen TVs. I bank mostly at ATMs, check out my own goods at self-serve supermarket scanners, and attend company meetings by videoconference. Technology has transformed much of our daily lives, in almost all cases by adding quantity, speed, and quality while lowering costs. So why is health care different?
Well, for the most part, it isn’t. Whether it’s new drugs to control previously untreatable conditions, diagnostic equipment that enhances physician productivity, or minimally invasive techniques that speed patient recovery, technology-driven innovation has been transforming care at least as greatly as it has transformed the rest of our lives.
But most health-care technologies don’t exist in the same world as other technologies. Recall the MRI my wife needed a few years ago: $1,200 for 20 minutes’ use of a then 20-year-old technology, requiring a little electricity and a little labor from a single technician and a radiologist. Why was the price so high? Most MRIs in this country are reimbursed by insurance or Medicare, and operate in the limited-competition, nontransparent world of insurance pricing. I don’t even know the price of many of the diagnostic services I’ve needed over the years—usually I’ve just gone to whatever provider my physician recommended, without asking (my personal contribution to the moral-hazard economy).
By contrast, consider LASIK surgery. I still lack the (small amount of) courage required to get LASIK. But I’ve been considering it since it was introduced commercially in the 1990s. The surgery is seldom covered by insurance, and exists in the competitive economy typical of most other industries. So people who get LASIK surgery—or for that matter most cosmetic surgeries, dental procedures, or other mostly uninsured treatments—act like consumers. If you do an Internet search today, you can find LASIK procedures quoted as low as $499 per eye—a decline of roughly 80 percent since the procedure was introduced. You’ll also find sites where doctors advertise their own higher-priced surgeries (which more typically cost about $2,000 per eye) and warn against the dangers of discount LASIK. Many ads specify the quality of equipment being used and the performance record of the doctor, in addition to price. In other words, there’s been an active, competitive market for LASIK surgery of the same sort we’re used to seeing for most goods and services.
The history of LASIK fits well with the pattern of all capital-intensive services outside the health-insurance economy. If you’re one of the first ophthalmologists in your community to perform the procedure, you can charge a high price. But once you’ve acquired the machine, the actual cost of performing a single procedure (the marginal cost) is relatively low. So, as additional ophthalmologists in the neighborhood invest in LASIK equipment, the first provider can meet new competition by cutting price. In a fully competitive marketplace, the procedure’s price will tend toward that low marginal cost, and ophthalmologists looking to buy new machines will exert downward pressure on both equipment and procedure prices.
No business likes to compete solely on price, so most technology providers seek to add features and performance improvements to new generations of a machine—anything to keep their product from becoming a pure commodity. Their success depends on whether the consumers will pay enough for the new feature to justify its introduction. In most consumer industries, we can see this dynamic in action—observe how DVD players have moved in a few years from a high-priced luxury to a disposable commodity available at discount stores. DVD players have run out of new features for which customers will pay premium prices.
Perhaps MRIs have too. After a long run of high and stable prices, you can now find ads for discount MRIs. But because of the peculiar way we pay for health care, this downward price pressure on technology seems less vigorous. How well can insurance companies and government agencies judge the value of new features that tech suppliers introduce to keep prices up? Rather than blaming technology for rising costs, we must ask if moral hazard and a lack of discipline in national health-care spending allows health-care companies to avoid the forces that make nonmedical technology so competitive.
In 2002, the U.S. had almost six times as many CT scanners per capita as Germany and four times as many MRI machines as the U.K. Traditional reformers believe it is this rate of investment that has pushed up prices, rather than sustained high prices that have pushed up investment. As a result, many states now require hospitals to obtain a Certificate of Need before making a major equipment purchase. In its own twisted way, this makes sense: moral hazard, driven by insurance, for years allowed providers to create enough demand to keep new MRI machines humming at any price.
But Certificates of Need are just another Scotch-tape reform, an effort to maintain the current system by treating a symptom rather than the underlying disease. Technology is driving up the cost of health care for the same reason every other factor of care is driving up the cost—the absence of the forces that discipline and even drive down prices in the rest of our economy. Only in the bizarre parallel universe of health care could limiting supply be seen as a sensible approach to keeping prices down.
theatlantic.com
...By David Goldhill, here is one bit:
How am I supposed to be able to afford health care in this system? Well, what if I gave you $1.77 million? Recall, that’s how much an insured 22-year-old at my company could expect to pay—and to have paid on his and his family’s behalf—over his lifetime, assuming health-care costs are tamed. Sure, most of that money doesn’t pass through your hands now. It’s hidden in company payments for premiums, or in Medicare taxes and premiums. But think about it: If you had access to those funds over your lifetime, wouldn’t you be able to afford your own care? And wouldn’t you consume health care differently if you and your family didn’t have to spend that money only on care?
Here is another:
From 2000 to 2005, per capita health-care spending in Canada grew by 33 percent, in France by 37 percent, in the U.K. by 47 percent—all comparable to the 40 percent growth experienced by the U.S. in that period. Cost control by way of bureaucratic price controls has its limits...
marginalrevolution.com |
