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POLICY: Health Care Costs 101

Occasionally you see a really dumb article.  Not wrong, just dumb.  This one in the NY Times last week asks Who Controls Health Care Costs?.  It wonders why Republicans would promote private plans as a solution to controlling Medicare costs when it’s been shown that both Medicare and private costs increase at roughly the same rate over time. Leaving aside the fact that the Republicans are doing this for ideological reasons, it’s worth taking a little walk down memory lane on health care costs.

The reason costs go up so fast in this country is because of what Alain Enthoven calls "cost-unconscious demand" and a general pattern of Fee-For-Service medicine. Do more, get more, and no one really worries about the cost. That’s more or less what we still have, although it’s become much more sophisticated.   Even after 40 years of health care cost inflation, the same basics apply. There are only three real approaches to change this;

    1) Make individuals conscious of the entire cost of the system care–don’t disintermediate it via employers and insurance companies–including either having them pay all their insurance premiums or all cash out of pocket.
    2) Make consumers directly responsible for health care via a directly proportional tax (this is how it works in Belgium and is what Vic Fuchs proposed recently).
    3) Give responsibility for the cost of the whole ball of wax to someone else who has to manage the bottom line (almost always the government, as in the UK and Canada)

We are nowhere near any of those solutions in the US, so costs will keep going up (as will uninsurance and underinsurance, as there is a what economists call a price effect).

Meanwhile, the leading advocate for my third solution, otherwise known as single payer, Steffie Woolhandler, also got her own interview in the Times.

And for those interested in performance-based reimbursement, a group of health policy wonks who favor a market-based solution, including Enthoven, believe that Medicare could and should change the market by rewarding providers with pay for performance. Not a bad idea, but not realistic in the present climate.

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