POLICY: Why health care costs so much

This one is the cross-post from Ezra’s blog yesterday.  I was going to do something different last night, but the wind was right and so I went paragliding instead! And it was great! I will have more on the FDA later today or tomorrow

Health Affairs (the essential peer reviewed health policy journal) has an article from the very well respected Center for Studying Health System Change (HSC) which announces that the decrease in the increase of health spending has stalled (here’s the slightly more digestible press release). No kidding, the press release starts off with this line. See if you can get the gobbledygook here:

"The reprieve from faster-growing health care costs stalled in 2004 as costs per privately insured American grew 8.2 percent"

The good news is that nominal GDP growth  (real growth plus inflation) was 5.2% in 2004, so health care costs (the 8.2%) were less than double that. So in the bizzaro world of American health care, it’s still something of a success when health care is expanding only are only a little under double the rate of the rest of the economy or less than three times the inflation rate. That’s why health care takes up 15% of the economy now when it was around 5% in 1970.

But the two key questions are a) do we have to spend so much more? and b) what are we getting for the money?

The short answer to a) is no, we don’t have to spend so much.  Most other countries spend between 6% and 10% of their GDPs on health care, and some, such as Canada and Japan in the 1990s, actually reduced the share of GDP they spent on health care.  The more complex answer to a) depends on what you think we ought to be spending our money on.  Back in the time of Vietnam and the Cold War the US spent nearly 10% of GDP on "defense".  Now we spend money on frappuchinos and viewing pictures of Paris Hilton on-line. These are all political choices, and it’s clear that Americans view medical care as to some extent a luxury good that they are happy to spend money on. In her book Medicine and Culture the late Lynn Payer described the difference between the British stiff-upper lip, the French consternation about balance in the liver, and the American desire to operate on any patient who’d lie still for a moment, and she ascribed most of the difference in medical practice, and thus costs, to culture. More recently Uwe Reinhardt has shown that it’s not just culture but also prices — we pay our health care workers and supplier more than foreigners do and that’s a big factor in our overall larger costs.

The other factor that allows us to spend so much more is that there is neither a competent market mechanism that stops us spending too much, nor a central budget authority doing so. Market mechanisms work in one of two ways, either on average we just can’t consume more (i.e. pictures of Paris Hilton) or we can’t afford to all consume as much as we might possibly want (i.e. we can’t all afford Prada dog-caddying purses or whatever Paris carries her dog around in). In health care our ability to consume is essentially limitless, especially if we’re sick, and usually some other sucker is paying the tab. So we are dependent either on the producers of care to say "that’s enough" (which is the British stiff upper lip approach which results in what Americans call rationing and Brits call compassionate care for the sick and elderly), or on the sucker that’s paying the tab to cry "Uncle!". Briefly (and this is a much more complex subject), because of our diffuse system of third party payment, none of the said suckers have either had the ability or the will to really reduce payment. And the producers here have always known that putting up their costs will result in someone ponying up. Even though as the prices go up more people get excluded out of the system on the margins, those who can stay in it will more than make up the financial difference. So costs go up, as we do more things with more technology at a higher price. And because not everyone is in the system, and there’s not one universal pot of money or line-item budget, or no effective consumer pricing mechanism (and there can’t be for reasons that I wont go into here), no one is there to cry "Uncle!". Of course in other countries that’s usually the job of the other cabinet ministers who say things like, hey if you put all the taxes towards health care there’s nothing left for education, roads, invading Iraq or whatever. When Congress votes on a new healthcare bill no-one seems to care too much about that bottom line, as the Medicare Modernization Act cost fiasco proves. Note that this is not how Walmart governs relations with its suppliers.

The second question is harder to answer. In some ways it’s easy to say that we don’t do as well as other countries on several outcomes measures and that we’re not getting our money’s worth.  On the other hand several of the things that used to kill people are now relatively easily surmountable — at a cost.  And then there’s the paying for comfort issue.  It used to be that if you had real heart trouble, you needed to have your chest cracked and have a full CABG.  No fun.  Now getting a stent put in is a relatively painless procedure that they don’t even put you to sleep for. Does that lower the bar on the decision to do invasive cardiology? Indeed. Does it cost more for the payer per individual? Probably, as in the end many of those stent patients need a by-pass anyway. Does it cost the payers and society more overall? You betcha. And the parking lots outside the cardiologist suites are filled with physicians’ Porsches as are those outside the executive offices at J&J and BSC.

Is that a good or a bad thing?  Complex. In aggregate the cheapest thing is to let the heart (and therefore patient) go when it’s time, but we’re never going to do that. So should we restrict procedures to only those in real trouble, and only give them a CABG?  Fine if you say so, but let me ask you two questions. What do you define as real trouble?  And would you rather have a stent put in while you lie there listening to Lite jazz, or have your chest cracked?

And that uncertainty is what drives our system and drives that cost barometer up.

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