Explosive Health Care Cost Growth
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A major objective of the Obama Administration’s health reform push has been to conflate coverage expansions and cost containment. This allows the Administration to argue that $200 billion per year in coverage expansions won’t require debilitating tax increases. The new outlays, say Administration officials, will be financed with reductions in the long run growth rate of health expenditures. While it is easy to make this case theoretically, the unresolved question is whether these reductions could be implemented in a way that does not reduce quality and access to care.
The Administration is quick to furnish Medicare data to highlight geographic disparities in average coverage costs to imply that cost containment can be achieved painlessly. This is at odds with the available evidence on cross-border health care inflation rates, which demonstrates a strong positive correlation between access to technology and cost growth. Canada and Sweden have enjoyed historically low health care inflation because they ration access to technology; health care inflation has been high in the U.S. due to “costly product innovations, such as the acquisition of CT scanners.” Because the U.S. does not have a system in place to ration access to technologies like magnetic resonance imaging, computed tomography, coronary artery bypass graft, angioplasty, cardiac and neonatal intensive care units, positron emission tomography, and radiation oncology facilities, the U.S. spends more per capita on health care than other nations.
The U.S. has strongly rejected previous efforts to slow health care inflation. During the 1990s, health care inflation was contained for a time thanks to the rise of “managed care” and health maintenance organizations (HMOs). Health economists like Peter Gruber attribute the real wage growth of the 1990s to the rise of HMOs, which allowed a greater portion of workers’ compensation to be devoted to wages. Yet, the decline in inflation rates was hardly cost-free: public anger over HMOs’ limits on choice of providers, seemingly arbitrary definitions of what was “medically necessary,” and other limits on access to care led to class action lawsuits and a political push for a so-called “Patients’ Bill of Rights” to end cost containment practices. In response, insurers loosened controls on access to specialists and abandoned other controversial practices. As a consequence, health care inflation quickly exceeded the pre-managed care rates of the early 1990s.
The bill approved by the Senate on Christmas Eve creates a new federal body, the Independent Payment Advisory Board (IPAB), which would have the power to dictate changes in the practice of medicine if Medicare spending growth exceeds a certain measure of inflation. But at the same time the Senate voted to create the IPAB, it passed an amendment to block the government from heeding the cost-saving recommendations of an existing expert panel that women should wait until age 50 to receive mammograms rather than age 40. Beyond the prospective savings generated by the IPAB, the House and Senate bills rely on nearly $300 billion in Medicare payment reductions that are labeled as “unrealistic” by the Medicare actuary because of the potential to cause providers to leave Medicare and jeopardize “access to care for beneficiaries.” Why would anyone believe future Congresses would be less sensitive to their voters’ concerns about access to care?
Many on the political left argue that the U.S. has a long history of health care rationing, but that it is an informal rationing based on one’s ability to pay for health care. Whatever the successes of American medicine, these critics make two counter-arguments: (1) it is fundamentally unfair that health should be so tightly correlated with income and (2) when those covered refuse to accept limitations on their access to medicine, it actually makes the uninsured even worse off, on a relative basis.
However, it is not clear that expanding health insurance coverage will automatically end these inequities. A detailed comparison of health outcomes in the U.S. and Canada reaches some counterintuitive conclusions: even though health care is putatively “free” in Canada, the relationship between income and health status is stronger and more consequential than in the United States. Health care does cost much less, but that is because the typical patient receives worse care.
The health care reform bills approved by the House and Senate are setting the nation up for an unpleasant choice between punishing tax increases or a dramatic reduction in the quality of U.S. health care. Members of Congress, and Obama Administration officials, need to appreciate the magnitude of the dilemma that will be created by passage of this “historic” piece of legislation.