Health Care Cost Control

Good editorial today in the WSJ on the myth of government health care cost control:

A field as dynamic and innovative as U.S. medicine, in which costs are largely driven by new technologies and better ways of caring for patients, is rife with complexities and uncertainties. But no one bothered to strike that note of caution when Washington was hopped up on a cost-control gambit that was too painless to be true. The new cost-control apologists concede that there isn't any actual plan for controlling costs: Throw enough speculative policies against the wall, they say, and some breakthrough will stick. Yet Mr. Orszag's no-less-confident predecessors spent decades trying to pull down Medicare spending with little to no success. Technocracy rarely if ever works as intended. Mr. Gawande points to the case study of U.S. farm policy, and if politically sacrosanct agriculture subsidies and rural price-supports are the best to hope for, then what's the worst?

More relevant examples include Medicare's "relative value" payment scale, which was designed in 1985 by the Harvard economist William Hsiao to encourage more primary care. That's this year's rallying cry too. "Diagnosis-related groups" were introduced into Medicare in 1983 to alleviate hospital cost growth, and what a monumental success that turned out to be. With only brief periods of relatively slower growth, nominal Medicare spending has risen on average at an annual rate of 9.6% since 1980. Over the same period total Medicare spending has grown 13-fold, climbing from 1.2% of the economy to 3.2% today.

Congress lacks the stomach for serious cost control in any case. One policy Mr. Orszag favors"”Medicare penalties for hospitals that re-admit certain patients"”is limited to only three conditions in the Senate bill, and the penalties are trivial.

Another"”a putatively independent commission that is supposed to enforce cost cutting"”is barred from going after costs incurred by doctors and hospitals, which leaves out more than half of Medicare spending. Earlier this year Mr. Orszag got into a heated debate with Henry Waxman over such a commission at a dinner party hosted by Connecticut Rep. Rosa DeLauro, precisely because the House baron enjoys the political power that flows from controlling health spending.

Paging Friedrich von Hayek.  The administration constantly whines that none of his critics ever offer an alternative (a patently false statement that seems to play well in the sympathetic press, very parallel to the global warming alarmist charge that skeptics haven't offered an alternative explanation of past warming).

Hmmm. One liberal sage noted in a 2007 paper that "four decades of empirical research" have shown that insulating people through third-party insurance coverage "from the full cost of health care has been responsible for anywhere from 10% to 50% of the large increase in health expenditures." Ultimately, he concluded, increasing cost-sharing would give individuals a direct stake in more prudent purchasing, as opposed to today's invisible health dollars that vanish as more expensive premiums, foregone wages and higher taxes.

Those are the words of Jason Furman, now the White House deputy economic director who seems to have been put into witness protection. Every serious health economist in the country recommends reforming the tax exclusion for employer-sponsored insurance, perhaps by converting it to a deduction or credit. Cost control will never stick unless it is extricated from politics and transferred to individuals to make their own trade-offs.

Such reforms were ruled out by union opposition, so the Senate gestures at them with a 40% excise tax on high-cost insurance plans, on the theory that two wrongs will make a right. But this untargeted tax will simply raise the cost of coverage for all workers in a given pool"”it's too clever by 40%"”while doing nothing to stem the distortions from first-dollar, third-party insurance.

  • astonerii

    Absolutely.

  • Congress lacks the stomach for serious cost control in any case. One policy Mr. Orszag favors—Medicare penalties for hospitals that re-admit certain patients—is limited to only three conditions in the Senate bill, and the penalties are trivial.

    shall we discuss the unintended consequences of this "cost control"? The cost will still exist - it will simply be borne in a way that is not easily written into an accounting ledger. As will the cost of all central planning and wealth redistribution.

  • People are finally starting to take note of this scumbag Orszag, who is the chief fiscal architect of the deception here.

    That this is being positioned as "reducing cost" at all is an enormous joke and insult to everyone's intelligence.

  • Dr. T

    "One liberal sage noted in a 2007 paper that “four decades of empirical research” have shown that insulating people through third-party insurance coverage “from the full cost of health care has been responsible for anywhere from 10% to 50% of the large increase in health expenditures.”"

    This liberal sage vastly underestimated the impact of health care insurance. I blame the use of third party insurance for 80-90% of health expenditure increases. Given the improvements in medical science, routine health care should be less expensive (in constant dollars) than it was decades ago. Our lack of cost sensitivity allowed health care providers to increase charges far beyond what a free market would allow.

  • I played doctor for 28 yrs and come to the following conclutions about health care:
    1. Medical care cost alot because of the government, ie. medicare and the medicare dollar ( about 40 cents on the dollar billed)
    2. the process of medicine (filing claims and getting payed) is full of pot holes where paper work falls and never returns( this is how insurance companies build the biggest buildings in the finest citys)
    3. The standard of care is the most expensive thing you can do TO a patient( newer is better in the patients mind and that makes it OK)
    4. Industry and the American medical community has turned the human body into target practice for ANY anyone can think up and make a buck.( the average 80 y.o. coming into the hosptal is on 10 to 20 different medications--the durg companies have done wonders in marketing to both doctors and patients)
    5. after serving on 2 missions abroad( 1 in central asia and 1 in west Africa) the poor people without access to modern health care are actually healthier than the average American with or without health care.
    6. If you want better health care get rid of the government involvment, get rid of the insurance companies, and pay as you go-- this would hopefully get rid of the merchants of medicine and a whole lot of unnessessary treatment.

  • Greg

    Great! So lets all get out there and preach to the uninsured that if only we had the correct economic incentive structure, they would spend less of their first dollar money on third dollar funded health procedures.

  • Norris Hall

    If the recent debate on health care has taught us anything...it's that the consumer is not in the driver's seat on this.
    Drug Companies, Insurance companies, Hospitals, and doctors...the ones that set the pricing for medical care...all have their high paid lobbyist prowling the halls of congress, dishing promises of golf outings, campaign contributions, future employment and other goodies to the hungry members of congress.
    As long as money is being waved in front of our elected representatives...don't expect them to pay much attention to voters. After all even elections are won by slick ads that cost money...so follow the money , right?

    My wife and I have found a solution that seems to work for us...
    Health care beyond America's borders.
    With medical costs a fraction of what the health care industry charges us in the US, we've found excellent affordable health care in Thailand, of all places..even without insurance.
    To woo the cash strapped and weary American uninsured and underinsured, The Thais (and Indians, Malaysian, and Singaporeans) have built excellent private hospital system that provide top notch care for a fraction of the costs in the US.
    These hospitals are accredited and follow the same standards as in the US. In fact they outperform US hospitals in service and care.
    Yet you can expect to pay 1/10th to 1/20th what it cost for the same procedure in the US.
    Heart Bypass...US $150,000.
    Hear Bypass..Thailand $15,000
    My minor throat surgery for disphagia...US $2500
    Thailand $100.
    (That was 1 year ago today and I am back in the US... very much alive.)
    In fact in Thailand most people have no use for health insurance. Prices are so affordable that Thais would rather save the insurance premiums and bank it.
    While we in the US get hit twice....once by the insurance company...and the second time by the medical profession. So we pay twice for health care.
    And don't think that you are safe with insurance in America. Check your insurance policy for hidden costs like deductibles, copays and insurance caps and you will be shocked to find that health care coverage is VERY LIMITED

    The US health care system is a train wreck hurtling down the mountainside with hope that anything...even the health care proposals in Congress can fix.

    As long as the people who stand to gain the most profit from health care are calling the shots...people who rely on the US health care system are SCREWED.

  • Norris,

    Your story is fascinating, but you're basically pointing out that the problem with US health care is that it is staffed with US workers and done in buildings located in the US. The Thai doctors and nurses are probably making a nice amount of money for their country, and they don't have to worry about US style lawsuits and US definitions of malpractice.

    On another note, the Reason folks have been pointing out the innovation and lowering costs in Cosmetic and Lasik procedures. It's a nice exception to the rule for medical care costs as these two areas are not covered by standard health insurance.

  • NormD

    Norris Hall:

    Exactly!

    I have been making this point for years. The developing world wants the SAME health care procedures that the developed world wants. They cannot pay the high rates we do. They will develop low cost alternatives WITH THE SAME QUALITY. We can take advantage of these. Just like cellphones and TVs and automobiles...

    We are having this healthcare debate because healthcare procedures cost far too much. Much more than makes sense from first principles. My wife's appendectomy was billed at $85K for an uncomplicated procedure and two days in the hospital. Her CT bill was $11K! Of course this was all reduced by insurance, but this is the real reason we need insurance: to negotiate the secret price.

    Here is an WSJ article about an Indian medical group looking to set up a hospital in the Cayman Islands to provide reasonably priced cardiac procedures for Americans.

    http://online.wsj.com/article/SB125875892887958111.html#mod=todays_us_nonsub_page_one

    If we allow it, foreign competition can force the realignment of the US healthcare industry into a far better, much more cost effective institution.

    I was employed in the semiconductor industry in the 1980s when foreign competition first appeared. At that time we supplied low performance parts at high cost and uncertain delivery and questionable quality. When competition showed up we did everything it could to fight it, but eventually we adapted and learned that we too could produce high performance parts, at ever decreasing prices with high quality and on time delivery. It was a painful process, but the world has been a much better place since. This same process can occur in healthcare if we allow it.

    There will be much screaming and gnashing of teeth and calls for government intervention.

  • Here is an WSJ article about an Indian medical group looking to set up a hospital in the Cayman Islands to provide reasonably priced cardiac procedures for Americans.

    It may not be long before American doctors set up groups in the Caribbean - especially if congress continues to screw with health care. Already, American doctors are setting up satellite clinics in other countries in part to free themselves from stateside restrictions like certificates of need.

  • Dr. T

    Greg said: "Great! So lets all get out there and preach to the uninsured that if only we had the correct economic incentive structure, they would spend less of their first dollar money on third dollar funded health procedures."

    Once again, another person equates lack of health insurance with inability to pay for routine medical care. They aren't the same.

    I would be happier if everyone were uninsured (except for catastrophic medical coverage). There would be a radical restructuring of health care, with the WalMart clinic model predominating. Costs of care would fall, costs of prescription drugs would fall, and providers would focus on what needs to be done rather than what they can bill for.