The Real Health Care Issue

Robert Samuelson puts his finger on the real issue with American health care: rising costs.

We need to have a candid debate about health care in 2008, but the odds are against it. The fact that covering the 47 million uninsured already looms as the centerpiece of this debate is a warning sign that it won’t be serious. We’re told that the uninsured are our biggest health-care problem, but they aren’t. Runaway health spending is. Although politicians pay lip service to that, what they really enjoy is increasing spending.

It’s understandable because expanding benefits is so much more politically rewarding than trying to control them. Everyone believes in adequate health care; people should have it when they need it. Politicians cater to these beliefs. But the intellectual and even moral laziness of this approach results in an invisible abdication of political responsibility. We are letting the unchecked rise in health spending determine national priorities.

This is exactly right. Currently the CBO is predicting that by 2082 that health care expenditures will account for 49% of GDP. That is just about every other dollar in the economy will be spent on health care. Obviously, this means that expenditures on other forms of consumption will have to decline as a percentage of GDP.

One reason for this increase in health expenditures is the aging population, so this increase in is, at least in part, a wealth transfer from the young to the elderly. Given that the elderly typically have more wealth and assets than the young it is fair to say that the haves are taking resources from the have-nots.

And expecting the government to do something about this is just blindingly stupid. No candidate right now really talks about this issue. They all talk about the uninsured, as if these people are denied necessary medical care. And if we look to government administered health care programs, e.g. Medicare and Medicaid, we see programs that are wildly out of control from a fiscal stand point. Medicare expenditures are expected to triple by 2082 as a percentage of GDP (see the above linked CBO report).

To help solve this problem people need to see and feel these expenditures. Right now that is not the case. Most people don’t think of their health care benefits as their money. They think of it as money their employer spends on them—i.e. it is other people’s money. However, from the employer’s stand point health care benefits are a cost associated with hiring a person. Getting rid of employer provided health care would go someway towards helping solve the problem. Of course politically, this doesn’t rise to the status of a dead horse.

Such a proposal would inflict “pain” in that people would see how much health care really costs in an explicit manner. And this kind of thing politicians avoid at all costs. Politicians love mealy-mouthed non-sense about how something can be done faster-beter-cheaper than we are currently doing it and about how health care is a right or a public good. Talking about reality like how health care is a private good just like tennis shoes or candy bars just wont cut it during election time.

FILED UNDER: Economics and Business, Health, US Politics, , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Grewgills says:

    Your links have additional OTB script built into the front end and so do not work. The CBO link doesn’t work even with that script removed.

    Some bits of the article that jumped out at me.

    Although politicians pay lip service to that, what they really enjoy is increasing spending.

    At least he lets you know just how serious he is near the beginning.

    Neither the government nor the private sector has succeeded in controlling health spending. From 1970 to 2005, average spending per Medicare beneficiary rose 8.9 percent a year. For similar services, spending for Americans with private health insurance rose 9.8 percent annually over the same period.

    and Medicare costs less than equivalent private insurance and has less management costs. So, the cheaper health insurance, whose costs are growing at a slower rate, and is less top heavy with management costs is government run.

    Note that these proposals take no position on how big the government’s role should be. That’s what we should debate. If (as many liberals desire) we went to a government-run universal system, the health tax would be much higher. If (as many conservatives want) we relied more on market competition among health plans, people would see how much these cost. Either way, there’d be more pressure to address the conflicts between providing more services and controlling spending.

    Don’t hold your breath. These proposals would inflict “pain,” and candidates who embraced them would invite political ruin.

    Really? We aren’t debating how large the governments role in health care should be? All those health care plans put forward with different levels of government involvement must be mirages.

    Rising costs do need to be addressed but there is only one paragraph in the article that directly deals with what he sees as the only real problem.

    People need to see and feel health costs. Politically, we need to create constituencies for spending control. Here are some suggestions. First, make Medicare beneficiaries pay more. Second, create a dedicated federal health tax to cover all government health spending (Medicare, Medicaid, etc.). If health spending rose, the tax would rise. Third, eliminate the income tax exclusion for employer-paid insurance and replace it with a tax credit of lesser value. Workers would have more pretax income, but they’d have to spend more after-tax dollars for insurance.

    The first will likely end up being necessary.
    The second really depends on his definition of “all government health spending” given the etc. after Medicare and Medicaid, I guess that includes the health care costs of all government employees including the military (in the field, VA etc) that are currently folded into other budgets. That approach has the added benefit of building another layer of bureaucracy to the entire system.
    The third is not well defined. How much less value would the credit have? Would it be constant or indexed for rising costs? If it is indexed it doesn’t address the problem in the way he proposes so we have to assume that he means for it to be more or less static, so we feel the rising costs. If it isn’t indexed the result will be a lot of people priced out of insurance and going to the ER for their medical care. Unless we change the law requiring hospitals to accept indigent patients with emergencies that means we still pay for their care, save little if any money, and as a bonus they get worse care, but at least we feel it.
    Rather than either of the latter two gimmicks, why not focus our efforts on increasing supply? We have previously achieved analogous results for scientists and engineers. If we are serious about it; it will cost tax money to build and/or incentivise building new medical schools and subsidizing medical education, but it can be done.
    If the AMA refuses to play ball some money will have to be spent to form an accrediting institution.

  2. sam says:

    To help solve this problem people need to see and feel these expenditures. Right now that is not the case.

    Aren’t we seeing something like this right now where some folks who fall into the “donut hole” are just not buying their meds? And, in the end, isn’t that what your solution really amounts to? That people forgo medical care because it’s too expensive, and thus the price will come down…But the pain you refer to in the last paragraph is not “pain” but real pain, sickness, and death. And try telling someone with a sick or dying child that healthcare is just like “tennis shoes or candy bars.”

    I can’t fault your logic, but when it comes to our lives and the lives of our loved ones, logic takes a backseat. I don’t know if there is a solution to this.

  3. Ironman says:

    Beware linear trend lines! There is a point, beyond which, no additional health expenditures will occur because of the diminishing returns. This effect is something that we already see. And I might add, an effect that would be reinforced if individuals were not as insulated from receiving the necessary feedback communicating their full cost of care as they are today, so your point here is a very good one!

  4. Dave Schuler says:

    There’s a study that’s pretty frequently cited by those who favor plans along the lines of the one that Steve has outlined that demonstrates that people in middle to upper income brackets behave very much as Steve has suggested i.e. when their healthcare decisions are economic ones for them, they behave in more prudent ways and healthcare costs are reduced without a reduction in the state of their health. The same study, the only one of which I’m aware that deals with this subject in a rigorous manner, also suggests that middle to lower income people also economize on healthcare when it’s an economic decision for them but that it may have serious impact on their health: they’ll defer both necessary and unnecessary treatment.

    The reason for the result in the case of those with higher incomes may be what Ironman suggests above.

    I’m skeptical that this result is generalizeable to the healthcare system as a whole because the supply of healthcare here is dominated by a cartel. Unless you believe that the cartel is willing to accept a cut in pay, they’ll just increase prices as demand falls to preserve their incomes. There’s some level at which that process will have a negative impact on public health.

    I’m also skeptical about the practicality of universal coverage as a means to reducing costs without fiat pricing since I think that it rests on poor assumption, especially that’s there’s excess capacity available to handle the increased demand and that the reform itself won’t cause the demand to increase beyond the estimates.

    Our problem is actually pretty simple. It’s what the original topic says it is: healthcare costs too much here and the explanation for that is simple too. Healthcare providers here have much high incomes than their counterparts in France, Germany, or the UK (even relative to our higher average national per capita income). I’ve covered the reasons for this at length on my blog. They’re mostly historical.

    My solution, as I’ve repeated ad nauseam is a sharp increase in the supply of health care through better use of technology, changed work rules, educating more physicians, educating more nurses, and fewer non-competitive regulations.

  5. Grewgills says:

    Dave,
    Would you provide that cite?

  6. Dave Schuler says:

    It’s been linked half a dozen times here before, Grewglls. I’ll see if I can locate it.

  7. Anderson says:

    As various bloggers pointed out when Samuelson’s column came out, the 47 million uninsured may not be “our” biggest problem … assuming that “we” are the insured Americans. As Samuelson, and Verdon, so evidently do assume.

  8. Tano says:

    Talking about reality like how health care is a private good just like tennis shoes or candy bars…

    That Steve, is not “reality”. It is your opinion.
    Most people, I suspect, have a very different opinion, because they dont mistake their economic ideology for their moral sense.

  9. spencer says:

    10% of the population accounts for 70% of health care spending. Essentially these are people with chronic illness and includes the elderly.

    Without changing the way health care is delivered and/or managed — keeping the existing system — the only way to cut cost is to tell the 60 year old just diagnosed with cancer, sorry there is nothing we can do but give you pain medication.

    If you are not willing to tell your mother that
    everything you say about government spending or
    Medicare is meaningless talk.

  10. Dantheman says:

    “And expecting the government to do something about this is just blindingly stupid.”

    Effectively, Samuelson is demanding from the candidates a proposal for the government to step in and control costs. However, the chance that any proposal with actual teeth will not be demonized by the Republican Party as “socialized medicine” is vanishingly small. It seems he wants the Democratic candidates (who are the only ones making any substantive health care proposals — I don’t count proposals for giving high income persons an incentive to save for their costs as substantive) to commit electoral suicide. No thanks.

  11. M1EK says:

    I’d also disagree with the ridiculous contention that everybody is getting necessary medical care. The guy with no insurance who has diabetes can’t get a supply of insulin from the emergency room. Yeah, they’ll pay to cut his foot off, of course. Similar situations abound. And even those who can get treated the same way at the ER as they would at the regular doctor are incurring five or ten times the cost for the public by doing so.

    The whole thing rests on the ridiculous contention from ideologues like Steve that there’s no benefit at all to primary-care physicians. If that’s true, I’d invite him to get all his health care from the ER too, and let us know how that works out for him.

    Libertarians who have actually lived under socialized medicine have a very different view of the subject. Ref Matt Welch: http://www.justabovesunset.com/id715.html

    (his original story is no longer available; probably due to pressure from more ideologically pure colleagues).

  12. Dave Schuler says:

    hat Steve, is not “reality”. It is your opinion.

    No, Tano, it’s definitional not ideological. A public good is one that is non-rivalrous and non-excludeable. Healthcare is by definition a private good.

  13. sam says:

    No, Tano, it’s definitional not ideological. A public good is one that is non-rivalrous and non-excludeable. Healthcare is by definition a private good.

    Please. As if the definitional cannot be the ideological. At the end of the day, politics, which is what we’re really talking about here, depends on categorizations (definitions) that are through and through ideologically based. In fact, I would say you’re begging the question: Ought health care to be a private or a public good? And thus we get to the politics.

  14. Dave Schuler says:

    The terms “public goods” and “private goods” are terms of art in economics. Public goods are things like national defense and clean air—goods in which my use of it does not interfere with your use of the same good (non-rivalrous) and for which I can’t readily prohibit you from enjoying the benefits (non-exclusive). Both economists who believe in things like universal coverage and single-payer like, say, Paul Krugman, Brad DeLong and Mark Thoma, and economists who don’t like, say, Arnold Kling, use the terms this way.

  15. floyd says:

    The biggest problems with health care are more likely things like…a $25 MRI for $2500,a $1 pill for $35, $500 to enter an emergency room where no services are offered by hospital staff.
    Services are contracted, and the result is something close to $7000 per hour for a few stitches.

  16. Tano says:

    Dave,

    Why is national defense a public good? Because we choose to make it so. We dont distinguish one part of the country from another – such that if Alaska were attacked, and our military resources were used to defend it, no one would think to claim that Alaska is making use of our finite defense spending – we would simply consider that the nation as a whole were being attacked and the nation as a whole were being defended.

    It need not be that way. We could task each state with its own defense, with the federal military as a back up, and then complain if one state ended up using that back-up more than others. Military resources are finite, and their deployment for defense of one region limits what is available for others.

    Of course, we dont think like that, because defense is accepted, prima facie, as a national concern. Some would consider the health of our citizens to be such a national concern as well.

    If we chose to view health care in the same way that we viewed national defense – that we will defend all our citizens against disease as a right of citizenship, irrespective of their economic situation, then it would be as much of a public good as is defense.

    The economists use terms to describe current reality. I do think that most people would prefer a different reality, based on thier moral sense – that health care should be a public good.

  17. floyd says:

    Tano;
    So, no man has any right to his own earnings? Just take it all and treat him like a child with an allowance,then see what happens to productivity and prosperity.
    Socialism is NOT enlightened self interest.
    I am always amazed when I hear someone say that the government can RUN something that they can’t even regulate efficiently.
    One thing is certain , the man who thinks his government is smarter than he is, is always right.

  18. Tano says:

    floyd,

    Kindly leave me out of the role of foil for your rants. I said nothing about socialism, or the government running anything – there is no necessary reason why healthcare could not be guaranteed to all but run mainly by private players.

    Who said anything about government being smarter than anyone, or taking everyone’s earning?

    Maybe if you actually started listening to what people are really saying, or reading their words with care, your thinking would develop beyond the level of mindless ranting.

  19. floyd says:

    Tano;
    Then to carry your analogy to it’s logical conclusion, our military should be run by mostly private players?

    QUOTE,
    “” because defense is accepted, prima facie, as a national concern. Some would consider the health of our citizens to be SUCH a national concern as well.””

    Are you sure you want a privately run mercenary army?

    QUOTE,
    “”If we chose to view health care in the SAME WAY that we viewed national defense””

    According to your statements..either health care should be the purview of the government, or national defense should not!

    As for the point of government being smarter than anyone, I guess I just can’t imagine someone WANTing to surrender autonomy to lesser competence!

    Any generalities stated in my “rant” should not be construed as ad hominem. Quite the contrary, I often enjoy your commentary.

    I may not have heard what you MEANT, but I heard what you SAID.

  20. Tano says:

    Floyd,

    Are you seriously this dense, or do you simply have way too much time on your hands?

    An analogy is an analogy. It does not set up an equivalence relationship. The reason one uses analogies is to point out similar aspects, not to claim that all aspects are similar.

    One does not “carry analogies to their logical conclusion” – to do so would make them equivalencies, not analogies.

    If we declare “war on cancer” does that mean that we must carry the analogy to its supposed logical conclusion, and sign up all researchers in the military? No, most people understand what analogies are.

    I was referring (and stated twice) to the underlying moral ethic – that healthcare, like defense, should be a public good. That says nothing whatsoever about how that public good is to be realized. Your claim that I am thus advocating that the military and the healthcare system must both be run int the same way, either both privatly or both by government, is entirely your own extrapolation from some assumption that you carry around in your mind, not from anything that I said.

  21. Steve Verdon says:

    Grewgills,

    Here is a link that should work.

    and Medicare costs less than equivalent private insurance and has less management costs. So, the cheaper health insurance, whose costs are growing at a slower rate, and is less top heavy with management costs is government run.

    Sure, but Medicare also covers anyone and everyone who qualifies so that means it is hard to save enough money on administration and management to offset rapidly rising expenditures for actual health care. Further, I’ve seen some evidence to suggest that such comparisons between private and public health care are not “apples to apples” with it going in favor of public.

    Really? We aren’t debating how large the governments role in health care should be? All those health care plans put forward with different levels of government involvement must be mirages.

    But that isn’t the debate, the debate is about universal coverage, the uninsured, etc. At best the issue of how much of a role government should play is secondary if not tertiary.

    Ironman,

    Unfortunately for your argument the CBO is not using a linear projection in that they are assuming the discrepency between GDP and health care growth rates will shrink overtime. They just don’t shrink fast enough.

    Tano,

    Sorry, it isn’t my opinion it is a definition. Your view however, is purely opinion and also wrong.

  22. Grewgills says:

    Thanks for the working link. I will look through the pdf when time allows.

    Sure, but Medicare also covers anyone and everyone who qualifies so that means it is hard to save enough money on administration and management to offset rapidly rising expenditures for actual health care.

    That only further supports my point. It doesn’t discriminate in coverage yet it still costs less, its costs rise at a slower rate, and keeps management costs lower. That’s a win in every category.

    Further, I’ve seen some evidence to suggest that such comparisons between private and public health care are not “apples to apples” with it going in favor of public.

    Care to share that evidence?

    But that isn’t the debate, the debate is about universal coverage, the uninsured, etc.

    The size of governments role in health care is part of the debate in most cases implicitly. Unless you are talking to an economic libertarian it is generally second or third of the big three issues being discussed here. First is who to cover and how (role of government implicit), after that are costs and the relative role of government. At any given point one or the other is second while the other is third.

    Sorry, it isn’t my opinion it is a definition.

    The problem with that is that it is only a hard and fast definition in a theoretical framework. In the physical world there is a continuum between public goods and private goods. Some goods are more public and others more private. In essence the supply of the good at any point in time ends up determining whether something is considered a public or private good. Add enough excess supply and private goods become public goods. For the foreseeable future health care will remain towards the more private than public end of that continuum. The argument boils down to where on that continuum is health care now, where do you think health care should be, and what you are willing to invest to accomplish that.
    IMO, from an ethical standpoint health care should be a common good and we should address supply issues to make it less rivalrous, increasing the good to the public and decreasing costs.

  23. floyd says:

    Tano;
    Even a “dense” man need not spend “too much time” delving the intellectual depths of your present commentary, as profound as it is.
    If, in fact, you have demonstrated some form of superiority here, then compassion for the “dense” would be more becoming than condescension.
    Perhaps you should be grateful for the opportunity to tediously clarify your position to those so far beneath your stature.There may, however unlikely, be other readers as “dense” as I.
    My further upbraiding can now be left to others, since your position is now “crystal” clear.
    Thank you.

  24. Tano says:

    floyd,

    Apologies for being less than compassionate. I have never quite understood the strategy that some people seem to follow in discussions, and that you seemed to follow here – to draw seemingly absurd extrapolations from some stated position, then ask – do you really mean that?

    Actually what you did was even less understandable to me. It wasnt just asking, it was assuming and asserting that I must be intending those absurd extrapolations.

    Somehow I suspect that you know perfectly well that I do not believe that people have no rights to their own earnings, or that government is smarter than people or any of the other points you made. So why waste my time claiming that that is what I must believe?

    The fact that you can find some route to absurdity in a particular postion (something that can be done for any position on any issue), doesnt mean that that is what the person means. What is wrong with dealing with positions as they are presented? If you have legitimate questions about what it all means, or what the larger context is, or what logic the person is using, then why not simply ask?

  25. floyd says:

    Tano;
    Go back and read your original comment.
    I would assert that you should not have used the word “SUCH” in paragraph#3, nor should you have used the phrase “THE SAME WAY”in paragraph#4, if you had not intended a direct correlation between the manner in which defense and health care are provided.

    Eliminating “such” AND substituting perhaps”SIMILAR” for “THE SAME WAY” could have conveyed your meaning more in line with your subsequent”explanation” in your latter comment.
    The intent is not semantical criticism , but rather semantical clarity which I assume was your original goal.

    “Dense as I am, the implication of your first sentence of your last comment is not lost on me.
    Of course the notion was completely rejected in my previous response in the form of obvious sarcasm.[lol]
    I mean you no harm.I will consider your sensibilities in future communications.

  26. floyd says:

    TANO;
    I meant to include this remark in my last response…. I really no longer have enough “time on my hands” to pursue this further. I look forward to other commentary at another time . Keep up the good work!