Health care spending and health care costs: they’re not the same thing!

March 19th, 2017 at 12:34 pm

Health economist David Cutler offers sage thoughts on the R’s health care plan. I like where he starts. When Paul Ryan said that what his plan brings to the table is the “freedom” for healthy people not to have to subsidize the sick, many progressives pointed out that…um…that’s kinda how insurance works, Paul.

But as Cutler points out:

Critics were probably too quick to dismiss Ryan’s remarks as ignorant. What he said reflects a long-standing vision of many on the right about who should pay for the chronically ill. Spreading the costs so that healthy people pay more than their own care likely will warrant in a given year is one option. But that’s not the solution Republicans have traditionally favored. Their answer for health care, as for old-age support, is to put a greater burden on individuals to pay for the costs they incur. In that mode of thinking, the unraveling of risk pools is a virtue, not a vice.

In other words, in their YOYO world (“you’re on your own”), risk pooling is a socialist, not an actuarial, tool. As Cutler suggests, this helps explain their antithesis to any version of social insurance.

What he doesn’t get into is that this is really just a stop on the path to the ultimate goal of turning the resources that support social insurance over to the wealthy in tax cuts, a very obvious play in the ACHA. (Heads-up: Ben S and I feature the author of that link, CC Huang, along with health expert Shelby Gonzales, in our next episode of the On the Economy podcast, out Tuesday.)

However, Cutler goes on to explain that:

Even under this philosophy, though, Ryan’s American Health Care Act is fatally flawed: It does nothing to address the high and rising cost of chronic illness.

Along with a must-read tutorial on the cost structure of chronic illness, Cutler’s key point, also relevant to the next piece I’ll discuss, is that in this debate, you don’t want to conflate spending with costs. It’s easy to cut spending. It’s hard to cut costs. With their emphasis on high deductibles and less comprehensive insurance, R’s cut spending by shifting costs onto people who are now getting more government assistance. But they do nothing to reduce costs, leading to a very dangerous collision between those with low and moderate incomes and their health needs.

I thought NYT columnist Ross Douthat fell into this trap in an interesting piece about the advantages of Singapore’s health care system, where they spend 5% (!#$&?@#) of GDP on health care (we spend 17%). My bold:

Republican politicians may offer pandering promises of lower deductibles and co-pays, but the coherent conservative position is that cheaper plans with higher deductibles are a very good thing, because they’re much closer to what insurance ought to be — and the more they proliferate, the cheaper health care will ultimately be for everyone.

No, no, no! Read Cutler. The cheaper health coverage will be, not health care.

Of course, all of this begs the question: how can we reduce health care costs?

Cutler mentions a key factor emphasized by Dean Baker: the extent to which the patent system adds literally hundreds of billions of dollars per year to the cost of American pharmaceuticals (see Chapter 5 here).

Revealingly, in his praise for aspects of Singapore’s single-payer system that keeps the private sector in the mix, Douthat fails to mention the main way they control costs: government cost controls (see Chapter 4 from this useful review by William Haseltine). The government sets prices in the dominant public sector, and the private sector must follow suit.


One study comparing healthcare systems among the developed Asian nations described the Singapore government as “micro-managing provision,” ensuring that public hospital charges are kept at acceptable levels, and in turn relieving pressure on Medisave accounts [mandatory health savings accounts]. It went on to say that the government “uses funding (and hospital ownership) in a calculated manner to control service costs and subsidize care, in turn limiting expenditure from insurance accounts and providing incentives for private providers to keep costs down.”

Medicare helps shape the private market to a lesser extent here, and there’s some compelling evidence that states that took the Medicaid expansion had lower premium costs charged by private insurers in the exchanges, along with reduced costs of uncompensated care.

It’s never hard to reduce spending in government programs. Reagan did it in the 1980s by throwing poor people off of the welfare rolls, and his present day disciples do so in the ACHA by cutting Medicaid spending by 25% by 2026.

But spending isn’t costs, which people either have to somehow pay or suffer the consequences of their illnesses. As this debate lumbers on, it is essential to recognize that many of the factors most associated with reduced health-care costs (vs. spending)–single payer, government cost controls, patent reform, incentives for quality care over quantity–involve a level of government intervention with which I’m totally comfortable but many others, like Douthat, are surely not.

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18 comments in reply to "Health care spending and health care costs: they’re not the same thing!"

  1. D. C. Sessions says:

    Of course, all of this begs the question: how can we reduce health care costs?

    Their plan does reduce health care costs, though. By making health care something that you get only if you can pay for it, the plan guarantees that most of the chronically ill (those who consume the overwhelming majority of health care in the USA) will not receive that expensive care [1]. The net result is that health care spending will, necessarily, decrease.

    [1] Of course if Bill Gates or his family, or other majorly wealthy people, have an expensive condition they’ll get whatever it takes. Even if they have to go somewhere like Mexico where there are doctors who see enough cases to stay current with that particular problem.

  2. Jill SH says:

    What seems to be overlooked by Speaker Ryan and so many others, or at least not spoken about, is that the cost of health coverage is not primarily the healthy helping to pay for the sick, but the working people paying for everyone.

    Consider the really big healthcare “payers” in the system — Medicare and Medicaid, and of course the govt pays for the military, and govt employees at all levels, town county state and federal — all funded by tax dollars. [BTW, that covers quite of few of the biggest risk groups, poor, elderly, soldiers…] Taxes are paid by working people.

    Then there’s the private insurance, through an employer or by individuals. Either you worked for that benefit, or you worked and earn what you pay for that coverage. Uninsured, uncovered people’s health costs are shifted to those who do pay. [That’s less so now with the ACA.] Think about why employers want to move manufacturing to robots–no paying for “workers” health benefits.

    It’s amazing how much of our health care system actually has alleviated risk in the private sector by using government based programs.

    Furthermore the best health care will also be the most cost effective, because 1] it will promote preventive and primary care that will keep people healthy; 2] it will effectively manage chronic illness so health is maintained and avoid expensive crises; and 3] it will intervene promptly in crisis situations to restore wellness. This last part is the only thing our system is really good at.

    “Cost-saving” mechanisms that impede #1 above — such as high co-pays and deductibles, or even narrow networks that force longer travel distance for treatment — will actually end up costing more in the long run because early, more effective care will be delayed.

    I have a couple of questions that I think are basic to this whole discussion and nobody ever asks or answers them:
    1. How much should any one person pay for health care out of their earnings?
    2. What’s more important: being able to choose your doctor, or your insurer? [Warning: employer-based insurance may give you neither.]
    3. Tell me again: What is the value added by private health insurance companies? [They really don’t seem to be keeping costs — or spending– down.]

    • Jared Bernstein says:

      Excellent questions. I’ll think about the answers–I know I can answer 1, 2 seems awfully tricky as for most I would think it’s insurer but for specific cases, surely the MD matters, 3…not sure I can answer that either but it sounds pretty rhetorical. I do think private health care provision, including the pvt insurance infrastructure, is a pretty uncomfortable structure in advanced economies as they at least partially treat hth care as a non-market good (ie, people get treated whether or not they have $/coverage).

      Update: Re #1, if you look at EPI’s family budgets, you find that families should be able to devote about 10-15% of their income to hth care, depending on family type and where they live.

      • Jill SH says:

        I think your update to #1, a family’s budget should allocate 10-15%, is based on having to buy private insurance? So let’s say a policy for a family of four cost $20K a year. A family with income of $60K will have to pay 33%. [For the moment I’m assuming a pre-Obama care world, and no employer coverage, and it’s perfect coverage, no deductible/copay.] A family with an income of 120K pays about 16%. So insurance, with its fixed premium price tag, means a drastically different burden, depending on your income level.

        Now someplace in Obamacare — which of course fixed the aforementioned problem with subsidies — didn’t they set a max out-of-pocket of 8% of income for some of the plans? So low income folks wouldn’t be sideswiped by copay/deductible dilemma?

        But!! … If we were to TAX people — not try to subsidize the premiums of private insurance companies — but raising the payroll tax to make Medicare for All, what would that take? Maybe less than 10 or 15%? [And of course, no top limit on taxable income.]

        That’s the kind of turning-the-issue-on-its-head that I’m trying to get at with these questions. Let’s get down to: how simple can we make this? I for one would love to make one payment — a percentage out of my earnings — and have complete coverage, no out-of-pocket. [OK, maybe a $5 copay for an office visit. But that’s just a clerical fee.]

        As for the second question. No brainer. We are not “health care consumers” — we’re patients. And one of the first steps toward wellness is being able to see a doctor you can trust. Insurance and their networks do tend to gum up the situation. You could get in with a doctor you know and trust, then your employer changes insurance, or your insurance changes who’s in the network.

        I think I’ve said enough to cast shade on the value added by insurance companies.

        Although I will say, I bet the insurance companies are sitting on a lot of data about what kinds of treatments, settings, practices are most cost-effective, since their rate-setting information is held as proprietary. Wonder if we’ll ever know.

        • Shannon Brownlee says:

          Thank you for pointing out that people who are sick are not consumers, they are patients, and people who are really sick with multiple chronic illnesses blow through things like deductibles with one hospitalization, so the idea that giving sick people more “skin in the game” will magically result in lower health care spending comes out of some kind of Alice in Wonderland thinking.

    • Smith says:

      There is research and data on these questions.
      1) Healthcare should be a basic right.
      2) Doctor, that’s common sense. The insurance is important in it’s ability to restrict the choice of the doctor, but that’s just a chicken or the egg argument. The goal is to be able to choose one’s primary healthcare provider, the doctor.
      3) Private health insurance companies could add value even if they don’t currently. Look at how other countries’ health insurance companies function. Many countries contain a non-profit or closely regulated health insurance industry. They don’t have healthcare executives and presidents of hospitals making tens of millions of dollars. (Should the president of a hospital make more than twice what the president of the U.S. makes? Does anyone need to make more than a $1 million per year?)

  3. Smith says:

    Shame on you for supporting Dean Baker’s totally unsubstantiated claim that “Weakening or eliminating patent and copyright support for innovation and creative work would radically reduce waste.”
    Surely we know this is so because no government agency has ever been guilty of waste, the patent provision in the constitution of U.S. was a mistake of the founding fathers, and the American lead in invention, technology, and intellectual capital had nothing to do with the incentives provided to foster creativity.
    Of course when corporations take unfair advantage of markets there are ways to address abuse without eliminating over 200 years of law and precedent. One could simply tax excess profits. There’s actually a name for that kind of tax. It’s called an excess profits tax. Got a problem with monopoly? We have something called anti-trust law, if the government ever chooses to start enforcing it again.
    Should the government essentially nationalize the pharmaceutical industry? No. Should the government increase spending on research of drugs to compete with the pharmaceutical industry? A public option couldn’t hurt.
    Why gut the patent law? Why not look at how other countries control prices better?

    This anti patent argument reeks of intellectual laziness. Being a Freakonomics wannabe doesn’t aid progressive policy debate, and ends up as the left’s version of conservative no-nothings. Someone has already missed the last train to Factville.

  4. William Miller says:

    Healthcare costs are just a result of the core problem which is wealth and income inequality driven by plutocracy in America. In 2013, the US spent about two and half times on healthcare per person compared to what European countries spent because a single payer system permitted negotiated prices from providers similar to how Medicare operates in the US. Only a single payer system will fix the healthcare problem in the US that is caused by the theft of American wealth by plutocrats.
    The news media will always fail to educate the public about plutocracy because the media thrives on short, superficial, empty messages that can be easily compromised with debates about false statements and fake news. As verified with linguistic and behavioral psychology research, the public needs to get educated by reading books including novels that communicate with expanded stories how plutocracy has caused the shift in political power and wealth in America over the last four decades. The public needs to read books that describe plutocracy in America such as Dark Money and books that describe the methods used by plutocrats such as False Faith and Equestrian Games and Polo … Game Changer. A group of billionaire GOP plutocrats for decades now have been gradually destroying democracy and moving all income and wealth to themselves. A group of 400 billionaires now own more than 61% of the wealth in America.

    • Smith says:

      No, but accidentally partly correct about inequality. Krugman (before he became the twittering fool and Bernie basher) published a graph on his blog from Kaiser Health that showed the classic 20/80 split (I forget the term for this). It wasn’t the 20% percent of the sickest people consuming 80% of healthcare costs. Instead it was 20% of the richest people consuming 80%. It may not have been an 80 20 split, may have been worse. Research it, find the graph, read it for yourself. This fact suggests single payer is not the only answer. If rich people want to spend a lot of money on healthcare, this potentially could be beneficial to others. They could unknowingly but voluntarily subsidize research, fund fund care for those with larger costs, or those with less resources. Instead they currently drain resources for research, and bid up costs for those with larger healthcare needs, and those with less resources.
      Many European healthcare systems function with lower costs without a single payer system. You can look at how they work to see viable alternatives. Compare UK, France, and Germany. I point to them simply because they are big and prosperous, and I haven’t checked Spain, Italy, Japan. Canada and Australia though smaller, are English speaking and so perhaps easier to get primary source information for English speakers.

      • William Miller says:

        My main point is that plutocracy has driven wealth and income inequality in America over decades of coordinated activity and part of that inequality is healthcare in which America and its citizens pay much more for healthcare than do other developed nations such as those in Europe. Another point is that the free press has not adequately informed the public of this fact, seems to accept higher cost for healthcare in America as a given, and further seems to avoid discussing plutocracy as a possible cause of the problem and the political myopia. Some academic research such as that done by Martin Gilens at Princeton has investigated the impact of affluence on politics but the research is superficial, was never specific related to plutocracy, and never at the level of the type published in Dark Money. Another point is that medicare prices for healthcare in America are much, much less than free market prices. That fact confirms that a single payer system in America sets lower prices. The political and economic debate in America is mainly based on the false assumption and ideology promoted by plutocrats that a largely unregulated free market system including private healthcare insurance even as an oligopoly will always provide lower costs and better care than any single payer system. The European alternatives are almost never discussed by the news media.

        • Smith says:

          But even when the American media discusses alternatives, they miss important points. Many or most European countries have mixed systems, for example, France and Germany. Also Germany has many doctors, but many are also leaving because of low pay, and Germany is importing foreign doctors instead. Also America needs more medical schools, at least a 33% increase. The cost is a capital investment of about $10 billion dollars, a drop in the bucket for the $3 trillion spent each year.
          Finally, one shouldn’t talk about higher health care costs without noting the sick American lifestyle that contributes to it.

      • Shannon Brownlee says:

        European systems function with lower prices because they regulate their insurance markets more tightly and they set prices. The UK, Canada, and Australia are single payer, effectively Medicare for all systems. Germany, France and Switzerland have a mix of public and private payers, which they regulate closely.

        And regardless of what Paul Krugman may have published about the 80/20 rule, the reality is the sickest 20% of people account for 80% of healthcare spending. Those sickest 20% are not the affluent, as rich people are less likely to be as sick as the middle class and the poor, at least not until they get old.

        Maybe what Krugman was saying is that people who have health insurance use more medical services, and more affluent people are more likely to have insurance. I’m a little confused by your argument that their use of medical services somehow benefits everybody else. The more health care services Americans “consume,” the more the total spend on health care goes up, and the more our insurance premiums cost.

        Our high health care costs are due to multiple problems. One, we pay very high prices per unit of service. Drugs, an hour with the doctor, a day in the hospital, an implantable defibrillator — prices for most medical stuff is higher in the US than elsewhere. Two, we use more high end, highly technological care, and hospital based care. We have the second highest rate of cardiac stenting, for example. (Norway out does us there.) Three, even though we spend fewer days per capita in the hospital, the unit price of those days is higher than in other countries, and we have more things done to us. Only some of which results in better outcomes.

        And four, we have worse health than peer countries, largely because we spend far more of our health dollars on medical services and fewer on social services, education, ensuring people have good food available and good jobs. Our infrastructure and many policies seem almost designed to make Americans as unhealthy as possible.

        But lest anybody imagine that other countries have worked out all the kinks, here’s a series of papers we published in the Lancet about overtreatment and undertreatment around the world. Turns out everybody is afflicted, even low and middle income countries.

  5. Smith says:

    People, do your home work. There is an internet and wikipedia. Go to Kaiser Health website too. This is not rocket science, brain surgery, or even first year calculus. The information is not secret. Other countries provide a natural experiment. Of course, Americans healthcare costs are also higher because we are sicker, and lead more unhealthy lives. Research that too. (example: obesity = diabetes) Lifestyle work more hours, more weeks, more stress, less exercise, fast food, etc.

  6. Robert Salzberg says:

    Paul Ryan used his Social Security survivors benefits to help pay for his college.

  7. William Miller says:

    Improvements in healthcare required innovation with controlled experiments. Innovation and government economic policy are linked but those topics and the link are not adequately discussed in the news media that largely fails to properly inform the public. As a result, America suffers.

    Consider the GOP policy on innovation. The GOP is against any government led innovation including innovation in healthcare because they believe innovation should be created and led by unregulated free markets. That’s an interesting policy because if followed, it would kill any innovation in national defense.

    According to the State Science & Technology Institute (SSTI) who analyzed the POTUS “skinny budget”, the GOP led Administration does not view government funded science, technology, R&D, innovation and entrepreneurship and the economic development efforts built around those activities as the path forward to making “America great again.” The GOP believes only the unregulated free market can create proper economic development.

    Case study: Within HHS is CMS – The Centers for Medicare and Medicaid Services.
    Consider the policy of the Democrats on government funded and led innovation. Great hopes for fundamental shifts in healthcare delivery were launched with the Center for Medicare & Medicaid Innovation (CMMI) at the CMS, an agency created by the Affordable Care Act (ACA) to test new healthcare delivery and payment approaches. The CMMI was created by the Affordable Care Act in 2010 to test different strategies including new business models for delivery of healthcare for promoting quality of care while also reducing costs.

    The GOP now wants to kill the CMMI and any other government led innovation in healthcare including reducing funded for the NIH and probably university/NSF research.

    Acting CMS Administrator Andy Slavitt had aggressively defended the CMMI and said it is key to achieving the bipartisan goal of paying for healthcare services based on value and quality. But more than 170 House Republicans sent a letter to Slavitt in September 2016 asking that the CMMI stop requiring mandatory participation in any payment models. They said the agency has upset the balance between the executive and legislative branches by overstepping its authority and failing to engage stakeholders.
    Some of the models, particularly those that have mandatory provider participation, have encountered significant opposition.

    Those models include two bundled-payment models—the Comprehensive Care Joint Replacement Model and the Cardiac Bundled Payment Model. The pharmaceutical industry has attacked the Part B Drug Payment Model, which changes how doctors are reimbursed for outpatient drugs. The bundled payment model has been described as “a middle ground” between the current standard fee-for-service reimbursement model (in which providers are paid for each service rendered to a patient) and capitation (in which providers are paid a “lump sum” per patient regardless of how many services the patient receives), given that risk is shared between payer and provider.

    The CBO had been monitoring the entire CMMI process, from the collection of ideas for new models through the testing, refinement, and evaluation phases of models selected for testing. Under the ACA if the CMMI program would be permitted to mature, the CBO intended to monitor expansion decisions and the implementation of those decisions, updating projections to account for those decisions.

    Of course, innovation in healthcare should also include radical innovation such as testing a single payer system. America is being destroyed by a lack of radical innovation and politics.

    • AngloSaxon says:

      “unregulated” free markets=market government and market totalitarianism. Anti-Nationalism at its finest. Globalist and Sephardic to the core.

  8. Shannon Brownlee says:

    Jared, I thought you might be interested in this blog from The Atlantic I wrote with colleagues about the difference between health care spending, costs, and price. Cheers, Shannon Brownlee