You Ask, I (try to) Answer

July 2nd, 2011 at 7:04 pm

Q: Could you please explain why it’s so important to enact measures to bend the cost curve in the private sector, if you want to save the government money? I mean, isn’t one of the assumptions behind plans like the Ryan proposal that the private sector is more willing (and able) than Congress to be the bad guy and impose otherwise politically untenable, but needed, measures, like higher copays for less-effective procedures?

Why important to save costs in pvt sector to save gov’t money?

Not so much to save the gov’t money as to save the economy money.  All the other advanced economies spend half to two-thirds what we do (as a share of GDP) with full coverage and better outcomes, on average.  Credible estimates say we waste about a third of health spending on unnecessary or unhelpful procedures and tests.

So the problem is that all this excess crowds out spending on other things society needs and wants.   We spend about 17% of GDP on health care, public and private.  Cut that by a third, say 6% of GDP, that’s $900 billion a year to be used for infrastructure, schools, productive investments, deficit reduction, tax cuts…you name it!

(There’s one area where some savings could accrue to the gov’t from lower private sector costs.  Employers can deduct contributions to their employee’s health care, which amounts to $200 billion a year of forgone tax revenue.  Slower private sector cost growth could generate fewer deductions and thus some savings here.)

Isn’t the pvt sector better at saying no and thus lowering costs?

Probably so for discretionary stuff like Lasik surgery, but that’s not where the big money is—the vast majority of health care spending is on major diseases, chronic diseases, and end of life, and pvt sector coverage is no better at controlling those costs.  And in fact, as I showed in a recent post, costs have been growing more slowly in the public sector, which does a better job than the pvt sector in controlling the bigger ticket costs (though costs are growing unsustainably quickly there as well).

What’s needed, as your question implies, is a system that can identify–both on the public and private sides–what’s cost effective and what isn’t, and make the latter something you can have if you pay for it.  That’s the core cost control idea in the Affordable Care Act, through the Independent Payment Advisory Board.


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6 comments in reply to "You Ask, I (try to) Answer"

  1. Michael says:

    Sorta. Part of the problem is that Americans also simply pay more for a given procedure than almost anyone else. That’s not because of “wasteful” medicine, it’s because the idea of a health care “market” is so absurd that our slavish devotion to the ideology is enormously expensive.

  2. Maggy says:

    I just went through the final illnesses and hospitalization of bothe my parents in the last two years. Believe me, there was a lot of defensive medicine being practiced. We finally had to get a hospice agency involved to protect my dear parents from unnecessary procedures at the end of their lives: things that they specifically asked NOT to be done in their living wills. Still doctors would be trying heroric procedures that would not change the outcome and would prolong their suffering. It is outrageous that a person’s living will would be questioned. It is outrageous that the family’s wishes were discounted and discouraged. In the end my 90 year old plus parents wanted to be left alone during their final days, and we fought for that right. This is what drives up costs. This does not relieve pain and suffering or give people the right to make choices. That is why the whole “death panel” thing was so outrageous. Thank you Mr Bernstein for your continued advocacy for good health care for all Americans. Yes we can do this…together!

  3. Fr33d0m says:

    “the private sector is more willing (and able) than Congress to be the bad guy and impose otherwise politically untenable, but needed, measures, like higher copays for less-effective procedures?”

    Thats a pretty ridiculous assertion. What is the purpose of the private sector imposing higher copays? And why does that matter?

    Of course the private sector would impose higher copays. Any business should do anything it can to to maximize profits. The assertion ignores the root of the problem. The cost of care is not mediated so much by supply and demand so the private sector is less concerned that raising the fee for service would negatively reduce demand. The result of that is that people are bankrupting themselves because of the cost of care and then turning to more expensive emergency rooms for care they can no longer afford–which drives the cost of care up further. And that assumes that any given person has the enough to pay for basic care in the first place. Thats why we have insurance companies and copays, both of which help shield the health care market from the potential corrective effects of supply and demand. All this leads to a strain on the rest of the populace and reduces economic activity in other markets. Thats why government is involved in health care in the first place.

    We are all paying for the health care of others with or without government involvement. The last thing we want is for that cost of care to go up. Higher copays just make the problem that much worse.

  4. David Kaib says:

    I ask, you answer?

    You’ve been writing a lot about what the federal government can do, but it’s clear at the moment that many at the federal level are not interested in improving the economy (or hell bent on doing things that will make it worse). So what about the states? What can the states do to improve the economy – or more specifically, fight unemployment?

  5. casey says:

    Thank you. It’s neat to be able to ask someone like Jared and actually get a persuasive and thoughtful reply!

    A couple of years ago, I attended a briefing where David Cutler said something to the effect of, “if we want to control exploding health care costs, then stop funding the NIH”. I definitely don’t mean to mischaracterize what he said, and I apologize if I did. His quip was obviously meant to be provocative and clever. But he was clear in his point that advances in medicine contribute heavily to rising health care costs. Agree or disagree?

    • Michael says:

      It’s true on a trivial level and false on an important level.

      Firstly, yes. Advances in medicine now make it physically possible to treat some illnesses, or treat the same illnesses with more effectiveness. And medical ethics hasn’t advanced to take that fact on.

      Second, not really. The problem isn’t that medical costs are rising; it’s probably a pretty sensible place to put money as we get richer. The problem is that they are rising so quickly that it is becoming less and less possible for a middle-class person to insure against even relatively expected shocks, like an injury or a birth. The US doesn’t spend 1 1/2 times as much per capita on its health care as the next most profligate nation because our outcomes are better. They aren’t. So it’s not just technology. Our organizational model is also at fault.