health care costs

What do we mean when we talk about the “rising costs of health care” in America?  It’s a very ambiguous term with a lot of different possible meanings.  We could mean the cost of health care per capita, or as a percentage of GDP.  In 2007, total health care spending was $2.4 trillion dollars.  Per capita, health care costs were an average of $7900.  This number is rising, and total spending is supposed to reach over $4 trillion by 2017, an estimated 20% of GDP.  Premiums on employer-based coverage rose 5% in 2008.

In 2007, here’s how medical spending broke down:

Then again, when we talk about costs of health care, we might also be talking about government expenditures.  This is another set of costs altogether, and according to the CBO:

Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035. By 2080, the government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

In CBO’s estimates, the increase in spending for Medicare and Medicaid will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080. Thus, reducing overall government spending relative to what would occur under current fiscal policy would require fundamental changes in the trajectory of federal health spending. Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy.

Now add the currently proposed H.R. 3200 to the table, which is expected, under conservative estimates, to cost $1 trillion dollars over the next ten years, and you see how entitlement spending is quickly outpacing our ability to pay for it.

And here is where things really become murky when talking about “health care costs.”  On the one hand we can talk about national costs – the expense to businesses and consumers across the country, and on the other hand you can talk about government spending and the costs to taxpayers.  These are two different costs.  Shifting costs from patients and businesses – the consumers of health care – over to government and tax-payers isn’t actually reducing costs at all.  It’s simply changing who pays for them and who gets paid.  So when President Obama talks about reigning in costs, it’s important to point out that H.R. 3200 doesn’t actually do that.  In fact, it just raises the tab on out-of-control entitlement spending, and shifts costs from one sector to another.

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What many studies have shown, and what many other countries are realizing as they begin to move away from centralized government control of health care, is that the single most meaningful way to control health care costs – in terms of government expenditures and personal/national spending – is to put health care decisions and their costs as close together as possible.  The consumers of health care need to be able to fully understand what they’re getting and how much it costs.  They need to be able to self-ration and to have options available to them. This is how health care used to be handled, before the tragic accident of employer-based coverage changed everything.  Third-parties cannot ever manage health decisions as well or as efficiently as people can themselves.  This applies to both third-party payers in today’s system and to the government.

I don’t think H.R. 3200 is all bad.  It’s good to have protections for those who cannot afford insurance or have pre-existing conditions.  I just don’t think it takes that most meaningful step – the cutting of the umbilical cord between us and our employers.  Until that step is taken, true reform – putting costs back into our own lives and decisions – will not become reality, and costs in the public and private sectors will continue to rise.   I realize that making decisions on health care is not like making decisions on buying a car or a pizza.  It’s much more complicated, much more important, and generally entails a lot of unknowns.  This is why I like Wyden-Bennett, even though it’s not the perfect market solution.  It contains costs while providing coverage and returning at least some of our health-care decisions back to us directly.

See also:

Support Wyden-Bennett

Jonathan Cohn on the Dutch and French health-care systems

Cato’s health-care reform policy site.

Andrew Biggs on entitlement costs and the aging population.

Ezra Klein on compromise, Wyden-Bennet, and bipartisanship.

Update.

Mark and I have gotten a lot of sort of resentful responses to these posts on health care (it’s the liberals turn now, get to the back of the bus! type stuff) even when we depart from more market-based solutions and push Wyden-Bennett.  So, I’d just like to push guest posts again.  I’d specifically like to hear a liberal defense of H.R. 3200 over Wyden-Bennett.