The Same Old Song

When I began reading Scott Gottlieb’s op-ed in the Wall Street Journal critiquing President Obama’s explanation for why healthcare costs have been rising so fast I had great hopes that I’d read a solid analysis of what has gone wrong with our healthcare system over the last forty years:

One theme the president has focused on is doctors’ motives. During a prime-time press conference on July 22, the president referred to a doctor who muses that she makes “a lot more money if I take this kid’s tonsils out”—even if the child might not need surgery. Responding to a woman whose spry 100-year-old mother was given a needed pacemaker despite her age, the president said a few weeks earlier (at an ABC News town-hall event at the White House) that doctors should let patients know that sometimes “you’re better off not having the surgery, but taking the painkiller.”

Mr. Obama’s clinical scenarios represent an excessive—if not erroneous—take on how doctors are influenced by financial incentives. This jaundiced view on medical decision-making may explain why programs the White House is proposing to lower health-care costs rely on the direct regulation of medical decisions. If Mr. Obama is serious about lowering costs, he’ll need to reform the economic structures in medicine—especially programs like Medicare.

Medicare data shows that for the most part, major surgeries aren’t the source of waste in health care. These kinds of procedures are typically guided by clear clinical criteria and are closely scrutinized by doctors and patients alike. Rather it is in routine procedures and treatments that economic incentives factor heavily into doctors’ decisions.

Unfortunately, it turned out to be yet another iteration of the same old, tired song. Costs are rising because of excess demand:

My colleague at the American Enterprise Institute, Tom Miller, estimates that U.S. patients have the lowest out-of-pocket costs as a percent of total national health spending of any developed country except France, Luxembourg, the Czech Republic and Ireland. They’re even lower than the single-payer health system in Canada. Mr. Miller calculates that out-of-pocket spending on physician and clinical services in the U.S. was about 60% of total real per capita spending on health care in 1960. By 2002 it had fallen to 10%.

Unsurprisingly, Medicare data show that over the past two decades Medicare’s costs for care have sharply outpaced spending in private plans, where co-pays and cost sharing are standard. While these estimates are confounded by factors such as the age of Medicare’s population, Medicare certainly hasn’t been austere.

In my view this is a half truth. Yes, there’s good evidence that costs can be brought down by making patients bear more of the costs, making them more sensitive to price signals. However, I know of no proof whatever that, particularly in the case of Medicare, we can do so in a manner consistent with good public health. When they bear enough of the costs that costs are actually brought down, patients reduce their excessive demand for healthcare and for necessary care as well.

There’s equally good evidence that in the early days of Medicare costs went up first because of increased utilization and then because of increased prices. For the last twenty-five years or so most of the costs in the increase of healthcare can be attributed to inflation alone.

I’m completely in favor of making even Medicare recipients more aware of healthcare costs. I believe in means-testing Medicare. I also believe in taxing employees based on compensation rather than on wages. Together those two things would tend to reduce excessive demand for healthcare.

That might help but I don’t believe it will do the whole job. To really decrease the costs of healthcare we’ve got to increase the supply of healthcare as well and, unfortunately, that’s a discussion that hasn’t really begun yet.