Friday, October 26, 2012

A thought on the growth of health care in the federal budget

There has been considerable comment about the Bush administration's choice of spending huge amounts on two wars while cutting taxes, leading to large deficits.

Health care spending now represents approximately one quarter of the federal budget, comparable to pensions and defense spending. It has grown to that size over a period of slightly more than 40 years. Yet no one seems concerned that it has been allowed to grow without the government creating corresponding revenues.

During this period, health care spending has increased greatly as a portion of the U.S. GDP. suggests:
While there is broad agreement that the rise in costs must be controlled, there is disagreement over the driving factors.  Some of the major factors that have been discussed in cost growth are:
  • Technology and prescription drugs– For several years, spending on prescription drugs and new medical technologies has been cited as a primary contributor to the increase in overall health spending; however, in recent years, the rate of spending on prescription drugs has decelerated.[1]  Nonetheless, some analysts state that the availability of more expensive, state-of-the-art medical technologies and drugs fuels health care spending for development costs and because they generate demand for more intense, costly services even if they are not necessarily cost-effective. [6]
  • Rise in chronic diseases – Longer life spans and greater prevalence of chronic illnesses has placed tremendous demands on the health care system.  It is estimated that health care costs for chronic disease treatment account for over 75% of national health expenditures. [7]  In particular, there has been tremendous focus on the rise in rates of overweight and obesity and their contribution to chronic illnesses and health care spending.  The changing nature of illness has sparked a renewed interest in the possible role for prevention to help control costs. 
  • Administrative costs – At least 7% of health care expenditures are estimated to go toward for the administrative costs of government health care programs and the net cost of private insurance (e.g. administrative costs, reserves, taxes, profits/losses).[1] Some argue that the mixed public-private system creates overhead costs and large profits that are fueling health care spending.[8]
Another of the many reasons is inflation. The demand for health services is determined in part by what doctors prescribe.

During my time as a health planner in Latin American I asked doctors what they would do if a private patient could not afford the course of diagnosis, treatment and care that the doctor thought most appropriate. The answer was that the doctor would seek to identify an alternative course that would benefit the patient and yet still be useful to that patient. So, in part one may assume that doctor's prescriptions are determined by the ability to pay.

Economists inform us that when demand exceeds supply, prices increase. There are a number of constraints on the supply of health services, such as limitations on the supply of doctors and nurses and limits on the financing of public hospital construction. On the other hand, government funding of health care greatly increased demand. Thus I conclude that there has been a lot of inflation over time. In support of this idea, here is a quote from the blog, Carpe Diem:
Physicians in the U.S. made an average of about $200,000 in 1996, which was between 2 and 5 times as much as doctors made in European countries and Japan (see chart above). The median physician salary in the U.S. is now closer to $275,000.
Government can control inflation through various actions. It could of course, ration health services, as has been done in some countries. It can also impose rules and regulations that prevent practitioners from prescribing less cost-effective treatments -- as my health maintenance organization does through the use of formularies and emphasis on preventive interventions. Or it can impose price controls.

One of the unusual aspects of the health care cost situation is that since the society agrees that adequate health care is a right, the costs have to be paid from some source. In the United States a considerable portion has been paid out of pocket by patients, another portion by employees and employers through health insurance plans, some by charity, and some by government. The transfer of responsibility for a portion of the bill to government has been accomplished without the government devising adequate means to finance the costs, and without the tax payers shouldering the burden of needed income.

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