Thursday, January 03, 2013

Government Should Slow the Growth of Health Care Costs!

When Medicare went into operation in 1965, U.S. health care costs were comparable to those in other developed countries. As the graphs above show, since that time U.S. costs have increased more rapidly than those of other countries, both per person and as a portion of GDP. Currently U.S. health care expenditures are running at 18 percent of GDP.

According to Wikipedia, the United States now ranks 38th in the world in terms of life expectancy. That implies that the high level of U.S. health care costs is not because we have better health care or better health. It is also not because we have a greater portion of people who are in the older age brackets, needing more health care.

The introduction of Medicare led to an increase in demand for health services. On the other hand we limited the rate of growth of the supply of health services, both through the system of financing of health service facilities and through professionally controlled limits on enrollment in professional schools and on immigration. We also have not imposed effective price controls on health services. If demand increases faster than supply increases without price controls, prices go up. Time magazine reported early last year:
Medscape surveyed 24,216 physicians across 25 specialties from Feb. 1 to 17, 2012. Doctors’ earnings ranged from about $156,000 a year for pediatricians to about $315,000 for radiologists and orthopedic surgeons. The highest earners — orthopedic surgeons and radiologists — were the same as last year, followed by cardiologists who earned $314,000 and anesthesiologists who made $309,000.
The simple market analysis in the previous paragraph has limited applicability to health care. Essentially it is the providers of health care who prescribe how much health care is needed by their patients. Thus the demand for services is largely controlled by the providers. (That is why I belong to Kaiser Permanente, a health maintenance organization, that uses formularies and standards as well as extensive preventive services to control costs.)

Unless the nation does something about health care costs, they are going to get worse. The population is aging and baby boomers are quickly going to be retiring in large numbers and having more needs for health care as they age. The increase in health care entitlements is going to cause them to grow as a percentage of federal health care costs.

The federal government is the obvious entity to intervene and help control the rate of increase in health care costs for the nation. The way to do so is not to keep the poor from equitable access to health care (as we have been doing).

  • One vehicle to do so is through its Medicare and Medicaid financing. I think these should introduce price controls consistent with the quality of services, such as demanding practices comparable to those of my HMO.
  • Tax financing is an element of the problem. I am not talking about tax exemptions for high levels of health care expenditures on individual income tax, but rather about tax exemptions for company costs for health insurance for their employees. I see little reason for the tax payer to subsidize luxury health insurance for rich executives.
  • Government can expand the supply of health care services, especially by promoting delegation of functions to lower paid professionals (who would be in increased supply). I was surprised in my days in the World Health Organization to discover that in so doing, better care was often the result.
  • Government can stimulate technological change, especially in areas such as patient record systems and mhealth -- technologies that result in lower expenditures on health services.

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