Health spending fallacy

The President emphasized the importance of health care reform in Tuesday evening’s press conference. One of his arguments was that reforming health care would help address federal and state government fiscal problems:

What we have to do is bend the curve on these deficit projections. And the best way for us to do that is to reduce health care costs. That’s not just my opinion; that’s the opinion of almost every single person who has looked at our long-term fiscal situation.

His statement is excellent but incomplete. There are two problems driving future deficits: rising health care costs, and the aging of the population. Both factors drive projected Medicare and Medicaid spending increases, and demographics helps drive projected Social Security spending increases. To fix our long-term deficit problem, we need to address both factors, and spending trends in all three programs.

The President then defended the increased health spending proposed in his budget:

What we’ve said is, look, let’s invest in health information technologies; let’s invest in preventive care; let’s invest in mechanisms that look at who’s doing a better job controlling costs while producing good quality outcomes in various states, and let’s reimburse on the basis of improved quality, as opposed to simply how many procedures you’re doing. Let’s do a whole host of things, some of which cost money on the front end but offer the prospect of reducing costs on the back end.

This is the health care investment myth: if only government will spend more money on health care, then that will reduce costs and, eventually, government health spending.

The correct response is a tautology: if government spends more money on health care, then government health care spending will go up, not down.

The President argues this spending is an investment that will address the sources of health care cost growth and “ultimately” drive down costs for the federal and state government. I dispute that, and will expand on my argument in the future.

But there’s a more important point. The President’s budget would increase health spending by $634 B over ten years. That’s a full order of magnitude larger than the current law program to subsidize health insurance for children (known as “S-CHIP”). You cannot spend $634 B on health IT, preventive care, and outcome measurement. You’ll run out of things on which to spend it.

When you’re setting aside that enormous sum, you’re doing it to expand taxpayer-subsidized health insurance coverage, as the Congress began to do in the so-called stimulus bill. That’s a policy choice that I’m happy to debate. But it is irrefutable that an expansion of taxpayer-funded health insurance coverage will dramatically increase government spending on health care, not reduce it.

The flawed logic goes like this:

  • Health care spending is a big problem for government finances.
  • Therefore, we will increase health spending in the federal budget to cover more people.

Proponents of this argument point out that federal, state, and local governments indirectly subsidize the uninsured through subsidies to cover some of the costs of uncompensated care (in clinics and hospital emergency rooms). By subsidizing health insurance coverage, they argue, we will keep them out of the emergency room and reduce total health care spending. They claim that we can cover more people and reduce spending without hurting anyone (except the taxpayer who is footing the bill).

This is incorrect, for three reasons:

  1. People receive more and better medical care if they have health insurance than if they are relying on free care. That’s a good thing for those people. It’s also more expensive for the payor.
  2. Every proposal to expand taxpayer-subsidized health insurance would have the government pay all or almost all of the cost of health insurance, while today the government pays only part of the cost of charity care.
  3. Medical expenditures tend to be highly concentrated in a relatively small proportion of the population. For each uninsured catastrophically sick person whose costs go down because they are receiving better or preventive care, you will get many more who would not use medical services if they were free, but will do so if someone else pays for it. When government is subsidizing pre-paid health insurance, the taxpayer will spend a lot to pay the premiums of a healthy previously uninsured person who may use no medical care at all. In the aggregate, government spending on heatlh care will increase.

Some argue that it’s worth it — that we have a moral obligation as a society to ensure that everyone has health insurance. That’s a separate question. I am instead disagreeing with the budgetary point. Expanding taxpayer-subsidized health insurance coverage by $634 B will increase government spending on health care, not reduce it. The President’s proposed $634 B health reform fund would severely worsen our long-term entitlement spending problem.

If this subject interests you, the best health policy writing I know is Jim Capretta’s blog Diagnosis.

By | 2017-12-09T12:35:18+00:00 Friday, 27 March 2009|