Health spending fallacy
27 March
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:
- 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.
- 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.
- 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.
Related Posts
(best matches are listed first)- The danger of autopilot entitlement spending
- Parsing the President’s health care reform letter
- America’s long run fiscal problem is spending growth, not taxes
- How to measure health care cost control
- Health insurance for poor kids
- Apparently $634 B is only the down payment for health care reform
- CBO: More taxpayer-financed health insurance coverage won’t save money
- Slowing health cost growth requires information AND incentives
I highly recommend Uwe Reinhardt's writings on healthcare at the New York Times Economix blog. Reinhardt is an economics professor at Princeton and an expert on the economics of healthcare.
Your point is very silly. No one thinks that if the government subsdizes more people it will spend less. You define the problem as the government spends too much on health care, but the real problem is that health care costs are rising too fast for society as a whole, not just got the govt. Liberals argue that if the government spends more in aggregate (and is smart about how it spends it) that costs for society as a whole can be reduced. Preventative care is a great example of this.
You have set up a false premise against which to argue, making your point frivolous at best and distorting at worst.
Alas so far as I know the studies on preventive care show that the aggregate costs of the false positives and the true negatives –
paying for testing people without the condition in question, which of course constitute a huge majority — usually overwhelm
the savings from early flagging of true positives. I know this is counter-intuitive.
If you know of good studies to the contrary please let me know.
For my money the best book out there in health care policy is Clayton Christenson's "Innovator's Prescription". Shows
how to deal with rising costs without being forced into rationing. Brilliant work.
To Peter Huffaker: I think you missed the argument. The point this post was trying to make was that this $634 B increase will not ultimately drive down costs. And therefore, even in the long run, this will have done nothing but increase government's expenditures.
Keith,
First, I would like to say thank you for writing this blog. As someone who recently entered the workforce from college and is working to form his political beliefs amidst this economic and political sandstorm, finding your blog has been very comforting. I am a big fan of your academic / memo-like style of writing. I am furthermore a fan of how you break down very complicated arguments into simple prepositions and stances.
Even though I have found your entries to be very rewarding to read, I must disagree with this post.
I still believe you are right, but not for the reasons you listed above.
See next comment for Part II. (FYI – Your commenting program has a text limit, although it doesn't say what that limit is.)
You are right in the sense that Obama is misleading Americans with the term "healthcare IT investment". While healthcare IT can at times reduce the cost of healthcare, through efficiencies made on the revenue cycle side of hospitals, most people don't understand the hidden costs behind IT. Having worked on a mulit-year, hosptial-wide implementation of an EMR (electronic medical record) I have seen how staffing, hardware, and consulting costs balloon during and after the implementation. Every coder, biller, or admin FTE that you let go you will need to be replaced by 0.5 to 1.5 technology analysts, who often cost 2-3 times as much. In addition to that, there are capital and operating costs associated with the new servers, computers / workstations, inter/intranet access, wireless coverage, re-training, etc. Given all this, you intuitive skepticism towards Obama's use of the word investment was correct. Healthcare IT "investments" should be viewed as investments in the improvement of QUALTITY of care not in the reduction of COST of care.
However, I believe your three points do not convincingly capture the balance sheet of healthcare costs.
See next comment for Part III.
In point 1 you put forth a basic economic tenent – if you reduce the price of a good, you will increase the demand / consumption. With most goods, this is true but with healthcare it is a little more complicated. It is unclear if increased consumption of healthcare upfront leads to a net negative, neutral, or positive healthcare spending outcome in the long run. By this I mean, if you get more "tests / check-ups" today will that lead to a greater or lesser net spending on healthcare. In point 1 you qualitatively assume that it will be greater. This belief is confirmed in point 3, with the specific example of preventative care. My question to you is where is the empirical evidence? How do you know that the net result of lowering the cost of healthcare to consumers will be increased overall healthcare cost?
See next post for Part IV. (Sorry for all the posts. Please change the comment software you use when you have a chance.)
Stan,
While you were the regional director for preventative services, did you have any exposure to people using CAM (complimentary and alternative medicine) as preventative medicine. My understanding is that diagnostic tests in modern allopathic medicine are unnecessarily expensive, especially from a diagnostic perspective. Many diseases can be proxied by easily observable measures such as BMI, eating/exercise/smoking/drinking habits, blood pressure, etc. The downside with these easy measures is that it requires the patient to do all of the work, instead of some fancy pharmaceutical.
Have you seen any health plan groups that include diet / exercise incentives as preventative medicine?
I believe the answer lies in a second point you make in point 3, "Medical expenditures tend to be highly concentrated in a relatively small proportion of the population". The real question people need to ask is if we change healthcare inventives, what will happen to this 20% of the population that causes 80% of healthcare costs? Will this healthcare "elite" spend more or spend less?
As I said above, overall I still think you are right in challenging Obama's healthcare budget. However, I would like to see some more quantitative evidence before I believe that changing healthcare incentives through increased coverage and IT investment will cause a net increase in healthcare costs.
Any government subsidy results in significant inflation, correct? Does Stigler's capture and public choice theory mesh with the subsidies (healthcare, education, corn, sugar …) and inflation in our economy? I think so. If that holds true, then this plan will actually increase costs, even if the aging population demographic reverses.
Candidates (and presidents now) have been re-discovering the "savings" in preventive care for some time. It's been a while since I dealt with this as regional director for preventive services for one of our largest prepaid group health plans, but the economics came down to:
1. You save money on tobacco cessation programs and immunization; and on aspirin for heart disease prevention
2. You reduce deaths or improve quality of life through early detection of disease, but at a cost that–for many interventions–is (was 15 years ago) on the order of $35,000 per year of life saved. That, as I recall, was an estimate for the 'savings' from doing mammography for breast cancer.
3. For primary prevention (e.g. statins for prevention of the first heart attack) you need to treat a lot of people to prevent one event; it's in the same ballpark as early detection of breast cancer, but NOT a money saver FOR THE HEALTH CARE SYSTEM.
4. Some very expensive procedures (e.g. heart transplant) are relatively inexpensive per year of life saved compared with less aggressive therapy, and compared with things like blood pressure control to prevent strokes.
Again, my recollection may be faulty and my data old, but I think that in general these still apply.
Bottom line: you do NOT save money for the health care system through preventive measures.
Don't forget the cost of 'defensive medicine'.
Mr. Huffaker, I believe you miss the broader point here. Government health programs have a direct and fundamental impact on the cost of health care for society as a whole. Given the nature of government policy over the last 60 years or so, the public and "private" markets in health care are inextricably linked. You simply cannot address one without addressing the other. It would be like putting out the fire in the living room and assuming that the one in the kitchen would go out as well. Prior to 1965 (advent of the Medicare and Medicaid programs), US health care spending, as a percentage of GDP, never rose above 6%, we are now approaching the 17% mark. The Medicare program alone is responsible for more than half of this growth. For a more thorough study of the correllation between government health programs and cost increases I'd encourage you to check out the work of MIT's Amy Finkelstein, specifically "The Aggregate Effects of Health Insurance: Evidence From the Foundation of Medicare." Furthermore, most research, including that of the CBO, suggests that the cost saving possibilities of things such as health IT, preventative care and the like pale in comparison to the vast sums being discussed to "expand coverage." They are a pipe dream: increasing spending with the expectation of phantom savings. What the Obama program would produce instead would be expanded entitlement benefits stacked on top of an already insolvent system. THIS, would be like throwing gasoline on both fires and hoping for a miracle.
A good medical history takes perhaps 15-20 minutes, sometimes longer. 1:1 questioning is far more likely to give the physician the best information and insights as to what is going on with the patient. No carrier will pay for that much physician time. IT or EMR systems have never been shown to reliably improve the history or decision-making process.
All mistakes in health care are due to presumptive logic; woe to the physician who presumes – but doesn't check it out. Even the best, most experienced, physicians know that a lab panel is needed when assessing a new patient or when re-assessing a chronic patient on certain medications, etc. Most tests will be negative; they are still needed.
Wellness programs are wonderful, but the "free will" granted by our creator is also evidenced in health / wellness choices. And if every one is covered then what would be the "punishment" for those who choose life styles that make them sick? Finally, health care rationing will follow any decision by Obama to socialize health care. If you think you will live to over age 65-70 then you might like to ponder what it feel like to be excluded from certain health care – for serious problems – "because of age".