November 19, 2010

A sick system

Current public health care spending is misguided

In the past few months, we’ve seen a lot of hand-wringing about the looming American fiscal crisis, but there has been far too little focused discussion of the single largest contributor to it: growing public health care spending. The Congressional Budget Office has estimated that if no changes are made, outlays for Medicare (which pays for medical care for the elderly) and Medicaid (which pays for care for low-income Americans) will rise to roughly 12 percent of our gross domestic product by 2050—roughly two-thirds of the average share of the economy going to federal revenue. In order for the federal government to meet its obligations to the poor and the elderly and still be able to perform other important roles—without raising taxes to punitively high levels—we need to find a way to reduce this projected cost growth. The solutions on the table from both the left and the right provide valuable starting points, but the ultimate goal must be a system which gives the beneficiaries of federal health programs incentives to demand less care while preventing the re-emergence of the barriers to accessing health care that both programs were created to remove.

The main Democratic proposal has already been enacted as part of the new health care law. It involves creating a panel of independent experts, the Independent Payment Advisory Board (IPAB), to evaluate the treatments which Medicare covers for cost-effectiveness and adjust the program’s policies accordingly. Approaches that are not cost-effective either will not be covered or will be reimbursed at lower rates. While this is a sensible policy for improving the value Medicare provides and will likely lead to some cost reduction, we should not expect it to play a large role in bringing down costs. Efforts to push down prices for expensive medical services have been tried before, and providers typically respond by simply billing the government for more of those services in order to make up the shortfall.

The main Republican alternative, which is included in Representative Paul Ryan’s budget proposal, gets at the real source of skyrocketing health care costs more directly than the Democratic proposal. Since health care costs are rising throughout the economy, it makes sense to look at features which both private and public health care payment systems share to try to figure out what’s driving the increase. The main characteristic that jumps out is the absence of direct consumer control over spending. Most Americans pay for the bulk of their health care indirectly through premium payments, employer-provided coverage, or taxes; they are rarely billed for the full cost of any specific treatment. Therefore, they have no incentive to ensure that they’re getting good value for any given procedure. Ryan’s approach addresses this issue by converting most federal health spending into vouchers that are given directly to households—since any health care spending would then come from funds that people control directly, they would pursue low-cost options.

While this approach has merit, it is limited by its failure to properly account for the purpose of Medicare. The program was created primarily because elderly people were priced out of the private insurance market due to their greater demand for medical treatment—insurers could expect to spend more paying the claims of a typical elderly American than they took in as premiums. While Republicans might justifiably claim that it would be better for elderly people to use Medicare vouchers to pay for most care out-of-pocket so they maintain direct control over insurance spending, “most” is the key term here. There are some medical expenses, such as catastrophic accidents, which truly cannot be anticipated. Insurance is designed to pool these unforeseeable risks so that any one person afflicted by them can use the resources of others in the pool to cope (as can any of those others when disaster strikes them). Since it is virtually impossible for elderly people to be worth insuring, it seems appropriate for the government to directly provide them with subsidized catastrophic insurance coverage. Such coverage would cost much less than the comprehensive coverage offered now, since medical emergencies are relatively rare. Elderly people could pay for their remaining healthcare expenses through savings and a voucher program which would serve the low-income elderly as well as former Medicaid recipients.

Thus, the best approach to reducing public health care spending lies in correctly distinguishing between beneficial and harmful government intervention in the economy. The government can do harm when it mistakenly subsidizes socially destructive behavior. However, intelligently crafted government programs can spend on important priorities without creating bad incentives: Government intervention is sometimes the only way to provide certain social goods. A proper understanding of these distinctions would go a long way toward addressing the burgeoning cost of federal health care programs as well as various other problems we face.

—Ajay Ravichandran is a third-year in the College majoring in Political Science.