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Maybe We Should Spend More on Healthcare

Wednesday, August 26, 2009

The argument that we spend too much on healthcare makes little sense, and the current ‘spend too much’ panic will prompt us to cut costs at the expense of the future.

The ongoing debate over healthcare has many twists and turns, but one staple is that the United States spends too much on healthcare and must cut back, or at least seriously slow the growth in the proportion of gross domestic product claimed by healthcare. Otherwise, disaster beckons. In 2007, the Congressional Budget Office (CBO) projected that 49 percent of GDP would be consumed by healthcare by 2082, under existing federal law.

In fact, the “we spend too much” argument makes little sense. There is no such thing as an amount that “should” be spent on healthcare, any more than there are pre-determined allocations that should go to housing, food, video games, or any other category of expenditure. The proper level of spending depends on the value derived from it, and in the end this level should be whatever results from the sum of consumer choices made in the light of the value received.

Historical comparisons are unpersuasive because there was no golden age when the porridge was just right. We spent only 5.3 percent of GDP on healthcare in 1960 because, under the technology and choices then available, that was what made sense. We spent zero on personal computers and the Internet in 1960, but to argue that zero is therefore the proper level for such expenditures today would be regarded, rightly, as evidence of madness, not as a qualification for high political office.

There is no such thing as an amount that 'should' be spent on healthcare, any more than there are pre-determined allocations that should go to housing, food, video games, or any other category of expenditure.

The 2007 CBO analysis also endorsed the view that “the most important factor contributing to the growth of healthcare spending in recent decades has been the emergence, adoption, and wide diffusion of new medical technologies and services.” Indeed, the modern healthcare system, like so much else in the contemporary world, is a product of the scientific and technological revolutions of the 19th century and the information revolution of the 20th century.

The first fruits, which grew from the germ theory of disease, were the great leaps in public health associated with clean water and waste disposal, and the recognition of the importance of cleanliness in hospitals. The $47 billion cost of the 52,000 community water systems that serve more than 280 million people represent a significant health expenditure that is not included in the usual calculations.

Technology-based personal medicine came later. In 1836, Nathan Rothschild, richest man in the world, died of an abscess that could now be easily cured by antibiotics. An 1891 picture hanging in London’s Tate Gallery shows a doctor sitting by the bedside of a dying child. The image is one of dedication, but someone once commented that he sat there because there was little else he could do.

Increased healthcare spending seems rather minor in the great scheme of things, and indicative not of a crisis but of an assessment that the state of healthcare technology has improved to the point where it is delivering steadily increasing value for the money.

An oft-quoted comment from Harvard biochemist Lawrence Henderson is worth recalling:  “Somewhere between 1910 and 1912 in this country . . . a random patient, with a random disease, consulting a doctor chosen at random had for the first time in the history of mankind, a better than fifty-fifty chance of profiting from the encounter.”

Henderson may have been optimistic, because better medicine developed slowly. Medical and surgical techniques improved, but the real revolution started only with the growing pharmaceutical discoveries of the mid-century. Other great advances had to proceed in step with the advances of other sciences—materials science has created bionic limbs and computer science has led to finely controlled and less invasive surgery.

But in the late 20th century the revolutions came on with a rush. The Statistical Abstract puts total healthcare expenditures at:

 Total Expenditures

 

These bare numbers may look alarming, but a graphic depiction changes the perspective somewhat.

 

 Total Expenditures 2

Think of it this way: From 1990 to 2006, GDP expanded by $7 trillion. If healthcare had retained its 1990 share of 12.1 percent of GDP, it would have grown by $847 billion, leaving an extra $6.153 trillion to be spent on houses, food, video games, etc. Instead, healthcare grew by $1.4 trillion, leaving only an extra $5.6 trillion for other purposes.

From this perspective, during this 16-year period from 1990 to 2006, the nation shifted its collective preferences a bit, deciding to allocate an extra 7 percent of its $7 trillion increase in GDP into health and away from other sectors.

Such a change seems rather minor in the great scheme of things, and indicative not of a crisis but of an assessment that the state of healthcare technology has improved to the point where it is delivering steadily increasing value for the money, and that as people meet more basic wants of food and shelter they move up the chain of desires and spend more on other things. As David Brown wrote in the Washington Post:

In the 1960s, the chance of dying in the days immediately after a heart attack was 30 to 40 percent. In 1975, it was 27 percent. In 1984, it was 19 percent. In 1994, it was about 10 percent. Today, it's about 6 percent.

Over the same period, the charges for treating a heart attack marched steadily upward, from about $5,700 in 1977 to $54,400 in 2007 (without adjusting for inflation) . . .

In 1970, the death rate from coronary heart disease was 448 per 100,000 people. In 1980, it was 345. In 1990, it was 250. In 2000, it was 187. In 2006, it was 135 . . .

About half the decline since 1980 is a consequence of better medical care.

There is little doubt that our national expenditure level includes waste, but it is unlikely that panicky cost-cutting or a government takeover will be directed at this. When I was a young analyst in the U.S. Bureau of the Budget, my boss once commented sadly: “Every government program consists of a hard core of fat surrounded by muscle and bone. So when they say ‘you are cutting to the bone,’ they are telling the truth.”

So in healthcare, the first impulse is to cut the bone and muscle of innovation and the future.  Intellectual property rights in pharmaceuticals, devices, and materials will be weakened so as to allow free riders on research to compete with the creators and lower the immediate price. That this will reduce future innovation is not of concern to the cost-cutters. Blogger Tigerhawk summed it up:

[A cost-cutting] plan would almost certainly lower the rate of return on investment for pharmaceutical, device, and diagnostics companies, either by lowering the prices paid for their products (allowing the government to "negotiate" for cheaper drugs, for instance) or their utilization. Of course, if you lower the rate of return on investment you will inevitably get less innovation that will improve or save lives in the future. It is another form of transferring wealth—and in this case, quality of life or actual lives—from our progeny to us. Our political class seems to have a particular genius for that.

Indeed, from the standpoint of third-party payers, suppression of innovation is a feature, not a bug. New treatments are expensive, at least initially, and raise nasty questions of who will get them and who will not, a difficult position, politically and psychologically, for the payers’ personnel, whose life is easier if the novel treatments simply do not exist. (Suppression of the new also simplifies life for the patients, of course, who no longer have any.)

A mania for cost-cutting creates other odd incentives. The system is shifting costs to healthcare providers by squeezing down their pay. Since the providers have sunk an immense investment of money and time in their training, rates can be cut a long way before they will decide to leave the field. As with the suppression of technological innovation, the essence of the deal is that it reduces the rate of return on investment, which expropriates sunk capital. And, as with technological innovation, this action will cause trouble in the future by discouraging entry into the professions.

If a cost does not appear on the books of the healthcare system, then it does not count, so early release from hospitals may require family members to take leave to care for a patient, a practice that can be quite inefficient.

Panicky cost-cutting also shifts costs to people outside the system. If a cost does not appear on the books of the healthcare system, then it does not count, so early release from hospitals may require family members to take leave to care for a patient, a practice that can be quite inefficient. To have an otherwise productive person functioning as a low-skilled one-on-one nurse is a bad use of resources, as compared with leaving the patient in a hospital setting where he can be cared for efficiently by high-skilled nurses. But no one will ever count the costs of the Family and Medical Leave Act as part of the cost of the healthcare system.

So what should be done about healthcare costs? Many things, including a phaseout of employment-based health insurance in favor of other policies; elimination of mandates that require insurance coverage of designated procedures; availability of programs that combine health savings accounts with catastrophe insurance; availability of policies across state lines; reform of the tort system; reform of cost accounting procedures that create dysfunctional incentives for industry participants; availability of high deductibles so that insurance can be insurance rather than socialized medicine; a second look at our policy of forcing the young to subsidize the geezers, who are after all the wealthiest segment of the population, and who can afford to spend more on healthcare because other demands on their income are less.

It is a long list. Take care of these reforms and total spending will take care of itself. Spending may become higher or lower—who knows?—but it will better represent a reasonable assessment of value for money. These reforms will also forestall the most worrisome aspect of the current “spend too much” panic: the urge to cut costs at the expense of the future.

James V. DeLong is vice president and senior analyst with the Convergence Law Institute and special counsel with the law firm Kamlet Reichert.

FURTHER READING: In other articles for The American, DeLong wrote “Preparing the Obituary” on the decline of the newspaper industry and “Avoiding a Tech Train Wreck” on the intersection of technology and politics. His other pieces include “The Coming of the Fourth American Republic” on how the Special Interest State that has shaped American life for 70 years is dying and “Behind the Green Dam” on how the controversies over Internet filtering are only just beginning. 

 

Image by Darren Wamboldt/Bergman Group.

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