Never-Ending Health Care Crisis, Part 2: Struggling to Pay for Stuff That’s Worth It—and a Possible Reprieve

Ross Douthat predicted that we are in for a never-ending health care crisis. He’s right, partly because health care is paid for by health insurance, which means spending other people’s money, as I said in Part 1.

But another factor drives the endless health care cost crisis even more: ever new and better medical technology—and the ever-increasing amounts we must find to pay for it. Those who follow health care policy (like Douthat) understand this. But to help inoculate the public against health care policy snake oil salesmen, everyone needs to understand it. To make things more complicated, but possibly a bit better, the US might, just might, get reprieve from the endless cost-growth.

Each year medicine does more and more wonderful things: hip replacements, organ transplants, anti-depressants, laparscopic surgery, insulins to suit people’s real lives, and perhaps personalized cancer drugs someday. Occasionally, the new stuff substitutes for more expensive stuff, like laparscopic surgery substituting for more expensive and onerous open surgery. But usually, the new treatments just add to how much we do. That’s the primary reason that, for decades, medical care spending has grown far more rapidly than our economy. For many decades, other rich countries’ health care expenditures grew as much as ours did, as they too adopted the same wonderful technologies.

For the most part, this growth is worth it. Saving people’s lives, freeing them from pain, helping them live full lives is worth the education, housing, gadgets, entertainment and other stuff is worth that we have to give up. What’s more important: grandpa surviving his heart attack to enjoy decades of playing with his grandchildren—or a bigger house?

When government pays for health insurance (Medicare in the US, Canada, UK…), each year’s budget has to find new money, just to sustain the commitments already made. When Medicare was passed and we first provided government-funded health insurance for all those over-65, it was 1.7% of the Federal budget (in 1967, first year of full implementation). Today, it’s about 15%.

We can’t just have one political fight, bite the bullet, figure out the funding and allocate so much in perpetuity. Each year, we have to fight again

And it’s not just government insurance that has this problem—so does employer-provided insurance. Each year, to find more money for health insurance, employers have to raise prices, cut earnings or reduce other costs (like workers’ take-home pay, net of their healthcare contributions!).

Even insurance people buy themselves has the same problem. That may seem strange to true market believers. Why isn’t it the case that, “if I think it’s worth it, I buy more, and if I don’t, I don’t”? After all, people keep spending more on information technology and we have no never-ending IT cost crisis. The difference is again Other People’s Money.  Even private, individually-purchased insurance is basically socialized. When you (and your doctor) decide to have that stent put in after your heart attack, a good share of the money you spend isn’t yours but from other premium payers. That’s a lot different than if you decide it’s worth it to spend more of you own money each year to update your iPhone and iPad more often.

That socialization of even private insurance is part of why you can’t buy 1970s health care at 1970s prices, even if you wanted to, as David Cutler, used to say when I was in grad school

(By the way, even for those high deductible plans and Health Savings Accounts conservatives love are still largely socialized. And if they weren’t, you wouldn’t be meaningfully insured.)

As long as new technologies are primarily cost-increasing, rather than cost-saving, and the new stuff is worth it, the US and other countries face a constant health care cost crisis. In any kind of health care system. Expect never-ending struggles to find new funds to pay for health care.

But wait! There is a caveat. Thanks, perversely, to our problems, the US might be able to get a temporary reprieve.

While the growth of US health care expenditures was long like that of other countries, our level has long been much higher. In 2011, the US spent $8508 per person on health care compared to the next highest spending country, Norway, at $5669 person and the OECD average of $3339 per person! In fact, even the growth of US health care expenditure has been somewhat higher for a while.

As Sherry Glied said (by email & in a presentation):

“We are basically sitting on a gold mine— or perhaps oil-filled tar sands—we spend far more money than other OECD countries on health care while achieving worse outcomes.  That extra money—which, other countries’ examples suggest, can be sucked out of the system without leading to a deterioration in population health—is more than enough to fund the needs of the aging baby boom generation and cover some of our debt. Unfortunately, like the tar sands, it’s likely to be very difficult to extract.”

Why is health care in the US so much more expensive than in other countries? As far as anyone can tell—and people still argue—there are three main reasons: prices (mostly for physicians),  administrative costs and higher tech care, probably in that order.

I’ll discuss whether—and how fast—those are changeable in the US in later parts in this series. But for now, I’ll focus on prices. We pay more for pharmaceutical drugs and medical devices, basically subsidizing the health R&D for other rich countries. But the big money is in how much more we pay for highly skilled health care labor in the US, particularly specialist physicians. Specialists make much more in the US than in other rich countries.

Can we (slowly) get oil out of the specialist tar sands? If so, we might get a partial, temporary reprieve from the technology-driven never-ending health care cost crisis.

In fact, since about 2008, US health care spending has slowed.[1] No one is sure why, but we know that it is definitely not just the recession or just the usual kinds of explanations (like more high deductible plans). Part of the slowdown might be due to technology diffusing more slowly.

Part of the slowdown might be due to a hardly noticed part of Obamacare: the Medicare productivity adjustmentSay what? Okay, warning: this is the kind of detail I hate. If the trillionth piece of health care policy detail will make you sick, skip the next two paragraphs.

Previously, the Federal government updated how much it pays Medicare providers based on how their costs grew, assuming no increase in productivity. In other words, the assumption was: being able to word-process, get X-rays on the computer or receive more informative diagnostic tests did not make medicine even one bit more efficient. That’s in stark contrast to the rest of the economy, which has gotten a lot more efficient. (Think Amazon.)

Obamacare changed that. Starting in 2011, Medicare payments to hospitals (and some other providers) grew by 0.25 percentage points less. And as Chapin White  has shown, when Medicare pays less, private-payers don’t pick up the slack but actually pay less too. Maybe an obscure update adjustment will help us lower prices and unlock the oil from the tar sands.

Here’s what we do know: As long as we invent new health care that’s worth it, we will struggle each year to find more money to pay for it, driving a never-ending health care cost crisis. And that is a really good problem to have. We’re a rich society, with bigger houses, more and better food, more gadgets. Better to have smaller houses and grandpa enjoying decades of high quality life after his heart attack than the other way round. Anytime anyone complains about rising health insurance costs, please remind them of this.

The US might manage a temporary reprieve, but only if we can figure out how to pay lower prices, like in other rich countries.

It’s no wonder that snake oil salesmen abound in health care policy. It’s genuinely hard to figure out if continuing crisis is due to Obamacare, too much reform, too little reform, the wrong kind of reform… There’s a zillion moving parts and even the experts are uncertain. (Of course, some experts don’t admit what they don’t know.) But the effect of new medical technologies is clear: a baseline expectation of never-ending health care crisis. Understanding that baseline can help us all to have realistic expectations and ward off the snake oil salesmen.


Next time: How the present-day US health care system limits the system we can have and how quickly we can have it.

Note to readers who asked about Part 2: Thanks for your interest and sorry for the wait! There was more new stuff to catch up on than I expected. Plus, my day job intervened.


[1] In 2013, growth came back up a bit, but probably due to the recession finally weakening.


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