The Rest of the Story: What is Really Driving Healthcare Costs?


The Designated Conservative culled the following excerpts from a long and ponderous article on American healthcare and the ongoing ObamaCare ][ debacle in Washington, D.C. The article appears in the online Opinion Journal of the Wall Street Journalclick here to read the entire thing.

The format of the article is ponderously academic in the extreme, but down near the bottom an intrepid and determined reader will find the following gems, which have been separated from the grandiloquent chaff:

“Bending the Curve”: What Really Drives Health Care Spending

The main problem is a pricing system that insulates both patients and producers from normal market incentives.

By JASON FODEMAN, M.D. AND ROBERT A. BOOK, PH.D.
From the Heritage Foundation

Much of the motivation driving health care reform is grounded in the belief that U.S. health care spending is too high and rising too quickly. Whether measured by individual insurance premiums, average spending per person, total national spending, or federal and state government health spending, U.S. health care expenditures are growing faster than inflation, faster than average wages, and faster than the gross domestic product (GDP). Thus, the President has declared that one key purpose of health care reform is to “bend the cost curve” downward.

A major source of these spending increases is a third-party payment system that often leaves the physician and patient insulated from and even unaware of the costs of the various treatment options. Often, the patient faces the same co-payment regardless of which treatment is chosen, and the extra costs are passed along to the insurance company, Medicare, or Medicaid. These payers may appear to have an incentive to encourage efficient use of resources, but ultimately they do not pay the price for inefficiency. Insurance companies offer “generous” benefits and pass on the increased spending to patients (and often their co-workers) through increased insurance premiums, and government programs pass on the spending increases to taxpayers.

To a large extent, increased health care spending is a consequence of this third-party payment system. In recent decades, the percentage of health care spending paid “out of pocket” by patients has fallen substantially, from 52 percent in 1965 to only 15 percent in 2005, which means that third-party payments have increased from 48 percent to 85 percent. As third-party payer spending has risen as a percentage, total spending has grown even faster. Since 1965, real per capita health care expenditures have increased approximately sixfold.

In short, neither the patient, the doctor, the insurance company, nor any government program has much incentive to spend health care dollars efficiently.

  • A system that determines prices through administrative procedures rather than market processes disconnects the prices paid for health care services and products from both the costs incurred to provide them and their value to patients.
  • A tax code that rewards employees who purchase insurance through their jobs and punishes individuals who purchase health insurance in the outside market further distorts these incentives.
  • A litigious tort system that encourages doctors to order unnecessary tests and procedures at no cost to themselves in order to forestall lawsuits exacerbates the problem.

However, the main problem is a system that insulates both patients and producers from normal market incentives to reduce prices and spending.

Despite the rampant inefficiencies and extremely high costs of health care in the United States, it is still possible to make the American health care system even more inefficient and more costly.

Regrettably, the health care bills passed by the House and Senate would do precisely that by saddling an already burdened system with more mandates, higher taxes, and less flexibility.

Instead, Congress should pass health care reform that increases patient choice and allows doctors and hospitals to be rewarded for providing high-quality, cost-efficient care. Any other reform will only deepen the current inefficiencies and introduce more problems.

Mr. Fodeman, M.D., is a former Health Policy Fellow in the Center for Health Policy Studies at The Heritage Foundation and is currently an Internal Medicine Resident at the University of Connecticut. Mr. Book, Ph.D., is Senior Research Fellow in Health Economics in the Center for Data Analysis at The Heritage Foundation.
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