Reason Roundtable

Curing America’s Health Cost Disease

Despite four heart attacks, Vice President Dick Cheney is alive and well and living at Number One Observatory Circle – a medical accomplishment that symbolizes the incredible progress of American medicine. Cardiac care has been revolutionized in recent years: Death by cardiovascular disease declined by two-thirds over the past five decades. Also, according to the American Heart Association, 88 % of heart attack survivors under 65 return to their job. Other medical fields have been similarly transformed: depression is treatable, childhood leukemia is curable, and polio is history.

Yet, American health care has never been more expensive. Between 2000 and 2005, health insurance premiums doubled. Employers fret about their eroding profitability and employees feel the pinch on their wallets. Though labor costs rose, average family income is down in the last half decade, largely because of rising health costs.

Many health care experts see rising health care costs as an inevitable and unavoidable consequence of advances in medical science. So the only choice, in their view, Americans have is between: paying more or embracing some type of rationing.

Professor Uwe Reinhardt of Princeton University sees health care swallowing up 28 % of GDP by 2030 (up from 16% now), but asks: What would we rather spend the money on? “SUVs?” In contrast, Brookings Institute senior fellow Henry Aaron prescribes a bitter, if sugar-coated, pill: “Intelligent health care rationing – limiting the availability of care that costs society more to produce than it is worth to patients – is not a horror to be avoided. It’s a regretfully necessary limit to sustain fair access to health care that is worth what it costs.”

Both of these approaches treat health care spending as if it was sui generis. In most other sectors of the economy, costs fall with advancements in technology, not rise. But the advancement of medical science has, curiously, not followed the trend; progress has begotten greater expense. In fact, even a lack of progress in health care is often accompanied by rising cost. Jonathan Skinner and his colleagues at Dartmouth considered cardiac care from 1986 to 2002. Their conclusion: while costs have continued to rise, survival rates have stagnated since 1996.

Why then is health care so different from other sectors of the economy? Simply put, consumers don’t pay for health care the way they pay for most other goods and services.

As I write in The Cure: How Capitalism Can Save American Health Care, American health care has been shaped by two days: October 26, 1943 and December 1, 1942.

On October 26, 1943, the IRS ruled that employers could continue to pay health insurance premiums in pre-tax dollars. As a response to wage and price controls, employers had begun to offer health benefits to attract better employees. The IRS ruling legitimized and encouraged the practice, giving rise to the dominance of employer-sponsored health insurance.

On December 1, 1942, Lord Beveridge issued his report on health care and pensions to the British Parliament, envisioning zero-dollar public health insurance. Lord Beveridge had enormous influence here, particular among Democrats; his thinking (and persuasiveness) helped lay the intellectual foundation for Medicare and Medicaid.

Fast forward 60 years, and the end result of these two days is that Americans – whether privately insured or publicly covered – tend to be over-insured, and thus less sensitive to prices. And so we come to a paradox: American health care is so expensive because it’s so cheap. That is, with Americans paying just 14 cents out-of-pocket for every health dollar, they have little incentive to economize on health expenses. Americans have access to the most technologically sophisticated system in human history – yet pay pennies on the dollar out of their own pockets. The upshot? A health care system that is heavy in cost but not necessarily strong in satisfaction and uneven in quality.

In other countries, faced with similar problems, the solution has been simple enough: rationed care. Canadians, for example, are resigned to wait for practically any diagnostic test or surgical procedure. According to the government’s own statistics, 1.2 million Canadians are actively looking for a family doctor but can’t find one. Patients in Ontario can only dream of having the access to PET scans that is available to lab animals enrolled in research studies.

Will spiraling costs force America down the same path? The best alternative is to put people in the driver’s seat through consumer-driven health care.

Consumer-driven health care is based on a simple premise: move health insurance back to a more traditional definition of insurance – that is, cover people for unlikely and catastrophic events. For smaller expenses, people should be empowered with health dollars, and thus given incentive to shop around.

In theory, this should result in lower cost care without sacrificing patient health. Back in the 1970s, the RAND think tank in California tracked two thousand families over eight years in a study that cost about a quarter of a billion dollars (adjusting for inflation)-one of the most expensive experiments in the history of social science. The study compared the health and the health-care spending of two groups: one with free health care, the other with some type of cost-sharing up to a point, after which catastrophic insurance kicked in (structurally similar to a Health Savings Account). The result? Those on the free plan cost 40 percent more but in the end were no healthier than those on the HSA-style plan. This suggests that people are able to make intelligent health-care choices when provided with a financial incentive to do so.

Consumer-driven health care is new to the marketplace but has made inroads. William Boyles, publisher of the Consumer Driven Market Report, estimates that by the beginning of 2007, 13.4 million people will be enrolled in some type of consumer-driven health plan, doubling the number of people enrolled from a year before. And the early data supports the theory. Consider:

  • In a Kaiser Family Foundation survey, some 71 percent of those in the new “consumer-directed health plans” said the policies prompted them to consider cost when seeking health care, versus 49 percent of those with more traditional employer-sponsored coverage.
  • After a year-long analysis of consumer-driven health care use by its members, Cigna reports that costs are lower by 16 percent yet patients don’t seem to be cutting corners; the use of medications that support chronic conditions increased, for example, indicating that members were not foregoing needed care, a fear that many people have about shifting from the current system to a more consumer-driven one.

There is, unfortunately, a Catch-22. These plans aren’t more popular because they aren’t more popular. The Kaiser study found, for instance, that half of respondents would rather be in a more traditional plan. No wonder – with market penetration of consumer-driven plans being relatively low, the pressure on providers to offer greater transparency (think hospital prices) is limited, making it difficult for consumers to navigate the health care labyrinth – and making the plans less appealing. In other words, the consumers at the cutting edge of the consumer-driven revolution have to pay prices set by consumers who don’t care about prices. This makes the transition to consumer-based health care more difficult.

In short, the concept of “shopping around” for health care makes for great rhetoric but runs up against a harsh reality: health care is the most consumer unfriendly sector in the economy. But that’s starting to change, albeit slowly. Some companies have already rushed to fill in the information void. Aetna, eHealthInsurance, Definity Health, and others offer services that are making it a little easier for patients to find pricing and quality information.

Government policy can contribute to the trend toward consumer-driven health: First, governments should work to popularize consumer-driven health care. This can be accomplished simply and easily: states can offer state employees the ability to enroll in consumer-driven plans. At present, most don’t, thereby limiting the number of potential enrollees. Second, both state and federal governments must eliminate barriers to competition in health care. Consider that because state regulations limit out-of-state insurance companies from offering coverage, a 30-year-old man will pay four times more for the same health insurance policy from the same company in New York as he would in Connecticut. To create a market for health care, we need more competition – not simply among insurance carriers, but among hospitals and other providers.

Ten years from now, if consumer-driven health care continues to grow, things will be different – and better. After all, in five-sixth of the general economy, we look to individual choice and competition to drive innovation and lower costs. That’s what will also cure America’s health care malaise.

David Gratzer, a physician, is a senior fellow at the Manhattan Institute. He is the author of The Cure: How Capitalism Can Save American Health Care.

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