Controlling health care costs

Economics columnist Robert J. Samuelson notes the intrinsic conflict between increasing access to health insurance and decreasing costs, arguing that it is impossible to do both at the same time. He suggests controlling costs first. One way to do it, he says, is to reform Medicare:

Just imagine what the health-care debate would be like if it truly focused on controlling spending.

For starters, we wouldn’t be arguing about how to “pay for” the $1 trillion or so of costs over a decade of Obama’s “reform.” Congress wouldn’t create new benefits until it had disciplined the old. We’d be debating how to trim the $10 trillion, as estimated by the CBO, that Medicare and Medicaid will spend over the next decade, without impairing Americans’ health. We’d use Medicare as a vehicle of change. Accounting for more than one-fifth of all health spending, its costs per beneficiary, now about $12,000, rose at an average annual rate of 8.5 percent a year from 1970 to 2007. (True, that’s lower than the private insurers’ rate of 9.7 percent. But the gap may partly reflect cost-shifting to private payers. When Medicare restrains reimbursement rates, hospitals and doctors raise charges to private insurers.)

Medicare is so big that shifts in its practices spread to the rest of the delivery system. But changing Medicare, and through it one-sixth of the U.S. economy, requires more than a few demonstration projects of “comparative outcomes” research or economic incentives. What’s needed is a fundamental restructuring. Fee-for-service medicine — Medicare’s dominant form of payment — is outmoded. The more doctors and hospitals do, the more they get paid. This promotes fragmentation and the overuse of services.

We should move toward coordinated care networks that take responsibility for their members’ medical needs in return for fixed annual payments (called “capitation”). One approach is through vouchers; Medicare recipients would receive a fixed amount and shop for networks with the lowest cost and highest quality. Alternatively, government could shift its reimbursement of hospitals and doctors to “capitation” payments. Limited dollars would, in theory, force improvements in efficiency and effective care.

I like FWS’s idea, expressed in a comment on our recent health care thread , of approaching it from the supply side: Let’s increase the number of doctors, hospitals, and high-tech clinics. A bigger supply of health care would send costs down. He writes:

the last time you sought medical care were you able to comparison shop for the best doctor based on his history of complications, education and price?

is there a reason there is a shortage of doctors and nurses fueling the demand side and prices? would it not make sense to open more medical schools and create more doctors and nurses?

Any other ideas for cutting costs without active or passive euthanasia?

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • LisaV

    My idea has always been to give incentives for people to live healthier lifestyles which would reduce disease and eventually the cost of healthcare. If you can document that you lost weight in 20 pound increments or so, give a tax break (assuming the person is overweight or obese which most people are these days). If you can prove that you went through a smoking cessation program-tax break. Join a gym-tax break. Also, increase taxes on cigarettes, alcohol, pop/soda, junk food, ect. Making the unhealthy stuff more expensive than the healthy stuff (and yes, I’m aware of the argument about the lack of resources in the south) which would reduce diabetes, cancer and heart disease-some of the most expensive diseases to treat. It does mean more government involvement which I’m usually against but most people won’t make these changes without an incentive to do so.

  • LisaV

    My idea has always been to give incentives for people to live healthier lifestyles which would reduce disease and eventually the cost of healthcare. If you can document that you lost weight in 20 pound increments or so, give a tax break (assuming the person is overweight or obese which most people are these days). If you can prove that you went through a smoking cessation program-tax break. Join a gym-tax break. Also, increase taxes on cigarettes, alcohol, pop/soda, junk food, ect. Making the unhealthy stuff more expensive than the healthy stuff (and yes, I’m aware of the argument about the lack of resources in the south) which would reduce diabetes, cancer and heart disease-some of the most expensive diseases to treat. It does mean more government involvement which I’m usually against but most people won’t make these changes without an incentive to do so.

  • James T. Batchelor

    One of the most over looked areas is tort reform. The cost of malpractice insurance for doctors is astronomical. In many cases half of the medical bill goes to pay the malpractice insurance premium.

    Tort reform would lower costs throughout society and not just in the medical arena.

  • James T. Batchelor

    One of the most over looked areas is tort reform. The cost of malpractice insurance for doctors is astronomical. In many cases half of the medical bill goes to pay the malpractice insurance premium.

    Tort reform would lower costs throughout society and not just in the medical arena.

  • Joe

    Lisa – that is way to much gov’t involvement for me. Also it starts form a flawed premise – that skinny, non-smokers (i.e, healthy people) cost the system less over time. It looks like that is not true.

    http://www.usatoday.com/news/health/2008-02-05-obese-cost_N.htm

  • Joe

    Lisa – that is way to much gov’t involvement for me. Also it starts form a flawed premise – that skinny, non-smokers (i.e, healthy people) cost the system less over time. It looks like that is not true.

    http://www.usatoday.com/news/health/2008-02-05-obese-cost_N.htm

  • Joe

    As to Frank’s question in the post, yes, I do shop for healthcare by price and by quality. I look up the number and types of complaints that have been filed with the state licensing board when I am looking for a doctor. Also, hospitals have price list(in Wisconsin they have to be published in the newspaper once a year – I have never seen the actual published list but if you need an MRI, etc. you can call around and find the cheapest one in your area).

    That said I agree with increasing the supply.

  • Joe

    As to Frank’s question in the post, yes, I do shop for healthcare by price and by quality. I look up the number and types of complaints that have been filed with the state licensing board when I am looking for a doctor. Also, hospitals have price list(in Wisconsin they have to be published in the newspaper once a year – I have never seen the actual published list but if you need an MRI, etc. you can call around and find the cheapest one in your area).

    That said I agree with increasing the supply.

  • LisaV

    Joe,

    I guess I wasn’t clear. I wasn’t saying that certain people cost more. I was saying that reducing disease overall would reduce costs, and making healthier lifestyle changes can help reduce the incidents of disease.

    http://www.pubmedcentral.nih.gov/articlerender.fcgi?artid=538507

    http://abcnews.go.com/Health/story?id=117001&page=1

    http://www.medem.com/?q=medlib/article/ZZZJO7ZO07C

    http://www.mayoclinic.com/health/reduce-cholesterol/CL00012

    http://sanjay-kapur.blogspot.com/2009/02/ten-simple-lifestyle-changes-to-reduce.html

  • LisaV

    Joe,

    I guess I wasn’t clear. I wasn’t saying that certain people cost more. I was saying that reducing disease overall would reduce costs, and making healthier lifestyle changes can help reduce the incidents of disease.

    http://www.pubmedcentral.nih.gov/articlerender.fcgi?artid=538507

    http://abcnews.go.com/Health/story?id=117001&page=1

    http://www.medem.com/?q=medlib/article/ZZZJO7ZO07C

    http://www.mayoclinic.com/health/reduce-cholesterol/CL00012

    http://sanjay-kapur.blogspot.com/2009/02/ten-simple-lifestyle-changes-to-reduce.html

  • http://www.bikebubba.blogspot.com Bike Bubba

    Do we want to control costs that much? to draw a picture, we have about 1.4 million cancer diagnoses and 500,000 deaths from cancer each year. If we had the cancer survival rate of Europe, we would end up with 700,000 deaths from cancer each year.

    Seems to me that we’re getting something very important from the money we spend. A few more years with those we love, for millions of Americans each year. Similar things happen with cardiac care.

    However, one thing would be beneficial for controlling costs; to remember that insurance is good for uncorrelated risk, not correlated, and to allow people to pay the costs for the risks they willingly accept.

    Put differently, we simply need to phase out coverage for things we can easily prevent–lung cancer, abortion and STDs, heart disease, type 2 diabetes, and so on. Leave insurance for the uncorrolated risks, and let’s see if people clue in and start changing their lifestyles to avoid the corrolated ones.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Do we want to control costs that much? to draw a picture, we have about 1.4 million cancer diagnoses and 500,000 deaths from cancer each year. If we had the cancer survival rate of Europe, we would end up with 700,000 deaths from cancer each year.

    Seems to me that we’re getting something very important from the money we spend. A few more years with those we love, for millions of Americans each year. Similar things happen with cardiac care.

    However, one thing would be beneficial for controlling costs; to remember that insurance is good for uncorrelated risk, not correlated, and to allow people to pay the costs for the risks they willingly accept.

    Put differently, we simply need to phase out coverage for things we can easily prevent–lung cancer, abortion and STDs, heart disease, type 2 diabetes, and so on. Leave insurance for the uncorrolated risks, and let’s see if people clue in and start changing their lifestyles to avoid the corrolated ones.

  • DonS

    Although I often agree with Mr. Samuelson, I have to part ways with him on this issue. Moving further toward a capitation model is exactly the wrong approach if you wish to avoid health care rationing. Few people really like HMO’s, and the reason is that they are incentivized NOT to treat you, because they receive no financial increment for doing so. The insurance company is also the provider, so there are no checks and balances, like there are in a fee for service model.

    True fee for service is the approach we need to move toward. The key, of course, is to make the patient responsible for paying the fee, at least to a point. At least make the patient aware of the cost of the treatment they seek. This is best done through the use of high deductible policies, coupled with a health spending account (HSA).

    LisaV — while your idea sounds good, in theory, it would be horrible for personal liberty, in fact. That is why we need to move government OUT of health care, not INTO it. The government’s increasing involvement in paying medical costs has given it a rationale to regulate social behavior, in the name of preserving public funds. A terrible development, that. Besides, who knows what is really healthy, and what isn’t? Alcohol is heavily taxed as a “sin” product, but, come to find out, drinking wine in moderation likely has significant health benefits. So, do we give you a tax deduction for drinking one or two glasses a day, but sock you with a penalty tax if you have a third drink? If you buy a three ounce steak, you get a tax benefit for ensuring that you are getting sufficient protein, but if you buy the family pack, look out? Please, let’s not go there! Bureaucrats in my cupboards is the last thing I need. :-)

  • DonS

    Although I often agree with Mr. Samuelson, I have to part ways with him on this issue. Moving further toward a capitation model is exactly the wrong approach if you wish to avoid health care rationing. Few people really like HMO’s, and the reason is that they are incentivized NOT to treat you, because they receive no financial increment for doing so. The insurance company is also the provider, so there are no checks and balances, like there are in a fee for service model.

    True fee for service is the approach we need to move toward. The key, of course, is to make the patient responsible for paying the fee, at least to a point. At least make the patient aware of the cost of the treatment they seek. This is best done through the use of high deductible policies, coupled with a health spending account (HSA).

    LisaV — while your idea sounds good, in theory, it would be horrible for personal liberty, in fact. That is why we need to move government OUT of health care, not INTO it. The government’s increasing involvement in paying medical costs has given it a rationale to regulate social behavior, in the name of preserving public funds. A terrible development, that. Besides, who knows what is really healthy, and what isn’t? Alcohol is heavily taxed as a “sin” product, but, come to find out, drinking wine in moderation likely has significant health benefits. So, do we give you a tax deduction for drinking one or two glasses a day, but sock you with a penalty tax if you have a third drink? If you buy a three ounce steak, you get a tax benefit for ensuring that you are getting sufficient protein, but if you buy the family pack, look out? Please, let’s not go there! Bureaucrats in my cupboards is the last thing I need. :-)

  • DonS

    As far as increasing the supply of doctors, hospitals, etc. is concerned, just how do we do that? Currently, we are constraining the supply, especially of specialists, because of our health care system models. Endless paperwork, ever reduced payments to doctors and hospitals, particularly by Medicare and other government insurance programs. These programs are also reducing access to specialists, by requiring approval and recommendation from primary care physicians. I have a good friend who is an ER physician who says he gets paid as little as $8 for certain medical procedures in the ER by MediCal (California version of Medicaid), and he is FORCED to treat all patients who come into the ER door. He has strongly advised his son NOT to go into medicine. Physicians usually come out of medical school with several hundred thousand dollars of debt and need to make a good income to pay that off, as well as catch up with their peers who started productive labor 6 or 8 years sooner. They’re not making that income today, because of government health care and limited payments to doctors and hospitals.

  • DonS

    As far as increasing the supply of doctors, hospitals, etc. is concerned, just how do we do that? Currently, we are constraining the supply, especially of specialists, because of our health care system models. Endless paperwork, ever reduced payments to doctors and hospitals, particularly by Medicare and other government insurance programs. These programs are also reducing access to specialists, by requiring approval and recommendation from primary care physicians. I have a good friend who is an ER physician who says he gets paid as little as $8 for certain medical procedures in the ER by MediCal (California version of Medicaid), and he is FORCED to treat all patients who come into the ER door. He has strongly advised his son NOT to go into medicine. Physicians usually come out of medical school with several hundred thousand dollars of debt and need to make a good income to pay that off, as well as catch up with their peers who started productive labor 6 or 8 years sooner. They’re not making that income today, because of government health care and limited payments to doctors and hospitals.

  • LisaV

    DonS,

    I do see your point and I am generally against excessive government involvement. My idea comes from knowing that people are generally more motivated by reward than by penalty, so I was thinking more of tax incentives on healthy habits, especially since most of the time the healthier choice is more expensive (especially gym fees!). Although I do think the NY governor is on to something by trying to tax soda/pop…however, I do see what you mean about violating personal liberties, and I wouldn’t want to pay a penalty on my half cup of ice cream every week!

    BTW, as far as the alcohol goes, most of the evidence that shows health benefits of alcohol are mostly found with drinking wine (in moderation) and these benefits can be mimicked by eating red grapes, so if alcohol was taxed, one could still take advantage of the health benefits. :)

  • LisaV

    DonS,

    I do see your point and I am generally against excessive government involvement. My idea comes from knowing that people are generally more motivated by reward than by penalty, so I was thinking more of tax incentives on healthy habits, especially since most of the time the healthier choice is more expensive (especially gym fees!). Although I do think the NY governor is on to something by trying to tax soda/pop…however, I do see what you mean about violating personal liberties, and I wouldn’t want to pay a penalty on my half cup of ice cream every week!

    BTW, as far as the alcohol goes, most of the evidence that shows health benefits of alcohol are mostly found with drinking wine (in moderation) and these benefits can be mimicked by eating red grapes, so if alcohol was taxed, one could still take advantage of the health benefits. :)

  • http://mesamike.org Mike Westfall

    As much as I like and take advantage of the fact that my employer provides me with health care coverage, I have to say that I don’t really care about how much any of it costs beyond the small copay required of me when use the services.

    Perhaps what would help bring health care costs down would be to eliminate the government tax incentive for employers to provide health care benefits. Employers stop providing the benefits, instead paying the cost of that benefit as extra paycheck money to the employee. Employees then would be responsible for buying health care services, either à la carte, or some comprehensive service plan, or just basic insurance for catastrophic illnesses. Let the buyer shop around for best prices. Competition is good for the consumer. Let health care providers, insurance providers and comprehensive plan providers jockey for the consumer’s dollar, like in most other industries.

    Also, the business of malpractice lawsuits has to be addressed. Damages should only be paid in cases of obvious neglect, not because your surgery turned out on the wrong side of the statistical probability of success.

  • http://mesamike.org Mike Westfall

    As much as I like and take advantage of the fact that my employer provides me with health care coverage, I have to say that I don’t really care about how much any of it costs beyond the small copay required of me when use the services.

    Perhaps what would help bring health care costs down would be to eliminate the government tax incentive for employers to provide health care benefits. Employers stop providing the benefits, instead paying the cost of that benefit as extra paycheck money to the employee. Employees then would be responsible for buying health care services, either à la carte, or some comprehensive service plan, or just basic insurance for catastrophic illnesses. Let the buyer shop around for best prices. Competition is good for the consumer. Let health care providers, insurance providers and comprehensive plan providers jockey for the consumer’s dollar, like in most other industries.

    Also, the business of malpractice lawsuits has to be addressed. Damages should only be paid in cases of obvious neglect, not because your surgery turned out on the wrong side of the statistical probability of success.

  • Peter Leavitt

    Capitation is too crude a way to solve the crisis of health-care costs. Increasing health-care supply, apart from giving consumers choice, would be futile, as the suppliers can and do find ways to get the government to favor their assorted supply increases.

    The solution is to free the insurers from federal and state restrictions and allow them to favor customers who make healthy choices, with some sort of backup for those who make poor lifestyle choices, much in the way that that most states provide expensive insurance for poor drivers.

    People who make healthy choices in terms of smoking, drinking, weight, and cholesterol control ought to be able to get high-deductible, low-cost catastrophic insurance coverage along with tax-free health-savings accounts that with luck can be transferred to their retirement accounts and estates. This policy in fact protects really sick people from the necessary cruelty of the sort of health-care rationing that comes with government involvement in health-care.

    The trouble is that the politicians meddle with health-care insurance issues, hoping to gain political favor. Obama, who ironically takes good physical care of himself, lusts for the votes of the many foolish unhealthy folk among us who excessively smoke, drink, and stuff themselves with largely junk food.

  • Peter Leavitt

    Capitation is too crude a way to solve the crisis of health-care costs. Increasing health-care supply, apart from giving consumers choice, would be futile, as the suppliers can and do find ways to get the government to favor their assorted supply increases.

    The solution is to free the insurers from federal and state restrictions and allow them to favor customers who make healthy choices, with some sort of backup for those who make poor lifestyle choices, much in the way that that most states provide expensive insurance for poor drivers.

    People who make healthy choices in terms of smoking, drinking, weight, and cholesterol control ought to be able to get high-deductible, low-cost catastrophic insurance coverage along with tax-free health-savings accounts that with luck can be transferred to their retirement accounts and estates. This policy in fact protects really sick people from the necessary cruelty of the sort of health-care rationing that comes with government involvement in health-care.

    The trouble is that the politicians meddle with health-care insurance issues, hoping to gain political favor. Obama, who ironically takes good physical care of himself, lusts for the votes of the many foolish unhealthy folk among us who excessively smoke, drink, and stuff themselves with largely junk food.

  • E Malley

    Mike, assuming you get your way. What do you do with people who can’t get insurance at all because of a pre-existing condition? Figure that’s their problem for being stupid enough to inherit rheumatoid arthritis?

    Also, it’s not much mentioned, but one reason health insurance companies even deign to cover preganancy and childbirth though employer provided plans is the govt mandates it. Such insurance on the open market is prohibitive, and even with it there results thousands in uncovered expenses. You’d figure the pro life folks would be outraged by this, but … no.

    This blog tends to make an idol of the ‘free’ market while reflexively cursing any form of govt regulation, but when it comes to health care, it’s a deadly and ignorant stand to take.

  • E Malley

    Mike, assuming you get your way. What do you do with people who can’t get insurance at all because of a pre-existing condition? Figure that’s their problem for being stupid enough to inherit rheumatoid arthritis?

    Also, it’s not much mentioned, but one reason health insurance companies even deign to cover preganancy and childbirth though employer provided plans is the govt mandates it. Such insurance on the open market is prohibitive, and even with it there results thousands in uncovered expenses. You’d figure the pro life folks would be outraged by this, but … no.

    This blog tends to make an idol of the ‘free’ market while reflexively cursing any form of govt regulation, but when it comes to health care, it’s a deadly and ignorant stand to take.

  • Peter Leavitt

    Mr. Malley, the issue of congenital disabilities would be a legitimate regulatory concern. If insurance companies had a truly national market, they could easily accommodate people with such disabilities.
    People who favor free markets are not averse to reasonable government regulation.

  • Peter Leavitt

    Mr. Malley, the issue of congenital disabilities would be a legitimate regulatory concern. If insurance companies had a truly national market, they could easily accommodate people with such disabilities.
    People who favor free markets are not averse to reasonable government regulation.

  • Joe

    E Malley – The market has already answered the pre-existing condition problem. You can buy a very inexpensive insurance plan to insure against the possibility that you may become uninsurable in the future. Or if the employer is no longer the supplier then you could buy a plan for your kids as individuals when they are young so that they can be insured their entire life – just like many people do with life insurance policies now.

    Also, Peter is right if the market were national instead of artificially limited to each individual state the insurance companies would be much more likely to insure people with bad markers.

    And lastly, pre-esiting conditions generally don’t prohibit insurance; rather, the increase the cost of the policy, which if it were really cost prohibitive could be addressed by a limited, targeted subsidy (personally I don’t favor this but which would be much less expensive then other options).

  • Joe

    E Malley – The market has already answered the pre-existing condition problem. You can buy a very inexpensive insurance plan to insure against the possibility that you may become uninsurable in the future. Or if the employer is no longer the supplier then you could buy a plan for your kids as individuals when they are young so that they can be insured their entire life – just like many people do with life insurance policies now.

    Also, Peter is right if the market were national instead of artificially limited to each individual state the insurance companies would be much more likely to insure people with bad markers.

    And lastly, pre-esiting conditions generally don’t prohibit insurance; rather, the increase the cost of the policy, which if it were really cost prohibitive could be addressed by a limited, targeted subsidy (personally I don’t favor this but which would be much less expensive then other options).

  • david in norcal

    Don’t help people who can’t afford healthcare.

    Eliminate all taxes that help people who cannot get health insurance.

    Don’t help people who are excluded from insurance by preexisting conditions get insurance or health care. if their bank account can’t get it for them, too bad.

    Thank God that you are not among those above.

    Praise Jesus on Sunday for smaller government and low taxes.

  • david in norcal

    Don’t help people who can’t afford healthcare.

    Eliminate all taxes that help people who cannot get health insurance.

    Don’t help people who are excluded from insurance by preexisting conditions get insurance or health care. if their bank account can’t get it for them, too bad.

    Thank God that you are not among those above.

    Praise Jesus on Sunday for smaller government and low taxes.


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