When Will We Slow Health Care Cost Growth?

Welcome to the second in our series on health care. (If you missed the first one, check it out at blog.cgr.org.) Today we discuss the growth in health care cost, both how much and how fast it has grown, and the reasons. Next week’s column will focus on ways to reduce health care costs—or, more realistically, to slow the rate of growth.

In 1960, health care spending was 5% of gross domestic product (GDP). This year it’s expected to reach about 18%. For the past 30 years, health care cost has been rising 2% faster than GDP.

On the one hand, perhaps this doesn’t matter. We are spending more on health care and sometimes we get more for our money. Medical science has discovered new therapies. Pharmaceutical companies have identified fabulously successful new drugs. The survival rate for many dread diseases has increased significantly. For example, many cancer sufferers are living longer and experiencing a higher quality of life. Some diseases that were fatal only a few years ago—AIDS is the most prominent example—are now considered almost chronic illnesses. But these new therapies, these new drugs, these new treatments aren’t cheap. Genentech’s Avastin, currently used for a broad range of cancers, can cost from $4,000 to $9,000 per month.

On the other hand, sometimes we get less for our money. Higher spending on health care does not always mean higher quality or better health. Rising health costs affect us in many ways. If we receive health care insurance from our employers, we may have seen our salaries rise more slowly as our employers struggle to absorb these higher costs. Over the past decade, health insurance premiums have gone up almost four times as fast as wages (119% v. 34%). Health insurance cost is part of GM’s financial troubles—for every car it sells, $1,200 to $1,500 of the sale price goes to pay for health care benefits for workers and retirees, making it even harder to compete in global markets. As taxpayers, we are paying more to support Medicaid and Medicare, crowding out funding for other priorities. Hospitals and other health care providers are absorbing more bad debt. And of course higher health care costs have resulted in continually eroding private insurance coverage, especially affecting middle and low income families.

The rising cost of health care forces us to confront some difficult and serious choices. How much are we willing to pay for our own health care or the health care of our loved ones? More challenging for society, perhaps, is the question of what we are willing to pay to support the health care costs of others.  Is health care a right, regardless? In our society most seem willing to answer a heavily qualified “yes, in part” to that question. But what about personal responsibilities that accompany that right?  Many may be reluctant to see their insurance and tax dollars supporting medical treatment for those who choose to continue to smoke. Or for individuals who don’t take their meds or take other steps to manage their health. And no one wants to pay more than is necessary to achieve our goals.

We know that we’re on an unsustainable trajectory.  The Congressional Budget Office notes that health care will soak up nearly half of GDP by 2082 if nothing changes. That’s certainly unaffordable—some crisis or political miracle will force change upon us before we get to that point.

We also know that simply expanding the system we currently have will only bring that day of reckoning forward in time. Congress is poised to pass a package of changes that primarily addresses gaps in insurance coverage without altering the fundamental incentives now driving health care costs inexorably upward.

So why is the cost of health care going up? Like a stable political system, a well-functioning economic system has “checks and balances.” For a normal product, the buyer and seller work this out between them. Starbucks can sell a grande latte at $4 but sell few at $8. Starbucks’ success prompted Dunkin’ Donuts and McDonalds to offer a similar product at a lower price, putting pressure on Starbucks to cut costs and emphasize its “value proposition.”

This feedback loop is missing in health care. The nature of health care insurance insulates the consumer—you and me—from the cost. If we’re not paying the bill, we may not care whether Starbucks is charging $8 for a grande latte.

In 1965, nearly half of health care costs—43%—was paid by the “consumer,” the person whose health was being cared for. Now the consumer pays only 11% of the cost. Insurers are constantly inventing new ways to encourage consumers to pay attention to cost—that’s what deductibles and co-payments are intended to do. But the full cost of our care is still hidden from the insured.  And it is a simple fact of human nature that we buy more when something costs less. This is why simply providing the uninsured with health insurance without cost controls is a prescription for even more exorbitant cost growth. That is one lesson of the Massachusetts experience with mandating “universal coverage.”

Of course, health care is not bought and sold in a normal market. A relative of Kent’s is fighting a nasty kind of brain cancer, glioblastoma, and is taking Avastin. Despite the fact that there is little hard evidence that Avastin does more than prolong life by a few months, none of us want to be put in the position of concluding that his life isn’t worth $9,000 per month.

Health care providers are also conflicted. As Kent noted in an earlier column, his mother’s doc will continue to try new ways to fix her back pain until she calls a halt. As Medicare pays the freight, she gets to keep hoping and he gets to keep billing. The system rewards the volume of services provided, and if you have insurance, there is no reason not to collude with this system.

If the consumer isn’t in a position to self-ration health care, someone else must. Next week we’ll explore proposals to “bend the cost curve.”

Kent Gardner, Ph.D., President & Chief Economist with Guest Columnist James Fatula, Ph.D., Chair & Assoc. Prof., Dept. of Public Administration, SUNY Brockport

Published in the Rochester (NY) Business Journal October 9, 2009