Health Care Corner: Herb Stein on Health Care

Lynn Bailey

Rising health care costs are placing our entire economic future at risk . . .. Addressing the issue must be a priority for the next president and Congress.

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In late January 2008, David Walker, Comptroller General of the United States, warned Congressional leaders of "large and growing structural deficits driven primarily by rising health care costs."¹ Rising health care costs are not just a problem for the federal budget but are our nation’s "number one fiscal challenge," Walker stated. Rising health care costs affect private companies as well as state and local governments.

Rising health care costs are placing our entire economic future at risk. Ignoring the problem is no longer an option, and addressing the issue must be a priority for the next president and Congress. Peter Orszag, Director of the Congressional Budget Office, projects that Medicare and Medicaid funding, which are now 5 percent of our Gross Domestic Product (GDP), will reach 20 percent by 2050. For some perspective, today’s total federal budget is approximately 20 percent of our GDP.²

The late economist Herb Stein is noted for Stein’s Law: "Any process that can’t go on forever, eventually stops." America’s rising health care costs may just prove the truth of Stein’s Law. The consequences if health care just stopped would be disastrous. Post-Katrina New Orleans is an example of what happens when a community’s health care suddenly ceases.

What drives our rising health care cost crisis? First, Americans are not sicker than other countries. We do, however, have an implicit philosophy of individual responsibility that places the burden of coordinating and financing health care squarely on the individual. Moreover, the focus of our public health policy has been on developing and disseminating new technology to fight disease without regard to whether the benefits of new technology are worth the costs.

According to a study by the McKinsey Global Institute, America’s high costs are the result of the failure of our intermediation system to address both the demand and supply sides of the health care sector. On the demand side, consumers lack incentives to demand value. On the supply side, providers lack the incentive to promote rational supply. There is no functional economic mechanism to drive down input prices or to dampen the usage of health care technology and services. The U.S. health care system also incurs unique costs because of our for-profit elements and a multi-payer and multi-state administrative structure.³

According to the McKinsey analysis, our high spending results from input costs, inefficiencies, and complexity of our system’s operation, along with our administrative, regulatory, and intermediation processes. Our high doctors’ and nurses’ salaries, drugs, medical devices and supplies, and profits from private participants account for the largest portion of rising costs. The second largest cause is inefficiency in our complex and fragmented delivery system that results in uncoordinated care. The third cause is how we administer, regulate, and pay for care in our system.

The American health care system is structurally flawed and failing. This system threatens our total economic well-being. The longer we wait to address these critical issues, the harder the choices will be. Tinkering around the edges with a tweak here and a twist there is a recipe for disaster.

Although the situation is grave, it isn’t hopeless. It is possible to constrain cost without adverse consequences to our health. The concept of "comparative effectiveness" may hold the key to rebalancing the economic forces of health care demand and supply. The basis for comparative effectiveness rests in the research done by the folks behind the Dartmouth Atlas (www.dartmouthatlas.org), which clearly highlights the regional differences in health care costs and delivery. Depending on where a patient lives, cost of care (to Medicare) may range from $4,500 to $12,000 for the same condition.

Comparative effectiveness research compares benefits with costs. It provides the information to consumers and providers on which treatments work best—both for pharmaceuticals and medical devices. It can evaluate new diagnostic and therapeutic procedures. Do the benefits of new technologies and therapies warrant the extra costs they generate? It could be the foundation for realigning incentives for both consumers (demand) and providers (supply).

Both Medicare and Medicaid lack the legal authority to take cost of care into account in establishing reimbursement policies. Over the past 40 years, these programs have approved payments for new procedures, and we are now able to treat formerly untreatable conditions. Many of these new treatments, however, are only marginally effective, while some are detrimental and others are even dangerous. (Think Vioxx.)

We simply don’t know what works best and what is just more expensive. No rational business person pursues the implementation of new technology without evidence that this new way is more efficient, as demonstrated by either increased output or lowered cost of production. In health care, we can no longer afford to ignore the microeconomic principles of the costs of production.

Remember Stein’s Law: "Any process that can’t go on forever, eventually stops." Your life or the life of someone you love may ultimately depend upon whether or not Stein’s Law actually does apply to health care

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1  David M. Walker, Testimony before the Committee on the Budget, U.S. Senate, "Long-Term Fiscal Outlook Action Is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future," GAO-08-411T (Jan. 29, 2008).

² P. R. Orszag and P. Ellis, "The Challenge of Rising Health Care Costs – A View from the Congressional Budget Office," "Addressing Rising Health Care Costs – A View from the Congressional Budget Office," The New England Journal of Medicine, 357: 18 (Nov. 1, 2007) and 357: 19 (Nov. 8, 2007), www.nejm.org.

³ McKinsey Global Institute, "Accounting for the Cost of Health Care in the United States" (January 2007), www.mckinsey.com/mgi/rp/healthcare/accounting_cost_healthcare.asp.