Diagnosing Health Care’s Cost

The United States will spend $2.5 trillion on health care this year, and the reform debate is focused on how to reduce costs. However, total health spending alone is not very informative. Two questions help clarify what our current spending levels mean for reform. Can we afford our health care system? Do we get our money's worth for what we spend?

Can we afford to spend 16-plus percent of our economy on health care?

Other democratic nations with market economies that are our close allies and trading partners spend substantially less. England, Japan, France, Germany and Canada spend 8 percent to 10 percent of GDP on health.

However, even this comparison tells us little. The percentage of a nation's economy devoted to health care represents a value judgment of the relative worth of health versus other spending. Maybe we simply value health care more than other nations?

Spending on Social Security (22 percent), defense (20 percent), Medicare (14 percent), interest on the debt (8 percent) and the federal share of Medicaid (7 percent) consumes $7 of every $10 in the 2009 federal budget. Other priorities that might be crowded out by current spending patterns include infrastructure, education, prisons, development aid and energy. Only by considering alternative uses for health spending can you decide whether our system is affordable.

I would argue we cannot afford our current health system while maintaining other spending priorities.

The long-term federal budget problems are driven by Social Security, Medicare and Medicaid. The financing problems of Social Security were largely inevitable once the baby boomers had fewer children than their parents. The impact of Medicare and Medicaid on the federal budget is related partly to demographics, but their accelerating rate of spending growth is linked to overall health system inflation, which is well above general inflation.

If you assume that Social Security and military spending are politically untouchable, then our health system is unaffordable, and the only way to have a responsible long-term federal budget is to curb health care cost growth.

Do we get our money's worth for the $7,500 per capita that we spend on health care?

Answering this question is directly informed by cross-national comparison.

The United States spends about $2 for each dollar spent by the nations named above. Yet our health outcomes are either worse or about the same as those in these nations, depending upon the nation and the measure used. Life expectancy at birth, remaining life expectancy in good health at age 60 and the mortality rate from diseases that are amenable to health care all show us lagging behind these nations.

Certainly any outcome measure cannot capture all aspects of a health system, but we spend twice as much per person on health care as these nations, and our outcomes are about the same or worse. It is clear that we are not getting our money's worth from health spending.

Deleting a Tax Subsidy from the EquationWhere does the money now go in the system? Hospitals, 31 percent; doctors, 21 percent; pharmaceuticals, 11 percent; laboratory tests and medical devices, 9 percent; nursing homes, 8 percent; administration, 7 percent. These categories represent nearly $9 in $10 spent on health care here. Any reform that reduces the rate of spending growth has to reduce spending to some or all of these categories.

It should be possible to reduce spending and improve quality. To do so, any reform would have to address the following cross-cutting issues that influence money flows to the spending categories noted above: Encouraging healthier lifestyles (exercise, obesity, smoking); assessing the manner and intensity with which a given condition is treated (technology, type of provider); altering provider payment mechanisms to reduce incentives to do more; helping patients better understand the cost implications of their medical decisions; shifting costs of caring for the uninsured to the insured; assessing administrative expenses and profit; and dealing with patient safety and malpractice.

Expanding insurance coverage and not addressing at least some of these in a meaningful way will make health spending rise and cannot be expected to improve quality.

We need to expect more value for money in health care while reducing costs. It will not be easy, as any savings realized will be a reduction in someone's income. For now, everyone is saying reform is needed, but no one has had to be opposed yet. As legislation moves toward a final House, Senate and ultimately conference committee vote, there is only one certainty. If opposition to a consensus bill does not become ferocious, it can mean only that the proposal does not seriously address health spending growth.

Donald H. Taylor Jr. is an assistant professor of public policy. His blog www.donaldhtaylorjr.blogspot.com is available for discussion of this article and health care reform in general. This article was first published in The (Raleigh) News & Observer on July 31, 2009.  This is part of a weekly series of articles by Donald Taylor exploring aspects of the health care reform issue.