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Health care spending and health care costs: they’re not the same thing!

Summary:
Health economist David Cutler offers sage thoughts on the R’s health care plan. I like where he starts. When Paul Ryan said that what his plan brings to the table is the “freedom” for healthy people not to have to subsidize the sick, many progressives pointed out that…um…that’s kinda how insurance works, Paul. But as Cutler points out: Critics were probably too quick to dismiss Ryan’s remarks as ignorant. What he said reflects a long-standing vision of many on the right about who should pay for the chronically ill. Spreading the costs so that healthy people pay more than their own care likely will warrant in a given year is one option. But that’s not the solution Republicans have traditionally favored. Their answer for health care, as for old-age support, is to put a greater burden on individuals to pay for the costs they incur. In that mode of thinking, the unraveling of risk pools is a virtue, not a vice. In other words, in their YOYO world (“you’re on your own”), risk pooling is a socialist, not an actuarial, tool. As Cutler suggests, this helps explain their antithesis to any version of social insurance. What he doesn’t get into is that this is really just a stop on the path to the ultimate goal of turning the resources that support social insurance over to the wealthy in tax cuts, a very obvious play in the ACHA.

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Health economist David Cutler offers sage thoughts on the R’s health care plan. I like where he starts. When Paul Ryan said that what his plan brings to the table is the “freedom” for healthy people not to have to subsidize the sick, many progressives pointed out that…um…that’s kinda how insurance works, Paul.

But as Cutler points out:

Critics were probably too quick to dismiss Ryan’s remarks as ignorant. What he said reflects a long-standing vision of many on the right about who should pay for the chronically ill. Spreading the costs so that healthy people pay more than their own care likely will warrant in a given year is one option. But that’s not the solution Republicans have traditionally favored. Their answer for health care, as for old-age support, is to put a greater burden on individuals to pay for the costs they incur. In that mode of thinking, the unraveling of risk pools is a virtue, not a vice.

In other words, in their YOYO world (“you’re on your own”), risk pooling is a socialist, not an actuarial, tool. As Cutler suggests, this helps explain their antithesis to any version of social insurance.

What he doesn’t get into is that this is really just a stop on the path to the ultimate goal of turning the resources that support social insurance over to the wealthy in tax cuts, a very obvious play in the ACHA. (Heads-up: Ben S and I feature the author of that link, CC Huang, along with health expert Shelby Gonzales, in our next episode of the On the Economy podcast, out Tuesday.)

However, Cutler goes on to explain that:

Even under this philosophy, though, Ryan’s American Health Care Act is fatally flawed: It does nothing to address the high and rising cost of chronic illness.

Along with a must-read tutorial on the cost structure of chronic illness, Cutler’s key point, also relevant to the next piece I’ll discuss, is that in this debate, you don’t want to conflate spending with costs. It’s easy to cut spending. It’s hard to cut costs. With their emphasis on high deductibles and less comprehensive insurance, R’s cut spending by shifting costs onto people who are now getting more government assistance. But they do nothing to reduce costs, leading to a very dangerous collision between those with low and moderate incomes and their health needs.

I thought NYT columnist Ross Douthat fell into this trap in an interesting piece about the advantages of Singapore’s health care system, where they spend 5% (!#$&?@#) of GDP on health care (we spend 17%). My bold:

Republican politicians may offer pandering promises of lower deductibles and co-pays, but the coherent conservative position is that cheaper plans with higher deductibles are a very good thing, because they’re much closer to what insurance ought to be — and the more they proliferate, the cheaper health care will ultimately be for everyone.

No, no, no! Read Cutler. The cheaper health coverage will be, not health care.

Of course, all of this begs the question: how can we reduce health care costs?

Cutler mentions a key factor emphasized by Dean Baker: the extent to which the patent system adds literally hundreds of billions of dollars per year to the cost of American pharmaceuticals (see Chapter 5 here).

Revealingly, in his praise for aspects of Singapore’s single-payer system that keeps the private sector in the mix, Douthat fails to mention the main way they control costs: government cost controls (see Chapter 4 from this useful review by William Haseltine). The government sets prices in the dominant public sector, and the private sector must follow suit.

Haseltine:

One study comparing healthcare systems among the developed Asian nations described the Singapore government as “micro-managing provision,” ensuring that public hospital charges are kept at acceptable levels, and in turn relieving pressure on Medisave accounts [mandatory health savings accounts]. It went on to say that the government “uses funding (and hospital ownership) in a calculated manner to control service costs and subsidize care, in turn limiting expenditure from insurance accounts and providing incentives for private providers to keep costs down.”

Medicare helps shape the private market to a lesser extent here, and there’s some compelling evidence that states that took the Medicaid expansion had lower premium costs charged by private insurers in the exchanges, along with reduced costs of uncompensated care.

It’s never hard to reduce spending in government programs. Reagan did it in the 1980s by throwing poor people off of the welfare rolls, and his present day disciples do so in the ACHA by cutting Medicaid spending by 25% by 2026.

But spending isn’t costs, which people either have to somehow pay or suffer the consequences of their illnesses. As this debate lumbers on, it is essential to recognize that many of the factors most associated with reduced health-care costs (vs. spending)–single payer, government cost controls, patent reform, incentives for quality care over quantity–involve a level of government intervention with which I’m totally comfortable but many others, like Douthat, are surely not.

Jared Bernstein
Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, Executive Director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. Prior to joining the Obama administration, Bernstein was a senior economist and the director of the Living Standards Program at the Economic Policy Institute, and between 1995 and 1996, he held the post of Deputy Chief Economist at the U.S. Department of Labor.

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