President Obama often says that bending the curve in health spending downward is one of the main objectives of his health care reform agenda. There is indeed a consensus that health costs are growing at a rapid rate, and that reformers should work to slow the rising tide of spending.
But as Heritage’s Robert A. Book, Ph.D, and Jason D. Fodeman, M.D. point out, the big picture is not so simple. In order to successfully reduce health care spending, legislators must address what is causing expenses to rise in the first place. The big House and Senate bills are based on faulty assumptions.
According to Book and Fodeman, “The House and Senate bills appear to be based on a fundamental misunderstanding of the basic factors driving health care spending upward. As a result, instead of restraining these basic factors, the bills neglect some and reinforce others, driving spending upwards instead of downward.”
Book and Fodeman break down the drivers of health spending, explaining that increased spending can be due to negative factors or positive factors, such as advances in medical technology or new treatments for previously incurable diseases. Furthermore, increased spending can also be caused by higher prevalence of disease. It is not enough to look at overall health spending and declare it excessive; rather, reformers must focus on areas where spending does not reflect the value of care received by the patient.
Several factors lead to increased health spending: disease prevalence, increase in insurance coverage, new medical technology, and waste. All increase health spending, with varied effects on actual health of the patient.
But, as Book and Fodeman note, all of these increases take place within a distorted health care market, driven by misaligned economic incentives. Since 1965, “third-party payments increased from 48 percent to 85 percent”. Third party payers, they argue, “may appear to have an incentive to encourage efficient use of resources, but ultimately they do not pay the price for inefficiency.” Patients, doctors, and insurers alike are thus insulated from the direct effects of increased spending; patients and taxpayers ultimately experience the pain, albeit indirectly.
So will the giant House and Senate health bills succeed in bending the cost curve downward? No. Limits on out-of-pocket spending, mandates requiring coverage for a greater number of services, and the Senate bill’s excise tax on high-cost insurance plans would all increase overall health spending and health plan premiums in the private sector. This is in addition to massive increases in government spending on health care.
To reduce health spending, lawmakers should reform Medicare, Medicaid, and tax law regarding health insurance. Finally, Congress should create a true national insurance market and change regulations to promote choice and reward cost-efficient care. Loading new mandates, taxes, and regulations onto patients, doctors, and insurers, as the House and Senate bills would do, will only exacerbate current health spending increases.