The cost problem

Matt Yglesias has a post arguing that health care is expensive because the prices are so high. (He cites a chart that notes that differences in quantities account for 18% and differences in cost account for 33% from high-cost to low-cost regions in the U.S.) This is, as he notes, somewhat tautological, but he thinks this implies that if the U.S. were really serious about cost containment it would adopt price controls. (This is, indeed, a big fear of doctors—I remember going to a talk with primarily doctors in attendance. The speaker said, “If we don’t figure out the cost problem, we’ll have cost controls.” The audience reacted with facial expressions usually seen on those suffering from gastrointestinal distress.)

I think the simplicity of thought here misses the overarching problems of the health care system. The cost problem isn’t just that prices are too high now, it’s that they’re high and rising. Currently our budget problem is just about sustainable in the long term; if health care costs rise at about previous trend, then there will inevitably be major problems. And it’s a bit too simple to say the solution is price controls. Chart:

Focus on the gray bars that show the inflation rate from 2000-2008. Enthusiastic price controllers U.K. have an even higher health care inflation rate than does the U.S.; Canada’s Socialized Medicine™ has a health care inflation rate equal to ours. Price control apparently isn’t enough to douse the fire. (Meanwhile, it’s not clear demographics play a huge role either—noted old people societies Italy and Japan were chugging along with a very manageable sub-2% inflation rate.)

The other problem, besides the inflation rate, is the low quality the American health care system too often delivers. This is often related to the overconsumption of care, or at least the substitution of more expensive yet less effective care for less expensive, more effective care. Viewed from this perspective the 18% of care related to the variation of consumption of care isn’t a number that is dwarfed by the third of costs related to higher prices, it is a huge opportunity. As Yglesias notes, the biggest chunk of the difference in health care spending is in “differences in health status.” Well, anytime you do an unnecessary procedure, resulting in a complication, resulting in even more care, you have an awfully expensive problem relating to both “differences in health status” and “overconsumption of care.” Hence health care is expensive because the prices are high , because we use too much of it, and because the product isn’t too great. (And 18% of all the variation is a huge amount—it seems silly to write off that entire part because there’s a bigger line item in the budget. Reducing that number substantially would reduce the budget hit substantially. Doing it right would deliver better health too.)