NCPA - National Center for Policy Analysis

OBAMA'S HEALTH COST ILLUSION

June 8, 2009

The main White House argument for health-care reform goes something like this: If we spend now on a hugely expensive new insurance program for the middle class, we can save later by reducing overall U.S. health spending.  This "tastes great, less filling" theory could stand some scrutiny, not least because it is being used to rush through the greatest social spending program in American history, says the Wall Street Journal.

What if this particular theory turns out to be a political illusion?  What if the speculative cost savings never report for duty, while the federal balance sheet is still swamped with new social obligations that will be impossible to repeal?  The only possible outcome will be the nationalization of U.S. health markets, which will mean that almost all care will be rationed by politics, says the Journal.

  • Since Medicare was created in 1965, U.S. health spending has risen about 2.7 percent faster than the economy and on current trend would hit 20 percent of gross domestic product (GDP) within a decade.
  • Every public or private attempt to arrest this climb has failed: wage and price controls in the 1970s, the insurance industry's "voluntary effort" in the '80s, managed care in the '90s.

A far better alternative is to increase individual responsibility for medical decisions, says the Journal:

  • In 1965, the average American paid more than half of his health care out of pocket; spending has since increased sevenfold, but the amount that consumers pay directly hasn't even doubled.
  • When people aren't exposed to the true cost of their care -- though it is paid in foregone wages and higher taxes for public programs -- they consume more care.
  • According to Amy Finkelstein, an economist with the Massachusetts Institute of Technology, roughly half of the real increase in U.S. health spending between 1950 and 1990 is due to Medicare and the spread of third-party, first-dollar insurance.

Increasing cost-sharing would discipline the health spending curve and give it a more rational bent.  As societies grow richer, it makes sense that people will invest more in their own well-being.  Health is a superior good, while the utility of wealth is fairly low if you're dead.  The U.S. health cost "crisis" is that we spend so much without incentives to weigh the costs against the benefits, says the Journal.

Source: Editorial, "Obama's Health Cost Illusion," Wall Street Journal, June 8, 2009.

For text:

http://online.wsj.com/article/SB124442772329993085.html

 

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