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Sebastian Mallaby, Columnist

The Budget Health Shock

By Sebastian Mallaby
Monday, January 24, 2005; Page A15

The biggest economic news last week had a mouthful of a name: implantable cardioverter-defibrillator. After the New England Journal of Medicine published fresh research on heart disease, the Bush administration said it would meet the costs of inserting this credit-card-size electric-shock device into Medicare patients. Depending on how many heart patients come forward, the cost to taxpayers could be $3 billion or $15 billion annually: An unassuming administrative decision has ripped another hole in the budget. But the really interesting thing is what this says about the future size of government.

Despite the hit to the budget, the Bush team made the right call on defibrillators. By detecting odd heart rhythms and preempting a fatal spasm with an electric shock, the implantable gizmo increases a heart patient's chances of survival by 23 percent, according to the four-year trial published in the New England Journal. Moreover, although the device plus doctor's fees runs to $25,000 or so, this is a bargain. Averaged across hundreds of patients, the gizmo buys an extra year of life for $33,000, according to Daniel Mark of Duke University.

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How do we know this is a bargain? Well, most middle-age Americans are willing to pay $300 to have an air bag in their car, a precaution that saves the life of one driver in 10,000. By implication, they value their lives at $3 million; and since they have around 30 or 40 years more to live, each year of their life is worth something like $100,000 or $75,000 to them. At $33,000 for each extra year of life, the implantable shocker clears this hurdle easily.

The shocker isn't the only expensive bargain around; modern health care is full of them. Indeed, Harvard's David Cutler has demonstrated that the whole of cardiology, a fantastically costly branch of medicine, could be viewed as the deal of the half-century.

Since 1960, Cutler reckons, advances against heart disease have accounted for five years of the 8.8-year increase in American life expectancy at birth. Of those five years of extra life, three are attributable to medical progress, with the other two reflecting behavioral changes such as less smoking. How much does cardiology's gift of three years of life cost? Well, the average 45-year-old will incur heart-related medical bills worth $30,000 over the remainder of his or her life. That's 10 grand for every extra year. Measured by the car-air-bag yardstick, cardiology is a bargain.

The message from Cutler's research, and from the Bush administration's defibrillator decision, is that spending ever growing billions on health care is likely to be worth it. Even though there is huge waste in the health system, which could be reduced by using information technology and improving incentives to cut out ineffective care, medicine is by and large both costly and cost-effective. Along with the heart gizmo, Medicare has recently agreed to pay for a new $30,000-a-dose cancer drug and brain scans to screen for Alzheimer's. Over the next couple of decades, the deciphering of the genome and other scientific strides are going to generate wonderful new drugs, and we are going to want to buy them.

Can we afford to do so? In one sense, yes. In a growing economy, medical spending can expand rapidly without cutting into other stuff we currently buy; medicine will just be claiming a large chunk of our additional prosperity. That seems fine. Health is important, so why not devote many of our incremental dollars to it?

But in another sense the coming flood of must-have drugs is going to cause a problem. Society as a whole may be able to pay, but which part of society is going to write the checks? The likely answer is that government will expand, taxes will go up and the Bush tax cuts will ultimately be viewed as doubly irresponsible.

You can see a sketch of the future in budget projections prepared by Alan Auerbach of Berkeley and Peter Orszag and William Gale of the Brookings Institution. In 2004, the combined cost of Medicare and the federal portion of Medicaid came to 3.8 percent of gross domestic product; by 2040, it will come to an astonishing 10.1 percent. Unless other government expenditures are cut drastically -- and such cuts, historians tell us, are as common as winged pigs -- taxes are going to have to jump by more than a third, measured as a share of the economy.

Scared yet? Well, consider the private sector's reaction to ever rising health costs. Between 2000 and 2003, the percentage of Americans covered by employment-based health benefits fell from 63.6 percent to 60.4 percent, as firms dropped coverage; and company health plans are increasing co-pays and deductibles, pushing costs onto individuals. The more corporations withdraw, the more individuals will turn to the government for help. And to the extent that government responds, taxes will have to rise still higher.

In sum, the Bush team made the right call by saying it would pay for those implantable gizmos. But its decision serves to show what a gamble it's taken with its repeated tax cuts.


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