Obama's Health-Care Headache

By Robert J. Samuelson
Monday, January 12, 2009

Barack Obama talked somberly last week about getting the federal budget under control once the present economic crisis has passed. To do that, he'll have to confront the rapid growth of health spending, which in 2007 was already a quarter of total federal spending of $2.7 trillion. If Obama is serious, he should read a fascinating study from the McKinsey Global Institute, the research arm of the famed consulting company.

American health care has gone haywire. It provides much splendid care but has glaring deficiencies. It is so costly that 15 percent of the population lacks health insurance. Runaway spending is also crowding out other government programs and, through bloated insurance premiums, squeezing workers' take-home pay. What McKinsey provides is a plausible estimate of the overspending: one-third. In 2006, U.S. health spending totaled $2.1 trillion. Of that, McKinsey figures that $650 billion exceeded the norms of other rich nations.

For the extra money, we receive no indisputably large benefit in national well-being. On some health measures (breast cancer survival rates), we do better than many countries; on some others (life expectancy), we do worse. We are constantly searching for villains to explain this unsatisfactory situation. The McKinsey study debunks some popular candidates.

One is that our mixed private-public insurance system drives up costs through high administrative overhead. Claims forms create a paperwork morass; marketing expenses add to the burden. True, U.S. overhead costs are more than double the level in other countries. But the effect is modest, because all administrative costs (including government programs such as Medicare) account for only 7 percent of total health costs.

The same is true of another common scapegoat: the alleged overuse of emergency room care. In 2006, all emergency room care cost $75 billion, about 3.5 percent of total health spending. That's too small to explain overall trends.

What really drives health spending, the study finds, is that Americans receive more costly medical services than do other peoples, and they pay more for them. On a population-adjusted basis, the number of CT scans in 2005 was 72 percent higher in the United States than in Germany; U.S. reimbursement rates were four times higher. Knee replacements were 90 percent more frequent than the average in other wealthy countries. In 2005, there were 750,000 knee and hip replacements, up 70 percent in five years, reports the journal Health Affairs.

We have a health-care system that reflects our national values. It's highly individualistic, entrepreneurial and suspicious of centralized supervision. In practice, Medicare and private insurers impose few effective controls on doctors' and patients' choices. That's the way most Americans want it. Patients understandably desire the most advanced surgeries, diagnostic tests and drugs. Doctors want the freedom to prescribe.

Open-ended insurance reimbursement encourages expensive medicine by making it easier to recover the costs of clinical advances. Economist Amy Finkelstein of MIT has estimated that roughly half the real increase in per capita health spending from 1950 to 1990 reflected the spread of comprehensive health insurance. In 2006, consumers' out-of-pocket spending represented 13 percent of total health spending, down from about half in 1960. Unfortunately, this semi-automatic system may now frustrate other national goals by displacing other spending and spawning ineffective or unneeded care.

On paper, there are various ways to control health spending: stricter regulation of prices and the availability of care; "market mechanisms" to push consumers toward more efficient or skimpier care. All have foundered, because they cannot be used aggressively. The reason is politics. There is no major constituency for controlling spending. Because most patients don't pay medical bills directly, they have little interest in using less care or shopping for lower-priced services. Providers (doctors, hospitals, drug companies) have no interest in limiting care. What others call "health costs" are their incomes -- wages, salaries, profits.

Unless we rectify this political imbalance, efforts to control health spending may fail. We need mass constituencies that favor cost control. But our consistent policy has been to conceal the burden of health spending by burying it in untaxed corporate fringe benefits or government budgets.

We could change this. We could charge the elderly more for Medicare. We could tax employer-provided health insurance as ordinary income. We could create a dedicated federal tax to cover government health costs -- if health spending increased more than revenue, the tax would automatically rise. People would quickly feel the costs of our present system. Of course, that would be unpopular, because it would compel Americans to face a discomforting issue -- how important is health care compared with other priorities?

Will Obama be so bold? In the campaign, he proposed more, not less, health spending. It's easier to embrace the rhetoric of change than change itself.

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