Paul Krugman: Health Care Costs

Paul Krugman continues his series on health care. In this column, he looks at why health care costs are increasing so rapidly and how the rapid increase can be reduced through changes in policy:

Medicine: Who Decides?, by Paul Krugman, Commentary, NY Times: Health care seems to be heading back to the top of the political agenda, and not a moment too soon. Employer-based health insurance is unraveling ... and vast Medicare costs loom on the horizon. Something must be done. But to get health reform right, we'll have to overcome wrongheaded ideas as well as powerful special interests. For decades we've been lectured on the evils of big government and the glories of the private sector. Yet health reform is a job for the public sector, which already pays most of the bills directly or indirectly and sooner or later will have to make key decisions about medical treatment. ...

Consider what happens when a new drug or other therapy becomes available. Let's assume that the new therapy is more effective ... than existing therapies ... but that the advantage isn't overwhelming. On the other hand, it's a lot more expensive than current treatments. Who decides whether patients receive the new therapy? We've traditionally relied on doctors to make such decisions. But the rise of medical technology ... makes ... medicine ... in which doctors call for every procedure that might be of medical benefit, increasingly expensive.

Moreover, the high-technology nature of modern medical spending has given rise to a powerful medical-industrial complex that seeks to influence doctors' decisions. ...[D]rug companies in particular spend more marketing their products to doctors than they do developing those products ... They wouldn't do that if doctors were immune to persuasion.

So if costs are to be controlled, someone has to act as a referee on doctors' medical decisions. During the 1990's it seemed, briefly, as if private H.M.O.'s could play that role. But then there was a public backlash. It turns out that even in America, with its faith in the free market, people don't trust for-profit corporations to make decisions about their health.

Despite the failure ... to control costs with H.M.O.'s, conservatives continue to believe that the magic of the private sector will provide the answer. ... Their latest big idea is health savings accounts, which ... induce "cost sharing" - that is, individuals will ... pay a larger share of their medical costs out of pocket and make their own decisions about care. ...[I]s giving individuals responsibility for their own health spending really the answer to rising costs? No.

For one thing, insurance will always cover the really big expenses. We're not going to have a system in which people pay for heart surgery out of their health savings accounts and save money by choosing cheaper procedures. And that's not an unfair example. The Brookings study puts it this way: "Most health costs are incurred by a small proportion of the population whose expenses greatly exceed plausible limits on out-of-pocket spending."

Moreover, it's neither fair nor realistic to expect ordinary citizens to have enough medical expertise to make life-or-death decisions about their own treatment. A well-known experiment ... carried out by the RAND Corporation... found that when individuals pay a higher share of medical costs out of pocket, they cut back on necessary as well as unnecessary health spending.

So cost-sharing, like H.M.O.'s, is a detour from real health care reform. Eventually, we'll have to accept the fact that there's no magic in the private sector, and that health care - including the decision about what treatment is provided - is a public responsibility.

Previous column (12/23): Paul Krugman:  The Tax-Cut Zombies.
Next (12/29) column: Paul Krugman: Heck of a Job Bushie

Comments

[hirvi]

"For decades we've been lectured on the evils of big government and the glories of the private sector. Yet health reform is a job for the public sector..."

He's right, ONLY public healthcare can work for everyone. And the point is is that it has to work for EVERYONE, otherwise it's to everyone's disadvantage.

[anne]

Hirvi

What is health care provision like in Finland?

[anne]

http://www.drs.org.au/new_doctor/75/fact_sheet_6.html

Winter, 2001

How Australia's Health Service Compares Internationally
By New Doctor

Four indicators are often used to compare health services in different countries. These are: universal coverage; level of satisfaction among the population with the health system; health status and overall cost to the economy. On each of these Australia rates well.

Health status

Australians enjoy a high overall level of population health status on almost every criterion. Most measures of death and illness show Australia ranks in the middle range of developed countries.

Age-standardised death rates take into account the different age distributions across countries. Comparing the number of deaths per 100,000 people provides a comparison of a nation's overall health status.

In 1992, Australia had the fifth lowest rate among 19 comparable developed countries (AIHW, 1998), bettered only by Japan, Hong Kong, Sweden and Canada. Australia's death rate was 16% lower than the rates for the USA and New Zealand, which ranked 15th and 16th respectively.

Life expectancy in Australia in 1996 was 78.2 years, one year greater than the OECD median and 2.1 years more than the USA - while infant mortality was equal to the OECD median of 5.8 per 1000 live births (Anderson 1998).

In 1995, a comparison of eight developed countries recently ranked Australia second only to Japan in achieving the lowest potential years of life lost for all causes except suicide for people under the age of 70 in 1995 (Anderson 1998).

Spending on health care

Australia's total spending on health care, as a proportion of GDP and in the proportion coming from the public sector, ranks in the middle of the developed countries for which data are available.

Note that the USA, with only 46.7% of its health care expenditure in the public sector spends 67% more than Australia as a proportion of GDP and 2.3 times as much per capita. Yet despite this additional spending, the USA reports a worse population health status and has 40 million people without any form of health insurance. Most of it's highest spending simply goes in higher costs.

Every OECD nation's health spending has risen since 1970. However, where the public sector dominates the market, such as Australia and the UK, cost rises have been slower and more controlled. In Australia the cost of health care has been relatively stable for the last 10 years....

[anne]

http://www.drs.org.au/new_doctor/75/75index.htm

Winter 2001 edition of New Doctor, provides fact sheets and discussion of Australia's health care system that make for an interesting comparison. New Doctor provides intersting health care discussions over several years, but this is the journal of a public health care advocacy group with slants that Australians are better able to identify. I find the fact sheets and discussions helpful in distinguishing our mixed system.

[Tim Worstall]

Sorry about the double trackback there. At least we know it’s working. But not quite perfectly as it didn’t tell me that the first one had gone through.

As I say, apologies.

[anne]

Psychiatrist Peter Kramer lectured to us on depression a few weeks ago. Understanding the depression is a disease as much as diabetes, as highly treatable, is essential, and there was a large appreciative audience. Much to my surprise, given the selective setting, I was suprised to hear a flurry of questions about how to seek out treatment for depression with a limit to or no health insurance. There are times, I foolishly forget for a while what it is not to have the sort of universal health care coverage of every other Organisation for Economic Co-operation and Development country.

[healthcarethinktank]

So Krugman would trust the Bush administration with his health care?

I suggest he spend a few days reading some of the 40,000+ pages of Medicare/Medicaid regulations and tell us what a great deal government health care could be.

Government has a role, and could have an expanded role, but the results could be ugly.

Krugman, being affluent and infuential, could always bypass the system he wants.

[Mike Doyle]

It's like Iraq.
A complete disaster.
A majority more or less knows what should be done.
They know the longer we wait the worse it gets.
But we can't do it.

[anne]

Certainly; Medicare is quite a wonderful and happily popular success that millions of Americans who have no health insurance would be delighted to have. Problems with Medicare, that conservatives are doing all they can with policy to accentuate, can readily be lessened, but there must likely be a different Congress.

Medicaid, sadly, which serves so many poor households who are so much less influential than Medicare households, is however under severe pressure federal and state pressure.

[Michael Cain]

"Most health costs are incurred by a small proportion of the population whose expenses greatly exceed plausible limits on out-of-pocket spending."

If we spread the costs uniformly, we end up with spending of about $11K per household per year (15% of an $11T GDP, 25% of those costs elective or avoidable under a single-payer scheme, 110M households). If that's an actual representative number for the expected value of household spending on health care over time, then it's at least a starting estimate for the annual health-care "premium" a household should pay. I assert that $11K/year exceeds the plausible limits on the premium that can be paid by many households.

Alternatively, consider a system in which the cost of such medical care is paid out of a tax on earned income (as Medicare is in part today). The tax rate would be about 16% (assuming 70% of GDP shows up as earned income, and the need to cover 75% of 15% of GDP as above). Poor households would be strapped by such an increase in their tax burden, and rich households would argue (accurately) that they could get comparable coverage for far less if they simply shopped in the private insurance market.

What are the politically feasible methods of changing how we fund health care? Taxes on business in place of the voluntary health care funding they provide today? Taxes on the wealthy? It seems to me that (an influential) someone's ox is going to get gored by the changes, and that things are going to have to get considerably worse than the state of the system today before the voters will elect representatives that are willing to do the goring.

[anne]

http://www.drs.org.au/new_doctor/75/fact_sheet_3.html

In 1998-9 Australia spent $50.3 billion on health care. This amounts to 8.5% of GDP. This percentage has been stable since the early 1990s, after increasing in the late eighties from 7.6% of GDP in 1984-85. Over the last decade GDP in real terms increased by about 4.1% with the health cost component rising by 4.6%. This means that health care costs have only exceeded the general rate of economic growth by 0.5% over a ten year period - a reality in direct conflict with claims of “spiralling health costs”.

[anne]

http://www.drs.org.au/new_doctor/75/fact_sheet_6.html

Note that the USA, with only 46.7% of its health care expenditure in the public sector spends 67% more than Australia as a proportion of GDP and 2.3 times as much per capita. Yet despite this additional spending, the USA reports a worse population health status and has 40 million people without any form of health insurance. Most of it’s highest spending simply goes in higher costs.

[anne]

http://www.sweden.se/templates/cs/BasicFactsheet____6856.aspx

December, 2005

The Health Care System in Sweden

Sweden's costs for its health services amounted to SEK 178 billion in 2000, a figure which includes pharmaceutical preparations and dental care. This corresponded to 8.5% of GNP....

[anne]

http://www.sweden.se/templates/cs/BasicFactsheet____6856.aspx

Good health and equal access to health services for everyone are the goals of the Swedish health care system. A fundamental principle is that the provision and financing of health services for the entire population is a public sector responsibility. This responsibility rests primarily with the county councils. These operate almost all services and levy taxes to finance them. As a consequence, health services in Sweden rest largely in the hands of local politicians in 21 geographical areas.

Health in Sweden

By international standards, health in Sweden is relatively good. Infant mortality is low, at 3.4 deaths per 1,000 in the first year of life. Cardiovascular conditions account for half of all deaths. However, deaths attributable to these diseases fell substantially during the 1980s, which has contributed to a higher average life expectancy of 77.1 years for men and 81.9 years for women. Deaths from injuries, alcohol-related diseases and suicide have also been on the decline for many years. The proportion of the population with allergic conditions doubled during the 1980s, with more than one third of people living in Sweden saying that they suffer from some form of allergy or over-sensitivity. Another public health problem is the growing proportion of overweight children, young and middle-aged people. Mental health and psychosomatic problems are on the increase among children and young people.

The number of elderly people has risen substantially-with the greatest rise in the age group 80 years and older. Sweden is seen as having the world's oldest population, with 18% aged 65 or over. In spite of the democratic principles espoused by Swedish society, there are marked differences in health between different social groups, and these differences are growing....

Well worth continuing....

[anne]

Wealthier households with health insurance are already paying the cost of treating households with no insurance. Massachusetts general turns no patient away. Our "private payments" for health care already cover any patient who uses Mass General and other public hospitals.

[anne]

http://www.msci.com/equity/index2.html

Notice, again, how robust the stock markets have been over the last decade for the Nordic countries. Up an average of 13.8% in dollars, compared with our 9.3%. the Nordic currencies have been even stronger than the dollar. Possibly we should ask how these countries are quite so competitive :)

[a student in economics]

When people are calculating the 15% of GDP on health care, (like the OCED numbers) do they also account for the tax deduction on employer paid health insurance?

If the US has already spend 15% of their GDP (not their tax revenue) on health care, why would the $11k per person be so horrible? After all, it is already spent. So if you let people get the health insurance their employers paid as income and then ask them to pay the same amount into tax for a universal health care plan, I am sure they all can afford it.

Whether a universal health care plan works or not, it depends on how you design it. A bad universal health care plan of course would fail. But with so many encouraing examples from other OECD countries, I don't see why US is so timid in trying.

And lastly, an insurance plan is where everyone share the cost where if it happen to anyone, the unfortunate "anyone" can't affod to pay... So it should be mandatory for everyone to chip in... But I am afraid it is against the culture of this country. I don't anticipate any wonderful thing to come out any time soon for this country. I admire the people who put out free public education out in this country in the first place; I am telling you, they won't succeed today! Not a chance.

[anne]

http://www.nytimes.com/2004/07/09/opinion/09KRUG.html?ex=1247198400&en=03486596e9b6302d&ei=5090&partner=rssuserland

July 9, 2004

Health Versus Wealth
By PAUL KRUGMAN

Will actual policy issues play any role in this election? Not if the White House can help it. But if some policy substance does manage to be heard over the clanging of conveniently timed terror alerts, voters will realize that they face some stark choices. Here's one of them: tax cuts for the very well-off versus health insurance.

John Kerry has proposed an ambitious health care plan that would extend coverage to tens of millions of uninsured Americans, while reducing premiums for the insured. To pay for that plan, Mr. Kerry wants to rescind recent tax cuts for the roughly 3 percent of the population with incomes above $200,000....

Considering its scope, Mr. Kerry's health plan has received remarkably little attention. So let me talk about two of its key elements.

First, the Kerry plan raises the maximum incomes under which both children and parents are eligible to receive benefits from Medicaid and the State Children's Health Insurance Program. This would extend coverage to many working-class families, who often fall into a painful gap: they earn too much money to qualify for government help, but not enough to pay for health insurance. As a result, the Kerry plan would probably end a national scandal, the large number of uninsured American children.

Second, the Kerry plan would provide "reinsurance" for private health plans, picking up 75 percent of the medical bills exceeding $50,000 a year. Although catastrophic medical expenses strike only a tiny fraction of Americans each year, they account for a sizeable fraction of health care costs.

By relieving insurance companies and H.M.O.'s of this risk, the government would drive down premiums by 10 percent or more.

This is a truly good idea....

[anne]

Notice how little attention was given to the health care plan of John Kerry before the election and readily the plan has been forgotten since, but there was a fine plan offered.

http://www.nytimes.com/2004/07/09/opinion/09KRUG.html?ex=1247198400&en=03486596e9b6302d&ei=5090&partner=rssuserland

Paul Krugman:

Our society tries to protect its members from the consequences of random misfortune; that's why we aid the victims of hurricanes, earthquakes and terrorist attacks. Catastrophic health expenses, which can easily drive a family into bankruptcy, fall into the same category. Yet private insurers try hard, and often successfully, to avoid covering such expenses. (That's not a moral condemnation; they are, after all, in business.)

All this does is pass the buck: in the end, the Americans who can't afford to pay huge medical bills usually get treatment anyway, through a mixture of private and public charity. But this happens only after treatments are delayed, families are driven into bankruptcy and insurers spend billions trying not to provide care.

By directly assuming much of the risk of catastrophic illness, the government can avoid all of this waste, and it can eliminate a lot of suffering while actually reducing the amount that the nation spends on health care....

[hj]

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[Heather Cook]

Isn't it true that health care costs have risen about 50% since 1998? Also, 7.5% has been risen this year of 2007. Your explanation on health care costs is very well put. Thankyou.

[Dave Lynch]

The existing health care system demonstrates Exactly why we can not entrust healthcare to the government. The supposed special interests that dominate healthcare and healthcare costs are not empowered by bribing doctors and lobbying patients. When was an HMO a freemarket private response, rather than a government empowered form of semi-private socialism ? Government mandates that your insurance provide can dictate your medical care - put bear no responsibility for it. I can sue my doctor for malpractice, yet government says that medial insurance companies can act in bad faith without consequence. Laws apportion rates for medical services - guaranteeing lower costs for medicare, HMO's and the Blues - of course private insurance rates are skyrocketting - maybe we should nationalize healthcare - so that the government will have to actually pay its fair share of its mandates. Medicare is just one giant public charity that the rest of us pay for in both taxes and higher insurance costs.
Besides the cost of heatlth insurance has little to do with medical catastrophe. Catastrphic coverage - what used to be called major medical, is a fraction of what full toothpaste to asprin coverage costs. Who does not understand that it costs alot more for a Doctor, to bill an insurance company, and the insurance company to collect premiums from an employer - and one way or another the employer to extract the cost of those premiums from employees, than to just pay your doctor. But because Doctor's have had to jack up their rates to cover dealing with insurance companies, and because they are required by law to charge everyone else more than medicare, you can not afford to pay for doctor visit without insurance.
Get the government completely out of healthcare. Let insurance companies, consumers and doctors duke it out in the marketplace - without anyone receiving unfair government protection. Hold medical insurance companies to the same legal standards as every other business. If it is good and charitable to care for those who can not afford insurance, don't fake charity while trying to shill off the expense on someone else.