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Friday, January 26, 2007

Does Getting Old Cost Society Too Much?

Paul Krugman emails, in reference to this post at Brad DeLong's:

Brad, Mark - saw the dismal post on Brad's blog. I wrote about that way back in 96!

Here's what he wrote:

Does Getting Old Cost Society Too Much?, by Paul Krugman, Commentary, NY Times: Back in the early 1980's, before most of us had ever heard of the Internet, science-fiction writers like Bruce Sterling invented a genre that came to be known as cyberpunk. Its protagonists were usually outlaw computer hackers, battling sinister multinational corporations for control of cyberspace (a term coined by another sci-fi novelist, William Gibson). But in his 1996 novel, ''Holy Fire,'' Sterling imagines a rather different future: a world ruled by an all-powerful gerontocracy, which appropriates most of the world's wealth to pay for ever more costly life-extension techniques. And his heroine is, believe it or not, a 94-year-old medical economist.

When the novel first came out, it seemed that Sterling was behind the curve. Public concern over medical costs peaked about four years ago, then dropped off sharply. Not only did the Clinton health care plan crash and burn, but the long-term upward trend in private medical costs also flattened, as corporations shifted many of their employees into cost-conscious H.M.O.'s. Even as debates over how to save Social Security make headlines, few question budget plans by both Congress and the Administration, which assume, while being systematically vague about the details, that the growth of Medicare can be sharply slowed with few ill effects. With remarkable speed, in other words, we have gone from a sense of crisis to a general belief that the problem of health costs will more or less take care of itself.

But in recent months, there has been a flurry of stories with the ominous news that medical costs are on the rise again. Suddenly, our recent complacency about health care costs looks as unjustified as our previous panic. In fact, both the panic and the complacency seem to stem from -- what else? -- a misdiagnosis of the nature of the problem.

Over the last generation, the U.S. economy has been digitized; it has been globalized; but just as important, it has become medicalized. In 1970 we spent 7 percent of our gross domestic product on medical care; today the number is twice that. Almost 1 worker in 10 is employed in the health care service industry; if this trend continues, in a few years there will be more people working in doctors' offices and hospitals than in factories.

So what? As Joseph Newhouse, a Harvard health economist, put it, ''Neither citizens nor economists . . . are especially concerned about rapid growth in most sectors of the economy, like the personal computer industry, the fax machine industry or the cellular phone industry.'' Yet where the growth of other industries is usually regarded as a cause for celebration, the growth of the medical sector is generally regarded as a bad thing. (Not long ago, an article in The Atlantic Monthly even proposed a measure of economic growth that deducts health care from the G.D.P., on the grounds that medical expenditures are a cost, not a benefit.) Indeed, the very phrase ''medical costs'' seems to have the word ''bloated'' attached to it as a permanent modifier: we are not, everyone agrees, getting much for all that money.

Or are we? There is, of course, some truth to what Newhouse calls the ''cocktail party story of excessive medical spending.'' Traditional medical insurance gives neither physicians nor their patients an incentive to think about costs; the result can be what Alain Enthoven, a health care reform advocate, calls ''flat of the curve'' medicine, in which doctors order any procedure that might possibly be of medical value, no matter how expensive. Reintroducing some incentives can produce important savings.

In 1983, for example, Medicare replaced its previous policy of paying all hospital costs with a new policy of paying hospitals a lump sum for any given procedure. The result was an immediate sharp drop in the average number of days in the hospital, with no apparent adverse medical effects. But after that one-time saving, the cost of hospitalization began rising again. There is, in fact, a clear rhythm in the health care industry. Every once in a while, there is a wave of cost-cutting moves -- fixed fees for Medicare, replacing traditional insurance with H.M.O.'s -- that slows the growth of medical expenses for a few years. But then the growth resumes.

Why can't we seem to keep the lid on medical costs, for older adults and for everyone else as well? The answer -- the clean little secret of health care -- is simple: we actually do get something for our money. In fact, there is a consensus among health care experts that the main driving force behind rising costs is neither greed nor inefficiency nor even the aging of our population but technological progress.

Medical expenditures used to be small, not because doctors were cheap or hospitals were well managed but because there was only so much that medicine had to offer, no matter how much you were willing to spend. Since the 1940's, however, every year has brought new medical advances: new diagnostic techniques that can (at great expense) identify problems that could previously only be guessed at; new surgical procedures that can (at great expense) correct problems that could previously only be allowed to take their course; new therapies that can (at great expense) cure or at least alleviate conditions that could previously only be endured. We spend ever more on medicine mainly because we keep on finding good new things that (a lot of) money can buy.

It is often argued that the share of our national income that we devote to health care cannot continue to rise in the future as it has in the past. But why not? An old advertising slogan asserted that ''when you've got your health, you've got just about everything.'' Sterling's protagonist goes through an implausible procedure (albeit one based on an extrapolation of some real medical research) that restores her youth; who would not give most of their worldy goods for that? Even barring such medical miracles, it is not hard to imagine that some day we might be willing to spend, say, 30 percent of our income on treatments that prolong our lives and improve their quality.

Some economists therefore argue that we should stop worrying about the rise in medical costs. By all means, they say, let us encourage some economic rationality in the system -- for example, by eliminating the bias created by the fact that wages are taxed but medical benefits are not -- but if people still want to spend an ever-growing fraction of their income on health, whether for older adults or for all Americans, so be it.

But matters are not quite that simple, for medicine is not just like other goods.

The most direct difference between medicine and other things is that so much of it is paid for by the Government. In most advanced countries, the government pays for most medical care; even in free-market, anti-government America, the public sector pays for more than 40 percent of medical expenditures. This in itself creates a special problem. It is not at all hard to see how the American economy could support a much larger medical sector; it is, however, very hard to see how the U.S. Government will manage to pay for its share of that sector's costs.

When Cassandras like Pete Peterson, the former Commerce Secretary, present alarming numbers about the future burden of baby boomers on the budget, it turns out that only part of that prospective burden represents the sheer demographic effects of an aging population: forecasts of rising medical costs account for the rest. Despite the aging of our population, the Congressional Budget Office projects that in 2030, Social Security payments will rise only from their current 5 percent of G.D.P. to about 7 percent -- but it projects that Medicare and Medicaid will rise from 4 percent to more than 10 percent of G.D.P. (Some people dismiss such forecasts: they point out that if medical costs were to rise to that extent, by the time baby boomers become a problem, health care would be a much larger share of G.D.P. than it is today -- and that, they insist, is just not going to happen. But why not?)

Some might then say that the answer is obvious: we must abandon the idea that everyone is entitled to state-of-the-art medical care. (That is the hidden subtext of politicians who insist that Medicare is not being cut -- that all that they are doing is slowing its growth.) But are we really prepared to face up to the implications of such an abandonment?

We have come to take it for granted that in advanced nations almost everyone can at least afford the essentials of life. Ordinary people may not dine in three-star restaurants, but they have enough to eat; they may not wear Bruno Maglis, but they do not go barefoot; they may not live in Malibu, but they have a roof over their head. Yet it was not always thus. In the past, the elite were physically superior to the masses, because only they had adequate nutrition: in the England of Charles Dickens, the adolescent sons of the upper class towered an average of four inches above their working-class contemporaries. What has happened since represents a literal leveling of the human condition, in a way that mere comparisons of the distribution of money income cannot capture.

There is really only one essential that is not within easy reach of the ordinary American family, and that is medical care. But the rising cost of that essential -- that is, the rising cost of buying the ever-growing list of useful things that doctors can now do for us -- threatens to restore that ancient inequality with a vengeance.

Suppose that Lyndon Johnson had not signed Medicare into law in 1965. Even now there would be a radical inequality in the prospects of the elderly rich and the ordinary older citizen; the affluent would receive artificial hip replacements and coronary bypasses, while the rest would (like the elderly poor in less fortunate nations) limp along painfully -- or die.

The current conventional wisdom is that the budget burden of health care will be cured with rationing -- the Federal Government will simply decline to pay for many of the expensive procedures that medical science makes available. But what if, as seems likely, those procedures really work -- if there comes a time when those who can afford it can expect to be vigorous centenarians, and perhaps even buy themselves smarter children, while those who cannot can look forward only to the biblical threescore and ten. Is this really a tolerable prospect?

There is, some might say, no alternative. But of course there is. It is possible to imagine a society that taxes itself heavily to provide advanced medical care to everyone and that rations that care not by wealth but by other criteria. (Bruce Sterling's imaginary future is ruled by ''the polity,'' a nanny state that rewards not wealth but personal hygiene: society takes care of those who take care of themselves.)

Such an outcome sounds unthinkable in the current political climate, which is dominated by a low-tax, anti-government ideology. But history is not over; ideologies may change. For all we know, the future may belong to the medical welfare state, a state whose slogan might be ''From each according to his ability, to each according to his needs.''

    Posted by on Friday, January 26, 2007 at 12:16 PM in Economics, Health Care, Market Failure | Permalink  TrackBack (0)  Comments (20)



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