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.

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