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Reining in health care costs

February 4, 2021

Topics: Quote of the Day

By David Cutler, Ph.D.
JAMA Health Forum, January 28, 2021

(Excerpts)

From 2007 to 2019, the 2 most recent business cycle peaks, the growth of inflation-adjusted GDP per person averaged only 1.0% annually. That is down from 2.2% per year in the 1990s. An enormous share of this economic growth was taken by health care, about 32% of increased GDP between 2007 and 2019.

In addition, the richest US individuals received the vast bulk of the benefit from the income growth that was not taken by medical care. Income of wealthy individuals has increased, whereas income in the lower and middle income parts of the distribution has stagnated.

If President Biden wants to improve the economic fortunes of people with low or middle incomes, he will have to address the cost of medical care—and doing so is not easy.

Areas to Save

There are 3 areas that the Biden administration could focus on for health care savings that could improve health even as they save money. These are administrative expenses, excessively high prices, and overuse of health care services.

Administrative expenses command about one-quarter of total health care spending in the US; in other countries, even those with multipayer systems, administrative expenses comprise less than one-eighth of their total health care spending. Advocates of a single-payer system note that their plans would reduce administrative costs. Those who are opposed to single-payer health care need to demonstrate that health care can be made administratively more efficient or the chorus for a single-payer approach will continue to grow.

The second area the Biden administration should look to for curbing spending is the excessively high prices related to health care in the US. The cost of brand-name pharmaceuticals, hospitals, and physicians are all higher than elsewhere.

The third area where savings may be found is reducing unnecessary medical care.

Helping the Less Fortunate First

Tackling these issues will take time. No industry as big as health care changes rapidly, but that does not mean that short-term savings are impossible. One concrete step that can be taken in the interim is to link payments for pharmaceuticals with income. The idea is that US residents with low incomes should be charged no more than people in lower-income European countries, and US residents who have middle incomes should be charged no more than people in the richer European countries.

The Biden administration is putting all resources possible into the fight against COVID-19, something everyone hopes is successful. But that is not the only health care challenge that the administration will need to tackle. It should devote just as many resources to lowering unnecessary spending on medical care. Doing so is among the most important steps the new administration can take to promote widespread economic prosperity.

David Cutler, PhD, is the Otto Eckstein Professor of Applied Economics in the Department of Economics and holds secondary appointments at the Kennedy School of Government and the School of Public Health at Harvard University.


Published Comment:

By Don McCanne, M.D., Physicians for a National Health Program
February 1, 2021

The three sources of potential savings mentioned by Dr. Cutler are very real but differ significantly in magnitude.

The overuse of health care services can be trimmed slightly, but it is very difficult to eliminate low value care, such as imaging procedures or elective surgeries if the patient finds those to be of personal value. Though people keep looking, the savings here will be small.

Prices have been confirmed to be high in the United States and can be reduced by government-administered pricing, much like the VA, saving hundreds of millions of dollars.

Administrative costs of the private insurers and the administrative burden placed on the health care delivery system are massive, and the recoverable amount by eliminating this industry is underestimated in most studies of single payer. The savings are potentially in the hundreds of billions of dollars (1).

Because of large income and wealth inequality funding does have to be progressive, but not through an administratively complex and expensive method such as setting drug prices based on income, as Dr. Cutler suggests. It is much more efficient to do it through progressive taxes instead.

That is why, as Dr. Cutler suggests, “the chorus for a single payer approach will continue to grow.”


Reference

1. Himmelstein, Campbell, and Woolhandler https://doi.org/10.7326/M19-2818

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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