Hard questions for Obama on health care spending and reform

June 22, 9:12 PMEconomic Policy ExaminerJoseph Hight

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Senate Health, Education, Labor and Pensions Committee member Sen. John McCain, R-Ariz. asks when lawmakers would have legitimate cost estimates on the health care reform bill as he gestures over a stack of documents comprising of the bill and its amendments, Wednesday, June 17, 2009, during the committee's markup hearing on Capitol Hill in Washington. (AP Photo/Charles Dharapak)  

For effective health care reform, President Obama needs to confront our rising spending on health care. To do this, he must face the real drivers of health care spending. They are not what you might think.

The Obama plan seems to be placing much of the blame for increased health care spending on the health care industry – on Doctors, hospitals, drug makers and insurance companies. He even managed to extract a promise from the health care industry to voluntarily hold down costs. 

And indeed, if you were asked what is causing the growth in United States spending on health care your quick answer might be, “It’s the prices that doctors and hospitals are charging. The bills are outrageous.”

Another favorite culprit for excessive health care cost growth in the U.S. is usually cited by advocates of a ‘single payer’ system, the high administrative costs of having many different private health insurance providers with different provisions of coverage and exclusions and co-payments. And a report issued by Obama’s economic advisory group seemed to be backing this as one of the factors when it listed “a complex system with high administrative costs” as a contributor to rising health care costs. 

But it turns out that health care provider pricing and high administrative costs are relatively minor contributors to the growth in health care spending.

The Congressional Budget Office (CBO) reports that medical advances – new and better treatments – are the biggest driver in health care cost. The CBO report concludes that an estimated 40 to 65 percent of the long-term increase in the growth in health care spending has been driven by new treatments being made available. Examples of major technological advances in treatment include coronary procedures to treat heart disease, such as angiography, angioplasty, pacemakers and bypass operations; dialysis procedures for kidney disease and knee and hip replacements. New and more expensive drugs to treat all kinds of illnesses are also examples of technological drivers of increased spending on health care.

According to the CBO report, price increases by providers of health care accounted for between 11 and 22 percent of the growth in health care spending. And the report concluded that administrative costs in the U.S. health care system caused only 3 to, at most, 13 percent of the growth of our spending on health care.

The CBO study also cited factors that might be considered natural economic forces acting to cause increased health care spending. One is the rise in our personal incomes. As we have more discretionary income, we tend to use a higher share of our increased income for health care spending. The CBO study reported that the increased demand for health care attributable to the increase in our personal income caused between 11 and 23 percent of the growth in spending on health care.

The other economic cause of the growth in health care spending is the growth in health insurance coverage. Those of us who have coverage tend to use more health care than those who are not covered, and we tend to use more expensive treatments than those who are not covered. The long term rise in the percentage of coverage contributed to between 10 to 13 percent of the growth in health care spending.

A major part of President Obama’s health care reform is the expansion of health insurance to most of the population. That will only add to the pressure for increased health care spending, making it more difficult to restrain the growth in spending.

So if it is new and better medical treatments, increased personal incomes and expanding health insurance coverage that increases overall spending on health care, how are we going to get this spending under control? 

And even more important, how can we restrain the growth in spending while still maintaining, or even improving, the quality of health care we can expect?

These are the hard questions we should be asking as we examine the President’s proposals.