The Health Care Cost Problem is Bigger Than Health Care Inflation

by Reihan Salam

Ezekiel Emanuel observes that the rate at which U.S. health care spending grows year to year has been declining “for about a decade now“:

Since 2004 — nearly four years before the economic downturn — the rate of health care inflation per person has been just 0.8 percent higher than the growth of the G.D.P. Between 1965 and 1993, for comparison, it was 3.2 percent higher.

What Emanuel doesn’t address is that, as Noah Millman noted a while ago, U.S. per-capita health spending has been broadly in line with other affluent market democracies for longer than the last decade. The big reason the U.S. is a health spending outlier is that its level of health care inflation per person was substantially higher than the average among affluent market democracies throughout the 1980s:

From 1978 to 1990, German heath-care expenses as a percent of GDP did not change; they were 8.4% at the start of that period and 8.3% at the end. During the same period, American health care expenses as a percentage of GDP went from 8.4% – the same as Germany – to 12.4%, a nearly 50% increase in relative share of GDP.

And so the U.S. needs to do more than stem health care inflation per person. Rather, we need to address the high underlying cost of health care. This will require restructuring the way we deliver medical care, and in particular (I would argue) reducing the influence of physicians relative to the management of for-profit integrated medical providers. But this is an idea that is arguably as distasteful to U.S. conservatives as it is to liberals, so it’s hard to see how we get from here to there. The cultural prestige of the medical profession is a huge barrier to market-oriented reform, as it makes the health sector more resistant to the kind of market-driven “empowering innovations” that could reduce costs.