The Corner

Economy & Business

The CBO Identifies a Big Driver of Health-Care Spending

Dan Mitchell of the Cato Institute points to a table I missed from the CBO report that came out on Tuesday:

This table goes a long way toward explaining many of the problems we have with the current health-care system: Consumers only pay for 11 percent of their health-care costs. Everything else is paid for by a third party; whether the government or private insurance.

That’s a problem because when people’s consumption is paid for by someone else, it jacks up demand and drives up the prices and inefficiencies of the good or service that is being subsidized. Why should you consume health care carefully if you don’t pay for it? And, of course, health-care providers have little incentives to keep their prices low to keep their consumers since these consumers are not paying the tab.

In fact, health-care suppliers that work with relatively low levels of third-party payment have seen significantly lower price increases and higher quality over time. Plastic surgery and laser-eye surgeries provide good examples of that:

Cosmetic surgeons and nonphysicians who perform cosmetic procedures are prime examples of suppliers who do not typically accept insurance, and as a result, offer a number of advantages. Compared to the waiting rooms of typical doctors, for instance, the waiting rooms of cosmetic surgeons tend to be cleaner and roomier. There is also greater consumer access to price and quality information about cosmetic surgeons. As a result, there is less asymmetry of information in this market, as opposed to the market for insured medical services. And, even though the demand for cosmetic procedures has increased significantly over the years (the number of procedures performed in 2008 was 40 times the number performed in the previous two decades), prices have remained stable and have even dropped in real terms, while all other medical services have increased an average of 45 percent in real terms since 1992. Prices of cosmetic surgery have tracked inflation partly because, in an effort to compete for customers, suppliers have learned to become more efficient. For example, many cosmetic surgeons reduce costs by having surgical facilities in their offices rather than in hospitals. Prices of Botox and other services that can be administered by nonphysicians have also fallen (D.M. Herrick, personal communication, 2014).

As with cosmetic surgeons, laser eye surgeons rarely accept insurance, with similar cost outcomes. The price of laser eye surgery has gone down about one-fourth while the prices of every other medical service have gone up faster than consumer prices. Even though the prices have dropped, however, the lasers have become faster and more precise. And, in contrast to the experience of most traditional doctors in third-party-payer practices, eye surgeons have found that their patients are careful shoppers. Dr. Brian Bonanni, a LASIK surgeon, explains that he must tell potential patients exactly how much his service is going to cost because patients tend to shop around when they are using their own money. Dr. Bonnani also notes that many patients will see three or more doctors before making a decision.

Also, imagine the massive fiscal issue it creates since close to 50 percent of the spending is paid for by the government.

This is lost on the two presidential front runners. The Democrats want to add a public option to Obamacare or switch to Medicare-for-all and Trumpcare would require more government than we have now because Mr. Trump believes that without the government’s intervention in health care people would die in the street.

We need a radical new vision for health-care reform. One that allows massive amount of innovation in the health-care industry that brings the kind of quality boost and price reductions we have seen in other industries. That only happens when you get the government and the interest groups it serves out of the way.

Thankfully, some of that is happening already independently of the will of Congress. As my colleague Bob Graboyes explains, “We are only at the dawn of this revolution,” but it is happening. It needs to grow:

For this revolution to flourish, the Ubers of healthcare must be bottom-up endeavors, forged through competition, with success or failure resting on the value they provide to patients and providers. In contrast, top-down efforts, such as today’s government-mandated electronic health records (EHRs), present an enormous impediment to innovation. Today’s EHRs are designed to serve insurers, third-party payers, and governments — not patients or providers. They are needlessly souring providers on the promise of technology.

Almost certainly, some aspects of healthcare will be impervious to Uber-like innovation. In these areas, the intuitive physician will remain indispensable. I recently sat down with a roomful of health innovation notables — physicians, entrepreneurs, financiers, and scholars. Someone asked how much of modern medicine we can, in time, reduce to algorithms. Guesses hovered about 80 percent, with one participant suggesting 97.5 percent. Some futurists envision a near future when computers like IBM’s Watson can out-diagnose any physician, as doctors’ capacity to absorb and analyze data is severely limited by time and cranial capacity.

We can always dare to dream!

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