The Problem is Cost of Care

Understanding America's dysfunctional health care system

The problem with health care is not that we can't afford insurance. The problem is that we can't afford health care.

The U.S. has the world's most expensive health care, $8,000 per person per year, eating up 16 percent of our GDP. There are many ways of paying these costs, of course, ranging from private insurance such as Blue Cross to public insurance such as Medicare. Many people pay out of their pockets, and local and state taxpayers pick up the rest.

The problem is that health care costs have increased at an annual rate double, or more than double, the rate of inflation for the last two decades. Right now, our attempts at reform are doomed by a law of accounting physics: Insurance can't cost less than the health care it insures.  That means that subsidizing insurance likely makes the problem worse.  

Consider: I have car insurance. But my insurance doesn't pay for oil changes.

Instead, I go down to the Happy Lube, without an appointment, get a diagnosis of the needs of my car, and choose services based on a price list published online. Some of these services are complex, and require large expensive machines and equipment. But I don't have to pay a separate bill, or go wait in another line, at another office or lab.

Now, if I fail to get my car's oil changed, or to perform other needed services, the engine will be damaged. That's expensive to fix, but my insurance does not cover the costs. I bear the costs, so I care for the engine.

Health care is a little different. Many of us have "engines," or other parts, that may not work very well, especially as we grow older. Things happen that may not be our fault, and even if they are we'd like to be able to buy some insurance against the worst consequences, the catastrophic injuries or illnesses that are part of every human society. The problem is that how we pay affects how much we pay.

Again, compare it to car insurance, for two people. Imagine neither of us has to pay for our car repairs, from accidents or engine wear. We can go to the garage as often as we like, and get whatever service we want, for free. The car repair shop can charge our insurance whatever they want, because insurance pays everything. An oil change would bill out at $600; an alignment would bill our insurance $2,200, with another $800 tacked on to pay for micro-digital wheel axis imaging.  

Of course, the services aren't really free. At the end of every year, we sum the total repair costs for both people, and each of us pays half of that total.  

The cost of that free car care would be enormous, because of all the unnecessary and overly expensive charges. Of course, the government could subsidize the final bill; would that help? The answer is no, for two clear reasons.

First, having the government (meaning taxpayers) subsidize the total would do nothing to reduce the runaway cost increases. Buyers won't shop around if they don't know or care about real costs. Subsidies mean I don't pay if I spend, and I don't save if I'm frugal.

Second, let's expand the example from two people (each paying half) to 300 million people getting free care (but paying an equal share of total costs). We have met the public option, and it is us! Once we are all paying ourselves, there is no one else to hit up to help with the costs. We are simply taking each person's money in taxes, then giving some of it back in subsidies. There is no saving, even to individuals.

The French economist, Frederic Bastiat, diagnosed the problem long ago when he said, "The public option is the conceit that each of us should have free health care at the expense of all of us." Okay, he didn't say that, exactly, but it was the same idea.

The solution is out there, but it will require a fundamental change in the way we think. Competition among insurers, without decreases in underlying medical costs, may actually harm people through bad service and arbitrary denial of claims. Instead, we need competition among medical providers, just like oil change services now. LASIK surgery, one of the few areas of medical services open to competition and listed prices, has fallen in cost by 70 percent or more in the last 15 years. And quality has gone up dramatically. Walk-in clinics and fee-for-service arrangements for check-ups, or simple diagnoses like strep throat or  infected thumbs, are already widely available, cost relatively little, and require no appointment.

Subsidizing insurance is a terrible idea. But that is the main focus of the health care reform bills passed by the House, and now being considered in the Senate. Why pin all our hopes on an approach that can't possibly succeed?

Michael Munger is a professor of economics, and the chair of the political science department, at Duke University. He has written on policy analysis and cost benefit analysis of government programs.