Control Health Subsidies, Control Health Spending


By 2020, the United States will devote roughly 20 percent of its total annual economic to health care, up from 17.6 percent in 2009. Why is health care spending chewing up ever-bigger portions of the economy?

Subsidize me, baby

One reason, as economist Arnold Kling has noted, is the dramatic increase in expensive medical technology and services. We're not just using more medicine. And it's not merely that the price of the same basic procedures and services has increased. It's that health innovation has given us access to a wide array of fancy new drugs and devices and time-intensive medical specialties.

But expensive advances in care technology aren't the only culprit. The more fundamental problem is the system of tax-funded subsidies in form of both tax breaks and entitlements—and in particular, the essentially unlimited health-spending commitment offered by Medicare. As Cato's Jagadeesh Gokhale writes in Politico, those subsidies have insulated patients from the price of care—and, by masking its true cost, funneled a growing share of our nation's economy into health spending:

The introduction of comprehensive health subsidies — Medicare for the elderly, Medicaid for low-income households and tax exclusions for employer health insurance provisions for the rest — has expanded the intensity of health care services use and has sucked resources from the private payer health sector.This has also stratified health care providers — with the more qualified, skilled and successful providers remaining in the lucrative private-payer sector.

So it is not surprising that, as public subsidies ballooned, the use-intensity and resource-siphoning effects led to bigger cost increases in the private-payer sector. It is a classic cart-before-the-horse argument to use the faster spending increase in the private-payer health sector as justification for expanding the government-payer sector — all the way to adopting the public option.

The payment structure of our public health care subsidies introduces a vicious cycle: Given supply-limiting health care regulations, those subsidies initially increase health care demand and prices and also spur innovations in costly medical technologies. Our open-ended health subsidy system then responds to higher prices of health care goods and services by diverting more resources from the rest of the economy toward the health sector.

The truth is that the only way to control health costs is to stop collaring funds from the rest of the economy and channeling them to this sector — as we have for the past 45 years.

The raft of public subsidies, in other words, distort the market by pushing economic decision makers —individuals and employers and providers—to spend far more than they likely would have. In the wake of this week's debt deal, policymakers seem to be leaning toward cuts to various yet-unnamed health provider reimbursements. Paying providers less might save some money in the short run. But simply tweaking the web of price controls doesn't address the underlying problem, and may squeeze the system in other ways. America's health care system doesn't need "better" price controls—it needs subsidy control.

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  1. Single payer w/ death panels and private supplemental insurance.

    1. But then again, because of all the $ in subsidies available, the capitalist medical companies do incredible research into these expensive, wonderful cures.

      1. “Capitalist medical companies” will do incredible research into expensive, wonderful cures, even without government subsidies, because that’s how they make their money. Ever wonder why our capitalist system leads in medical innovation, even though Europe is full of socialist systems with plenty of “free” subsidized healthcare?

        1. Profit is bad, Whitney! It’s bad because…uh…because…uh…because it’s bad!

          1. Profit is bad because it leads to inequality, and inequality leads to envy.
            It’s just not fair that one person’s ideas earn them a profit while another person’s ideas, or lack thereof, do not.
            It’s just not fair.
            As any young child or liberal will tell you, fairness is everything.
            Therefor it is the duty of government to confiscate those profits, or prevent the person’s ideas from even coming to market, in the interest of fairness.
            This way there is no inequality, and no envy.

            Of course the result is no wealth being created, which means everyone is equally poor, but that is not the stated intention so it doesn’t matter.

        2. never said profit was bad, but by jumping to that conclusion, ya’ll got to get in your 2 minute hate on teh libruls. you’re welcome.

          just pointing out that the money flowing in via the ‘open ended subsidies’ to the consumers has led these companies to invest in research that has greatly improved medical treatments.

  2. Our system is about the worst possible arrangement. Private actors get unlimited funding from government bureaucracies with little accountability anywhere.

  3. those subsidies have insulated patients from the price of care

    Wait; people use more resources when somebody else is picking up the tab?

  4. OT: It seems there may be another gunman loose on the VT campus. What the fuck is in the water down there?

    1. “May be”. Any place that has had an attack goes full retard at the slightest possibility of another one, as unlikely as it is. It is most likely just a false alarm.

      1. [Update 10:31 a.m.] Virginia Tech is in lockdown as authorities look for a man three youths said may have had a weapon, possibly a handgun.

        The white male was described as having light brown hair and being 6 feet tall and was walking in the direction of a volleyball court. The man was wearing a blue and white striped shirt, gray shorts and brown sandals. He had no glasses or facial hair, according to the report.

        What’s the odds that this is just some random guy carrying a phone/wallet/stapler?

        1. I can’t say, but the potential for full hysteria retard is high.

        2. How can that be?
          That’s a Gun Free Zone?!
          That means it is free of guns!
          People are safe when they’re not allowed to defend themselves, right?

  5. If we had gone to single-payer in the 60’s we wouldn’t have all these problems caused by innovation.

    1. And Social Security would be solvent too! We just need to roll back any medical advances since 1960 and the problem is solved.

      1. My iron lung investments would still be worth something.

  6. And we have this mentality that everyone, for some bizarre reason, deserves access to the latest and most expensive medical technology. It’s just not fair if somebody doesn’t get the best care – regardless of their ability to pay, age, or their value to society.

    1. I’m even willing to say its not fair. So what? Life isn’t fair.

      1. But…but…that’s not fair, RC!

      2. Just pass a law declaring life to be fair.
        Laws are magic.

      3. Equality, on the other hand, is almost never fair.

    2. We’re The Greatest Nation on Earth?.

      It’s the least we can do.

      1. If we can put a man on the moon… (leans over to whispered comment from aide)…oh uh…never mind.

    3. To leftists “not giving” is the same as “stealing”. The other day I saw some shithead little “homeless” kid (doubt he was really homeless) was hustling up people for cash and giving them lip when they wouldn’t pay up. He’s got a bright future in politics ahead of him.

      1. Actually, “stealing” may be too strong a term, more like “taking from”

        So if you don’t use every single treatment in the book to give an octogenarian an extra 4 months to live you are effectively taking away those 4 months, thus killing him/her.

      2. Not taking is giving, and not giving is taking.

        So if I want something and you don’t give it to me, that is equivalent to my having it and you taking it from me.

        I mean, the end result is the same, right?

        So what if it’s not what actually happened. The end result is the same so that’s what might have actually happened. In fact that is what happened. Prove me otherwise. I shift the burden of proof onto you. Prove you didn’t steal it! Thief! Baggins, we hates it forever!

        1. “Not taking is giving, and not giving is taking.”

          It tends to follow logically though, if you don’t believe in property rights and think that access to property should be based on need alone.

          1. True. But such a mentality assume the wealth is just “there”, ignoring that there must be incentives to produce it.

            The greatest of these incentives being property rights: You keep what you produce.

    4. Of course even in the world of socialized medicine, there is still inequality. People in Europe who have the money will come to the US to get the best cancer treatment possible while the proles back home are denied what are basic medical services in America because they are deemed non-essential by the government.

      1. See?!?! We’ve gotta stop that, so that their systems are more ‘fair’!

  7. And it must all be *free* because hordes of our morbidly obese, chain smoking drunken Democratic voters can’t cough up even a token payment.

  8. I don’t know what everyone is worried about. Once Obamacare fully kicks in most medical research companies will be leaving the US since they won’t be able to turn a profit anymore (Boston Scientific Corp. is already packing up 1400 jobs and sending them to China). Once we get rid of these companies there won’t be as many high tech equipment providers around, and the insurance companies won’t be able to afford said technologies because the mandates to provide coverage to people who can’t pay for it will have eaten away at any profit they were making.

    Soon enough China will be the one with all the cost problems associated with fancy new drugs and devices and time-intensive medical specialties.

    Problem solved!

    1. I can barely take the heartbreak and agony every time I read or hear about another encroachment, another act of utterly indefensible and totally abominable tyranny, happening on some level, somewhere in the country.

      Holy fucking shit. What happened to our republic? How did good people let this happen?

      1. For most:

        free shit > freedom

      2. Those who rob Peter to pay Paul can always count on the support of Paul.

        1. Welcome to democracy.

      3. By the logic of the knee-jerk cop-haters in these parts, this means that there’s no such thing as a good American.

  9. Unless we transition to a government-run single-payer monopolistic system within the next year, old people will be dying in the streets, blacks won’t have a hard ghetto life to sing about since all the ghetto dwellers will be dead of anarchy syndrome ™, and Atlas is going to drop the Earth into the huge shitty toilet he’s been holding it over for the last zillion years.

    Don’t you libert-aryans GET IT?????

    1. Don’t you libert-aryans GET IT?????

      Ha, well done. Well done.

    2. I, for one, look forward to the job opportunities of post apocalypse no single payer.
      Stacking up dead bodies like cord wood behind the hospital is the one I look forward to.
      I just love stacking dead bodies.
      And there will be no shortage of them.
      Every old person and poor person will die when we don’t have single payer, and I plan to get rich stacking their bodies.

      Woo hoo!

      1. I just love stacking dead bodies.

        Is that what the kids are calling it these days?

        1. +1, lol

      2. I kind of thought, as a child, socialist nations would get there first and our mighty, free capitalistic society of prosperous men and women would bail them out in the grandiose style of old epic movies about American greatness.

        How fucking wrong I was.

        1. I think the parliamentary system of most European nations protects them from the worst parts of the demands of democracy. We’ve removed a lot of those restraints from our system.

        2. When I was a child I wondered why there were so many different kinds of cars. Why didn’t everyone just settle on one particular model? Like the Trabant. It just made sense that one authority should make a decision like that and everyone abide by it.

          Then I grew up.

          Too few people grow up.

          1. Yeah, infant mortality is a tragedy. Particularly in a world populated by so many strawmen.

  10. This analysis seems off to me. The disconnect between healthcare costs and healthcare comes from the way both health insurance (public or private) and provider compensation is structured. A primary problem imho is, actually, employer-based health coverage.

    Simplistic “it’s about the subsidies, man” analyses like this one don’t move us towards meaningful reform. At least not very far towards meaningful reform.

    1. Sure, the market is broken in two ways:

      (1) Third-party coverage, especially first-dollar coverage.

      (2) Subsidies.

      1. wtf r u talkin about

        ther r only 2 type of covarage —

        1) govarment gud coverage that make sure all ppl get gr8 care

        2) privat coverag wher ppl r murder in bak-room medical meat factory

        y do u hate blak ppl

      2. R C Dean|8.4.11 @ 12:09PM|#

        Sure, the market is broken in two ways:

        (1) Third-party coverage, especially first-dollar coverage.

        (2) Subsidies.

        Still too simplistic, but if we want to fix these, the priority should be on 1 (which would, of course, require change to the way any subsidies are structured). A focus on reducing the size of the subsidies doesn’t address the disconnect between customer and cost.

        1. We could tax health insurance as income, but as we’ve seen with Obmacare the opportunity for politically favored exceptions is too great.

          1. We could tax health insurance as income, but as we’ve seen with Obmacare the opportunity for politically favored exceptions is too great.

            If you mean “treat employer health benefits as income”, sure. But I don’t see how taxing an expenditure as income makes any sense.

            1. I don’t understand how your employer giving you $10,000 a year in health insurance counts as an expenditure.

              It’s an expenditure for him but so would giving you the cash equivalent. The only difference is that the benefits are tax free.

              1. Giving the cash equivalent would actually cost more because of payroll taxes.

                1. Hence the perpetuation of our system.

                  Doesn’t it seem that the govt. creates a problem then people call for the govt to fix our ‘broken system’?

                  1. Doesn’t it seem that the govt. creates a problem then people call for the govt to fix our ‘broken system’?

                    The concept that government undoes what caused the problem in the first place is foreign.

                    Always more.

                    More, more, more.

              2. capitol l,
                If I buy my own insurance it is an expenditure. If someone else buys it for me it would make sense to treat it as income.


                1. Okay, I’m reread my earlier comment and didn’t explicitly state that I meant employer provided health benefits, mea culpa.

            2. He means cease treating the money spent on health insurance as if it weren’t income.

            3. I still don’t understand why employers are obligated to arrange health insurance/coverage for theit employees. It seems like a vestige of 1950’s human resources strategy. At one point it might have been a perque to attract and retain top corporate talent. But now, it seems every stakeholder is unhappy with the arrangement. Companies should stick to making and selling products and services. Employees should be able to purchase the level of insurance they need on an open market. Insurance companies should be more responsive to the needs of consumers (profit imperative). And the medical industry will have to get better at “playing ball” with consumers and insurance companies. Also, government has nothing to do with process.

              1. You’re mostly right but it actually goes back to WWII. At the time employers had salary caps on what they could pay employees, so in order to get around this they came up with the current health insurance benefit system.

                Also they were called Personnel Departments back then not “human resources” departments. That term was probably invented by some politically correct, corporatist scam artists in the late 80s/early 90s, convincing your typical corporate douchebag that this was changing the “para-dig-im!!1!!111!”

          2. “How could I have a ‘cadillac plan’ I work in the ford factory!?”

        2. Simple and simplistic are not the same thing.

          Some things are simple. Like your mind.

          Simplistic is a word used when somebody wants to make things more complicated than they are because the person is to simple to understand that some things actually are simple.

          1. Simplistic is a word used when somebody wants to make things more complicated than they are because the person is to too simple to understand that some things actually are simple.

            Joe’z law or something. And yes, I like my mind too.


          2. Wait, I thought that ‘simplistic’ is when someone takes a complex idea and makes it simple, but loses something in the dumbing down.

            As in:

            “We could fix medicare/aid if we only got rid of waste and abuse.”

            1. Don’t confuse sarcasmic…he can’t process more than one thing at a time.

              1. I was honestly wondering. I got a sudden fear that perhaps I had been using the word wrongly for years, making a fool of myself in the process.

                I don’t any more ways to look a fool than I already have.

                1. third sentence, third word —> *insert* ‘need’

                  See what I mean.

            2. I think of simplistic as “I’m an arrogant boob looking down on you because I can make things more complicated than you which means I’m better than you nya, nya, nya.”

              1. While it CAN be used that way.
                I wasn’t using it in that way.

                1. intentions != results

                  1. Yeah, yeah, there is no text without the reader. And sure the interpretive community around here includes a heavy dose of discourse as competitive self-esteem massaging. I get it.

                    1. Boo hoo you’re so misunderstood.
                      I feel for ya dude, really I don’t.

                    2. Man. You are so stupid you don’t even know how stupid you are.

                      (is that better?)

          3. “Arrogant” is a word used when somebody wants to make things less complicated than they are because the person is too simple to understand that some things actually are more complex than they are willing to admit.

            n|m (@_~)m|n

            1. “Tiny” is a word used to describe the genitalia of a certain Reason poster who goes by Neu Mejican.

              (is that better?)

              1. Coming from “sarcastic”, yeah, sounds about right.

                1. It’s “sarcasmic”, not “sarcastic”.

                  I’m sarcastic and Irish.

                  1. Okay. Coming from a sarcastic mick, it sounds about right.

    2. There’s a reason that health insurance is tied to employment, and it sure as hell ain’t the free market. First it was response to wage control, but now it’s a way around progressive taxation.

      1. So you’re saying both reasons are caused by the government ?

    3. Subsidies are third-party payment, so it’s part of the same problem.

      Employer based care shields consumers from the cost of care, so do medicare and medicaid. Any time a third party is paying for the care, the consumer is shielded from the cost and his incentive to conserve resources is reduced.

      1. Of course. The issue, it seems, is which of the two shields provides a bigger distortion on the market when government subsidies only account for (about) a quarter of total expenditures?

        1. So it seems that that description of how the market is broken was not simplistic, but rather not simple enough.
          It could be reduced to third party payment and left at that.

          1. No. That would be too simplistic. No reason to boil it down to a single factor, or a single change. Reform of a complex system will involve multiple approaches including some not even broached in this discussion.

            1. [sarcasm off]

              I’m more a fan of emergent order than top-down.

              But hey! That’s only because I don’t think a small number of self appointed and self important government fuckwads can impose anything near as good as what emerges when millions of market participants participate in millions of voluntary transactions.
              No single person or (relatively) small group is that smart or possesses the knowledge required to design something so complex.

              The single most important step is removal of that self important middle man: the third party payer.

              Everything else will simply emerge. Doesn’t need to be reformed from without. Markets heal themselves from within.

              [sarcasm on]

              1. Single most important.

                Markets, however, always operate in the context of both bottom up and top down forces. Policy discussions are about shaping those top-down forces so that they are functional.

                1. I’m an economic anarchist.
                  Other than enforcing contracts and punishing force and fraud, I see no role for government in the economy.

                  1. I’m an economic anarchist.
                    Other than enforcing contracts and punishing force and fraud, I see no role for government in the economy.

                    That doesn’t make you an economic anarchist. In economic anarchy you would have to enforce your own contracts and punish force/fraud on your own.

                    Just saying.

                    1. Uh, no?

                      In economic anarchy the rules are not imposed, they are agreed upon.

                      But some things are universal.
                      A contract is a contract.
                      Initiation of force is initiation of force.
                      Fraud is fraud.
                      Those things are not strictly economic in nature. They are universal.

                      Anarchy means nobody saying “if you’re gonna do this you’re gonna do it our way”.
                      It doesn’t mean no rules. There are rules in anarchy. But they are backed by “do it as we agreed or I will stop doing business with you” instead of “do it this way or I’ll send men with guns into take you to court”.

                      Rules can exist without force.

                    2. sarcasm on

                      “OK…thanks for ‘splaining it to me.”


                    3. By the way…in your description you gave government the explicit role of enforcing contracts and punishing force and fraud. That is why you aren’t talking anarchy…you have designated a monopoly on enforcement of the rules that “everyone agreed upon.”

    4. Subsidies ARE third party payment. The third party can be an employer, or it can be the government. It’s not particularly functionally relevant which third party it is.

      Except of course, the government has an even harder time negotiating for lower poayments than private insurers paid by your employer.

      1. the government has an even harder time negotiating for lower poayments

        Insurance companies have an incentive to control costs: profit.

        Unelected government bureaucrats have no such incentive.

      2. OOps, I thought my first comment didn’t get through

  11. Some economist: cost of healthcare has increased partly because of dramatic new improvements in technology.

    In other news, the cost of almost everything else in the world has DECREASED due to dramatic new improvements in technology.

  12. It’s annoying that even at Reason magazine people can’t identify the real problem – lack of health care freedom.

    We’re not free to order medicine or tests on our own. We’re not free to order from the lowest cost providers. Providers aren’t free to offer their services, give us medical information, or offer us the latest devices and medications.

    Health care is cheap. Health care regulation is expensive.

    1. Not to mention things like drugs. Have a problem and need a drug to cure it?

      Can’t go to the store and just buy it. Need a prescription…and this extends to things like allergy medicine.

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