Samuelson: Facing Tough Questions on Health Care

Barack Obama talked somberly last week about getting the federal budget under control once the present economic crisis is past. By simple arithmetic, that means he'll have to confront the rapid growth of health spending, which already accounts for a quarter of the budget. In 2007, that was about $700 billion out of total federal spending of $2.7 trillion. If Obama is serious—and no president yet has been—he could start by reading a fascinating new study from the McKinsey Global Institute, the research arm of the famed consulting company.

Almost everyone agrees that the U.S. health-care system has gone haywire. It provides much splendid care but is so costly that 15 percent of the population lacks health insurance. Equally troubling, runaway spending is crowding out other government programs and, through bloated insurance premiums, squeezing workers' take-home pay. What McKinsey provides is a plausible estimate of the extent of overspending: almost one third.

This means that, compared with other advanced societies, the United States spends about a third more on health care than high American incomes alone would predict. In 2006, all U.S. health spending totaled about $2.1 trillion. Of that, McKinsey figures that nearly $650 billion exceeded what other rich societies, adjusted for relative incomes, spent.

For the extra money, we receive no indisputably large benefit in national well-being. On some health measures (breast-cancer survival rates, for instance), we do better than many countries; on some others (life expectancy, for instance), we do slightly worse. We are constantly searching for villains to explain this unsatisfactory situation. Because it's not peddling a political agenda and simply describes U.S. health spending, the McKinsey study debunks some popular theories.

One is that our mixed private-public insurance system drives up costs through high administrative overhead. Claim forms create a paperwork morass; marketing expenses add to the burden. True, overhead costs in the United States are more than double the level in other countries. But the effect is modest, because all administrative costs account for a mere 7 percent of total health costs. Even halving administrative costs would offset only about six months of the annual growth in health spending of 6 to 7 percent.

The same is true of the alleged overuse of emergency-room care: another common scapegoat. In 2006, all emergency-room care cost $75 billion, about 3.5 percent of total health spending. That's too small to explain overall trends.

What really drives health spending, the study finds, is that Americans receive more costly medical services than other peoples do, and pay more for them. On a population-adjusted basis, the number of CT scans in 2005 was 72 percent higher in the United States than in Germany; U.S. reimbursement rates were four times higher. Knee replacements were 90 percent more frequent than in the average wealthy country and are growing rapidly. In 2005, there were 750,000 knee and hip replacements, up 70 percent in five years, reports the journal Health Affairs.

We have a health-care system that reflects our national values. It's highly individualistic, entrepreneurial and suspicious of centralized supervision. Despite gripes about limits imposed by private insurers and Medicare, there are few effective controls on doctors' and patients' choices. That's what most Americans want. Patients understandably desire the most advanced surgeries, diagnostic tests and drugs. Doctors want the freedom to prescribe and recommend.

The open-ended nature of insurance reimbursement encourages this expensive style of medicine by making it easier to recover the costs of new technologies and therapies. Economist Amy Finkelstein of MIT has estimated that roughly half the real increase in per capita health spending from 1950 to 1990 reflected the spread of comprehensive health insurance. In 2006, consumers' out-of-pocket spending represented only 13 percent of total health spending, down from more than 50 percent in the 1950s. The trouble is that this semiautomatic system may now frustrate other national goals, because it displaces other spending and results in care that is unneeded or ineffective.

On paper, there are various ways to control health spending: impose stricter regulations on prices and the availability of care; adopt "market mechanisms" that push consumers toward more efficient, more effective or skimpier care. All have been tried and have failed, because they cannot be maintained long enough or toughened enough. The reason is politics. There is no major constituency for controlling spending. Because most patients don't pay their medical bills directly, they have little interest in using less care or shopping for lower-priced services. Providers (doctors, hospitals, drug companies, equipment manufacturers) have no interest in limiting care. What others call "health costs" are their incomes—wages, salaries, profits.

Unless we rectify this political imbalance, efforts to control health spending are likely to be futile. We need mass constituencies that favor cost control. But our consistent policy has been to conceal the burden of health spending by burying it in untaxed corporate fringe benefits or government budgets. We could change this. We could charge the elderly more for Medicare. We could tax employer-provided health insurance as ordinary income. We could create a dedicated federal tax to cover government health costs—if health spending rose more than income, the tax would automatically rise. People would quickly see and feel the costs of our present system.

Because this is so, all these possible responses would be unpleasant and unpopular. That's the point: to compel Americans to face the uncomfortable questions—how important is health care compared with other priorities, for whom and why?—that we have long avoided. Will Obama be so bold? In his campaign, he proposed more, not less, health spending. It's easier to embrace the rhetoric of change than change itself.