By Daniel Sutter

The U.S. has experienced explosive growth in spending on healthcare, from 5% of GDP in 1960 to 18% of a much larger GDP today.  Medicare, the Federal program for the elderly created in 1965, now consumes by itself 13% of the Federal budget and almost 4% of GDP.  If current trends continue, we will spend 10% of GDP on Medicare alone by 2080.
Will Medicare eventually consume the entire Federal budget?  Will we eventually spend all of GDP on healthcare?  While an aging population will continue to drive healthcare spending in the future, I am confident that changes will eventually curb spending.  Yet these changes will likely result in consumers having less control over healthcare choices.

We need more of a market for healthcare, but instead will get more government decision-making.

Any examination of how government restricts healthcare choices cannot ignore two basic facts.  Aggregate spending on health care is meaningless, and only individual expenditures can be evaluated.  As individuals we could help reduce medical spending by not going to the doctor or refusing needed treatment.  But foregoing cancer treatments to lower total medical spending will not make the nation better off.  The availability of new treatments, say to improve cancer survival rates or allow quicker recovery from surgeries, will lead to more spending, whether markets or government direct healthcare.

Medical care, though, is not a free good, and someone must pay the costs.  We cannot evade scarcity.  Providing more medical care requires that we give up something else, whether we pay for medical services out-of-pocket, through higher insurance premiums, or higher taxes.  And if choose every treatment of conceivable medical value, we may indeed spend all of GDP on healthcare.

Unfortunately our system already takes too many decisions about medical care out of consumers’ hands.  While one could easily write a book about all the ways government policies restrict our choices, I will consider only two here.  These examples are not the ones most discussed in current policy debates and serve to highlight how well-meaning polices can really affect the healthcare system.

The first is the tax deduction for employer-paid health insurance.  Employer purchase of health insurance typically leaves workers, the ultimate consumers, with little ability to tailor coverage to fit their preferences and circumstances.  Most employers offer only one or two health insurance options.  By contrast, we can buy auto or homeowners insurance from dozens of companies and set the deductible, limits of coverage, and excluded losses as desired.  Employment-based health insurance has many other negative effects.  For instance, health insurance can be a consideration when changing jobs.  Tying health insurance to employment means that retirees and the jobless will not have coverage, creating a need for programs like Medicare and Medicaid, which have driven up healthcare costs.

The second example is the regulation of pharmaceuticals by the Food and Drug Administration (FDA).  The FDA began reviewing the safety of drugs in the 1930s, but research reveals that the requirement to demonstrate effectiveness imposed in 1962 has drastically increased the cost of new drugs with no appreciable improvement in safety.

Furthermore, thousands of Americans die waiting for the FDA to approve the drugs which could save their lives.  People with otherwise untreatable illnesses, for example, don’t get to decide for themselves if an experimental drug is worth trying.  The requirement that new drugs be more effective than those already on the market reduces competition which might otherwise make prescription drugs more affordable.

Life is about choices.  The choices we make shape who we are and the quality of the lives we lead.  Decisions about medical care are an important component of life’s choices.  If government curbs healthcare spending for us, we will end up with less input on these critical choices than today.  We need to turn to markets to ensure that our values shape the unavoidable tradeoffs about healthcare..

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.  Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.