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Meaningless numbers? Not in healthcare

Published 11:00pm Wednesday, October 2, 2013

Many liberals point to the rapid rise in healthcare spending in the U.S. over the past several decades as evidence of a crisis which government must solve. Readers who remember Hillary Clinton’s attempted takeover of the industry in 1994 will recall this rhetoric, which resurfaced in the debate over the Affordable Healthcare Act. Yet total healthcare spending, along with every other aggregate statistic about our economy, results from decisions by over three hundred million Americans. No one person decides any of these aggregate spending levels. Consequently such numbers are meaningless in assessing whether our nation faces a policy crisis.

Society is too vast to observe in its whole firsthand. So we form mental images about society, and a crucial issue for public policy is whether these images include individuals or groups. Our minds prefer relatively small numbers, so we tend to want to think in groups, for example, young, old and middle aged, or men and women. Aggregate numbers can assume their own meaning if you view society as composed of groups. One might think that “America” decided to spend $2 trillion on healthcare annually.

Yet only individuals make choices. Choices have consequences, and we make choices that increase healthcare costs. But if the individual choices are reasonable, the aggregate spending is not excessive.

One set of choices we make concerns end of life care. About 30% of the Medicare budget is spent on the 5% of patients who die in a year, and about 10% of lifetime medical expenses typically occur in the last year of life. Of course we don’t know when that last year has begun, and this care is undertaken to prevent diseases from proving fatal. As a society we reject assisted suicide for the terminally ill. And family members want to know that everything medically possible was done for a loved one. Is there a problem with this?

We take great measures to save infants born prematurely. Infants born at 25 weeks can now survive, which is wonderful but costly. The hospital cost for such a premature baby averages over $200,000, and premature births account for half of all hospital maternity expenditures. Personally I don’t see a problem here, do you?

Healthcare expenditures are highly concentrated, as around 5% of Americans incur half of the healthcare costs in a year. Some people unfortunately inherit or develop conditions requiring ongoing, expensive care. Do we want to let these individuals suffer to reduce total spending?

Private health insurance anchors our system, and involves “third party payment” of medical bills. We do not pay out of pocket for expenses covered by health insurance, and so we worry less about these costs. While considered a source of waste by many health economists, third party payment costs are better thought of as shipping costs. Having to pay for shipping doesn’t mean we don’t make online purchases, merely that the item purchased must be worth the extra cost. Private insurance allows for responsible and voluntary provision of healthcare, without having to rely on charity. Since third party payment costs are largely inevitable, where is the problem?

Using an aggregate number to argue that the American healthcare system needs a government makeover is fallacious. Numerous government interventions, particularly in health insurance, already lead to bad choices. The tax deduction for employer-paid benefits expands insurance and third party payment costs to smaller, more anticipated expenses, like dental and vision coverage. Politicians over the past two decades have burdened insurance plans with coverage mandates, like mental health care, which drive up costs. Regulation of rates prevents insurers from charging premiums reflecting risky or unhealthy activities by consumers. And the Affordable Care Act’s preexisting conditions coverage requirement undermines the incentive for people to buy insurance before they become sick.

Do we spend too much on healthcare in the U.S.? Almost certainly, but the argument cannot be made by pointing to aggregate spending. We spend too much because of government’s domination of the industry, which the Affordable Care Act will increase, not because we choose certain treatments.

 

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.

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