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You've Got Questions: Health Reform's Cost Paradox

Orszag.jpgRussell e-mails:

Ezra - I'm wondering if you can help me understand a couple of really simple questions.

If one of the major current problems [in health care] is cost - why is reform going to cost even more?? Seems backwards.

That question is, I think, key, and the sort of thing that's going to be a real problem for the Obama administration. Peter Orszag, in fact, tries to answer it on his blog today. He's even got a graph. But uncharacteristically, I'm going to try to do this without a graph.

There are two main things happening in health reform. Coverage expansion and cost control. Extending coverage to the uninsured costs money immediately. Cost control measures generally work over longer periods of time.

An example: Imagine you have a family of 10 kids. Every night you take eight of them out for $100-a-head dinners. But you want to make two changes: You want all your kids to eat, and you want eating to cost less money. You start by simply taking all 10 kids out for meals. Costs go up. You're paying $1,000 a night. But at the same time, you begin learning how to cook at home, shopping at Costco, eating at cheaper places. These changes take a few years. But over time, costs drop. Now you're only paying $60 a head.

That's the theory behind health care reform. Costs will jump in the short-term as we expand coverage, but contract in the long-term as we make changes to the system. Quoth Orszag, "In the near term, the impact of expanded coverage will temporarily dominate, and health care reform will therefore temporarily increase government spending. Over time, however, the impact of the cost containment provisions will accumulate, and the net impact will be a reduction – and perhaps a dramatic one – in government spending."

Some argue, by the way, that you can't make the necessary reforms unless you first invest in universal coverage. Before insurers will compete on cost and quality, for instance, they have to stop competing to simply insure the healthiest applicants. And they can't do that unless the system is universal and all insurers have to offer coverage to all applicants. (For a longer version of that argument, see this article.)

I think I half-believe that argument, given the cost control measures under consideration. Comparative effectiveness and Health IT, for instance, do not require universal coverage, but they're key to the administration's strategy. But the argument I do believe is that expanding coverage is the right thing to do, and the right thing to spend money on in the short-term, and that controlling costs is an important thing to do, and the correct goal in the long-term.

(Photo credit: Getty Images.)

By Ezra Klein  |  May 29, 2009; 5:36 PM ET
Categories:  Health Reform  
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Comments

It's pretty clear to us that the issues are actually linked: how you expand access sets the groundwork for how costs are controlled.

If access is expanded through private, for-profit insurance corporations how can cost be controlled? It is unclear to us, as nurses, that it can. These guys take 30% overhead for the simple function of connecting patients and caregivers.

Changes healthcare IT or other programs are mere drops in that bucket.

Posted by: NationalNursesMovement | May 29, 2009 7:16 PM | Report abuse

Why do we worry so much about people being insured? That matters not at all. What matters, really, is people getting actual health care, right? Or am I missing something?
The costs will go up - they always do. Never has the government estimated a program and it didn't cost more - and sometimes 5-10 times more - than it was estimated.
Universal health care, though, will probably mean that people will have less access to actual health care. Other countries that do it (and have the govt in charge of everything) seem to ration more. Longer waits, blahblahblah.

But my biggest issue is the same as it is with most FEDERAL programs. We live in an incredibly diverse country, each area has different needs. And yet we have the people in DC thinking they can figure everything out easily and well, and just plop all the programs down and they'll be great. That is absurd (look at education, for one). New York City is different than rural alabama. Different than Nebraska. Different than Ohio. Each place in our country is so different than another place, that one solution could not work everywhere. That is a huge fallacy (and seriously - the fact that it might work in someplace like, what, sweden - where the population is tiny compared to ours and completely homogeneous - means absolutely nothing HERE).

Posted by: atlmom1234 | May 29, 2009 10:16 PM | Report abuse

Why do we worry so much about people being insured? That matters not at all. What matters, really, is people getting actual health care, right? Or am I missing something?
The costs will go up - they always do. Never has the government estimated a program and it didn't cost more - and sometimes 5-10 times more - than it was estimated.
Universal health care, though, will probably mean that people will have less access to actual health care. Other countries that do it (and have the govt in charge of everything) seem to ration more. Longer waits, blahblahblah.

But my biggest issue is the same as it is with most FEDERAL programs. We live in an incredibly diverse country, each area has different needs. And yet we have the people in DC thinking they can figure everything out easily and well, and just plop all the programs down and they'll be great. That is absurd (look at education, for one). New York City is different than rural alabama. Different than Nebraska. Different than Ohio. Each place in our country is so different than another place, that one solution could not work everywhere. That is a huge fallacy (and seriously - the fact that it might work in someplace like, what, sweden - where the population is tiny compared to ours and completely homogeneous - means absolutely nothing HERE).

Posted by: atlmom1234 | May 29, 2009 10:17 PM | Report abuse

Where the analogy falls down is that the 2 kids who don't go to the restaurant still eat.

And people without coverage still get sick and still cost money to the system.

I thought part of the argument for coverage was that it will lower uninsured losses at hospitals.

I just read recently that the average family (or their employer) pays $1,000/year in excess premiums and billings from providers to cover the losses from the uninsured.

So how does impact your model (and the real world...)

Posted by: RalfW | May 30, 2009 1:18 AM | Report abuse

Ezra, there's more to the argument that we should do universal coverage first, then cost-cutting second.

A nice series of arguments commonly overlooked is provided here in reference to the Massachusetts reforms: http://content.healthaffairs.org/cgi/content/full/hlthaff.28.4.w588/DC1

I would only add to it that the political ground shifts as well as the marketplace when universal health care is enacted. Conservatives won't be able to take it away, so they will instead focus their energies on reducing costs. Assuming the Democrats are strong enough to direct them away from simply more cost-sharing and into system reforms (highly likely, in my view) we will have more allies for cost reforms after universal coverage. Not only that, but the public will be a much more reliable ally in cost controls, because (a) wealthier folks who vote will see their taxes increase and (b) millions of lower middle class folks who vote almost as much will find that they are now forced to pay premiums, even if they are partially subsidized. Even if there isn't much cost-sharing in the benefit plan, there will obviously be a visible expense burden in that the system will have to be largely self-funding even in the beginning.

Not only that, but you take coverage improvement off the table as an issue, which right now distracts a lot of people on the left from being able to focus on cost reforms.

In short, this is absolutely the right way to go.

Posted by: jdhalv | May 30, 2009 9:37 AM | Report abuse

This was touched on by jdhalv, but isn't part of the reason why cost controls come second the idea that you need to get everyone in and invested in the system first? Right now people are invested in the system that they've got, but there's a window where they're frustrated and willing to try something (slightly) different, so you put everyone into this new system and once they get attached to it as the new status quo you fix it through tweaks.

Posted by: MosBen | May 30, 2009 10:11 AM | Report abuse

There are several thoughts I have upon reading this:

-The ER visits made by uninsured patients to resolve every medical issue they have actually costs money now. Seems like providing universal coverage would diminish the extreme costs associated with that kind of medical treatment, i.e. - primary care via the ER - freeing up funds that could be pointed to universal coverage.

-I have no idea how the cost of anything medical is determined. I don't even think the EOB I get from my insurance company is anything like the statement/payment to the health care provider. There is absolutely no transparency in the way things are billed. My son requires an ongoing medication - I can't call anywhere to find out how much it costs - I can only find out by actually picking up the prescription. That's a farce.

-Profit is made by health insurance companies because they kick off the people who actually need healthy insurance. So the uninsured issue also must address the fact that many of the uninsured at that way because they cannot find affordable health insurance due to a pre-existing condition. They're actually the ones costing the big bucks.

-How much is being spent in the business of billing across the health care spectrum? The billing people in the doc's office, the third party billing companies, the hospital, the massive numbers of employees at health insurance companies who wrangle together the EOBs and the billing codes and the denial letters? There is so much fat in the administration needed to run any kind of health care practice.


Posted by: anne3 | May 30, 2009 7:05 PM | Report abuse

In your dining analogy if it wasn't your money being spent on feeding the 10 kids then why would you bother to explore cost saving measures? I don't think you can assume that market discipline applies when your spending taxpayer funds. It never seems to work out that way. If anything I imagine the restaurants would probably start charging more and you would use the higher prices as an excuse for raising taxes.

Posted by: fallsmeadjc | June 1, 2009 10:45 PM | Report abuse

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