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An Interesting Point on Cost Control From Brad DeLong

He writes:

The problem, I think, is that the CBO has a category for cost control but no category for getting system incentives right. It is a budget office, after all, not a philosopher-king office. The problem, however, is that it is the only arbiter out there. And there appear to be a lot of members of congress who think controlling costs = getting system incentives right.

I don't think we should care much about costs: it might be in the future we want to spend a lot on health; it might be that in the future we develop magic treatments and so want to spend a lot less. If we get the system incentives right, then whatever we spend on health will turn out to be the right thing to do.

To translate that a bit, if the health-care system worked efficiently, then it would presumably deliver good returns on our dollars, because otherwise, rational agents like ourselves would stop spending more dollars on health care. I'm not sure how well that approach works for health care. But it could certainly work a lot better than it is right now. And it brings up another important distinction: We talk a lot about cutting costs in the health-care system. We would do well to also think about increasing value. Spending fewer dollars is important, but so too is getting more health for the dollars we do spend, and there's case to be made that, in the short-term, we could increase value a lot more quickly than we can decrease cost.

By Ezra Klein  |  July 23, 2009; 10:08 AM ET
Categories:  Health Economics , Health Reform  
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Nothing on the presser last night? Maybe reading Ezra has made me too wonky, but I thought he did great last night while it seems like an emerging consensus that he was "boring." Did he do what needed to be done to get Congress moving? Am I just entirely too entertained by healthcare reform?

Posted by: MosBen | July 23, 2009 10:25 AM | Report abuse

"If we get the system incentives right, then whatever we spend on health will turn out to be the right thing to do."

This is a good point, but it is obvious (cf Medical Loss Ratios) that the incentive of the private insurers is simply to make money for shareholders, and this is simply the wrong incentive.

Posted by: lensch | July 23, 2009 10:33 AM | Report abuse

Brad is exactly right. Incentives matter in health care economics, just like everywhere else. The problem is, does anyone trust Congress to get the incentives right? I don't. The first and, by far, the most important step would be to remove the employer tax deduction for health insurance coverage. But only the Senate Finance Committee is even considering this option. Government has a poor record of getting incentives right (see also Fannie/Freddie, financial bailouts (Bear Sterns), GM & Chrysler, etc).

Posted by: mbp3 | July 23, 2009 10:33 AM | Report abuse

My bad, Ezra. It looks like you were working on a post about Obama's presser and I was just impatient. Sorry!

Posted by: MosBen | July 23, 2009 11:00 AM | Report abuse

It's not my's that for an incentive. The house subsidies limit the beneficiaries cost to a percentage of their income, removing any concern about rising costs for that population. The employer tax deduction was mentioned by the CBO as a cost driver, but this will be trump that easily as employers are reluctant to absorb all the cost increases. I spent $7000 to pay for private health insurance last year that was lousy and would have had to pay less than $300 under the house bill for what I imagine will be better coverage. If you want the incentives right people have to feel the pain of costs. That pain creates the political backing and will to do the kind of changes that will be resisted by many.

Posted by: jskdn | July 24, 2009 10:42 PM | Report abuse

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