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Thinking Clearly About Health-Care Spending

I fear this post will seem obvious to most of you, and pedantic to some. But commentators tend to be extremely unclear when they talk about the changes in spending that will result from different bills.

There are two things that people might be talking about when they bring up the cost of health-care reform. One is "national health expenditures." That's the amount of money we spend as a country, in both the private and public sectors, on health care. The other is "public health expenditures," which is the amount of money the government -- and thus taxpayers -- spend on health-care programs like Medicare and Medicaid.

These two measures do not always point in the same direction. A single-payer system could cut national health expenditures by 10 percent while increasing public expenditures by trillions of dollars. In that scenario, national health expenditures would fall, but public health expenditures would rise, because we would be paying through taxes rather than premiums. Conversely, a scenario in which we ditch or weaken the public plan might mean that public health expenditures are lower because less money is being routed through government, but national health expenditures are higher, because you're missing out on a potential source of cost savings.

Another piece that confuses people is the difference between "paying" for health-care reform and "saving money" through health-care reform. Imagine that the final health-care bill costs $1 trillion but spends all that money on subsidies and doesn't change the system at all. That bill could be "paid for" through a tax that raises $1 trillion, or by cutting defense spending by the same. But it wouldn't save money. Conversely, imagine a health-care bill that cost $1 trillion but unravels the employer-based market and substantially reforms Medicare: That bill might save trillions in the long term by cutting national health expenditures, but unless someone found $1 trillion up front, it wouldn't be "paid for."

The goal of health-care reform -- at least on the cost side -- should be to save money on national health expenditures. Saving money in the long run is a lot more important than deficit neutrality in the short run. And the total level of health-care spending is a lot more important than what percentage of it is public.

By Ezra Klein  |  July 21, 2009; 11:32 AM ET
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Thanks for pointing out the distinction. From what I can tell, CBO has only given preliminary scores to bills in terms of public health expenditures. Are there any estimates of the change in national health expenditures coming from the house bill? The HELP bill with Medicaid expansion? Don't forget, the house bill phases out the doughnut hole in Part D.

Posted by: GrandArch | July 21, 2009 11:46 AM | Report abuse

I'm pretty sure Greg Mankiw was exploiting this distinction in his dumb post from yesterday, by sneakily conflating "reducing health care costs" with "reducing the deficit."

Posted by: WHSTCL | July 21, 2009 11:48 AM | Report abuse

nthing GrandArch. Stepping back and explaining some of the basic terms is very helpful for those of us who find ourselves getting lost. Furthermore, taking the time to lay these out out in easy-to-understand language helps me describe this to others (such as my intransigent family).

Obrigado, Ezra.

Posted by: gusgoya | July 21, 2009 12:00 PM | Report abuse

If you conclude that the Government should play a larger and therefore more expensive role in healthcare then your thinking is not clear.

You should focus on the food writing. You do not understand what you're talking about.

Posted by: fallsmeadjc | July 21, 2009 12:07 PM | Report abuse

"And the total level of health-care spending is a lot more important than what percentage of it is public."

Technically true, but in practical terms it's blasphemy... remember, libruls want to enslave all noble, hardworking, decent capitalists by making them either wards of the almighty State or by extracting every drop of blood & sweat (oh noes!- taxes!) from Our Most Productive Citizens. Never mind that the government *is* the people or that at least a large plurality of our wealthy are pretty much just paper-pushers who skim off the top of what real production still exists-- it's an insult to our state economic religion and its mullahs.

Posted by: latts | July 21, 2009 12:11 PM | Report abuse

To me the real question is whether government is able to control long term costs better than we currently do. I simply don't see any way thats possible as long as people do not have any incentive to limit the costs. If government really can hold down healthcare spending costs then show us that its possible with Medicare since thats certainly at a big enough scale to do any of the changes you would want. I simply don't think that our government is capable of holding the line on spending when it comes to costly end of life procedures that don't make financial sense.

Posted by: spotatl | July 21, 2009 12:22 PM | Report abuse

"Statistics were just as much a fantasy in their original version as in their rectified version. A great deal of the time you were expected to make them up out of your any case, 62 million was no nearer the truth than 57 million or 150 million..." George Orwell, 1984

Posted by: truck1 | July 21, 2009 12:23 PM | Report abuse

To steal from a famous economist "in the long run we are all dead."

We should save money in the long-run. However, we shouldn't spend so much money in the immediate future that we don't get to the long-run.

Like Spotatl - I think we won't save a cent until people have to pay themselves. Even small amounts dampen the free=more effect.

Posted by: RedBird27 | July 21, 2009 12:26 PM | Report abuse

Ezra, great clarifying post. However, I'm with Mankiw. Until a credible source scores the national savings from these bills, government spending is all we have to go on.

And given that the plans so far don't seem to fundamentally change how healthcare is delivered in the US, it's hard to see how they're going to save us $800 billion in five years (the CBO estimate of $1 trillion over ten years counts three years before the program is even active and then two years where it is still ramping only the last five years are really a good estimate, even as estimates go).

Posted by: blsdaniel | July 21, 2009 1:58 PM | Report abuse

I would also hope that the debate over health reform would also include the national security aspects. If there is ever some sort of attack; bio, chemical or other we would fare much better if the entire population was insured.

Posted by: MerrillFrank | July 21, 2009 2:02 PM | Report abuse

Ezra says, "A single-payer system could cut national health expenditures by 10 percent..."

Well I think it would be 20%, but I don't want to quibble, but one should remark that not only would it save money, but it would cover everyone, increase preventive care, solve the pre-existing problem, solve the lose job - lose insurance problem, etc., etc., etc.

spolatl says, " I simply don't see any way thats possible as long as people do not have any incentive to limit the costs."

Have you ever heard of France, Germany, UK, Japan, Spain, Italy, etc., etc., etc.?

Look at

Posted by: lensch | July 21, 2009 2:05 PM | Report abuse

If you would like to help pressure Congress to pass single payer health care please join our voting bloc at:

Posted by: letsgobuffalo | July 21, 2009 2:18 PM | Report abuse

I don't see any way possible that OUR GOVERNMENT could limit costs in a healthcare system. A new expensive heart attack prevention pill is invented. The people want to see that covered because they want fewer heart attacks. The politicians want to see it covered because it makes the voters happy. The Pharma company of course wants to see it covered. In our system who is there to put a halt to increasing the spending?

In the UK they have been able to deny treatment to people in a way I do not think we would ever be able to do in this country. I am not at all worried about government rationing healtcare- I am worried that Government will never take the tough steps in order ot ration healthcare.

Posted by: spotatl | July 21, 2009 3:13 PM | Report abuse

spotatl - Are you on Medicare? I am. Medicare fails to cover many things that are pushed by the health industry such as virtual colonoscopies. Also there are limits on the number of tests of a given type you can take in a year, e.g. no more than 4 lipid panels.

Your concerns are misplaced.

Posted by: lensch | July 21, 2009 3:55 PM | Report abuse

And once 50% of voters feel that they are entitled to free healtcare I see absolutely no way that treatments like that would remain uncovered. There would be too much incentive for politicians to cover more and more.

Posted by: spotatl | July 21, 2009 4:23 PM | Report abuse

Medicare is not free. It's cheap and effective, but not free.

Posted by: lensch | July 21, 2009 4:50 PM | Report abuse

Medicare currently covers 15% of the population, is bankrupting the country by the admission of the current administration, and is already politically untouchable enough that neither side is willing to talk about spending cuts. I just don't see how costs can be more easily contained when 97% of the population is covered. You think that any treatment for kids that show up well on TV would be stopped?

Posted by: spotatl | July 22, 2009 9:10 AM | Report abuse

The big money in savings on health care is in reducing health management that either actually makes people worse, doesn’t work, or doesn’t work any better than management that is much less expensive. Almost everyone who has looked at this issue has estimated that between $500 billion and $800 billion a year is spent in the US on this type of care. Another $200 billion or more is spent on mistakes that cause injuries to patients which could be prevented by better quality assurance protocols.

Patients are not well equipped to make decisions about these types of issues, since they just don’t have the information to be able to do so. Study after study has shown that increasing patients’ share of health costs leads to poor results because patients forego useful but less dramatic care while demanding dramatic care of questionable utility. Some studies actually show that increasing “moral hazard” for patients actually leads to higher costs because of poor choices.

Private insurance made a pass at controlling these costs in the late 80’s and first half of the 90’s, during the “managed care” era. They had considerable success, but foundered on resistance by plan enrollees, over-emphasis on costs with insufficient attention to effectiveness, and on competition between plans to offer policies that enrollees wanted. They remain reluctant to re-engage on this issue.

Since then – and in the period from 1975 to 1985 – Medicare has been the main driver in health care cost control, doing the heavy lifting while private plans followed along after the fact. As “lensch” points out, Medicare often engages in cost control aimed at effectiveness issues.

Medicare, because of its size – which may be enhanced by a public plan – is the best hope for cost reform based on effectiveness issues, since it has the power to address the issue. These are reforms that can be made not by rationing care but by making care better.

In that vein, the development of an independent board to govern Medicare spending, discussed higher on this page by Ezra, is just as important as plans addressing access to health care, since they will help as many or more people and could be the force to finally begin making health care spending rational.

Posted by: PatS2 | July 22, 2009 2:35 PM | Report abuse

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