10/09/2009 11:27 am ET | Updated May 25, 2011

The Price Is Wrong

In a recent Health Affairs article, authors Henry Aaron and Paul Ginsburg ask "Is health spending excessive? If so, what can we do about it?" Access and quality, they argue, are easily understood and addressed, although--in the case of quality--a bit challenging. Health care costs, on the other hand, seem cut and dried, but are in reality a messier issue. The first question they raise, however, is whether or not health spending is excessive. While one can argue that the definition of excessive is nearly impossible to pin down--that the proper amount of health spending is that amount that the public has collectively decided to spend--it is also possible to look at things relatively, as shown below.

Overall, yes, it seems reasonable from the above table to conclude that U.S. health care spending is potentially excessive by most standards. The question then is what to do about it? As Aaron and Ginsburg remind us, spending equals price times quantity. If spending is too high, it is because prices are too high, quantity of care demanded is too high, or some combination of both. So, which case is it? We have to figure that out before we can work towards a solution.

Enter Jon Oberlander and Joseph White, who--also writing in Health Affairs--assert that it is not the excess quantity of care demanded that drives up U.S. health care spending, but merely higher prices. In fact, they show that despite the argument that having insurance leads to moral hazard and an increased demand for care, "Americans actually receive less medical care than citizens of other rich democracies." Even in the presence of perverse incentives to overconsume, Oberlander and White conclude that "Higher U.S. spending is not primarily explained by greater volume of services."

That places the blame squarely on price--Americans spend roughly double what citizens of other OECD nations do on out-of-pocket costs--and suggests that the answer to unsustainable health care cost growth lies not in altering utilization patterns, but in implementing an appropriate system of price controls. That brings us back to the familiar problem of the status quo. All of the payers and providers on the supply side of the equation look at the phrase "price controls" and see "pay cuts." Their interest in opposing reform is understandably well-crystallized. How to implement the reform we so desperately need in the face of that opposition, is a far greater challenge.
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