CBO Is Wrong About Health Care Costs

08/21/2009 05:12 am ET | Updated May 25, 2011

The Congressional Budget Office made Republicans cheer on July 16 when it said that health care reform proposals will raise, not lower, costs. The CBO economists are wrong. In the 1970s and '80s, economists thought inflation in many industries was an immutable fact, as they think it is in health care today. Early in the Clinton Administration, they still thought inflation would come roaring back if Democratic programs brought unemployment to below six percent. Instead Clinton drove joblessness below four percent with no inflation. Since then the costs of many goods and services have continued to fall: Look at computers, flat panel TVs, telephone calls, the cost to ship goods, clothing, cars, appliances and housing if properly adjusted for quality improvements -- all are less expensive than they used to be. Products and services that at one time were available only to the well-to-do are now within the reach of almost every American household because costs have fallen.

Costs will fall if health care is reformed. Think about it. Wal-Mart's pharmacies in September 2006 began to offer a long list of generic drugs for $4 per month, 50 percent less than it had been charging before. Its competitors like Target and the Kroger grocery chains are copying Wal-Mart and more will be forced to do so. The costs of generic drugs are already coming down and they will come down further, eventually cutting health costs by tens of billions of dollars. Brand name drugs, unless they are very special, will have to be priced to compete with lower cost and effective generics. Medicare and Medicaid, doctors and insurance companies can promote and speed this process if they are pushed by reform to pay more attention to costs.

Computerization of medical records also will bring down health care costs sharply over time. Pharmacists waste hours every day calling doctors about scribbled prescriptions, costs that will come down as computers replace phone calls and faxes. Doctors still play "telephone tag," calling each other by phone -- 1920s technology -- that should have been largely replaced by computers two decades ago. Over 50 percent of the cost of medical research, I have been told, is in collecting and making sense out of paper records. Computerization of records will cut research costs enormously.

The health care supply chain for paper goods, cleaning supplies, masks, cuffs, and other common items is horrendously expensive. Reform that makes doctors, hospitals, and insurance companies compete for patients will increase pressure to cut costs in these areas, as was the case when competition was forced on the telephone industry.

So why is CBO so off the mark? Its economists look at patterns of numbers from the past and project them into the future. It is really anti-economics. The central insight of the great economists starting with Adam Smith is that competition creates a dynamic that break down the costly patterns of the past. Health insurance exchanges and computerized records will increase competition in health care and lower costs. That is what happened in other American industries when competition increased, and it will happen in health care.