Bending the cost curve

Other than those who are admirers of Louis XIV and his philosophy of  "Après moi le déluge", there is widespread agreement that continuing our present path of growth in health care spending is not sustainable. All political posturing and bluster and magical thinking aside, how can this actually happen? 


This does not involve higher math and uses the mathematical tools which I learned in elementary school.  We need to either spend less or increase the pool of resources which can be tapped to pay for health care or a combination of both. However, we need to define which actions would result in either of these two outcomes and then define which entities are empowered to make those decisions. None of this is easy.


First of all, how can we predict that any given action by any given entity will have the expected outcome? In addition, saving money is not the only charge of those whose mission is to remake the health care system. Competing imperatives include increased access, lower out of pocket costs, sufficient payments to guarantee provider participation and availability of services, long term support of health care education, support for research, support for quality initiatives, promotion of innovation, fairness and functionality of the tax code, and limiting the tax burden in order to promote overall growth of the economy. Any action taken by any numbers of parties to further any one of the above goals will have impact on how much is available to be spent on health care and how much will be spent.

Let me simply highlight one interaction between competing imperatives. Despite the huge increases in the total amount spent on health care, the portion of costs which fall upon the medical consumer (patient) has on average fallen since 1960. On one level this is highly desirable in that out of pocket  (OOP) expenses do not create a barrier to accessing what patient need (see chart).

On the other hand, insulating people from the costs of goods and services creates all sorts of moral hazards, the worst of which is the tendency to over consume or utilize more expensive approaches which may bring limited if any additional benefit for the additional dollars spent. In the broader economy, substitution options  create downward price pressures on goods and services. In the medical realm, this mechanism works poorly if at all since substantial portions of the public have historically have not been motivated to cost shop since their insurance insulates them from such cost differentials. This may or may not be changing.


As I see things, the only way this changes is by implementation of some sort of gain sharing mechanisms. The public will not broadly buy into cut backs in their benefits unless the gains are explicitly shared with  them. Short of actually paying patients to use cheaper interventions, which would create all types of perverse incentives, we are left with having patients pay more for more interventions that have lower cost (and perhaps lower quality) alternatives. Otherwise, why stint on your own care when you have nothing to gain from it.


How this can actually come about is another story. None of the parties presently involved is either empowered or incentivized to make the changes which can result in bending the cost curve in the desirable direction.  It is only the rare politician who will be re-elected by promising his constituents that she/he will deliver less. Few people other than those with martyr complexes are driven to pay more to get less from the health care system. Physicians will refuse to play both patient advocate and cost containment agents simultaneously. Insurers will not be capable of being effective agents for cost containment. They will not gradually move their business model to simply collecting a fee for claims adjudication and check cutting and leave the thorny job of saying no to their political masters who will provide more and more of the funds to keep the health care monster alive. 


It brings us back to how can this be managed and I again get back to the best model for scarce resource allocation; markets. There is no question that such a model will remake the health care industry into something very different from what it is today. There will be great resistance to this approach given the bias that markets can not work for health care. Ultimately we will have no choice. The only approach which can bend the curve is for each of us to husband our individual resources and for health care purchases to compete with other individual wants and needs on an even playing field. If those within the health care industry cannot convince the public that their investment in their own health is worth the expense is worth it, the cost of moving that decision making process for resource allocation to another entity will prove to be disastrously expensive in the  long term.