Paying for Health Care Not Fun, But Worth the Cost

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

February 25, 2010

Mike Tanner’s belief that consumers are the key to slowing the growth of health care spending reminds me of the claims of supply-side economists that tax cuts would boost revenues. The ideas of both the supply-siders and Tanner contain a kernel of truth. Unfortunately, they then proceed to exaggerate absurdly.

In the case of supply-side economics, the kernel of truth was that lowering tax rates causes people to work a bit more. The mistake was in believing that they would work so much more that revenues would actually rise. Taxes were cut. Work effort increased, but only a little. Revenues dropped sharply, contradicting the supply-siders’ exaggerated claims. As my colleague Charles Schultze put it, “there is nothing wrong with supply-side economics that dividing by 10 wouldn’t cure.”

Tanner is right that the more people have to pay for health care, the less care they will use. And there is little doubt that health insurance in the United States now covers some small outlays that most people can easily handle themselves. But there is no reason to think that justifiable increases in the proportion of health care spending individuals should be asked to bear can materially slow the growth of health care spending. Here is why.

1. The goal of health care reform should be to assure health insurance coverage for the nearly 50 million Americans who are currently uninsured. Insurance coverage for this group must go up, even if their coverage entails significant cost sharing.

2. Tens of millions of people are covered by plans that currently have annual and lifetime limits on how much health insurance are covered. Insurance reform will—and should!—end those limits, for the good and sufficient reason that health insurance should spare people financial ruination from even the most serious illnesses.

3. The primary drivers behind rising health care spending are population aging and advancing medical technology—joint and organ transplants, new and improved drugs, non-invasive radiology, major improvements in neo-natal care that have dramatically lowered infant mortality, aggressive treatment for victims of coronary disease that have dramatically lowered age-adjusted cardiac mortality rates, and a host of other advances. Some of these technologies are overused. Discouraging overuse would save money. In some cases, doing so would also improve the quality of care. But simply using evocative language about grocery shopping does not come close to making the case that savings from making consumers more cost conscious would offset the cost increasing consequences of advancing technology and population aging.

4. Per capita health care spending in no other country is as high as in the United States. Yet no other developed nation relies on exposing consumers to the cost of health care to control spending.

In brief, there is nothing wrong with Tanner’s prescription that dividing by 10 wouldn’t cure. Yes, increased cost sharing would modestly reduce the level of spending among those who are already insured. And even modest savings in a $2.6 trillion industry are important. I strongly favor limits on the tax breaks that encourage excessively generous health insurance that covers even routine spending. But increased cost sharing cannot control the projected growth of health care spending. For many – those who will be newly covered – cost exposure will and should fall, and that will boost use of health care. Furthermore, there is negligible evidence that asking people to pay more of routine health care spending will offset the principal force driving spending on serious illnesses – the advance of medical technology – and nothing at all that will reduce the added costs from population aging.

The hard fact is that health care spending is going to go up – even if consumers’ cost sharing goes up and even if the efficiency of health care delivery improves. Most of that increase will go for new services that enhance people’s welfare. If consumers pay more for routine care, the increase will be marginally reduced. The truth remains, however, that if we want the benefits that modern medical technology can deliver, we are going to have to pay for it – through premiums or taxes. Paying is not fun, but the demonstrably longer and healthier lives that modern health care has provided have been worth the cost.