The Health Care Cost Saving Myth

One of the central selling points used by President Obama to push the Democrats' health care plan is the notion that a comprehensive overhaul of the health care system will reduce costs. But costs to who, and how? Let's step back a minute and try to figure out how Obama's cost-cutting argument could possibly be so.

First, a quick reminder of two reasons why cost-cutting is such an important selling point.

Number one, the core of what the Democratic base, in particular, wants from health care "reform" is universal coverage. You often hear statistics thrown around about there being 30 or 35 or, last I heard, 47 million people without health insurance, and the implication that these people are receiving zero or negligible healthcare. Debunking those statistics and assumptions is itself a cottage industry, but let's leave that aside for the moment, because the fact of the matter is that in a country of 300 million people, when you strip out the people who (1) already have health insurance and expect to continue having it, (2) don't especially want to buy health insurance, (3) are only briefly without health insurance and not worried about it, or (4) don't or can't vote, what you end up with is a very small slice of the electorate that would benefit from getting health insurance they currently lack or fear lacking. Now, voters don't only vote their own self-interests on any issue - but the fewer people who benefit directly from legislation, the harder it is to drum up public support for a bill that may threaten the self-interest of others. So, it becomes politically necessary, if the bill is to be as sweeping and ambitious as most of the versions circulated have been, to sell it to the public on the basis of some argument above and beyond insuring the uninsured. That's doubly so because if your goal was solely to insure the uninsured, much of what is in the various bills would be unnecessary.

Second, specific to the issue of saving money for the federal government, the Obama Administration and the Democrats have already severely tried the electorate's appetite for massive expansions of federal spending, especially deficit spending. The explosion of new spending, most notably the pork-laden "stimulus" bill, makes prior complaints about spending under Bush look like complaints about the deck chairs on the Titanic and flatly contradicts Obama's read-my-lips pledge during two of last October's debates that his proposals would result in a net reduction of federal spending. The voters have noticed that they're not getting anything resembling what they were promised. Thus, Obama has repeatedly pledged, with the same assurance as his campaign pledge on spending, that the health care bill would be "deficit neutral." The Congressional Budget Office, typically a liberal redoubt, has repeatedly thrown cold water on the claim that any of the proposals on the table would be deficit-neutral. Clearly, to get there, cost savings would need to be found somewhere to completely offset outlays.

How's that gonna work?

Let's review the options. The Democrats' main argument is that restructuring the entire health care sector will reduce the nation's total (public and private) outlay for health care. When you boil it down, though, there are only three variables you can cut: reduce the amount of medical care provided; reduce what providers of medical care earn for their products and services; and reduce intermediary costs. All are problematic.

I. Less Medical Care

The most obvious way to cut spending on medical care is to buy less of it. That's at the crux of the public's worry about "death panels" cutting off care, about rationing; it's why so many of the people showing up agitated at town halls are senior citizens worried about getting less medical care.

The "death panel" phrase was shorthand, of course, but it neatly captured the core of the problem: government already rations care, albeit not very efficienctly, in programs like Medicare and Medicaid (see, e.g., here - then again, the failure to do more rationing explains those programs' exploding, budget-busting costs) and the end-of-life consulting procedures criticized by Palin and subsequently dropped by chastened Democrats are not the only way in which government incentives could or would be brought to bear on physicians to push patients from consuming health care to preparing for death or assisted suicide. More here, among many other places. But you don't have to be looking at the end-stage to see that any plan premised upon cost-cutting by reducing the amount of care provided would, well, reduce the amount of care provided. And if the costs being cut are taxpayer costs, the power to do so would end up being vested in some sort of governmental entity, likely a panel of government-appointed "experts," as Mickey Kaus notes was alluded to by President Obama himself back in April:

THE PRESIDENT: So that's where I think you just get into some very difficult moral issues. But that's also a huge driver of cost, right?

I mean, the chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here.

LEONHARDT: So how do you - how do we deal with it?

THE PRESIDENT: Well, I think that there is going to have to be a conversation that is guided by doctors, scientists, ethicists. And then there is going to have to be a very difficult democratic conversation that takes place. It is very difficult to imagine the country making those decisions just through the normal political channels. And that's part of why you have to have some independent group that can give you guidance. It's not determinative, but I think has to be able to give you some guidance.

One argument advanced by proponents of the various plans is that costs would be reduced by providing more care, because preventative care would prevent more expensive care from being needed. Even leaving aside the grim fact of human mortality (i.e., preventing heart disease at one age can just leave you to die slowly of cancer or suffer prolonged dementia later), Charles Krauthammer notes that studies in reputable medical journals have concluded that the need to offer preventative care to so many people to make sure you catch health problems early means that more widespread preventative care is more, not less expensive:

Think of it this way. Assume that a screening test for disease X costs $500 and finding it early averts $10,000 of costly treatment at a later stage. Are you saving money? Well, if one in 10 of those who are screened tests positive, society is saving $5,000. But if only one in 100 would get that disease, society is shelling out $40,000 more than it would without the preventive care.

That's a hypothetical case. What's the real-life actuality? In Obamaworld, as explained by the president in his Tuesday town hall, if we pour money into primary care for diabetics instead of giving surgeons "$30,000, $40,000, $50,000″ for a later amputation - a whopper that misrepresents the surgeon's fee by a factor of at least 30 - "that will save us money." Back on Earth, a rigorous study in the journal Circulation found that for cardiovascular diseases and diabetes, "if all the recommended prevention activities were applied with 100 percent success," the prevention would cost almost 10 times as much as the savings, increasing the country's total medical bill by 162 percent. That's because prevention applied to large populations is very expensive, as shown by another report Elmendorf cites, a definitive review in the New England Journal of Medicine of hundreds of studies that found that more than 80 percent of preventive measures added to medical costs.

Whatever else can be said for more preventative care, it is likely to offer no great cost savings.

Moreover, reducing the total amount of care provided contradicts one of the central premises of the entire project, which is that it will result in providing more care to tens of millions of people not presently receiving it. As Bob Hahn notes, if this is the case, it won't just drive up costs but will create shortages:

If we added 47 million more people to the health care system, there would be lines. We wouldn't even know how to send 47 million more people to McDonald's without causing lines.

I'm unfamiliar with the details, but apparently there is some provision in Obama's plan that expands the number of doctors, nurses, hospital beds, etc., to instantly accommodate 47 million more people. It usually takes eight to ten years to school a new doctor, so whatever the Democrats are doing here is a major advance.

The Democrats can't have it both ways. One way or another, they either need to sell the public on the idea of sharply curtailing the amount of medical care provided, or stop claiming cost savings that can only come from less care.

II. Medical Care For Less Cost

The issue of shortages brings us to the problem with the second option: rather than reducing the amount of care provided, reduce the amount paid to the people who provide it: doctors, nurses, and pharmaceutical and medical device companies. Certainly on the Left there is a fair amount of sentiment for making it less profitable to provide care. But there is really no getting around the basics of supply and demand: if we make it less profitable to become a doctor, we will end up with fewer doctors. If we skimp on salaries for nurses, home health aides, and less-skilled care providers (e.g., people who work in nursing homes), we will exacerbate the existing shortage of nurses and other providers, which is likely to become more acute in years to come as the population ages. And if labor responds to financial incentives, capital is even more sensitive: slash the profit margins of drug companies and medical device manufacturers, and inevitably there will be less investor capital for those companies and less coming out of the pipeline in terms of drugs and devices that save or improve lives. The net effect will be the same as rationing care directly: cost savings will come only by reducing the quantity and quality of medical care.

III. Cutting Out The Middleman

With open advocacy of government rationing of care largely politically infeasible and reducing the profitability of health care providers economically impractical, the debate logically falls upon the middlemen, mainly insurance companies. Pretty much everybody hates insurance companies, whose business model by nature involves collecting more money than they lay out. And there's empirical data to support the idea that we're spending proportionally more of our health care dollars on insurance, rather than care, than we used to spend. To shift the discussion away from rationing care, Democrats are desperately trying to paint the insurers as somehow siphoning off more money to enrich themselves than they "should," an effort that's now leading to an especially vindictive crackdown by panicked Congressional liberals:

House Democrats are probing the nation's 52 largest insurance companies for lavish spending, demanding reams of compensation data and schedules of retreats and conferences.

Setting a deadline of Sept. 14, the letters demand extensive documents for an examination of "executive compensation and other business practices in the health insurance industry."

The main idea here, other than simply intimidating the insurers, is to try to sell the Democrats' plan on the theory that the insurers are artificially inflating their overhead. The fact that they have to subpoena 52 companies suggests that this will not be as easy a case to make as in the case of a monopoly industry…and of course, a monopoly is the preferred solution of Democratic policymakers, elected officials and even Democratic base voters who essentially see the long-term goal as using a "public option" to plant the seeds for replacing this patchwork of private companies with a single-payer system of government monopoly insurance.

But let's unpack here a little further the elements of the expense of a middleman. First of all, there's the question of why have insurance at all. Most of us pay for other life essentials - food, clothing, shelter, transportation - directly, rather than buying, say, grocery insurance to make sure that an insurance company or government agency will give us groceries every week on terms acceptable to the insurer plus a premium. Now, unless you are seriously wealthy, insurance against truly catastrophic health care costs makes economic sense, so that the pool of the insured absorbs the individual occurrences of massive spikes in one person's health care costs. But pretty much all the proposals on the table go far beyond purely catastrophic coverage.

The entire rationale of the Democrats' proposal is to get more people to buy insurance or have it bought for them than is currently the case, thus increasing the proportion of our health care that is paid for through intermediaries rather than directly. That's true of people who currently buy no insurance and get little or no care, or pay for it out of pocket; it's true as well of people who currently get their care from emergency rooms. That's exactly the opposite direction of where you want to be moving if cutting intermediary costs is your goal.

And in the existing health care market, Democrats (with the help of big-government Republicans) have been driving up costs for the past two decades by piling on mandates and "patients' bill of rights" legislation that ever increases the number of procedures that the insurers have to be involved in. The Medicare prescription drug plan likewise expanded the scope of health care products and services paid for through a public intermediary rather than directly by consumers. And of course, subsidizing preventative care that may be presently paid for out of pocket does the same. So, not only are the Democrats proposing to have more people use health care intermediaries (public or private), but their proposals will inevitably continue the trend towards having more types of health care paid for through intermediaries.

Well, say Democrats, we will use more intermediaries, but we'll be much more efficient in doing so, because the public plans won't have a profit motive and expensive executives. Which is true. But it's also true that government programs, even ones that start out fairly simple, tend only to grow and expand over time and grow less efficient as their competition is eliminated and the political power of those who draw salaries and contracts from them grows. Will unionized government workforces necessarily be less expensive than non-unionized private insurer workforces? History doesn't suggest so. As one National Review reader posed the question:

If we can cut a half-trillion dollars from Medicare and Medicaid to pay for health insurance reform but if, as looks to be the case, healthcare reform won't pass, why not just cut a half-trillion dollars from Medicare and Medicaid anyway?

The fact that it hasn't happened and won't happen should remind us that replacing a competitive private marketplace with a colossal, Washington-run bureaucracy is a bad bet to produce savings. The conservative answer in this situation is not to throw out the entire existing system on the hope that things will work out better than they ever have before.

The elephant in the waiting room is the other big cost driver of intermediaries besides the scope of coverage and the cost of having shareholders and executives: lawsuits. Precise figures are again a subject of intense dispute, but a goodly chunk of what drives the amount of `unnecessary' care provided, the cost of providing services and the cost of intermediaries is the need to protect against and pay for the cost of medical malpractice and denial of coverage litigation. None of the Democratic proposals, however, seek to make any practical inroads against this source of costs. Replacing a private system with a public one could arguably do so if the trial bar is effectively precluded from bringing against the government many of the kinds of lawsuits now used against private insurers - but aren't liberals in favor of keeping those kinds of suits viable? And how likely is it that in the long run they won't provide other mechanisms to keep one of their vital constituencies in business?

We have pretty much exhausted the options for cost-cutting: less care (at a steep political price, at the cost of giving frightening power to the government, and at odds with the goal of providing care where none is now given); less money to caregivers, which would amount to the same thing; less use of intermediaries (which is likewise contrary to the whole thrust of the project); or less cost in using intermediaries (which is impractical and unlikely to pan out).

There will be no cost savings. There's no sense in pretending otherwise.

By Dan McLaughlin
Reprinted with permission from The New Ledger