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Controlling Health Care Costs

Unless health care costs are brought under control, they will eventually bankrupt individuals, families, businesses, unions, state governments and the federal government. The question is not whether we deal with the crisis of health care cost growth, but how we deal with it.

The root cause of this crisis is the extraordinarily expensive, wasteful and inefficient way we deliver health care in this country, and the solution is to deliver care in more cost-effective ways. The solution is not to shift costs onto consumers and make them pay more out of pocket, because the enormous waste and expense of the U.S. health care system is not driven by consumers.

To make our health care system more cost-effective, we have to do two things. First, we have to change the incentives that encourage the delivery of expensive, wasteful and inefficient care. Second, we have to counter the extraordinary (and growing) market concentration in our health care system that enables resistance to cost-saving reforms and keeps prices unusually high.

Building on Medicare

Medicare is an indispensable tool for countering market concentration. Since 1970, the average annual growth in Medicare spending per enrollee has been 1.1 percentage points less than the growth of private health insurance premiums. If private insurance premiums had risen at the same pace as Medicare spending, they would be one-third lower than they are.

This is why raising the Medicare eligibility age from 65 to 67 and dumping seniors into the private health insurance market would increase—not reduce—overall health care costs. It is also why replacing guaranteed Medicare benefits with vouchers also would increase overall health care costs. It is why allowing people of all ages to buy into the equivalent of Medicare (a “public health insurance option”) would reduce premiums by 5 percent to 7 percent for individuals and employers. And it is why “Medicare for All” would be the most effective way to control health care cost growth.

"Medicare for All"

America should learn from the experience of other industrialized countries, which shows that the most cost-effective and equitable way to provide quality health care is through the social insurance model (like “Medicare for All”). Although health expenditures in the United States now account for about one-sixth of our economy, countries that have adopted a social insurance model have succeeded in keeping their health care costs below 10 percent or 12 percent of GDP. 

Medicare also serves as a critical tool for overcoming resistance to reforms designed to make the delivery of health care more cost-effective. Medicare payment reforms already have begun changing the incentives that encourage the delivery of expensive, wasteful and inefficient care, and Medicare will make even greater progress in this direction under the requirements of the Affordable Care Act. These reforms include paying for value rather than paying for volume and promoting the use of integrated medical practices.

Public Option

Allowing people of all ages to buy into a public health insurance option—the functional equivalent of Medicare—would also be a critical tool for overcoming resistance to reforms designed to make the delivery of health care more cost-effective. The public option program would partner with Medicare in driving these reforms, and competition with the public option would be a powerful impetus for adoption of key reforms throughout the health care system.

Bargaining With Employers Over Health Care

But America can’t afford to wait for enactment of the public option or Medicare for All before working to promote these cost-saving reforms. This is why unions have been working with employers through the collective bargaining process to adopt a wide range of cost containment techniques.

No Cost Shifting

The alternative to making the delivery of health care more cost-effective is to shift costs to consumers and make them pay more out of pocket through higher deductibles, higher copays and reduced coverage. Examples of this approach include proposals to increase cost-sharing in Medicare, turn Medicare in to a voucher program and tax employer-provided health benefits.

The premise underlying this approach is that health care cost growth is driven by “excess insurance,” which leads to excess consumer demand for health care, excess utilization of health care and excess health care expenditures. But the enormous waste and inefficiency of our health care system is not driven by consumers. The vast majority of health care spending is for people who genuinely need care, not people who demand care simply because their insurance covers it. Half of all health care spending in this country is for 5 percent of the population, and greater cost-sharing will have very little impact on this key cost driver.

One flaw in the reasoning behind this approach is the assumption that health care is like other markets. But it isn’t. Health care consumers do not behave as rational economic actors. They have to rely on providers to tell them what will make them best off, and they are not in the best position to distinguish between necessary and unnecessary care. Making them pay more out of pocket for their health care will not make our health care system more cost-effective; it will merely increase human suffering by making sick people do without necessary care or endure economic hardship to access the care they need.

Of course, blaming consumers and making them pay more out of pocket for their health care is less threatening to the profits of drug companies and insurance companies, which explains why this approach is so popular with drug companies, insurance companies and their advocates in Congress.

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