Controlling Healthcare Costs

| Tue Jun. 16, 2009 3:37 PM EDT

Can Barack Obama and congressional Democrats control healthcare costs?  Megan McArdle doubts it:

I'd say we have substantial empirical evidence that we are not going to control the health care cost inflation which is busting Medicare's budget, much less the new costs the administration is planning to add.  We have been trying to control health care costs since the 1970s made it clear that Medicare was going to get really, really expensive.  And any idea that you care to name, from comparative effectiveness research to healthcare IT to preventive medicine . . . these have all been on the table for more than thirty years, under one name or another.  They haven't happened.

The answer that those promising magical cost reductions need to ask is "Why haven't they happened?" and "What has changed to make them feasible now?"  But when I ask this question, I get angry demands that I put forward my plan for cost control, rather than merely critiquing everyone else's.  This seems rather like demanding that I put forward my design for a perpetual motion machine before I am allowed to point out problems in the US energy market.

This is an entirely reasonable position.  But I suspect the answer to cost containment lies less in technical arguments about healthcare policy than it does in arguments about taxation.  Right now, not only is America is rich enough to afford expensive healthcare, but the cost of that care is largely hidden.  For seniors, it comes via Medicare, and Medicare taxes haven't gone up much recently.  Its problems are still largely in the future.  The rest of us mostly get healthcare from our employers, and the only cost increases we see are higher copays — which are painful, but not quite painful enough to spur us to do much about them.

So what will spur us to get serious about cost containment?  My guess is: universal healthcare, paid for out of taxes.  A taxpayer funded system actually makes healthcare costs more visible than our current system, and a universal system is much bigger than Medicare alone.  A universal public system will, eventually, require painful tax increases, and that's the point at which the public will finally be willing to accept cost containment measures.

And if it doesn't?  Then it means, via revealed preferences, that Americans want expensive, unlimited healthcare even when the costs are fully and completely known to them.  That's not my preferred outcome — I think a lot of that money could be far better used on other things — but if that's what taxpayers turn out to want, then that's what taxpayers turn out to want.  That's how market democracies work.  My guess, though, is that it's not what they want.  They just don't know it yet because they're too far removed from the costs of the current system.  National healthcare will change that.

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