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How to Fix Health Care

January 18, 2010
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There are two things you need to know about why health care costs are higher in this country than anywhere else in the world.  Yglesias explains one of them:

The biggest chunk of excess spending we’re involved with is spending on “outpatient care.” We pay doctors more than other people do, our doctors order more tests than other doctors do, our tests are more expensive than other people’s tests, and we have many more relatively expensive specialists and relatively few relatively cheap GPs.

Veronique de Rugy explains the other one:

Economists have shown that if a good’s price is zero or decreasing, then the demand for this good will likely increase. In 2008, consumers were only directly responsible for 11.9 percent of total national healthcare expenditures, down from 43 percent in 1965, according to new data from the U.S. Department of Health and Human Services. This means that someone other than consumers pays roughly 88 percent of all healthcare costs, giving consumers little incentive to mind costs and much incentive to over-consume.

The graph below shows out-of-pocket payments by consumers and spending by Medicaid, Medicare, and private insurers on healthcare from 1965 to 2008. Since the passage of Medicare in 1965, consumers’ out-of pocket spending on healthcare has decreased steadily as a percentage of overall U.S. healthcare spending. While real and nominal out-of-pocket healthcare payments increased over the period, growth in these costs was dwarfed by a much more rapid growth in overall spending. On average, consumers’ out-of pocket healthcare costs increased 6.7 percent each year, while national healthcare expenditures increased by an average 9.8 percent each year.

So, we use more services, and patients don’t pay for them out of their own pockets.  Liberals like the President enjoy chalking this up to doctors’ greed, but the current health care proposal will do slightly less than nothing to fix these problems.  The best way to reduce waste in our system would be tort reform, which would reduce defensive medicine practices as well as the price of malpractice insurance for doctors.  The other involves changing the way people pay for their health insurance—the bottom line is that patients need to pay more of their own money for what they receive.  Therefore, the tax code should be structured so that the minimum amount of third-party payers is involved (that is, equating the benefits for buying individual insurance to that of having employer-based insurance), and incentives should be established for buying high-deductible insurance plans.  This is how you fix health care.

Alas, none of this is on the table.

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