‘Cost’: Health Care’s Four-Letter Word

Forbes.com, July 24, 2009

So why not foster competition?

World War II veteran Jack Tagg is losing vision in his right eye. He suffers from macular degeneration, a progressive illness that causes blindness. A drug could slow the deterioration, but the British government refused to pay for it, arguing he wasn’t blind enough to justify the expense since his left eye has been spared so far. Tagg’s story is one of thousands of examples of rationing we hear every day from government-run health care systems.

Even with ruthless cost controls like these, annual growth in the British National Health Service budget rose as high as 7% over inflation in recent years. Yet President Obama’s health care plan is based on the idea that government insurance is the best way to control cost inflation. It’s time for Americans to wonder: Where did he get that idea?

To be fair, no one in the Obama administration is arguing for a British-style health care delivery system. But the White House definitely believes that introducing British-style public insurance into the American market will cut costs in ways that private competition cannot; the administration also embraces a British-style approach to determining funding of drugs and devices–with a government committee. And reducing cost is the central sales pitch: The four-letter word cost was mentioned 36 times at Wednesday’s press conference and 71 times in the president’s last health reform town hall. It’s as if no one in the White House has bothered to check if such measures have slowed health inflation elsewhere. Often, the opposite is the case.

After recent scoring, the Congressional Budget Office Director Douglas Elmendorf concludes that: “the curve is being raised” with proposed reforms. The White House responded that Congress should be bolder, allowing more aggressive price controls for Medicare. But the problem is more fundamental: assuming that government control results in cost control.

In the United States, millions of elderly Americans are covered by a government program, Medicare. In 2003, economist Michael O’Grady, then with the Joint Economic Committee, studied two decades worth of health data and concluded that Medicare’s annual growth closely paralleled that of programs for federal employees and California state employees (though less than that of other private insurances).

Others–like Marilyn Moon and Jacob Hacker–have reached different conclusions. But their conclusions are not based on true comparisons, as the American Enterprise Institute’s Joseph Antos has argued, since over its lifespan, Medicare grew less and less generous in what it covered relative to private insurance, suggesting that while private insurance costs rose, so has its value. Most recently, the Pacific Research Institute’s Jeffrey Anderson, accounting for out of pocket spending, concludes that Medicare’s per-patient costs have soared compared to private insurance.

How anyone can believe that the government can possibly run healthcare better than private companies is beyond me. On need only look at the post office, medicare, social security, the DOT, etc. to s….

Critics insist that the privately dominated American health care system has seen greater cost increases than public health care systems abroad. And, historically, that’s true.

But health care has changed, and costs are rising worldwide without regard to each nation’s health insurance model. In 2007, the Kaiser Family Foundation used OECD data to show that the growth of American health care spending slowed considerably in recent years. Between 1990 and 2003, America’s per capita health care inflation was 3.6% (less than in the 1980s). America’s “spiraling health costs” were in fact comparable to growth in France and Iceland, and even lower than many countries, including Australia, Belgium and Britain.

OECD data confirms that the trend continues through this decade, with American health spending increases being about the average for OECD countries (see below). And public systems continue to spill red ink; even with pharmaceutical price controls and rationing, limited access to technology, and minimal capital investments, Ontario’s health budget is projected to grow by 16.5% over the next three years. Quebec’s annual health inflation rate is almost 6%. In Britain, the NHS reports a 60-year average increase of 3% over inflation. Ireland’s single-payer system has experienced constant price turbulence. Despite 4.7% deflation this May, Irish health costs still grew at an annualized rate of 3.5%.

Real Annual Growth Rate of Health Expenditure


OECD Average



















Average for 2000- 2006



Source: OECD

Reason Foundation analyst and Forbes columnist Shikha Dalmia notes that government insurers have “a mixed record in controlling health care spending increases, even after resorting to rationing.” That may be because these public or quasi-public systems simply cannot penny-pinch any further. In the age of Google, people can go online for health information and thus demand more.

In countries like Britain, patients wait for practically any care, or are simply denied certain drugs as Mr. Tagg found. In his case, the RAF veteran launched a PR campaign at the door of 10 Downing Street, demanding the drugs he’d been denied. The government quickly “revisited” its decision. And then, the government agency responsible for approving drugs for funding began to review its mandate–at the exact moment U.S. Democrats are selling that agency as a model for America.

The White House is right to worry about the fiscal implications of health care inflation. But a poorly defined experiment in public insurance is not an evidence-based solution–since the evidence shows that even rationed government insurance models won’t suppress rising costs effectively.

There is an alternative. Reform health care the way we’ve reformed the other five-sixths of the economy: Move decisions closer to individuals, foster competition and encourage innovation. By doing this, future administrations will not need to face the likes of Jack Tagg.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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