Wednesday, July 01, 2009

Controlling costs

Steve Malanga takes issue with the notion that greater government intervention can combat rising costs in health care. He begins by noting that prior interventions, such as Medicare, have actually contributed to inflation in this sector:
One indication of just how much of a culprit government has been in the rapid expansion of U.S. health care costs is a 2005 National Bureau of Economic Research study by economists Laurence Kotlikoff and Christian Hagist which examined the growth in public sector-care spending since 1970 in 10 industrialized countries including the U.S. The study found that the annualized rate of growth in government spending on health care was not only tops in the U.S., at 6.23 percent, but that the rate of growth here was the fastest relative to increases in gross domestic product among the 10 countries studied. That's one reason why today the U.S. devotes about 16 percent of it domestic product to health care, compared to an average of less than 9 percent in other industrialized countries.

Much of this growth, by the way, is not a function of demographic trends like the aging of the population, the economists estimated, but of a constant expansion of benefits by government. That accounted for nearly 90 percent of the increase in spending over the years.

And much of that expansion was driven by vast disparities between government spending in the U.S. and elsewhere on the elderly. Since health care costs are highest for seniors, the economists compared the difference in spending on seniors with spending on a control group aged 50 to 64. In the U.S., where seniors are covered by universal insurance in the form of Medicare, we spend a whopping 8 to 12 times more for medical care on the elderly than on those aged 50 to 64. By contrast, Austria, Germany, Spain, and Sweden spend only twice as much on health care for the elderly as the younger group, and Japan, Norway, the United Kingdom, and Canada spend just 4 to 8 times more. The economists attribute the vast differences between America and other countries to the fact that, "America's elderly are politically very well organized, and each cohort of retirees has, since the 1950s, used its political power to extract ever greater transfers from contemporaneous workers."

Besides such programs Malanga also notes the role of regulation:
One stark example is in staffing levels at hospitals and clinics. Advocates have argued for higher staffing levels and used political muscle to achieve their ends. One characteristic example is a 1999 effort by nurses in California to win a new law mandating that hospitals employ one nurse for every five patients-down from an average of one per six patients. Although hospital administrators argued the legislation would cost more than $1 billion annually and not benefit patients, the legislature passed it and Gov. Gray Davis signed into in law. Several years later, when Gov. Arnold Schwarzenegger tried to roll back the requirement, citing the burden on hospitals, nursing unions went ballistic. They ran a $100,000 a week ad campaign attacking the Governator and interrupted his speeches with chants of "safe staffing saves lives" and "hands off our ratios."

This kind of political pressure amounts to more than just small change, as a 2007 McKinsey & Co. report found. McKinsey compared costs in American healthcare to those of 12 other industrialized countries to determine why we spend so much and one differential, McKinsey found, was in labor costs associated with nursing. Adjusting for population and the wealth of nations, the report found that the United States spent on average $50 billion more annually on nursing and clinical care than the other industrialized countries because of significantly higher staffing levels. Meanwhile, in California, studies have shown that the additional staffing requirement had no impact on patient care.
A government intervention that would lower costs would be unprecedented.

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