Medicare and the health care cost explosion

I've been quite critical of the role that insurance has played in driving health care costs. By introducing a third party that foots the bill instead of the consumer insurance has removed incentives for comparison shopping and cost control. When speaking about insurance, however, I don't simply mean private health care insurance, which the government promotes via tax policy that encourages employers to offer this benefit to their workers.

The other key element in the insurance calculation is Medicare and Medicaid, programs established in 1965 to provide coverage for the elderly and the poor. These programs now account for a huge portion of health care spending -- around 46 percent as of early 2005. This amount has been on a steady increase, from 38 percent in 1970 to 43 percent in 1980.

Via the Economix blog here is how health care costs in the U.S. have tracked against other countries since from about the time Medicare/aid were established as a percentage of GDP:

This graph, meanwhile, examines health care spending in terms of purchasing power parity:

In the first graph the first notable jumps tend to take place in the early 1970s while in the second graph the inflection point is about 10 years later. It should be stressed that correlation does not mean causation and that these graphs may hold no explanatory power. That said, it is interesting to note that health care costs have risen in all of the countries listed, something that I would attribute to increasing technology in health care as well as demographic trends.

While it can't be definitively stated that the U.S. insurance model is responsible for our uniquely surging costs, it strikes me as a likely culprit.

Any real health care reform will not only have to eliminate the link between employment and insurance -- which should only be for emergency and catastrophic care -- but also address Medicare/aid to turn them into programs that perhaps more resemble health savings accounts while also providing for high-cost, catastrophic care.

Update: Related thoughts here.