Arnold Kling  

Peter Orszag on Health Care Costs

On the "to be read" list... The Paperback Arrives...

He spoke at the Wilson School. The audio sounds bad on my computer, but he makes an important point. If health care costs are 16 percent of GDP, and we could reduce spending by 30 percent with no worse outcomes, that saves 5 percent of GDP. There is no economic policy change in any other area that has the potential to even come close to that.

Orszag argues, as others do, that because health spending is highly concentrated, catastrophic health insurance will not reduce spending very much. The point is that for very sick people, catastrophic coverage is like comprehensive coverage. This in turn suggests that there is not much to be gained by trying to tinker with insurance incentives.

I tend to disagree. First, I think that having a multi-year term for catastrophic policies, as sketched out in my book (soon to be out in paperback, by the way), would mean that a much larger percentage of health care spending would be subject to incentives than the typical analysis would suggest. Second, it is possible to restructure insurance to use co-payments rather than deductibles as the main mechanism for cost sharing. Third, if we were to phase out Medicare and replace it with actuarially fair catastrophic insurance, the remaining lifetime deductible (again, this is discussed in my book) would be so high that even high-spending consumers would still be responsible for much of their spending.

On balance, however, I am in the same camp as Orszag. Our camp believes that the United States could reduce health care spending substantially without hurting health care outcomes. However, the path to getting there involves lots of research into the efficacy of various procedures as well as changes in behavior (Orszag refers to physician norms as an example).

The other camp, which includes Jacob Hacker writing in today's Washington Post, says that all you have to do is socialize medicine and magically costs will come down. That is unlikely.

Comments and Sharing

COMMENTS (5 to date)
Thomas writes:

But who is "we"? And why should the "United States" reduce my spending on health care if it comes out of my own pocket?

jsalvati writes:

I think the idea is largely that your spending decisions are heavily shaped by how the government already interferes with the how the health care market. For example, medicare and rules about what insurance companies can and can't do.

Floccina writes:

How about term health insurance combined with an annuity. As the annuity rises so does the deductable, old age not being an insurable even, leading to deductibles in old age of maybe one hundred thousand dollars of more, with the deductable coming from the annuity. Thus the insurance companies could get some help from the insured as he would own the annuity.

Matt writes:

Get everyone over the age of 40 to make periodic visits to the blood sugar clinic and about half your savings is achieved.

Clinics to monitor key health parameters in targeted groups, with strong incentives on the clinics to perform and clients to participate.

Do this with mandates on the states and localities, in return, the federal government runs the emergency room system on the backs of middle class tax-payers. The mandate says that if the emergency room receives patients with self-inflicted health problems, then these patients should have been in clinics before emergency onset, and when these patients are out of emergency, they will be assigned a state clinic or institution for release.

Larry writes:

1) Decisions about investments by providers and about purchases by consumers are made at the margin. By focusing on insuring catastrophic events, (especially using copay instead of deductible) don't we change behavior at the margin on both sides? Doesn't that marginal behavior act like the rudder to turn the much bigger ship of the average?

2) Isn't it also key to rationalize subsidies, so that instead of the healthier, poorer, younger subsidizing the sicker, richer, older, that the richer simply subsidize the poorer?

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