President Obama made a remarkable statement to John Boehner in the middle of their negotiations leading up to the fiscal cliff. "We don't have a spending problem," the president said. We have "a health care problem."
To put this in perspective, almost every economist familiar with the federal government finances views our national health care problem as a spending problem. In fact, it is THE spending problem. If the federal government were not buying health care, we wouldn't have a long term deficit.
The reason is not hard to understand. For the past four decades health care spending per person in this country has been growing in real terms at twice the rate of growth of our income. Over time, tax revenues at every level of government will tend to grow at the same rate as the economy grows. But if health care spending is growing at twice that rate, the public sector will be running ever larger deficits or raising taxes or cutting spending on every other program or all three.
So what is the president talking about and why is this distinction important? Well, if you view our health care problem as a spending problem, then the follow up questions are fairly obvious. Why are we overspending on health care? What would it take to get people to spend less and keep health care within our means?
The answers to those questions are also fairly straightforward.
We are overspending on health care because when we enter the medical marketplace most of the time we are spending someone else's money rather than our own. On the average, every time we spend a dollar on health care only 13 cents comes out of our own pockets. The remainder is paid by a third party insurance company, an employer or government. If we can buy medical care for 13 cents on the dollar, our incentive as consumers is to buy every test and procedure in sight as long as it's worth at least 13 cents to us.
But if society is spending a dollar and getting 13 cents of value in return, we're wasting a great deal of money.
On the provider side, incentives are also perverse. When third-party payers, rather than patients, are paying the bills providers perversely begin to treat the payers as their customers, rather than the patients. Instead of competing for patients based on price and quality — the way other professionals do the incentive in health care is to maximize against payment formulas doing whatever reaps the most revenue.