Ending the Cost Insanity: Some First Steps

On May 11, the White House hosted a meeting of major players in the health industry – hospitals, doctors, insurers, drug manufacturers, and others – who collectively promised to shave $2 trillion off health care spending in the next decade. This announcement elicited huzzahs from some bloggers and columnists. Others were skeptical. The skeptics were right. To see why, let’s play a game.

Pretend you are a mad health care planner – insane, that is, not angry. You are setting out to design a health care financing system as immune as possible to cost discipline. Some of you are, no doubt, way ahead of me already. Your response is, “Why bother? The United States has built it.” But let’s review the blueprint.

The first design feature would be fragmentation. You would make sure that no payer had any significant leverage over spending. And if, by chance one payer was big enough to have such leverage, you would debar that payer from using it, for example, through language such as “Nothing in this title shall be constituted to authorize any Federal Officer or employee to exercise any supervision or control over the practice of medicine.” This wording is verbatim from the 1965 legislation establishing Medicare.

Next, you would insulate those who use medical care from the cost of all or most of the care they use. You might even be subtly perverse, shielding patients from costs for low-benefit and discretionary care, but imposing cost sharing on the chronically ill for maintenance drugs, thereby encouraging noncompliance that results in higher costs later on.

But the overriding fact is that despite the crescendo of complaints about rising out-of-pocket health care spending, Americans who are sick pay out of pocket for only about 12 percent of the cost of their health care, about half what that fraction was two decades ago, when it was half of what it had been two decades before that. Out-of-pocket payments are a smaller share of health care spending in the U. S. than ever before – lower than in many other developed nations, including Canada.

On the other hand, the per capita cost of care is so much higher in the U. S. than elsewhere that even a modest share of it claims a sizeable chunk of income. Even so, a thick layer of insulation separates most Americans from the full cost of their care.

A third feature of this cost-insensitive system would come on the supply side. We would pay most providers for whatever they do, whether or not it is worthwhile. We wouldn’t pay more than a minority of providers on salary. We most assuredly wouldn’t capitate patients. To the extent that we violated these principles and paid providers in ways that encouraged them to economize, we would make sure that patients saw little of the savings. That would undercut the willingness of patients to tolerate limits of any kind, which, would deter providers from economizing out of fear they would lose patients.

The final component would be a resolute refusal to spend more than a pittance on research to find out what really works. We would funnel what little we spent through politically weak organizations that would fall prey to influential groups offended by research showing that some device or procedure was not worth what it cost. And, of course, we would compare innovations not with existing methods of treatment but with doing nothing, so that costly innovations that worked no better than old procedures would be approved.

These problems are widely known, but describing them in this manner underscores a key fact: everyone talks about controlling health care spending, but no one does—or, under current arrangements, can do – anything about it. Every aspect of the current U.S. health care system conspires to prevent such control.

Yet, expenditures on health care, public and private, are growing at unsustainable rates. The Congressional Budget Office has repeatedly announced long-term budget projections showing that nasty choices await us if growth of health care spending continues at, or near, historical rates.

We could raise total taxes by half, or more. If done through the income tax alone, tax rates would have to double.

We could try cutting spending other than on health care. But that wouldn’t work because there isn’t enough spending to cut, other than health care, interest on the debt, and such essentials as national defense.

Letting deficits happen isn’t an acceptable option either. That course would result in explosive growth of government borrowing and produce a big tent calamity that would make the past financial crises in South Asia, Mexico, and Argentina seem like Lilliputian side shows.

The official projections indicate that 100 percent of the expected gap between spending and revenues can be traced to projected growth of Medicare and Medicaid. So, what should we do? I am going to list three broad recipes, two of which are, I believe, more likely to do harm than to help.

The first recipe embeds the problem of increasing health care spending in a larger challenge of an entitlement crisis. The leading edge of the baby boom has just become eligible for Social Security pensions. They will shortly qualify for Medicare, then for Medicaid nursing home benefits. Tens of millions more will follow.

The term “entitlement crisis” has been used so often and so authoritatively that anyone who denies it risks being labeled as a nut. But it is way off the mark. For one thing, Social Security doesn’t really belong in the list. The Social Security gap is politically vexing it but doesn’t come close to being a big fiscal problem. Over the next 75 years projected increased pension spending averages roughly one percent of gross domestic product.

In addition, most of the projected increase in public health care spending comes from the advance of medical technology, not from the baby boom. And most of those advances are a cause for celebration, not hand wringing. The problem isn’t rising spending but wasteful spending. And that is a problem not just of Medicare or Medicaid but of the U.S. health care system as a whole.

The second misguided approach to reining in the growth of health care spending is what I call the magic bullet approach. Adherents typically identify a single important shortcoming of the current way we pay for and organize the delivery of health care. Then, they tell us, fix this problem, and we will have controlled spending. The way to stop or sharply reduce the growth of health care spending is, variously, malpractice reform, increased use of preventive care, streamlined administration, not overtreating the terminally ill, heightened consumer cost consciousness – and the list goes on.

These proposed reforms are mostly good ideas. Many promise to improve the quality of care. Some even save money. There is just one problem – most won’t save much money and some won’t save any. To cut the growth of publicly financed health care spending significantly, sensibly, and in ways that do not subvert commitments to the elderly, disabled, and poor will require systemic change in the way we pay for and deliver health care

We have been talking health system reform for decades without much progress. The difference now is that the compassionate goal of fair access for all has been married to the hard arithmetic of fiscal balance. Changing the U.S. health care system is the work of a generation, not of a single presidency. But I believe that some steps are now on the table that can move the nation forward.

The first is a lot more research on which interventions affect patient outcomes at what costs. The research will be hard and costly, but the principle challenge is political – how to insulate the entities doing this work from the political pressures that have doomed past efforts. It may not save money immediately, but it is a precondition for rational savings later.

The second step is consolidating the number of payers in a geographical area, so they have – or a single payer has – real clout. The Massachusetts Connector, embryonic though it is, could become a revolutionary innovation if businesses and individuals are encouraged to buy insurance through it and if it becomes the conduit for subsidies to make insurance affordable. Lo and behold, a financial entity capable of effecting real systemic change could result.

The third step would be the enactment of similar reforms in other states. Assume that Massachusetts is able to solve the many problems that it faces in implementing its plan. Assume that the federal government enacts legislation to encourage other state-based reforms. Assume, finally, that a few other states implement them. Were these things to happen, I believe that the debate in Washington would cease to be whether to enact systemic reform, and would then focus on how to do it. And I ask those single-payer advocates who see state-based reform as a sellout to recall that the Canadian system began as, and remains, a provincial system.

Are these steps sufficient? I doubt it. Extending insurance coverage to all Americans, a shared goal of a majority of Americans, means eliminating even more people from any effective role in policing the cost of most health care spending. Thus, cost control can come only through collective, probably government, action, motivated by a budget constraint.

The budget constraint can come from linking payment to an earmarked tax, as with Social Security. Or it could come from competition with other government spending through an annual budget process. But until the entity that pays for health care is constrained by limits on what is spent, I believe that talk of controlling health care spending will remain just that – talk, and little else. When such budget limits become a reality, research on what works and at what cost will provide political cover for spending limits.

Henry J. Aaron is the Bruce and Virginia MacLaury Senior Fellow at The Brookings Institution. His areas of research include the reform of health care financing and public health care systems such as Medicare and Medicaid. This article was adapted from Aaron’s remarks for the twentieth anniversary of Harvard Medical School’s Department of Health Care Policy. HAARON@​brookings.​edu; 202–797-6128.

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  1. Thanks for your insightful article. I have arrived at the same conclusion. For me single payer isn’t so much about the savings that arise from getting rid of the insurance companies as having linkage between the entity that collects the money and the entity that has the responsibility/authority to control the costs. Insurance companies can only raise premiums (by 50% over the last three years) and deny claims (which they can fairly be accused of doing in the name of profits). If the single payer came to us three years in a row with double digit increases in our health tax, we would stay “No way! You gotta control costs.” Then, and only then, will difficult decisions be made.

    This isn’t about health care. This is about the broken political process in which The Industry manipulates the public process in order to craft public policy to sustain their profits. We aren’t going to accomplish anything substantive until we get campaign finance reform. Instead we will get “reform” that is more of the same.

  2. Isaac says:

    What’s the use but here goes .… people in the medical business know how to trim spending.
    Wee need a surgical approach, not some broad “cookie-cutter” approach.
    1. Start with the most egregious wasters … publicly funded prescription drug seekers and drug traffickers.

    2. Reduce abuse of the system such as colds and non emergency conditions in the ER.

    3. No public health funds for illegals … unless emergency

    4. discourage poly-pharmacy by the doctors .. some patients are on 20 different meds

    5. require a co-pay for care, if only 5 dollars.

    6. Tort reform .… billions are spent each year on useless tests just to CYA… “cover our ass”.

    7. decrease use of antibiotics, another CYA, for viral conditions.

    8. Increase REAL health education in schools. Make sure that while we are teaching kids to put condoms on bananas, we also teach them the difference between viruses and bacteria, basic and even advanced first aid, and some common-sense anatomy and physiology, wound cleaning, hygiene, etc.

  3. M says:

    I appreciated this article and agree with Isaac above on #6. I witness, nearly every day, the covert and overt threats from patients and families demanding various forms of intervention that are not likely to work to meet the patient and family’s goals. I spend hours with these patients and families educating about the prognosis of terminal conditions to try to help them understand what is controllable with medical intervention and what is not. Bottom line is that when it comes to facing death, many, many people are not ready to do it and would rather hide behind the demand for the 4th opinion or the continuation of multiple intensive treatment modalities that every physician taking care of the patient will readily admit cannot change the patient’s outcome. This is a substantial element of the spending problem– more than 25% of medicare dollars are spent in the last year of life. The number escalates exponentially as death approaches, as the system throws “all it’s got” at the patient. At least in my environment, it is not about the greed of the physician wanting to continue to victimize the patient who does not want the intervention– the MUCH more common scenario is that the physicians feel held hostage by the threat of lawsuit if they put a foot down to say that putting a 98 year old, non-verbal, contracted dementia patient, or a 52 year old cachectic stage 4 non-small cell lung cancer patient who has failed multiple chemo regimens prior through repeated hospitalizations and ICU care/life support/code blue is actually poor quality medical care that is not the standard of care and will not be provided. The pendulum of autonomy has got to swing back a bit from the extreme place where it is now, lest the principles of justice and non-malfesience continue to be neglected. It must be a societal agreement, though, that we as a society cannot and should not demand low value interventions just to maintain the entitlement of American immortality, to “get all we can” out of the system, or to try to put off the tough, sad and trajic realities for one more day, week, month. There is a lot of data out there already about efficacy of some interventions– code blue data in the frail elder, the stage 4 cancer patient, and the multiply co-morbid hospitalized patient as a start. Physicians need to be able to make decisions about appropriate or innappropriate interventions based on the evidence, with support from the system at large that if they are following the standard of care they will not pay the astronomical personal and financial price of being named in a lawsuit if that decision makes the patient/ family angry. Until the system adjusts in this way, physicians will not take the risk of actually practicing evidence based medicine, behavior is not likely to change, and the treatment demands of patients and families who do not have medical licenses will continue to drive the system. It’s not the whole answer, but in my world as a physician it is what we see happening. It’s not a philosophical argument about an abstract concept, it is a physical reality in any ICU that any policy maker could walk into today to see for themselves.

  4. Geri Rodin says:

    We “had” a great friend, late 80’s who was so terribly ill there was just nothing that could be done. He was finally on life support. He had suffered great pain for over 10 years. When the doctors asked he and his wife if they should keep him on life support, he turned he head to his wife and said he would prefer to die. She agreed with HIS decision, and after 2–3 minutes of removing the life support, he passed away. He now is out of his ever lasting pain at this choice.
    My husband and I have living wills that issue these same signed statements. This is a very tough decision for many to make.

    This article was extremely pointed in making clear many of the problems of the doctors today in these cases.

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