Friday, July 24, 2009

How High Can Health Care Costs Go?

I'm going to refer to a column by Jay Hancock from the Baltimore Sun again. Here is how he concluded his July 24th column:

"Families already understand that medical costs have taken over so much of the household budget that in some cases they threaten to crowd out necessities, like food.

Why should the federal budget be any different? Obama is right about one thing: Health costs can't and won't keep growing at this rate. (They've doubled again in the past decade.) If the government can't stop them, there are forces out there that eventually will: the laws of economics and Herb Stein."

The reference to Herb Stein at the very end ties back to the start of his column on July 24. Mr. Stein was a White House economic adviser in the 1970's who said "that if something cannot go on forever, it will stop." While amusing, it is less important to ponder interesting quotes from three decades ago than to consider basic economic principles.

The key question is how much more can the amount that we spend on health care increase? The amount that we spend on health care has increased, seemingly without any barriers, over the past several decades. We see all sorts of projections about spending over 30% of the nation's income on health care. Yet, sooner or later, and probably sooner, we'll find that we don't have enough money for other things--housing, food, vacation, lessons for kids, etc. At some point, individual patients will start asking physicians and nurse practitioners "can't you do this a little less expensively?" (even with more sophisticated care available if we could only pay for it). Even those who are insured may be asking about the price before just accepting care. Individuals' own budgets will force them to become more informed (and more price sensitive) consumers of health care.

This alone will control costs to a degree. It may take longer than more direct policies. This type of break on spending doesn't do anything for the uninsured. It simply means the need to spend on other things will eventually catch up with out health care decisions. Why hasn't it caught up yet? Many people have largely been shielded from these pressures by insurance over time. However, we are approaching a point at which more people are affected and will work on their own to control what they spend.

We ever had a doctoral student who worked on a similar macroeconomic topic for her dissertation and suggested that in the long run health care may take up less of the country's budget than is being predicted now as our country makes fundamental decisions about how we do and do not want to spend our money.

1 comment:

  1. I believe average annual cost per person of health care could go to 50,000 dollars. Currently if health care cost go up some revenue is lost as people who cannot afford the new price drop out. However the number of people who just pay the increased price is so much larger than the number that dropout that total revenue to the health insurance industry goes up. Eventually if you set the price high enough any further increase will not add to total revenue because the loss from people dropping out will equal the gain from the increased price. That price is $50,000 per year. I am assuming an income level of $70,000 and allowing the first $20,000 would go to living expenses. Using U.S. census statistics at this point 34% of people in the U.S would be able to pay this amount. At this point the health care industry would see total revenue of about 1.7 trillion dollars. Let’s hope health care reform prevents this from happening. My point is if you let maximum profit drive the price of health care only the top 34% will be able to afford it.