A Humane Reduction In Healthcare Costs

Thursday, February 23, 2017
Image credit: 
Nata-Lia, Shutterstock

The new Congress has started work on a healthcare plan to replace the misnamed Affordable Care Act. Our healthcare system is expensive—too costly for many in the middle class to afford adequate protection. And costs will increase enormously in the future as the number of retirees grows. Congress and past administrations have promised benefits, mainly for health and pensions, estimated to cost $110 trillion. Unless the new plan reduces cost humanely and substantially, healthcare problems will remain.

The largest part of that huge sum will pay for healthcare for an aging population. Since government has not accumulated many reserves, future workers in a declining labor force will have to pay heavy additional taxes to honor the commitments. Because that solution is neither individually or socially desirable, it won’t happen. That’s reason enough to consider better, less costly alternatives. 

Congress must find a way to reduce future costs in a humane way. My proposal does that. It greatly reduces future costs without forcing painful reductions on anyone. All proposed reductions in benefits are voluntary. And the savings are large—probably many trillions of dollars.

The Proposal

Careful estimates put the cost of care given to senior citizens in the last few months of life at 60 percent of health costs paid by government. Doctors and hospitals offer these costly treatments at little or often no cost to the patients. My proposal replaces free treatments by requiring a modest payment. Patients or their families would be asked to choose whether they prefer to pay a small fee for treatment or accept free hospice or palliative care. Those who choose the latter give up often extremely painful treatment, but receive home or hospital care, pain relief, and nursing services. All choices remain voluntary. There is no coercion.

We have no data from which to estimate how many would choose to forego end-of-life care. However, we know that in Europe, governments spend as much as five percent of GDP less than we do on such care. A main reason for their lower costs is that most European governments do not offer major medical services to citizens over 65 or 70.

Based on these data, my guess is that we could reduce the estimated $110 trillion liability by as much as 30 percent, or about $30 trillion. Most of the saving would be used to reduce future deficits or the estimated $110 trillion of unfunded liabilities.

Some of the savings could be used to subsidize the cost of insurance for low-income earners and some could be spent to improve infant and child care. The largest part should reduce future spending. Let me emphasize the important point: Putting healthcare on a sound, responsible long-term footing requires more than just changing the details of the Affordable Care Act. Any reforms should include ways to make current and future healthcare affordable for everyone at a cost that taxpayers willingly pay while sustaining a growing economy with low inflation.

The term “affordability”—or providing current benefits at lower costs—is often misleadingly used as an argument for a single-payer system—that is, complete government control of health costs and benefits. European systems are used as an example, though most of these systems permit some, limited privately funded insurance. Any economist worth his doctorate can produce the alleged proof that single-payer systems are less costly.

The proof is completely static. It does not apply to the dynamic system that finds new ways of treating patients, new medications, and new methods. We want to strengthen the dynamism in our system, not lock it into a static system. Competition drives change. Our federal system gives us an opportunity to increase competition by returning responsibility for health services to the 50 states. Medicaid is now administered mainly by the states. Medicare and other programs should follow.

Most Federal rules should be relaxed to encourage experimentation by the states. As differences in outcome occur, states can copy successful models and avoid ideas that don’t work well. That is how competitive dynamics would benefit the public.

Recent policy has gone in the opposite direction. In a great many cities, hospitals have merged to form a single dominant supplier of hospital services. These trends reduce competition, as well as the pressure to innovate and improve services. Prices for services increase. Our government rails against the cost increases that its own policy of reducing competition promotes.

Pricing drugs is another example. Government policies promote drug monopolies. It is foolish to grant monopolies to encourage the development of new and better treatments and then complain about the prices charged. And it is no less foolish to compare the cost of the drugs here to their cost in other countries. For the monopoly supplier, additional sales abroad at lower prices than at home is additional revenue and profit. Since most countries do not develop medications, the monopoly supplier does not face the competition he would face at home. And the company can offer the drug at a lower price to discourage a local producer from entering the market. To make the domestic monopoly work, the producer must prevent inter-country trade in drugs.

Public hostility to the Affordable Care Act forces attention to possible reforms. But reforms would be necessary in any case because the cost of healthcare services exceeds revenues. Public programs will face a funding crisis in 10 to 12 years. Major reform will take time to spread through our large and complex medical system, so reform must begin long before the funding crisis occurs. Burdensome regulation, excessive paperwork, and efforts to control costs by reducing fees have disinclined many doctors from serving Medicare- and Medicaid-funded patients. This reduces medical services mainly for the middle- and lower-income population. That’s the opposite of the goal of much public policy.

My proposal makes the medical system more efficient by reducing very expensive end-of-life care that treats mainly aged patients, often at great expense, many of whom do not survive for long. Hospitals and their staffs provide most of these very expensive treatments at no cost to the patient, but at considerable cost to taxpayers. Relinquishing the free treatment is voluntary. To encourage patients to consider palliative care at home or hospice care in a nursing home, I propose putting a modest, voluntary co-pay charge on expensive end-of-life care. I believe the savings over time would be large, so future health costs would decline dramatically.