What Are "Health Care Costs"?

A blog about business and economics.
Aug. 2 2012 2:02 PM

What Are "Health Care Costs"?

I was glancing at a new report on controlling health care costs and it occurred to me—and not for the first time—that it would be helpful if people would try to be clearer about what they mean by the phrase "health care costs."

Let's say right now we have a Baseline Projection of what "health care costs" will be in 2042. We want to do better than baseline at controlling them. What does that mean? Well it could mean that relative to baseline, aggregate spending on health care services will be lower, i.e. less spending. To that end, anything that reduces health care consumption would work. We could hold a lottery and declare five percent of the population ineligible for treatment. Costs fall like magic. A different idea is that health care services should be cheaper, i.e. those who people do consume health care services will pay lower prices. Reducing prices would probably reduce overall spending, but it might not be nearly proportionate since if care were cheaper people might consume much more of it.

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Another idea is that health care spending should be more cost-effective, i.e. that we should stop dedicating resources to things that don't do much good or are actually harmful. This seems like a great objective to pursue, but barring some separate initiative it would almost certainly make aggregate spending go up. Right now, Americans spend tons of money on health care services even though the services aren't very effective. If health care service providers got way better at delivering positive health outcomes, we'd very likely want to buy a lot more of them.

Yet another idea is that we want to reduce the social cost of illness. This is what I think people have in mind when they say that various kinds of wellness programs will reduce health care costs. It's by no means clear that healthier people will ultimately consume fewer health care services (living a long healthy life and then needing extensive long-term care in your nineties can be very expensive) but illness itself is costly. Yet the cost of illness and the cost of treating illness are not the same thing. Part of what makes illness so bad is that the treatments are not only expensive, but often extremely unpleasant and not all that effective.

Last there's ambiguity around what we mean by the "health care" side of the "health care costs." Not only because the line between "health care" and lifestyle/prevention/wellness issues can get fuzzy, but because the concept of health care is a moving target. People say that "health care costs" are much higher than they were 40 years ago, but the services available in 2012 are not the same as the services available in 1972. Perhaps as the state-of-the-art advances we're witnessing diminishing marginal cost:benefit returns. That's different from something like beach front property in the Hamptons, where the exact same land is much more expensive than it used to be.

Since this is already long, I'll make it even longer with a brief summing up. Here are some separate questions:

— 1. How can we contain aggregate spending on health care services?
— 2. How can we contain unit prices of health care services?
— 3. How can we increasing the cost-effectiveness of our aggregate health care spending?
— 4. How can we make people healthier?
— 5. Why don't we see more "same kind of thing, but cheaper" innovations in health care the way we do (Wal-Mart, Ikea) in retail?

I think this is more complicated than people generally acknowledge.

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