The Government Can't Control Health Care Costs

President Obama and members of Congress claim they can realize billions of dollars in cost savings simply by gaining control over the medical industry. They cannot. Despite its longstanding ability to fix prices through legislation and market dominance, the government has not and cannot effectively control the rising cost of health care.

We know this because a public option along the lines of what is being proposed in Congress already exists. It is called Medicare and the federal government has failed to rein in its costs for nearly five decades. Even with below market reimbursement rates for doctors and hospitals, between 1997 and 2005 total Medicare spending per enrollee grew almost three percent faster than did spending on patients insured by the private sector.

And that was despite the artificially high prices for privately insured patients made necessary just to offset losses from government programs. Similarly rapid cost inflation has resulted in Medicare taxes being hiked several different times since the program's inception.

This will almost certainly continue with the introduction of another massive entitlement.

In fact, according to a recent nonpartisan Congressional Budget Office (CBO) report, the plans being discussed in Congress don't reflect the "fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount." On the contrary, the CBO report notes that "the creation of a new subsidy for health insurance...would by itself increase the federal responsibility for health care that raises federal spending on health care." Simply put, "it raises the amount of activity that is [already] growing at this unsustainable rate..."

So, why can't the government control its health care costs?

The reasons are varied and complex, but the basic problem is one of incentives. In large part, successful cost controls are a function of competition. Decentralized decision making in an open marketplace allocates resources to where they are in highest demand, pressuring providers to offer the best value for money to compete. But a government-run system functions in exactly the opposite way.

There decisions are made by a slow moving bureaucracy, one designed primarily to limit political liability, but unable to react in a timely fashion to changing market dynamics. As a result, measures adopted to arbitrarily lower the price of care, such as a reduction in Medicare reimbursement rates for doctors, tends to bring unexpected growth in costs, such as an increase in the amount of care prescribed.

Yet, thanks to the structure of the current system, no matter how much or how fast costs rise, patients themselves bear only a fraction of the financial burden.

It is telling that the average insured American and the average uninsured American spend almost the same amount of their own money on health care each year: $654 and $583 respectively. But where other people's money is concerned (whether through the government or private insurance), those numbers differ dramatically; spiking to $3,809 for those with coverage versus $1,103 for those without.

In essence, patients consume far more health care than they might otherwise because they are not forced to consider the full cost of what they purchase. This is the result of various government policies-including tax incentives encouraging comprehensive third-party involvement and direct government payments-that have removed the patient from the center of health care transactions. A true reform of the health care system would return power back to the patients, lessening our dependence on expensive third party payment systems that obscure the true value of medical services.

President Obama could achieve such reform by championing a bill to legalize the purchase of health insurance across state lines. This concept is already a component in several of the health care plans before Congress, and the president himself has expressed no formal opposition to it. Companies that currently dominate the insurance market in certain states would be forced to compete with those offering cheaper coverage from other parts of the country, pushing prices down everywhere.

Additionally, the expansion of Health Savings Accounts through income tax incentives would also increase patient power. Those accounts could be coupled with wider access to low-premium, high-deductible insurance plans, allowing consumers an opportunity to save and spend their own money for routine medical expenses like annual checkups or elective surgery; leaving costly insurance claims for genuine catastrophes.

Rather than waiting for a slow moving bureaucracy in Washington to artificially push down one price while five more go up, 300 million Americans would be putting downward pressure on health care providers everyday, demanding more for less like we have done to great effect with so many other services we receive.

The key to controlling costs is reform based on price discovery. When government gets between providers and consumers, as it has for decades, marginal costs are obscured and prices inevitably rise. Policy makers should stop trying to control the market and instead embrace reform that lessens the role of government and actually lowers the cost of care.