Framing our problem in terms of "costs" is a misrepresentation of the real challenge -- how to slow the increase in spending.
No fiscal policy event is complete without the plaintive cry that health care costs are out of control. The phrase has become a form of rhetorical boilerplate that is often used to imply that policy makers are helpless in the face of market forces, and that the only way to reduce "costs" is either cutting benefits or rationing.
Let's take a look at what the phrase "health care costs" really means. It turns out, everybody uses the term to mean something different. Politicians talk about costs in reference to federal and state spending on health care. When hospital administrators and physicians talk about health care costs, they are usually referring to their costs of production, the money they spend on the resources needed to care for patients. Business leaders use the term health care costs when what they really mean is the price of insurance, or the amount they spend on their employees' health care insurance plans. Meanwhile, everybody bemoans out of pocket costs, the amount patients must fork over at the doctor's office and pharmacy counter over and above whatever portion of the bill their insurance covers.
And cost is just one more of the terms that means something different depending upon who happens to be using it. This creates confusion even among experts, to say nothing of the public, and it is getting in the way of a frank discussion about how the nation can address the central challenge: that we are spending more and more on health care without seeing equivalent improvements in health.
In the interests of clear communication, we propose three distinct definitions for three words: cost, price, and spending. We'll start with cost. The simplest and most sensible use of "health care costs" is in reference to the cost of production of health care services. In order to give a patient a CT scan, a hospital has to have purchased a scanner. It must also pay a technologist to perform the scan and a radiologist to read it -- to say nothing of paying for the hospital building itself, chairs in the waiting room, a receptionist at the information desk, and the parking lot outside, all of which are components of the cost of a scan.
Price is how much the hospital pays for the scanner, or how much an insurer pays the hospital for the patient to get the scan. In the U.S., prices for everything from a CT scan to an office visit to a stay in the ICU are higher than anywhere else in the world. Even within the U.S. and within the same community, different hospitals can charge wildly different prices for the same service.
To make matters worse, prices for medical goods and services have little to do with their true value in terms of improving health. To take just one of any number of examples, elective angioplasty (surgery to reopen narrowed blood vessels in the heart) doesn't prevent heart attacks or reduce angina (chest pain) any better than drug treatment alone, and you already need to be on drug treatment in order to get the surgery. Yet the price of angioplasty is tens of thousands of dollars higher than drug therapy. If we were paying for value in healthcare, two equally good options would fetch about the same price.
The last term is spending, probably the most important of the three. The easiest way to define it is the total number of dollars paid for a particular group of people over a set period of time. The most common example is total national health care spending over a year, which last year amounted to $2.7 trillion. You can also talk about spending on a particular type of service, say all CT scans delivered over the course of a year. In that case, the amount we spend depends upon both the price we pay for a scan, and the number of scans we get, or price times quantity.