Putting a Value on Health

The way to arrest spiraling costs is to admit that we already do what we say we never will—ration health care—and then figure out how to do that better

For all its flaws, medical care in the United States has improved enormously over the past several decades. Deaths from heart disease have fallen by 40 percent since 1970. In the mid-1980s HIV was an automatic death sentence; it's not anymore. Since 1990, thanks to better detection and treatment, cancer mortality rates have been falling. (Breast-cancer mortality is down by 20 percent since 1990.) Altogether, medical advances have helped to raise U.S. life expectancy from an average of sixty-eight years in 1950 to seventy-seven years today.

Not only have American lives grown longer, but their quality has improved. The proportion of people over sixty-five with one or more chronic disabilities—such as the inability to walk, or to get dressed, without aid—declined from greater than 25 percent in 1982 to less than 20 percent in 1999. And the development of Viagra and vision-correction surgery, among many other drugs and procedures, has allowed many Americans to prolong pleasures historically associated with youth.

Of course, not all the recent improvements in American health and longevity can be directly attributed to our health-care system; some are as much the result of adopting healthier habits (exercise, better diet) or of dropping unhealthy ones (smoking, excessive alcohol consumption). And even though life expectancy has been rising in America, it remains lower than in many other advanced nations—probably because those nations have lower rates of obesity, broader access to health care, and lesser degrees of wealth inequality. Still, better medical care is the principal cause of improvements in American health and life-span over the past fifty years.

The problem, of course, is that since 1960 health-care spending has grown significantly faster than the economy, meaning that we're spending an ever larger portion of our incomes on medical care. In 1960 health care constituted 5.1 percent of the U.S. economy; in 1980 it constituted 8.8 percent; today it constitutes 13.3 percent. The Centers for Medicare and Medicaid Services (CMMS) projects that health-care spending will grow by an average of more than seven percent a year until 2012, even after adjusting for inflation. Meanwhile, private health-insurance premiums—which rose by 14 percent last year alone—are becoming unaffordable for ever more Americans.

It seems that cutting costs should be relatively easy. After all, health-care delivery in the United States is notoriously inefficient. Consumers lack sufficient information or expertise to make informed choices of physicians, hospitals, and treatments. Also, because most of their health care is paid for by insurance, they tend to overuse the system. Physicians, for their part, usually profit from the tests and procedures they order and perform—whether or not those tests and procedures are truly necessary. Shouldn't it be a simple matter to reduce waste and abuse?

Up to a point, yes. The frequency of a major surgical procedure such as coronary bypass surgery varies widely from physician to physician and region to region, with no discernible difference in health outcomes, on average, between patients who receive such treatments and those who don't. According to one study, 20 to 30 percent of health-care spending goes for tests, treatments, and visits that have no positive effect on either the quality or the length of our lives. If we could identify and prevent even half this spending, we would save some $25 billion to $35 billion each year on Medicare alone.

But this would do little to address the fundamental problem. That's because the largest driver of growth in health-care spending is not waste or price gouging or the slow aging of the population but, rather, the cost of technological innovation. Even when technological improvements make some treatments less expensive and more effective, overall spending often rises. Cataract surgery, for example, used to require up to a week in the hospital and offer only uncertain results. Now it's a quick, highly effective outpatient surgery. Per-procedure costs of this surgery have fallen, on average, by about one percent a year over the long term, after controlling for inflation. But because so many more people opt for cataract surgery today, real total spending on the procedure has risen by four percent a year over the same period. Given the overall growth in health-care spending currently projected by the CMMS, even an immediate drop, through waste reduction, of 20 percent in nationwide spending—which would be highly difficult to achieve—would be undone by new technology-fueled spending in just four years.

Most of the growth in health-care spending has produced real improvements in the scope of medical services and the quality of care. But the number of things we can do to cure disease, eliminate discomfort, and stave off aging is expanding faster than the ability of many Americans to pay for them. Indeed, it appears very likely that growth in medical spending will continue to outpace growth in personal income or GDP over the next few decades—even if we introduce temporary cost-saving measures.

That we spend enormous sums of money for even tiny improvements in health-care quality reflects a social ethos to which most Americans implicitly subscribe: anything that might improve health or extend life, however marginally, should be made available to everyone, at whatever cost. That may seem morally proper. But because of the way that health care is bought and financed in this country, we tend to be blind to the costs, both economic and moral, of taking this ethos too far. Because neither patients nor physicians pay for them directly, expensive tests, treatments, and procedures of only marginal value are routinely ordered, and expensive new technologies that barely improve the ability to detect or treat a disease are widely and rapidly adopted. Of course, not every health plan covers every test or treatment, but most health-insurance plans have been rapidly expanding what they cover. The result is a system in which patients with insurance can order up an expensive test that is one percent more effective than a test costing one third as much—indirectly pushing health-care premiums beyond the reach of many others.

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