The United States will produce more than $10 trillion worth of goods and services this year — truly an astonishing amount. But equally astonishing is that nearly one out of every six of these dollars will go to health care. By comparison, in 1960, Americans spent only $1 out of every $20 on health care.
This ever-increasing share of national output going to health care is the source of much hand-wringing by policymakers. They worry that we cannot afford to spend so much, and that our national output will suffer as a result. Policymakers have it backward.
We spend so much more on health care in part because we are wealthier. As incomes rise, there is only so much value we can get from adding more square footage to our houses, putting more horsepower in our cars or buying finer wines.
What really makes a rich society happy is having more time to enjoy all these goods and services. So we spend more on health care so that we can live longer and have healthier lives to enjoy the fruits of our labor. Put another way, if you had the choice between buying 1960s medicine at 1960s prices or today's medicine at today's prices, which would you prefer?
This doesn't mean we couldn't spend our money better. Medicine is rife with stories about how money is being wasted. Some argue that we just need to rein in executive salaries, administrative costs and malpractice lawsuits to solve the problem. But while these costs are real, they have always been part of the system and aren't what is driving up health-care costs annually.
The primary driver of rising health-care costs has been medical technologies. We continue to develop expensive treatments and, equally important, apply them to broader swaths of the population.
For example, the development of magnetic resonance imaging (MRI) has revolutionized our ability to diagnose brain tumors and serious musculoskeletal problems. But when patients with insurance clamor for an MRI every time they sprain their knee, that raises costs for all of us. It's also what makes insurance premiums unaffordable for many Americans. The result is a two-tiered system.
If you belong to a union or work for a large employer, then you have access to the best medicine in the world. Meanwhile, the uninsured and the indigent must rely on a public health system straining to meet basic health-care needs. In other words, the system is both in-equitable and inefficient.
So going forward, the goal should not be to cut health-care spending. A more nuanced approach is needed. This means getting the right drugs and treatments to the patients who need them. But it also sometimes means withholding treatment in cases where it might do only very little good. Such decisions are made routinely in other countries with national health systems. In the United States, we need to find a way to make such determinations.
In other industries, suppliers who can do things more cheaply are rewarded with more market share — think Wal-Mart. In health care, insurance completely insulates the patient from the full price. Health insurance benefits need to be restructured so that consumers are asked to pay more out of pocket for services that provide little clinical benefit. Patients who insist on an MRI for their ankle sprain will think twice if they have to pay several hundred dollars for it.
We also need to encourage the development of treatments that save money. The Food and Drug Administration is responsible for approving many new treatments and medical devices. Right now, the FDA makes this decision solely on the basis of medical necessity. So if your drug is somewhat better than standard care, it gets approved regardless of whether it costs $100 or $100,000 per year.
The FDA can tilt the playing field to encourage cost savings. This could be done by offering expedited approval — and immediate coverage by Medicare — if the manufacturer can demonstrate that its treatment will reduce overall health-care costs. This judgment would be made by independent experts, as the FDA does now, and would be monitored through post-marketing studies.
When it comes to health policy — as with health — a prudent approach often works best.
Dana P. Goldman is director of health economics at the RAND Corporation, a nonprofit research organization.
This commentary originally appeared in Press-Enterprise on October 23, 2005. Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.