Health care costs difficult to reduce

“Passing real health care reform this year is nothing less than what the American people need.”

That was in a recent e-mail from Organizing for America, the group created by the Democratic National Committee to mobilize supporters of President Obama for his legislative agenda. The e-mail urged its recipients to sign a declaration for the three principles of health care reform Obama outlined last Monday: “reduce costs,” “guarantee choice” and “ensure all Americans have quality, affordable health care.”

The fact that Obama is pushing for another big policy initiative before the end of the year isn’t surprising. The president seems convinced his wider agenda will help our economic recovery.

As a larger debate about Obama’s plan for health care reform begins, the starting point is clear: Does this administration really have a plan that “reduces costs”? The answer is “doubtful.”

It’s true that Obama’s plan could reduce the health care costs for the increasing number of Americans who find them too high. But if the government is subsidizing health care, the costs are simply being shifted. And, unfortunately, rising health care costs are as much of a problem for the government’s balance sheets as they are for most Americans’ wallets.

The recession has worsened the projection for Medicare, the government program providing health care coverage for the elderly. Medicare’s expenses are expected to exceed its tax revenue by 2017, two years earlier than expected. It is unclear how Obama plans to pay for a large expansion of government health care coverage, while Medicare beneficiaries may soon have to pay higher premiums, co-payments and deductibles.

Lowering the real costs of health care seems to offer a way out. However, Obama’s proposals are lacking. The $19 billion in economic stimulus earmarked to improve electronic health records might lower costs in the short run, but if this was really the cash-saver the administration has implied, why didn’t health care providers make this investment themselves?

The pledge Monday from parts of the health care industry to cut their own costs was also unconvincing. Groups including the American Medical Association promised to make changes that could save $2 trillion over 10 years. If firms could make these cuts competitively, they wouldn’t need encouragement to do so. If these cuts are the result of government bullying, then cuts will probably come in tandem with a reduction in the quality of services.

There are better ways to cut real health care costs. Jason Furman, deputy director of Obama’s National Economic Council, previously pointed out that replacing the tax exclusion of employer health benefits with a tax credit could make consumers more aware of their insurance premiums, resulting in lower long-run costs.

But whatever policy Obama adopts, he will likely confront a difficult reality. Much of the increase in health care costs is probably attributable to advances that allow more advanced and expensive treatments – something we can’t reverse.  

Government intervention might be necessary to “ensure all Americans have quality, affordable health care,” but we are all going to have to help pay for it.