Health Care Benefits vs. Costs: Are We Making the Right Choices?

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Rosa Abrantes-Metz, Albert Metz, Sep 30, 2014

America has a new health care system, which attempts to increase coverage at less cost. There are doubts that it is in fact doing so, but that should not be a surprise to anyone. We have for years pointed out that increasing coverage while lowering prices would not generally be feasible without severe rationing of services. And, in fact, we can now see that to date and for many Americans, not only are our health care options severely restricted but we also pay drastically increased insurance premiums.

In addition, the new health care system may also have undesired effects on much needed innovation, by making “low health care costs” the policy objective. Lowering health care costs is important, and there is certainly room to do so, but the question is at what impact to future benefits? Is it a coincidence that we see pharmaceutical companies reducing staff and planning on moving (further) key operations abroad? And should “lower costs” truly be the goal of policy? After all, one person’s “cost” is another person’s “revenue,” and costs can rise for a number of good, socially desirable reasons.

In this article we argue that, instead, policy should focus on the price per constant quality of health care. There are reasons to think that prices may be inefficient in this market, and there may be policy options that could address that. Allowing for interstate competition between insurance companies would likely reduce premiums and significantly reduce health care costs.

Still, even “reducing price” must be attempted judiciously. Measures discouraging innovation may allow for lower prices in the present but, to the extent they reduce current R&D, they will represent a large social cost in the future. Such measures would include the growing number of cases in which pharmaceutical companies are denied the financial benefits from their patents till expiration. Yes we get cheaper medicines today, no doubt, but how about tomorrow?