Healthcare and GDP


The Congressional Budget Office (CBO) has projected that spending on healthcare will increase from 17% of GDP today to 25% in 2025 and 37% in 2050.  This increase will leave less money available for defense, infrastructure, food stamps, homeland security, and other government activity.  Private spending will be affected to a similar degree crowding out spending on homes, cars, vacations, and food.

This obviously cannot continue. So, what are the options?

The CBO has broadly outlined the options for control of healthcare costs:

  1. 1.Have a panel of experts review to total body of medical research and decide whether a treatment is sufficiently effective to be paid for by Medicare. Politicians have derided the use of “death panels”. Eventually, someone is going to have to decide what treatments are worth the cost. It would be better for this to be decided by physicians rather than accountants.

  1. 2.More modest steps that Medicare could take would include smaller-scale financial inducements to doctors and patients to encourage the use of cost-effective care. Doctors and hospitals could receive modest bonuses for practicing effective care or modest cuts in their payments for using less effective treatments.

  1. 3.Medicare could provide information to doctors and their patients about doctors' use of various treatments, which would create some pressure for them to use more-efficient approaches.

  1. 4.Greater bundling of payments to cover all of the services associated with a treatment, disease, or patient could reduce or eliminate incentives to provide additional services that might be of low value. Such approaches, however, can raise concerns about the financial risk that providers face and about incentives for them to provide too little care.

  1. 5.On the consumer side, a landmark health insurance experiment by RAND showed that higher cost sharing reduced spending—particularly when compared with a plan offering free care—with little or no adverse effects on health.

  1. 6.Some analysts have advocated significant expansions of disease management and care coordination as mechanisms for reducing costs—proposals that reflect the increasing prevalence of many chronic conditions, the large share of health care spending attributable to those conditions, and the lack of systems to coordinate care in many public and private health insurance plans. For example, 25 percent of Medicare beneficiaries accounted for 85 percent of the program's costs in 2001; more than three-quarters of those expensive beneficiaries had one or more of seven prominent chronic conditions (including coronary artery disease, diabetes, and congestive heart failure).

As it relates to government spending on healthcare, some politicians have recommended simply cutting spending and letting the market sort things out. The most commonly discussed approach involves providing Medicare vouchers for a fixed amount of money and letting seniors shop for the best buy. This would involve the patient paying the difference between the value of the voucher and the actual cost of the services.