Small Biz Health Care Daily: On Rising Health Care Costs

In an early June report (“The Economic Case for Health Care Reform”), the President’s Council of Economic Advisers (CEA) said the following about costs and inefficiencies in health care:

“The sources of inefficiency in the U.S. health care system include payment systems that reward medical inputs rather than outcomes, high administrative costs, and inadequate focus on disease prevention. Market imperfections in the health insurance market create incentives for socially inefficient levels of coverage.”

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council, offered the following assessment:

“The CEA misses the mark. It not only looks to the symptoms rather than the disease, but mistakes government failure for market failure. In reality, government health care programs are a key driver of rising health care costs. Part of the dramatic rise in health spending in recent times have been positive changes in patient care, including new and improved medicines, medical devices and other treatments. But costs also have been driven higher by the vast expansion in third-party payments. That is, government or employer-provided insurance picking up the tab. When someone else pays, health care providers and consumers have no reason to care about prices and utilization, and hence, costs rise. When government is the third-party payer, there are still fewer incentives to care about costs. Fundamentally, expanded government involvement in health care is a key driver of higher costs. If one fails to truly understand why costs are accelerating in health care, then policymakers are doomed to make the wrong policy choices.”