Small Biz Health Care Daily: Reminder on What Drives Health Care Costs Higher

As the debate over health care policy continues hot and heavy in the Senate, it is critical to keep the basic economics straight.

The Obama White House and other supporters of injecting more government spending into the health care equation continually claim that this will somehow wind up controlling health care costs. That flies directly in the face of what has been a key driver of rising health care costs over the past four-plus decades, that is, third party payments – in particular, government as third-party payer.

In 1960, for example, 75% of national health care expenditures were private expenditures. In addition, 46% of national health care spending came from private out-of-pocket payments. Meanwhile, government’s share stood at 25%.

In 2006 (latest data), private expenditures accounted for 54% of national health care spending. Private out-of-pocket payments had plummeted to only 12% of national expenditures. Meanwhile, government expenditures had risen to 46% of total spending.

To review, the rise in third-party payments – in particular by government – means that health care consumers and providers have few, if any, incentives to be concerned about prices and utilization. For good measure, elected officials and government appointees also have few incentives to be concerned about costs as they are spending other people’s money. These developments and incentives coalesce to drive costs ever higher.

So, to the extent that the debate is focused on more government funding for health care, that means health care costs will be driven up, certainly not down.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council