health care rationing - the limits of cost reduction

The entire public discussion on health care spending in the United States to date has rested on the notion that the high cost of health care can be explained almost entirely by the inefficiencies in the health care delivery system, such as administrative overhead and suboptimal utilization of resources (i.e., waste and fraud). This argument, which allows us to imagine that we can control health care costs simply by eliminating unneeded expenditures, is the only politically feasible one that can be made (since, if this argument were not true, our only remaining alternative would be to ration health care). Therefore, virtually all the methods proposed for dealing with the high cost of health care have been based on the assumption that improving inefficiencies in the system is all that is needed. (It is worth noting here, once again, that such an argument is only for public consumption. Experts in the field of health care economics, in their scholarly writings, start with the premise that rationing is the only choice we have.)

Nobody denies that there are plenty of inefficiencies in the health care system. And nobody disagrees with the notion that we should make every effort to eliminate unneeded expenditures. The problem with relying on a reduction in inefficiencies as the primary means of controlling the rising cost of health care, however, is that it won’t work.

David Eddy, in his book Clinical Decision Making (Jones and Bartlett Publishers, 1996), examines the feasibility of reducing inefficiencies as a means of controlling the cost of health care. Assume, he says, that in 1970 (around the time a health care crisis was first declared) a severe austerity program had been initiated within the health care system that accomplished all the following things:

Eddy's Austerity Program for Health Care
1. cut all administrative costs by 50% 2. cut costs of all prescription and nonprescription drugs, plus costs of all other non-durable medical goods, by 50% 3. cut physician services by 20% 4. eliminate all government public health programs 5. eliminate construction of all health care facilities 6. eliminate all medical research

Further, assume that these cuts had been maintained, at the same levels, for the next 21 years - from 1970 through 1991.

Obviously, one would expect such a drastic program of cuts to significantly reduce national health care expenditures. And in fact, it would. The following table compares actual U.S. health care expenditures for that 21-year period to the expenditures that would have occurred under Eddy’s austerity program (values are reported in billions of dollars):

Year	Actual spending	Austerity spending
1970	74.4	59.2
1980	250.1	206.4
1989	604.3	499.5
1991	751.8	623.6*

*values in billions of dollars; derived from Eddy, pp 270-274.

Note that the austerity program saves a lot of money right away. In 1970, the first year of the cuts, only $59.2 billion would have been spent, compared to the actual expenditures of $74.4 billion. Further, the significant savings persist over time. In 1991, only $623.6 billion would have been spent under the austerity program compared to $751.8 billion in actual spending.

Note, however, that the amount of money actually spent in 1989 is roughly the same as the amount that would have been spent under the austerity program only two years later, in 1991. In other words, all one ultimately gains after 21 years of an austerity program even as improbable and severe as this one is a little time; in this example, a little less than 2 years.

Why is this? It is because the rate of increase in health care expenditures is largely unrelated to anything that was cut under Eddy’s austerity program. So when the cuts were made, health care costs continued rising at the same rate as before – they simply started at a lower baseline. The only thing that was saved with this Draconian effort was time, and not all that much time, at that.

This phenomenon is not just theoretical. It is being experienced by all western countries, even those like Canada and Great Britain, that have tightly-controlled, single-payer health care systems with overt rationing measures in full view. In general, while health care spending in such countries is significantly lower than in the United States, the rate of growth of that spending is very similar to the double-digit rate of health care inflation seen in the U.S. The economic crisis we are experiencing is shared, and recognized, by most developed countries around the world, despite tightly managed health care systems in many of those countries.

In the U.S. itself, the “reforms” in health care that have been instituted since 1994 brought the annual rate of growth in health care to below 5% for a few years. However, latest indications are (now that we have made the “easy” cuts) the rate of growth is rising again. In the state of Pennsylvania, by 1999 the increase in insurance premiums paid by companies for their employees was back to 10 – 15% per year. Managed care and administrative reforms can significantly reduce the cost of health care, but the rate of growth is ultimately unchanged. Ultimately, in fact, the only thing gained by reducing waste and increasing efficiency is a bit of time. The basic assumption made by virtually every party in the great health care debate (i.e., that reducing inefficiencies is all that is needed), is demonstrably wrong.

There are finite limits to how much money we can spend by instituting systematic efficiencies in the health care system, even "efficiencies" as drastic and as unacceptable as the ones postulated in Eddy's thought experiment.

Next: The bottom line on rationing

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