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John Hood: Smart policies can reduce health care costs

By John Hood

RALEIGH — Health care costs too much. Agreed? Great. Perhaps now we can discuss the more interesting question of what policymakers should do about the problem.

There are dozens of different proposals to reform all or significant chunks of the health care system. Many are federal in scope, involving major changes in Medicare, Medicaid, and regulated private plans. Others are state-level reforms of insurance, licensure, and the operation of the market for medical services.

North Carolina lawmakers are currently considering both sets of alternatives. As usual, there is a proposal to accept federal Medicaid dollars under the Affordable Care Act to expand subsidies to hundreds of thousands of North Carolinians. Gov. Roy Cooper included Medicaid expansion in his budget. Some Republican lawmakers agree, although probably not enough to prevail.

I think a more productive area for bipartisan cooperation would be on the cost side of the equation. After all, Medicaid expansion is largely about reducing the price of care, not the cost.

If Medicaid expansion forces taxpayers to pick up the tab for a medical service that was either previously financed some other way or not consumed in the first place, there is no reduction in the cost of care. What really happens is that the price largely or fully disappears. The cost of care gets hidden in the taxes people directly or indirectly pay to cover the Medicaid bill.

Sometimes expansion advocates argue that Medicaid expansion would truly reduce the cost of medical care by diverting people from emergency rooms or encouraging cost-saving preventive care. The first claim is incorrect. Expansion does not consistently reduce ER utilization, and may even boost it. The second claim is wildly exaggerated. Most preventive care does not save money in the long run, although patients may derive other benefits from it.

I think health care costs too much — that is, the full cost exceeds the real benefit in health outcomes — because of poorly aligned incentives, insufficient information, and insufficient competition. Consumers should be spending (tax-free) cash for routine expenses, rather than filing low-dollar insurance claims, and feel empowered to buy that routine care in the form of monthly fees and other alternative arrangements rather than just in payments per service rendered.

For hospitalizations, surgeries, ongoing therapy for chronic diseases, and other high-dollar expenses that represent a disproportionate share of total health spending — the costliest five percent of patients in America account for about half of total annual expenditures — we need a more transparent and coherent system of upfront prices coupled with more robust competition.

The North Carolina General Assembly could make significant headway on the competition front this year. For example, the bipartisan SAVE Act (House Bill 185 and Senate Bill 143) would expand the scope of services that advanced-practice nurses can perform in our state without direct supervision by physicians, which can be unnecessary and adds tremendously to the cost of delivering care.

Lawmakers could also pare back the regulatory thicket of North Carolina’s certificate-of-need law, which forces providers to get permission from the state to open new facilities or offer new services in competition with existing hospitals or physician practices.

Finally, lawmakers should not attempt to obstruct State Treasurer Dale Folwell’s push for more transparent and affordable pricing of the services that teachers and other public employees purchase from North Carolina hospitals through the state health plan.

About half of medical bills are already “paid for” by government programs rather than households or private insurers. Of course, taxpayers are really paying those bills, but not in a way that effectively pairs perceived value of the service with cost.

Even as we may disagree about how expansive these government financing systems should be, surely we can agree that finding ways to deliver high-quality services at a lower cost is in everyone’s interest.

Shifting the cost from one pocket to another doesn’t make it go away. We need more innovation, more competition, and more information. Smart state policies can help.   

John Hood is chairman of the John Locke Foundation.



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