Inefficient Health Care Spending
While some of the greater health care spending may be attributed to technological improvements that enhance the quality of care and to increases in national wealth, there are also many findings that are consistent with some degree of inefficiency associated with relatively higher health care spending. Health outcomes in the United States are often not substantially better than those in other developed countries that spend far less on health care. The Rand Health Insurance Experiment found that increased medical spending led to only limited health improvements. The Dartmouth Atlas of Health Care shows wide variations in Medicare spending within the United States without associated variation in health or health outcomes.
It may, at first, appear to be difficult to reconcile the research findings that new technologies over time produce valuable health benefits with the research findings that higher spending does not yield better outcomes. It is likely that there is significant overconsumption of health care that provides little marginal benefit. Consider a costly new technology that provides very large health benefits to specific patients in need. Suppose, however, that it is also consumed by patients who benefit very little from the treatment. If the benefits to "appropriate" patients are very large, the increase in spending over time on both "appropriate" and "inappropriate" patients combined can still imply that the new technology is cost effective. However, because some "inappropriate" patients also receive the treatment, some of the variation in spending is due to inefficiency. If this characterization is accurate, the technology is not as cost effective as it should be.
This overconsumption of health care is frequently thought of as being caused by poor incentives such as overly generous health insurance coverage. That is, patients often face marginal prices for costly treatments that, due to insurance coverage, are lower than the true marginal costs of treatment. (More detail on optimal forms of private health insurance and the effect of increasing cost sharing by consumers is provided in Chapter 4 of the 2006 Economic Report of the President.) The presence of generous health insurance may also influence the research and development of certain technologies with questionable cost effectiveness.
There is also evidence of significant underuse of valued health care. For example, there is a large body of medical literature demonstrating the cost effectiveness of beta blockers for patients recovering from a heart attack. Due to their effectiveness, they are prescribed in over 90 percent of cases. However, studies have shown that persistence in use of beta blockers declines rapidly even in the first year of treatment. Moreover, the U.S. Preventive Services Task Force recommends that all women over 40 receive mammograms every 1 to 2 years, that all adults over 50 receive regular colorectal screenings to detect colon cancer, and that all adults over 50 receive annual immunizations against influenza. Compliance, however, is low: 68 percent of women receive recommended mammograms, 35 percent of adults receive recommended colorectal cancer screenings, and 65 percent of adults over 65 receive annual influenza vaccines.
These data suggest that there are two main ways in which the efficiency of Medicare spending could be improved, because there is both a relationship between the insurer and beneficiaries and a relationship between the insurer and providers. One is to encourage the use of cost-effective care that is currently underconsumed. Medicare now covers an initial preventive physical examination and many preventive screenings, but there are still potential improvements to be made. Policies to achieve this goal should aim to improve the incentives for health care providers and insurers to provide high-quality care. A second way to improve the efficiency of Medicare spending is to discourage the use of ineffective care that is currently overconsumed. Policies to achieve this goal should aim to improve the incentives that Medicare beneficiaries face regarding their consumption of care. More detail on these policies is provided in the next two sections.