Opinion: Daily Journal

The Case for Bending the Curve

Although it may not seem obvious at first, there is a common denominator between two separate dramas playing out in Washington and Raleigh right now. Nationally, the top story in domestic policy is the impending implementation of the Affordable Care Act a.k.a. Obamacare. In North Carolina, controversies within the state Department of Health and Human Services are dominating state news headlines.

In both cases, officials say they are trying to rein in health care costs. At the federal level, the Obama administration promised that its 2010 reform bill would “bend the cost curve of health care downward,” saving taxpayers thousands of dollars a year when fully implemented. At the state level, the McCrory administration is developing a reform strategy to use competitive contracting and other means to limit cost inflation in North Carolina’s Medicaid program, currently the most expensive in the South.

The two reform agendas differ substantially, of course, although managed competition as a shared design feature. I won’t pretend to lack an opinion about their respective virtues. As Duke University’s Chris Conover pointed out in a Forbes column, the idea that Obamacare would reduce the cost of health care over time is deeply at odds with reality. Total spending on U.S. health care will rise, not fall, as Obamacare is implemented. As for the McCrory administration’s strategy for Medicaid reform, I think it is promising. But the details have yet to emerge, and the departure of Medicaid director Carol Steckel to a private-sector job in Florida is at least likely to delay the strategy’s implementation.

Let’s set aside the merits of the two contrasting reform plans for a moment, however, and consider why it is important to rein in health care costs in the first place.

As societies mature and economies grow more sophisticated, it is entirely reasonable for the share of total economic output devoted to health spending to rise. Technological innovation and economies of scale, among other factors, allow people to satisfy their immediate needs for food, clothing, and shelter at a decreasing unit cost. That leaves them a growing share of their incomes to devote to other goods and particularly to services, including health care. This is just basic math: all subcategories of household spending (including savings to fund future spending) must all up to 100 percent of income in the long run.

So far, so good. But health care is not exempt from the law of diminishing marginal utility. Initial spending on clearly valuable medical services alleviates tremendous human suffering and death. As we continue to spend more on health care, however, the next increment of personal benefit tends to be smaller than the previous one. It is possible to spend a great deal of time and resources on medical care that doesn’t really save or improve lives much, either because the treatments had a low probability for success (think heroic efforts to save terminal patients) or because we spend many preventive-care dollars on people with a low probability of getting sick in the first place.

If resources were unlimited, it would be meaningless to speak of spending “too much” on health care — particularly since we would all reside in Heaven and have better things to speak about. Here on planet Earth, however, resources are inherently limited. To the extent that households, businesses, or governments spend ever-increasing sums on health care that doesn’t produce similarly increasing benefits, we can’t spend money on other goods and services that might make us safer, happier, and more productive.

Specifically, excessive spending on health care pushes up federal income and payroll taxes, which discourage private investment in new companies, employees, and capital goods. At the state level, excessive spending on health care via Medicaid and other programs displaces additional private investment via higher taxes while displacing greater public investment in assets such as roads and schools.

While we may continue to disagree about how best to discourage excessive health care spending, surely we can all agree that addressing the issue is critical to rejuvenating America’s economy and improving our quality of life.

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Hood is president of the John Locke Foundation.