Why a Reduction in Health Care Costs Per Se May be a Misleading Policy Objective

Rosa Abrantes-Metz, Jul 27, 2012

There is nearly universal agreement that a restructuring of the health care system is required, particularly with regard to the public financing of health care. Longevity has greatly increased, and the current public health care programs are not designed to sustainably afford such life-long additional expenses. But the policy discussions are almost always in terms of the total cost of health care, which is not, per se, a socially useful metric. Costs can rise for a number of good, socially desirable reasons.

In this article I argue that, instead, policy should focus on the price per constant quality of health care. There are reasons to think that prices may be inefficient in this market, and there may be policy options that could address that. Allowing for interstate competition between insurance companies would likely reduce premiums and significantly reduce health care costs.

Still, even “reducing price” must be attempted judiciously. Measures punishing innovation may allow for lower prices in the present, but to the extent they discourage current R&D, they will represent a large social cost in the future.

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