FEBRUARY 2001

Stemming U.S. Healthcare Costs —
The Fix Cannot Be Made
in Small Doses

by James E. Gover

The cost of healthcare in the United States has grown to 15 percent of the gross domestic product (GDP). As such, U.S. healthcare costs are as much as double those of any other industrialized nation. Each year, we spend about four times as much on healthcare as we spend on national defense, and about two times what we spend on education. The average U.S. expenditure on healthcare is more than $4,000 per person. Those over 65 years old pay an average of $12,000 per person for services, and those over 85 — the fastest growing age group in our country — incur charges of $20,000 per person. What’s more, current cost projections indicate that when our nation’s baby boomers reach their late 70s and 80s, healthcare costs will soar to 25 percent of the GDP.

Healthcare spending is slowly eroding national savings, and as the population ages, this problem will continue to escalate. Unless we do something to stem the continuing upward spiral, the U.S. healthcare cost problem may well become the albatross that brings our economy to its knees.

To reduce healthcare costs without drastically reducing income for healthcare services providers, we must increase the labor productivity of the U.S. healthcare system. Yet, regulations — both government-mandated and professionally imposed — have removed the economic incentives that traditionally have driven productivity growth. Such growth can now only be reached by increasing competition among service providers.

One way is to replace many of those working in the healthcare field with low-cost technology — principally electrical and computer technology. In highly competitive systems, technology innovation increases productivity, increases quality and reduces both costs and charges to consumers. In weak competitive systems — such as healthcare and education — technology innovation often increases quality, decreases costs and increases charges. The path to productivity growth is first competition, then technology innovation.

The federal government has been unable to investigate the U.S. healthcare system thoroughly enough to propose a systems-level solution that increases competition, reduces costs, and offers incentives to improve productivity. Instead, it is pursuing a piecemeal, incremental, microscopic approach. Congress is even beginning to specify the number of days of hospitalization each surgical procedure requires. And the responsible agency of the executive branch regards the medical profession rather than the public to be its customer. It is becoming increasingly clear that our political system, as currently organized, lacks either the courage or the intellectual capital required to address rising healthcare costs.

The time is now for the United States to initiate a major research program to investigate healthcare system alternatives. Finding a solution to the U.S. healthcare problem will require a combination of skills in economics, business, political science, systems modeling, and technology. Technology skills must encompass information technology; integrated preventive diagnostics; self-administered diagnostics; minimally invasive therapies; imaging technology; preventive medicine and incentives programs; and rehabilitation science and assistive technologies that will force major changes in the healthcare delivery process.

Because of the magnitude, complexity, and importance of the healthcare cost problem, it is economically rational to initiate a $1 billion per year publicly funded research program. A national laboratory outside of the National Institutes of Health could manage this program. The lab could be tasked with managing a program that designs an entirely new healthcare delivery system.

The major components of this research program should include:

• Developing models that break down healthcare systems into subsystems, so researchers can compare the cost and effectiveness of alternative models. Alternatives to the U.S. model could then be synthesized from these.

• Comparing the U.S. healthcare delivery models and their costs and outcomes at the subsystems level to other countries’ systems.

• Identifying necessary regulatory options and conducting thorough analyses of the hidden costs of medical regulations.

• Identifying technologies that could lead to a substantial reduction in healthcare costs and proposing a partnership of private and public funders to develop these technologies.