Code Red: Two Economists Examine the U.S. Healthcare System

December 4, 2007

Cost Containment: It Could Be Bad for Your Health

Filed under: Health Reform — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:06 am
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William White:


Let’s continue our conversation about health reform.  Issues about coverage and the uninsured have dominated recent campaign debates, especially among the Democrats.  But candidates are also putting forward lots of proposals to improve performance and hold down costs.  One popular idea across the political spectrum from Clinton, Edwards and Obama to McCain is wellness and preventive services. It’s understandable.  They are seemingly a double whammy, improving health and saving money at the same time.  The problem is that wellness and prevention aren’t exactly the twofer they seem. Candidate proposals are pretty terse and it’s not always easy to parse out exactly what they have in mind.  It is nice to see prevention and wellness getting some limelight.  But I worry if they get linked to cost containment in the implementation process, there could be a lot of foregone opportunities with bad consequences for your health and mine.  Let me explain.

There is no question inexpensive prevention and wellness services offer extraordinary opportunities for enabling us to live longer, healthier lives. If we adopted a system of zero based budgeting, many of these services would come out at the top of the list for allocating health care dollars, far ahead of things like open heart surgery and expensive diagnostic tests.  But linking incremental decisions about adding these services to cost savings is another story.

It might seem that at the margin wellness and prevention would still be no brainers for saving money.  But it isn’t necessarily so even for seemingly obvious cases like flu shots.  The rub is the problem of future costs.  A shot may prevent me from getting the flu and dying of pneumonia may save money up front.  But if I end up dying instead from a series of strokes, total expenditures may end up greater.

From a cost containment perspective the response is predictable.  Recent comments in the Times by Helen Darling, president of the National Business Group on Health, about the willingness of her members, 200 large employers, to pay for enhanced primary care services sum it up well.  Adding such services is ok.  But ‘‘It has to be budget neutral.’’    That is, it’s a no go unless these services reduce or leave unchanged total costs.  Similarly, budget neutrality is being held up by CMS as a criteria for evaluating new demonstration projects such as the Medicare Stop Smoking Program.

I don’t know about you, but I would rather not see wellness and prevention placed on the Procrustean bed of budget neutrality.  A lot of potentially very beneficial innovations could lose out.  A much better approach seems to me to ask the following question:  “If we have X dollars from new funding or savings from elsewhere, where should we put it to maximize the impact on population health?”  I’m betting wellness and prevention services will win hands down.

David Dranove:


You thoughts bring to mind a bigger question that all the candidates are ignoring—what is so bad about spending money on health care?  Cost containment per se is a worthy goal only if we are get nothing in return for our dollars. (This is not to say that we should ignore inefficiencies.)  But Harvard’s David Cutler and his colleagues have made a very compelling case that we get a huge bang for our buck from health care spending, in the form of longer, healthier, and more productive lives.

Holding any new health spending to a strict budget neutrality standard would be downright dangerous to our health.  Not only would we fail to make proper investments in prevention.  Think of all the ongoing scientific advances that promise to greatly improve our health.  Advances in biotechnology and pharmacogenomics will revolutionize the diagnosis and treatment of disease.  Nanomedicine will enable doctors to use microrobots to monitor and repair organ systems.  Device manufacturers are miniaturizing pacemakers, defibrillators and brain stimulators to permit non-invasive procedures.  The FDA recently approved the first temporary implantable artificial heart for patients awaiting heart transplants.  It will not be long before patients receive permanent implantable artificial hearts.  And thanks to the lessons learned in the development of artificial skin for burn patients, it is only a matter of time before it is possible to grow entire organs.  We will soon enjoy the benefits of many of these admittedly costly technologies.  And just as with today’s well-accepted technologies like CT scans, joint replacement, neonatology, heart surgery—the list goes on and on—we will wonder how we managed without them.  That is unless the Luddites have their way and, by imposing budget neutrality, halt technological change in its tracks.



  1. Hearing arguments that establish budget neutrality for health care expenditures or holding health care expenditures to a % of the GNP make me wonder what the priorities are for these individuals/institutions. Innovation and technological change are all about investment with an eye towards future improvements in health and health care delivery. We didn’t achieve our level of technological sophistication by hopping on the “budget neutrality ” bandwagon every time a political candidate delivers a message about his/her healtcare agenda. If we as a society prioritize personal health and healthcare, we have to pay the price and that doesn’t mean “budget neutrality ” to me. jpkelly MD, MBA EMP68

    Comment by James P. Kelly, MD MBA — December 14, 2007 @ 11:01 am

  2. I think the crucial issue in this economic debate about health care financing is how much as a society are we willing to spend and can afford. The next consideration is are we being wasteful or not in spending our dollars. In my opinion as a practicing cardiologist , we are wasteful. Hence we need to eliminate our redundant and ineffective system of practice and prioritise our goals in health care delivery to our fellow citizens. Prevention and well being are important and so is our R & D for progress in positive well being. We need a national policy and direction from health care leaders in this regard, this is not to support paternalism but only to exercise responsible leadership ideals.

    Comment by Vijay rajendran — December 15, 2007 @ 3:53 pm

  3. David and Will,

    I’m all for budget neutrality, although not in the way that the National Business Group on Health is proposing. The U.S. is spending over $2 trillion dollars a year, or 16% of GDP on healthcare. Certainly for that amount, we should be able to afford a great amount of excellent healthcare for everyone. Several prominent health policy researchers have made the point that Medicare, Medicaid, and private insurers reimburse hospitals and doctors for the quantity of services provided, rather than the quality of care and/or patient outcomes. We’re spending too much on the wrong things. We need fundamental changes in the way we reimburse providers in order to get costs under control.

    I agree with David Cutler’s research showing that many of the expensive technologies developed over the past decades have provided enormous benefits in patient health. This result has been echoed by the recent article by Murphy and Topel in the Journal of Political Economy showing that post-1970s gains in life expectancy contributed $3.2 trillion per year to national wealth.

    However, each time that insurance covers a new medical technology, premiums rise, and that prices another customer out of the market for health insurance. I’m fortunate that I’m able to afford an excellent health insurance policy through my employer. But the number of people who are without insurance in this country because of affordability has become just too high. Somehow, I’m comfortable with some people driving our streets in a Lexus or Mercedes, while other people can only afford to take a bus or walk. But I’m not so happy when I hear about about a woman who needs to have a malignant tumor surgically removed, but her doctor’s hospital won’t admit her, because she lacks health insurance. Part of the reason for problems like this is that rising healthcare costs make health insurance premiums too high for many Americans to afford. We have to find ways to spend our health care dollars more wisely, or suffer the consequences of a more unequal society.

    Comment by Vivian Ho, PhD — December 21, 2007 @ 4:56 pm

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