MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE:What's driving health care costs, and what can we do about it?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

Are health care costs too high? Most people, especially patients in the health-care system, would answer "yes." Many factors are cited as being behind the high costs, including wasteful spending, government programs, high profits earned by some providers and an aging population.

Recently I looked at health-care costs in depth to prepare for a conference speech. While some of my findings confirmed common perceptions about health care, I also discovered several surprises.

For instance, recent health-care spending has risen faster than other spending and faster than consumer income. But half the increase is due to greater health-care usage; the rest to higher prices. Indeed, health-care prices have risen two-thirds faster than other prices in the last decade.

Yet there's debate about whether we measure health-care price increases properly.

Most of us think of a price increase as paying more for the same thing. If the price of a dozen eggs rises from $1 to $2, we say eggs clearly cost more.

However, health care is different because of its important quality component, and few would disagree that health-care quality has improved enormously. Our health-care system can treat many more illnesses, diseases and injuries with greater effectiveness than in the past.

So part of the reason health-care prices are up is that we get more for our money now. In fact, some economists argue that when we calculate quality-adjusted health-care prices, they show no increase. This would be like saying the doubling of egg prices from $1 to $2 was because the $2 eggs were twice as nutritious and satisfying as the $1 eggs.

All this means the debate about health-care costs is much more complicated than it appears at first glance. Increased usage and quality improvements have to be factored in before we come to any conclusion.

What can we do to slow future health-care cost and price increases? Economists always focus on the two sides of any market: demand and supply. To hold down price jumps, we'd want to slow demand increases while speeding up supply increases.

On the demand side, a major issue is how consumers pay for health care. Currently they pay little of care's direct cost. Instead, they pay indirectly through government and insurance payments.

Some think that if consumers paid more of the direct price tag for health care, they'd be more motivated to compare prices and evaluate treatments, becoming more price-sensitive when they make health-care decisions. In turn, this would motivate providers to be more efficient and to eliminate wasteful spending.

Critics of this demand-side approach question whether consumers are capable of making health treatment decisions and worry that any consumer incentives to reduce health-care expenditures could come at the expense of their own future well-being. They also worry that there's a fine line between improving efficiency and lowering health-care quality.

Attacking health-care costs from the supply side means reducing barriers and regulations to make it easier for the number and type of health-care providers to expand. Licensing and training requirements and certificate of need programs would all come under review with this plan.

Again, such supply-side proposals raise issues. If we relax standards, would the competency of health-care providers suffer? Further, if more providers are allowed to enter the market, would lower prices come as a result of cutthroat competition and instability?

Although health care is fundamentally different than other product markets, it still follows the laws of that "dismal science" called economics

You decide if some combination of demand and supply changes can bring health care prices more in line with other costs.

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html