Five ways to lower health care costs from an economist’s perspective

In Victor Fuch’s “Who Shall Live,” he lays out a simple economist perspective of how health care costs could be reduced. Sarah Kliff went in to a bit more detail about the problems of the American health care system today.  

These age old principles examine some of the economic arguments to reduce the problem of health care costs. These theories center on the basic argument that cost is a combination of price and quantity. Therefore, if you want to reduce the cost, you either can reduce the price or the quantity of use, or both. 

For those that like formulas:

Cost=Price per unit of care*Quantity 

Price=Productivity * price paid for services

1. Increase the number of hospitals and physicians- This is the theory, that increasing the supply of doctors will reduce the price or increase productivity, because doctors will compete against each other in the market. This implies price transparency, which has not been made available to the consumer or market. 

2. Improve the health of the population- In this theory, improving the general public health would reduce the quantity of people needing health services. This implies that we know how to target public health measures and that they will see results. 

3. Add administrative controls and planning- This theory is used for many drug formularies or utilization review committees. Many people may think that this is limited to government controls and regulation, when in fact this approach could occur within a hospital, manufacturer or provider office. Imposing controls could reduce the price paid for services, reduce the quantity or improve productivity based on which levers are pulled. 

4. Impose greater cost consciousness in consumers- Co-payments and deductibles are at the heart of this theory. If the consumer sees more of the cost for a service, they are less likely to agree to it. This reduces the quantity of services.

5. Physician control costs- This theory is based on the assumption that changing the way we pay physicians could reduce the quantity of services that a physician provides.  This theory focuses on the problem of paying for each service, known as fee-for-service payments. 

 

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