ECONOMIC SCENE: Why does healthcare reform founder?

Cutting costs would mean trimming pay for too many professionals.

Reuters/Kevin Lamarque
President Obama discusses healthcare at a June meeting with Senate Democrats at the White House. Many health economists doubt that the president will be able to reform the health care system this year.

President Obama has taken on a perilous project in attempting healthcare reform.

The reason: Substantially reducing healthcare costs means cutting the incomes and profits of physicians, nurses, health insurance firms, hospitals, and others.

“Everybody has to take a haircut,” says Jean Mitchell, a health economist at Georgetown University.

That’s why she and some other top American healthcare economists doubt Mr. Obama will really reform the system this year.

Proposals to cut healthcare costs boil down to “talking about people’s salaries,” says Henry Aaron of the Washington-based Brookings Institution, who recently bet Washington Post columnist E.J. Dionne that no large-scale healthcare reform would pass this year.

The industry already is the biggest in the nation. It employs more than 14 million people, many well paid. Its lobbyists have serious clout.

So when reforms are proposed, those affected go to Congress to block change. If the future follows the pattern of the past, they will succeed again in preventing serious cost reductions.

Over the longer run, the rising cost of healthcare is unsustainable. Businesses and individuals won’t be able to pay the bills.

The government estimates healthcare spending this year will reach $2.55 trillion, or 16.9 percent of the gross domestic product (GDP), the nation’s total output of goods and services. That’s $8,839 per person.

Without restraint, costs will rise by about 6.7 percent a year to reach $4.2 trillion by 2017, or 19.5 percent of GDP, projects the Centers for Medicare and Medicaid Services.

Those rising costs will push the government-run Medicare system into the red by 2017, trustees of the program projected last month.

Other nations have done a better job of controlling costs, says Victor Fuchs, a veteran healthcare economist at Stanford University.

The US already spends 60 to 80 percent more of its GDP on healthcare than many other rich nations do. And that’s before adding the money the Obama administration will need to provide health insurance for 45 million uncovered Americans.

Some of those nations get better health results than the United States gets.

A recent study by the McKinsey Global Institute found that the US spends $650 billion more on healthcare than might be expected given its wealth and the experience of comparable well-to-do nations. Roughly two-thirds of that excess pays for outpatient care, including visits to physicians, same-day hospital treatment, and emergency-room care, often expensive tasks relying primarily on paid individuals and not medical machines.

The lead author of that study, Diana Farrell, has gone to the White House to work for Lawrence Summers, head of the National Economic Council.

Of course, many reformers hope to squeeze costly inefficiencies out of the US healthcare system. For instance, a new study published in Health Affairs, an academic journal, finds the time cost to physicians of dealing with health plans runs $23 billion to $31 billion each year. Reformers also point to the use of costly medical procedures when less expensive ones work as well or better.

The healthcare industry recently promised the president to trim $2 trillion in costs over 10 years, an amount equal to 1.5 percent in the annual growth rate of healthcare costs.

“That’s a joke,” says Professor Mitchell, who doubts those voluntary cuts will be made. “Do you know anyone who wants to take less income?”

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