Cost Shifting Does Not Reduce the Cost of Health Care

ALMOST EVERY POLITICAL PRONOUNCEMENT NOW emphasizes cost reduction as a central object of health care reform. The policy recommendations that follow, however, frequently aim at cost shifting rather than cost reduction. Shifting has popular appeal while reduction usually requires painful choices. To see the irrelevance of shifting for cost reduction, consider the proposal to prohibit health insurance companies from varying premiums according to enrollee’s health status. This obviously reduces premiums for the sick but, not so obviously, also increases premiums for the healthy. Such a shift may be desirable on equity grounds but does nothing to reduce the real cost of care. Also, unless accompanied by a strict mandate, these shifts may lead to an increase in the uninsured because some healthy individuals will discontinue their health insurance coverage in response to higher premiums. A subsidy is another example of a so-called cut in the cost of care, but also is just cost shifting. A subsidy reduces the cost for low-income eligible individuals by shifting the cost to higher-income taxpayers. Again, this may be desirable policy, but it is not a reduction in real costs. When eligibility for a subsidy includes those individuals and families with incomes up to 500% of the poverty level (approximately $110 000 for a family of 4) as in one senate proposal, even the shifting of costs is an illusion. It is impossible to collect enough taxes from those with incomes of more than $110 000 to subsidize the poor and the sick and also help the numerous middle and upper middle income households. The latter will have to pay for their own health care one way or another. Also misleading is the claim that government is cutting the cost of care to families and individuals by requiring employers to provide health insurance (ie, an employer mandate). Abundant theoretical and empirical research shows that although employers appear to pay, the cost is actually passed on to workers through foregone wage increases or to consumers through higher prices. To prescribe policies that would result in cost reduction instead of cost shifting, it is useful to know why Americans will spend more than $8000 per person this year for health care while the next highest spending country (it will probably be Switzerland) will spend about $5500, and the average Organization for Economic Co-operation and Development country will spend less than $4500 per person. There are many explanations for the differentials, some more applicable when comparing the United States to one country and some to another. The following generalizations, however, hold on average for comparisons between the United States and other high-income countries.