Prologue: It is widely believed that American health care costs are spiraling upward at a rate that is unsustainable. Or are they? In this essay Joseph Newhouse, one of the country's leading health economists, argues that the health cost containment crisis may be overstated. One by one, he debunks widely held perceptions of why health costs are increasing: an aging population; wasteful administrative costs; the spread of health insurance; a surplus of physicians, which increase induced demand for health services; more defensive medicine; expensive care for the terminally ill; and so forth. Instead, Newhouse argues that the main cost driver is new technology and its ability to increase the capabilities of medicine. To date, the scant available evidence has shown that Americans have been willing to pay more for such increased capability. Assuming that Newhouse s premise is correct—that increased medical capability is the major cost driver— then managed competition alone (without global budgets) “will not, apart from a transitory period, slow the rate of increase in medical care costs,” he writes. Newhouse is John D. MacArthur Professor of Health Policy and Management at Harvard University and director of the Division of Health Policy and Research Education. He holds a doctorate in economics from Harvard and is founding editor of the Journal of Health Economics. Newhouse spent the first twenty years of his career at the RAND Corporation, where he designed and directed the RAND Health Insurance Experiment, a research venture that has had a profound impact on health insurance policy debates. Highly respected by his peers, Newhouse has received numerous awards, most recently the 1992 distinguished investigator award from the Association for Health Services Research. Abstract: Calls for medical care cost containment are all around us. Although the evidence that costs are too high is strong, the evidence that they are rising too quickly is much weaker. The principal cause of increasing costs appears to be the increased capabilities of medicine; the scant evidence available suggests that to date the public has wanted to pay for most of these capabilities. Effective global budgets would address the rising opportunity costs of health care. However, they would threaten ongoing innovation and probably would increase distortions from pricing errors.
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