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October 30, 2012 3:52 PM Government IS Good at Some Things

By Aaron Carroll

I’ve written about this before, but it’s worth bringing it back to add in some numbers. Let’s recap my prior argument:

There are plenty of things that government does poorly. Or, at least you can make that argument, and find some support for it out there. For instance, many people believe that government does a terrible job at sparking innovation. I could imagine a debate there. Some think that government does a bad job at providing choice. That’s entirely defensible. Government run systems also allow less room for profit, which can drive out entrepreneurs. Also arguable.
But what government systems do well is hold down costs. They use central planning. They use their large market power to negotiate for reduced reimbursement (see Part 2). They buy drugs cheaper. They eliminate profit and overhead.
This is what government does well. It’s why every other country that has more government involvement than ours spends less than we do.

Part of our problem is that even when we allow the government into the game (ie Medicare), we set restrictions that hamper its ability as a government-run insurance plan. For instance, Medicare is – by law – prohibited from considering cost at all when making coverage decisions. So even though Medicare has been better than the private insurance sector at holding down costs. But how much better could it be?

There’s a new paper in Archives of Internal Medicine, “Cost Control in a Parallel Universe: Medicare Spending in the U.S. and Canada“:

As the U.S. was implementing Medicare in 1966, Canada was phasing in its own Medicare program which covered all Canadians under provincially-administered plans. While these provincial plans varied, all incorporated significant payment reforms - global budgeting of hospitals and stringent capital expenditure controls - and ban copayments and deductibles.
Before the mid-1960s the two nations’ health care financing systems were similar, and health costs were comparable. Since then overall U.S. costs have grown more rapidly, but no study has compared spending for the elderly - the populations covered by Medicare in both nations.

So this study simply compared the growth of health care spending of the two programs (Canada Medicare and US Medicare) for people 65 and older from 1971 through 2009. They excluded Medicare Part D, which started in 2006, so that the new program didn’t make the US look worse. What did they find?

In 1980, US spending was $1215 per enrollee versus $2141 in Canada. Since then, US spending has grown by an inflation adjusted 198.7% versus 73% in Canada. Here are some more details:

Per-elder Medicare hospital spending grew 44.7% in Canada vs. 81.9% in the U.S. Physician spending grew 100.7% in Canada, vs. 274.3% in the U.S. Hospital’s share of total Medicare spending fell from 49.6% to 41.5% in Canada and from 68.4% to 41.5% in the U.S. Spending for other services (e.g. home, hospice and skilled nursing facility care) rose from 3.9% to 23.6% of spending in the U.S. and from 39.7% to 44.3% in Canada.

Here’s the kicker. If the US Medicare program had grown at the same rate as Canada’s did over this period, we would have saved more than $2.9 trillion. In 2009, the trust fund would still have been running a surplus, instead of a deficit.

I can already hear the protests of rage and bluster. You’ll argue that Canada rations, or that Canada is different, or that you have to wait a year to see the doctor once you discover you’re pregnant. I’ve covered many of these things before. They still miss the point. You know what Canada is better than us in? Keeping costs down. Period. If your main complaint these days is that the health care system, or Medicare specifically, is a entitlement we can’t afford and that we have to cut, you’d think we’d be open to recognizing that this is something other countries do better. They keep costs down. Ignoring that makes no sense.

[Cross-posted at The Incidental Economist]

Aaron Carroll ,MD, is an associate professor of Pediatrics and the associate director of Children’s Health Services Research at Indiana University School of Medicine.