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August 23, 2013 10:00 AM When Government Says ‘No’ to Rising Costs

By Ezra Klein

Health care and education pose the same basic threat to the economy: How do you keep costs down for a product that consumers must purchase?

Saying “no,” after all, is how consumers typically restrain costs. If Best Buy Co. wants to charge you too much for a television, you can walk out. You might want a television, but you don’t actually need one. That gives you the upper hand. When push comes to shove, producers need to meet the demands of consumers.

But you can’t walk out on medical care for your spouse or education for your child. In the case of medical care, your spouse might die. In the case of college, you’re just throwing away your kid’s future (or so goes the conventional wisdom). Consequently, medical care and higher education are the two purchases that families will mortgage everything to make. They need to find a way to say “yes.” In these markets, when push comes to shove, consumers meet the demands of producers.

The result, in both cases, is similar: skyrocketing costs for a product of uncertain quality. As the Brookings Institution’s Isabel Sawhill writes: “We spend twice as much per capita than most other countries on health care and don’t get better outcomes as a result. We also spend twice as much per full-time equivalent student on higher education than other OECD countries, and 38 percent more on elementary and secondary education with disappointing results.”

Health care and education spending now account for fully a quarter of the U.S. economy. Costs in both sectors routinely rise faster than overall economic growth (though health-care costs have slowed in recent years). The question isn’t whether there’s a problem. It’s what’s to be done.

Controlling Costs

One answer, beloved on the right, is that government is the problem and less government is the solution. Both medical costs and education costs are highly subsidized. Those subsidies, some contend, are the cause of rising prices. If people were paying full freight, they’d be acting more like typical consumers and demanding a better deal.

That gets causality backward. The subsidies exist because consumers — also known as “voters” — are desperate to get medical care when they need it and secure quality educations for their kids. As prices rise, they appeal to the government for help. They find a way to say “yes.”

But that’s a symptom, not a cause, of their inability to say “no.” Unless you can imagine a polity that’s comfortable with forgoing expensive chemotherapy and pricey college for kids, there’s no sustainable way to end government involvement in these areas. The subsidies will always come back because people will always vote them back.

Inside the Barack Obama administration, the question is turned around: Perhaps, they think, the subsidies are actually the solution.

The idea isn’t to funnel more money into these sectors. It’s to use the existing money differently. If the government is going to pay, then perhaps it can use its huge market share to do what consumers can’t: Say “no,” or at least be more cautious about when it says “yes.”

This is the core cost-control idea behind the president’s Patient Protection and Affordable Care Act. The government is using the money it spends for Medicare and to try to push the health-care system away from fee-for-service medicine and toward pay-for-performance.

This insight is the basis for a bevy of experiments, from gathering mountains of data on care quality and treatment effectiveness to penalizing hospitals with high rates of preventable readmissions, to setting up accountable care organizations that make more when they spend less, to “bundling” payments so providers get a lump sum for all treatment around an illness rather than getting paid for each individual intervention.

Saying ‘No’

There’s early evidence that it’s working. Health-care costs have slowed sharply in recent years — much more sharply than the recession, on its own, can explain. This week, the Kaiser Family Foundation added to the good news, releasing new data showing that health costs for employers are growing much less quickly than they did in the 1990s and 2000s.

Now the Obama administration is looking to use the same strategy to stem ballooning higher-education costs. Right now, the higher-education sector is on a “pay for enrollment” model. Colleges get more money when they sign up more kids. That gives them reason to increase operating costs with expensive lures such as climbing walls, to admit students who probably won’t graduate, and to resist innovations that might cut tuition because it would mean less revenue.

The question is whether they can be moved toward a pay-for-performance model under which the institutions that do the best job educating and graduating students make the most money. In theory, it’s easy: Just tie federal loans to cost and quality metrics so students have a financial incentive to go to universities that are doing a good job.

In practice, it’s hard: Defining the right quality metrics is difficult, and making sure you’re not penalizing institutions that accept disadvantaged kids is crucial. And that’s before you even get into the politics.

Of course it’s hard. But if saying “no” were easy, consumers would be doing it already.

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Ezra Klein is a columnist for Bloomberg View.

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