Health care.

• Author: Garber, Alan M.
• Position: Delivery of medical care in US

Notwithstanding the recent cessation of efforts toward comprehensive health care reform in Washington, improving the financing and delivery of health care remains a major issue for the public sector. Health care markets are undergoing dramatic change, as consolidation of health care organizations, the expansion of managed care, and increased price competition among health care providers have transformed the landscape of health care delivery. Members of the NBER's Program on Health Care have studied the phenomena now occurring in health care markets, worked to understand the factors leading to changes in health care markets, and analyzed the consequences of alternative policy options. This research program also has included efforts to forecast Medicare expenditures and to evaluate health care technologies. Members of the program include both young and well-established academic economists, as well as four physician-economists.

Growth in Health Expenditures

In a recent paper,[1] David M. Cutler has compared the growth of health costs in the United States to that in the rest of the OECD. He finds that higher income is responsible for much of the higher cost of health care in the United States. Even after accounting for income effects, however, the growth of health costs in the United States in the 1980s outpaced the growth of health costs in other countries. This relative increase in spending was not associated with corresponding increases in longevity, though. Further, it is uncertain whether the lower cost growth in other countries, which was achieved largely by mandated reduction in prices for care, will continue in the future.

Medicare represents the largest public component of health care spending and is responsible for a large fraction of the growth in the federal budget deficit. Thus, understanding why Medicare expenditures have grown is important for the development of health care cost containment strategies. For example, is expenditure growth concentrated among the groups of elderly Americans who have large claims? Or, has the expenditure growth been distributed equally across low- and high-cost users of services covered by Medicare, and across racial and gender categories?

To address such issues, Thomas E. MaCurdy and I[2] performed an analysis using data from a 5 percent file of Medicare hospital claims for 1986-90. We find that expenditure growth was not restricted to the highest-cost users, but rather occurred across the board. Expenditure growth for men, women, blacks, and whites, each viewed separately, also took place across the board. These findings suggest that cohort-targeted cost containment procedures are unlikely to curb overall Medicare expenditure growth. Identification of specific sources of growth, such as the procedures and diagnoses associated with rising expenditures, will be an important additional step in formulating cost containment policies.

Health Care Technology: Costs, Use, and Effectiveness

The adoption and diffusion of new health care technologies is widely considered to be the most important controllable source of growth in health expenditures. Several NBER economists have explored how health care technology can explain cross-sectional variation in health expenditures. They also have developed and applied methods of evaluating health technologies.

Cutler and Mark McClellan[3] have investigated the causes of growth in hospital spending on heart attacks for the Medicare population. Between 1984 and 1991, that spending grew by 4 percent annually. Over the same time period, Medicare determined prices for heart attack care on an administered basis. The prices paid were essentially unchanged in real terms during that period. An increased use of intensive surgical procedures - cardiac catheterization, coronary artery bypass surgery, and angioplasty - accounted for the entire increase in spending on heart attacks.

The share of patients receiving one of these procedures rose from about 10 percent in 1984 to more than 40 percent in 1991. The procedures result in...