Making sense of the medical system.

• Author: Cutler, David M.

Problems of the medical care system are among the most vexing issues on the public agenda. While virtually everyone complains about the medical care system, there is no general agreement about the diagnosis of what is wrong or the appropriate remedy. My research examines the performance of the medical care system and the role that the public sector can and does play in influencing that system.

Public complaints about the medical system are numerous.(1) About 15 percent of the United States population is without health insurance; in a rich country like ours, many find that unacceptable. Others who are insured find that coverage fleeting; they can get insurance when they are healthy but are canceled or face large rate increases when they become sick.(2)

But far and away the dominant concern about the medical care system is that it costs so much money. The United States spends nearly 14 percent of national income - close to one in every seven dollars - on medical care. Nearly 20 percent of government spending is for medical care. A person with an expensive illness can easily spend over $100,000. The cost of medical care is so important because virtually every medical care problem we face - from caring for the uninsured to decisions by insurers to insure only the healthy - is made worse when medical costs are high. For example, some people are uninsured because the cost of insurance is so high compared to the much smaller cost of receiving free care; if medical care were less expensive, this would be less of a concern. Similarly, insurers like to select healthy people to insure because the cost difference between healthy and sick is so great; if medical care were less expensive, the gains from favorable selection would be smaller.

Concern about high medical care costs is not unique to the United States. Throughout the developed world, the cost of medical care has increased in real, per capita terms twice as rapidly as national income for three decades or more.(3) As a result, medical care reform has been on the agenda of virtually every country in the OECD in recent years. Understanding the growth of medical care spending is thus a problem with world-wide implications. The first part of my research is thus focused on understanding the rising cost of medical care.

The passkey to access the medical care system is health insurance. Substantial evidence exists that people with health insurance receive more care, more frequently, from higher quality providers, in more appropriate settings, than do people without health insurance. Examining why people are without health insurance, and what role the public sector can plan in this issue, is the second part of my research.

The Rising Cost of Medical Care

Very little has traditionally been known about the sources of cost increase in medical care. Public policy has generally focused on the price of medical services; deficit reduction, for example, is frequently accomplished by reducing the prices the government will pay for medical care over time.(4) But price increases need not be the whole story. Spending on medical care (or any good) can increase because prices are increasing (holding the quantity and quality of services constant) or because the quantity or quality of services is increasing.

In several recent papers, Mark McClellan and I have attempted to disentangle the sources of increased spending on medical care.(5) McClellan and I look in particular at spending on heart attacks. We use a case study approach because the only way to really understand the nature of medical care provision is to consider care for a particular...