Do we spend too much or does it cost too much?

We can’t even ask the right questions.

Maybe it’s the writer in me, but it drives me nutty when smart, educated, informed people say we have to cut health care cost, when that’s not what they mean. What I believe they mean, taken from the context in which this phrase is usually used, is that we spend too much on health care (and I believe that assertion is hard to defend).

The evidence of what I say? Listen to the discussion. “We spent $2.5 trillion on health care, 16 percent of our GDP. We have to cut the cost of health care.” So, do we spend too much or does it cost too much? Furthermore, is health care spending a good thing or a bad thing?

Cost. Every purchase we make reflects built in cost. Cost includes labor, materials, administration, marketing, and various other overhead expenses. The cost of a pacemaker, for instance, includes research, development, marketing, the buildings in which all this is done, taxes, snow plowing (lately, all across the country), administration and a whole lot more. You get the idea.

Price. Every purchase carries a price. Price is different from cost. Price usually reflects cost plus some degree of margin. If the total cost of making a pacemaker is $15,000, and the manufacturer wants a 10 percent return on investment (before taxes), the price will be $16,670.

Spending. When all purchases are combined we can arrive at a spending level. Spending includes cost and price, plus use or the quantity of purchases made. My insurance buys me a pacemaker. Nine others in my town also receive pacemakers (thanks to their health insurance or government health plan). Our health care payers just spent $167,000 on the pacemakers (plus at least that much for the doctors, surgeons, scanners, MRIs, X-rays, blood test, hospital room, surgical center, etc.).

Every facet of the health care industry reflects cost and selling price. Spending reflects purchase quantity.

The definitional difference is critical to our health care redesign debate. Because spending, quite frankly, is directly related to rationing. Someone is going to ration health care because someone has determined that we spend too much in the aggregate, or we spend too much on a certain type of procedure.

The best way to control cost, on the other hand, is through competition. When Smart Choice of Milwaukee figured out how to do all MRI’s for $600, it should have resulted in other MRI providers finding a way to reduce their cost if they want to stay in business. Unfortunately, the third party payer system seems to prefer to pay a higher price and real cost competition falls aside.

Yet, at $600 each, we cannot say whether health care spending would fall just because the price is less – because Smart Choice found a way to reduce cost. Spending could very well double as more people turn to less expensive MRIs in place of less effective but cheaper X-rays. Such is the nature of health care spending.

Ask your health care guru, Congressman, or state legislator this question: Do you intend to reduce health care spending? Or do you intend to reduce the cost of health care?

There is something Congress and legislators can do to reduce cost, and they ought to do it quickly. The cost of business regulation in the United States during 2009, according to The Wall Street Journal, was $1.75 trillion dollars or 14 percent of GDP. What if a miracle occurred, and elected officials decided to reduce the imposed cost of doing business that result from over-regulation? These regulatory costs are included in every increment of health care cost.

If the government-imposed regulatory cost were reduced, the price of health care services would fall, thanks to competition. This is a winning strategy, but it does not address the other question: How much do we and should we spend on health care?

Stay tuned.