There's been the requisite hand wringing of late over what's driving health care costs. Is it the prime endogenous suspect, technology? Or an exogenous factor like insurance? New data out of MIT gives us a better read, and, in a grossly oversimplified nutshell, the answer is . . . insurance. 
To be sure, it doesn't require deep insight to grasp that third-party insurance and health costs must have more than a nodding acquaintance. After all, it's the existence of health insurance entities willing to pay for what people spend that puts the reimburse in reimbursement. But if the insurance-cost relationship is more than casual, is it actually causal?
Yes . . . causal to the tune of about half of health care inflation. That's the answer at the heart of the MIT study, which was nicely summarized in the most recent Business Week (online edition requires registration). MIT Assistant Economics Professor Amy Finkelstein found that "the impact of Medicare on hospital spending is over six times larger than what [conventional studies] would have predicted." Sifting through barn fulls of Medicare data, she produced a key insight: It's the steady, relatively predictable flow of a reimbursement revenue stream that gives providers the fiscal confidence to build buildings and add services.
Viewed in this light, technology is seen more as a natural consequence of insurance than as an independent driver of costs. As splendidly brought to life in Andy Kessler's new book, The End of Medicine: How Silicon Valley (and Naked Mice) Will Reboot Your Doctor, the med tech industry is suffused with innovation, yet now cynics can argue that all this creative juice is linked to insurance in the way canine saliva is linked to Pavlov.
The task of selling into a reimbursed market is indeed different. Let's play "what if" and imagine that an assortment of well-known circumstances -- the Great Depression, Henry J. Kaiser's worker beneficence at Grand Coulee, World War II, etc. -- stimulates a series of actions that ultimately leads Congress in 1965 to adopt (and President Johnson in a rose garden ceremony to sign) a bill guaranteeing elderly Americans access to adequate amounts of . . . food. This new national entitlement provides beneficiaries with insurance that reimburses food costs (subject to a deductible and co-payments), with the private sector being counted on to spoon up the actual meat and potatoes.
Today, the situation has devolved to the following:
- Grocery stores and the feds squabble annually over complex adjustments to Nutrition Related Groups, or "NRGs," which classify beneficiaries by their nutritional needs. Grocers, suffering a reduction in the number of elderly customers, contend that high-end specialty shops are cream-skimming.
- Chefs chafe as insurers turn up the heat on adherence to culinary practice guidelines. A complex kitchen-expense calculation threatens to splinter cooks along the lines of the major food groups.
- Manufacturers, their foodstuffs already regulated by FDA, rage against insurers' additional evidentiary requirements for higher-cost items. Disputes erupt over how to measure the effect of new foods on beneficiaries' nutritional well-being.
Far fetched? Most assuredly. But if the new MIT data is to be believed, the effect of insurance on markets is a lot more than chopped liver.
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