Reggie Jackson and the Cost of Health Care
When Reggie Jackson's five-year, $2.9 million contract with the New York Yankees kicked off baseball's free-agent era in 1976, a box seat at Yankee Stadium -- the best in the house -- would run you $5.50. Thirty-eight years later, the minimum salary for a major leaguer is just below Jackson's then-record amount. The biggest stars earn more for four games than Jackson did for an entire 162-game season. Now, tickets to a Yankees game range from $18 for the bleachers to $300 for the best seats. The connection seems obvious: The extraordinary run-up in player salaries has driven an outrageous rise in ticket prices.
But as any student of the baseball industry -- or any industry, for that matter -- knows, the relationship is exactly the opposite. As more people spend more money on baseball-related entertainment, baseball raises prices. Even so, game attendance has more than doubled since Jackson signed his big contract. Ticket prices, broadcast contracts, concessions and in-stadium advertising have exploded. And those are just baseball's old-fashioned revenue streams. Today, there's also pay television, luxury boxes and "VIP" experiences, high-end restaurants, logo licensing and collectibles. All of this comprises what economists call "raising the demand curve" for baseball.
More demand for baseball raises demand curves for almost everyone whose living relates to baseball. The increasing value of a slugging outfielder drives up the value -- and therefore the pay -- of the scouts who found him, the executives who signed him, the minor league instructors who nurtured him, the marketers who exploit his image and the broadcasters who call his games. A team of expensive sluggers requires a luxurious clubhouse, gourmet food, first-class travel, skilled publicists, state-of-the-art training equipment and top-notch medical care.
Which brings us to America's building awareness about our uniquely high prices in health care. New York Times reporter Elisabeth Rosenthal's excellent series "Paying Till It Hurts" has brought this concern into focus by examining inexplicably big bills in every corner of health care, from stitches to ambulance rides to hip replacements. Rosenthal tours a world of irrationality and excess, where prices bear no relationship to underlying inputs of time or resources, and charges for the same service vary inexplicably across regions, institutions and even individual patients.
There's only one problem: Like casual baseball fans, most health experts get cause and effect backward. They believe these absurdly high prices are what explain the U.S.'s high health-care tab. But it's the other way around. America's unique willingness to pay more for health care -- the continuous raising of our demand curve -- forces up prices.
Ignore the political rhetoric, and look at the totality of U.S. policy in terms of its impact on health care as an industry. Medicare, Medicaid, new insurance mandates, elimination of coverage caps, Part D drug coverage and the Affordable Care Act have been the economic equivalent of baseball's pay-TV revenues, new luxury boxes and online subscriptions services: huge new sources of revenue. These incremental dollars lift the value -- the "cost" -- of everything that helps capture these revenues, from doctors to devices to hospital administrators. Remember, every "cost" in health care is simply someone else's "price" for their services and goods; pushing up the demand curve for health care pushes up all of these demand curves, too.
There is probably no health-care expert who hasn't looked at some data point in the health-care economy -- doctors' salaries, hospital overhead, pharmaceutical marketing, paperwork, you name it -- and concluded that if we could just cut the cost of this one obviously wasteful or overpriced service, the overall cost of care would fall.
Unfortunately, this confusion between cause and effect isn't just of semantic or academic interest; it drives policy. Rather than rely on markets or actual consumers to discipline costs, health care relies on the efforts of big intermediaries -- insurers and government -- to use their supposedly superior knowledge of real costs to identify and control the excess.
Yet there's no such thing as a true underlying cost by which to measure excess. Sure, a sudden increase in the price of beef may cause a spike in ballpark hot dog prices (assuming there's some beef in them). Over time, though, the "cost" of every input in baseball -- player salaries, executives, even uniforms -- depends only on how much we fans are willing to pay to attend, watch and buy all things baseball. In health care, it's the same: As long as society is willing to add more air to the balloon of the health-care economy, the overall costs of all things health care will rise. Government policy is the baseball fan of health care.
But hold on, you might ask: Doesn't the success of other developed countries in controlling costs confirm the conventional wisdom? Lower prices for almost everything seem to underlie their greater success in managing overall health spending. Perhaps counterintuitively, it's the other way around: Prices (or costs) are lower in other countries because they're not willing to spend as much on care as we are. All other developed countries use some mechanism to limit demand, subjecting it to either absolute budgets or insurance mechanics that delay or prevent certain treatments. It's this limiting of demand that makes price controls effective: Only by restricting how much air a society blows into the health-care balloon can a nation control pressure on prices and costs.
In contrast, in the U.S., the goal of health policy is to ensure that everyone receives whatever health care they "need." Because there is no objective measure of need, the industry can endlessly expand what people consider necessary. So our uniquely unbudgeted public entitlements -- and insurance structured as uncapped benefits -- continuously add dollars to the industry, making effective price discipline impossible. Many supporters of a single-payer system in the U.S. believe it could maintain open-ended coverage while controlling prices to keep costs down. But these objectives are incompatible.
Now, it's not true that the U.S.'s efforts to control health prices have zero impact. It's just that these efforts are akin to squeezing certain areas of a balloon while it's being pumped with air: The volume still grows but the shape is distorted. So, limit reimbursement for Medicaid primary care, and hospitals "prove" that the warehouselike treatment in their emergency rooms is somehow a higher-cost alternative. Have Medicare pay lower-than-market prices, and oversee an empire of unnecessary care and fraud. Penalize rehospitalization, and multiply the number of patients admitted only for "observation." Or, as Rosenthal reported, limit reimbursement for surgeons performing spinal operations, and unleash a proliferation of "assistant surgeons" requiring payment. It's endless. Our health-care balloon-squeezers have the power to drive down some prices, but the effect is merely to push up some price bubble elsewhere.
Limiting prices without simultaneously limiting demand is like capping the salaries of "overpaid" shortstops and then being surprised when all the good ones turn into high-priced second basemen.
Look at the National Football League and the National Basketball Association -- the two major U.S. sports leagues that managed to cap players' salaries. Did this cause ticket prices or pay-TV prices to decline? Of course not. How about those big-time "nonprofit" college sports programs that pay their players absolutely nothing? The artificial wage control merely inflates the salaries paid to coaches, the arms race in training facilities and the size of university athletic department staffs. Keep these examples in mind the next time you read about increasing pay for hospital administrators. The squeeze on reimbursement rates paid to private doctors has motivated them to sell out to hospitals, pushing up the demand -- and pay -- for hospital administrators.
Since Medicare's inception, government and health insurers have tried to control health-care prices; 50 years later, it's time to admit failure. If America's health-care politics are unique in refusing to accept limits on demand, then we need a solution tailored to our reality. Let's reduce the role of the big intermediaries who have allowed our system to become so expensive and opaque and increase that of the one force that can drive good behavior: the consumer. After all, America's fully employed army of health-care cost experts knows a lot about an extraordinary range of small things -- the prices of literally millions of individual medical goods and services in every nook and cranny of the industry. But they don't know baseball.
(David Goldhill, the president and chief executive officer of the cable TV network GSN, is the author of "Catastrophic Care: How American Health Care Killed My Father -- and How We Can Fix It.")
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