September 28, 2006 11:54AM

Costs vs. Spending

In yesterday’s New York Times, David Leonhardt writes:

Mr. Wagoner’s argument has become the accepted wisdom about the [health care] crisis: the solution lies in restraining costs. Yet it’s wrong.

In fact, the solution does lie in restraining costs. Leonhardt is wrong because he conflates costs and spending

Spending is the amount of money we devote to medical care. Costs are different. The money devoted to medical care represents a cost, because we give up the next‐​highest value use of that money (e.g., a skiing trip). But we also bear costs due to illness, including pain, limited mobility, and shortened lifespans. We spend money on medical care to reduce the total costs that we bear. Spending a lot of money on medical care is therefore desirable — so long as the benefits (reduced pain, enhanced mobility, longer lifespan) exceed the costs for each increment of spending. The solution to every economic problem undeniably lies in restraining costs. 

Leonhardt probably meant to shoot down the idea that the solution to America’s health care crisis is in restraining spending. Indeed the thesis of his article seems to be that even though there are many wasteful medical expenditures, a lot of what America spends on health care is very worthwhile. But he repeatedly confuses the two concepts:

But the No. 1 cause of the cost increases is still the one you can see at the hospital and in your medicine cabinet — defibrillators, chemotherapy, cholesterol drugs, neonatal care and other treatments that are both expensive and effective. 

But if those treatments are expensive and cost‐​effective, then they would reduce costs. 

The confusion keeps Leonhardt from reaching the $64,000 question: How can we eliminate waste while preserving what works? Or to put it another way, How can we reduce spending without increasing costs?