Does Prevention Reduce Costs?

One of the common memes in the health debate is the claim that increased spending on preventative medical care (e.g., cancer screening) can reduce overall health spending.

That idea is very attractive, since it seems to offer a free lunch: greater health at lower cost. It has just one small problem, though: it isn’t true.

As the Congressional Budget Office describes in an analysis released on Friday:

Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

That result may seem counterintuitive. For example, many observers point to cases in which a simple medical test, if given early enough, can reveal a condition that is treatable at a fraction of the cost of treating that same illness after it has progressed. In such cases, an ounce of prevention improves health and reduces spending—for that individual. But when analyzing the effects of preventive care on total spending for health care, it is important to recognize that doctors do not know beforehand which patients are going to develop costly illnesses. To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway. Even when the unit cost of a particular preventive service is low, costs can accumulate quickly when a large number of patients are treated preventively. Judging the overall effect on medical spending requires analysts to calculate not just the savings from the relatively few individuals who would avoid more expensive treatment later, but also the costs for the many who would make greater use of preventive care.

In short, an ounce of prevention may save a pound of cure for the patients it helps. But those ounces of prevention can add up to tons of costs when spread over millions of patients.

And that’s not all.

If you approach this issue from the perspective of costs to the government, you also have to consider another factor:

Even if the provision of preventive medical care saves money, potential savings from expanded federal support might be limited depending on how frequently that service is currently provided. Many studies of preventive care compare the costs and benefits of a preventive service with the costs and benefits of doing nothing. In practice, of course, a great deal of preventive medicine is already being performed—examples include periodic screening for colon or breast cancer, the use of cholesterol-lowering drugs that help prevent serious heart disease, and the use of vaccines—and many insurance plans already cover certain preventive services at little or no cost to enrollees.

Consequently, a new government policy to encourage prevention could end up paying for preventive services that many individuals are already receiving— which would add to federal costs but not reduce total future spending on health care.

In other words, physicians and insurers aren’t complete idiots. Many types of valuable preventative care are already done for a substantial fraction of patients. If the government introduces a new policy to pay for more prevention, there’s a real risk that the government will end up paying for the prevention that would have happened anyway (this is often known as buying out the base). And that extra spending, for no health benefit, may mean that the overall program increases federal health spending — even if the extra preventative services are beneficial.

The bottom line is that increased preventative care can affect the federal budget in three distinct ways. First, there is the happy case, in which the prevention benefits a patient, leading to greater health and lower costs. Second, there is the unhappy case, in which the prevention adds costs but yields no benefit for the patient. Third, there is the buying-out-the-base case, in which the preventative care would have happened anyway, but now the government is picking up more of the tab. Policymakers tend to focus on the happy case. But serious analysts have to consider all three.

This conclusion may seem familiar to regular readers of this blog. As I noted recently, a similar framework applies when thinking about the economics of doing mortgage modifications. Policymakers tend to focus on the potential happy cases (e.g., instances in which a mortgage modification will keep someone in their home and shield the lender from unnecessary costs of foreclosure), but often overlook the unhappy cases (homeowners who can’t be saved) and the buying-out-the-base cases (homeowners who would have been saved anyway).

P.S. For completeness, I should note that CBO also considers another budget impact from prevention: successful preventative health may increase lifespans — a good result, to be sure, but one that may increase spending in other programs such as Social Security and Medicare.

P.P.S. I should also emphasize that the discussion above focuses on what appear to be the typical cases. There may certainly be specific instances in which increased federal spending on prevention could reduce costs, and if there is evidence, CBO will score them accordingly.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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