Are Increasing Medical Costs Just Upfront Preventative Costs?

Are Increasing Medical Costs Just Upfront Preventative Costs?

Do increasing medical costs reflect a switch to preventive medicine, such as an increased reliance on pharmaceuticals to prevent disease?

The transition to preventive medicine using drugs raises an interesting point that we may be misreading the signals in health care cost increases.

Medicare and most government programs are monitored on a cash basis accounting method. If a person will likely have a future high medical expense, such as hospitalization for a heart attack, that expense is not recognized until the actual event, the heart attack and treatment occur, sometimes many years into the future.

A switchover to an expensive heart attack preventive drug, such as a statin, increases the current costs but decreases future treatment and hospitalization costs.

There is an overlapping period where health care costs increase to reflect the expense of a disease as it occurs and the expense of a prevention measure, such as a drug that will prevent future occurrence of the disease. Annual health care costs will increase until the preventative effects of the drug (or other measure) lower the disease incidence in the at risk population.

On an actual costs basis it looks like health care costs are rising, but on an accrual costs basis, based on expected disease incidence, costs are declining.

As medicine switches to more preventative treatments, the current cost of prevention is added to the medical costs of those who will get the disease because they are beyond a preventative stage. Medical costs rise on a cash and actual outlay basis, but the unrecognized expected future costs of treating the disease decline.

Assuming that preventative treatments costs increase until they are equal to the disease treatment costs and the goal is quality of life and life expectancy improvements and not cost savings; the switchover to prevention increases current annual costs for the benefit of lowering future annual costs. In other words, prevention does not lower medical costs but improves health outcomes.

Medical costs look like they are increasing because medicine is in a transition period of switching to more prevention measures as oppose to disease treatment measures and medical costs do not incorporate the cost savings from the disease prevention. What we need is a budgeting process similar to most companies and government where they separate capital expenditures from operating expenses. We need to look at prevention measures as capital investments in cost saving measures, current treatment expenses as operating expenses and we need to accrue future treatment expenses.

If we redid the medical costs books on an accrual and capital investment basis, I think we would find that costs are not increasing as much on an inflation adjusted basis as we believe. The costs increases are a reflection of poor accounting during a period of introducing prevention methods and are actually investments to lower future medical costs.

The above is based on a comment I left on Econlog, "Tyler's Triple on Health Care" by David Henderson.