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POLICY: Why health care costs so much

This one is the cross-post from Ezra’s blog yesterday.  I was going to do something different last night, but the wind was right and so I went paragliding instead! And it was great! I will have more on the FDA later today or tomorrow

Health Affairs (the essential peer reviewed health policy journal) has an article from the very well respected Center for Studying Health System Change (HSC) which announces that the decrease in the increase of health spending has stalled (here’s the slightly more digestible press release). No kidding, the press release starts off with this line. See if you can get the gobbledygook here:

"The reprieve from faster-growing health care costs stalled in 2004 as costs per privately insured American grew 8.2 percent"

The good news is that nominal GDP growth  (real growth plus inflation) was 5.2% in 2004, so health care costs (the 8.2%) were less than double that. So in the bizzaro world of American health care, it’s still something of a success when health care is expanding only are only a little under double the rate of the rest of the economy or less than three times the inflation rate. That’s why health care takes up 15% of the economy now when it was around 5% in 1970.

But the two key questions are a) do we have to spend so much more? and b) what are we getting for the money?

The short answer to a) is no, we don’t have to spend so much.  Most other countries spend between 6% and 10% of their GDPs on health care, and some, such as Canada and Japan in the 1990s, actually reduced the share of GDP they spent on health care.  The more complex answer to a) depends on what you think we ought to be spending our money on.  Back in the time of Vietnam and the Cold War the US spent nearly 10% of GDP on "defense".  Now we spend money on frappuchinos and viewing pictures of Paris Hilton on-line. These are all political choices, and it’s clear that Americans view medical care as to some extent a luxury good that they are happy to spend money on. In her book Medicine and Culture the late Lynn Payer described the difference between the British stiff-upper lip, the French consternation about balance in the liver, and the American desire to operate on any patient who’d lie still for a moment, and she ascribed most of the difference in medical practice, and thus costs, to culture. More recently Uwe Reinhardt has shown that it’s not just culture but also prices — we pay our health care workers and supplier more than foreigners do and that’s a big factor in our overall larger costs.

The other factor that allows us to spend so much more is that there is neither a competent market mechanism that stops us spending too much, nor a central budget authority doing so. Market mechanisms work in one of two ways, either on average we just can’t consume more (i.e. pictures of Paris Hilton) or we can’t afford to all consume as much as we might possibly want (i.e. we can’t all afford Prada dog-caddying purses or whatever Paris carries her dog around in). In health care our ability to consume is essentially limitless, especially if we’re sick, and usually some other sucker is paying the tab. So we are dependent either on the producers of care to say "that’s enough" (which is the British stiff upper lip approach which results in what Americans call rationing and Brits call compassionate care for the sick and elderly), or on the sucker that’s paying the tab to cry "Uncle!". Briefly (and this is a much more complex subject), because of our diffuse system of third party payment, none of the said suckers have either had the ability or the will to really reduce payment. And the producers here have always known that putting up their costs will result in someone ponying up. Even though as the prices go up more people get excluded out of the system on the margins, those who can stay in it will more than make up the financial difference. So costs go up, as we do more things with more technology at a higher price. And because not everyone is in the system, and there’s not one universal pot of money or line-item budget, or no effective consumer pricing mechanism (and there can’t be for reasons that I wont go into here), no one is there to cry "Uncle!". Of course in other countries that’s usually the job of the other cabinet ministers who say things like, hey if you put all the taxes towards health care there’s nothing left for education, roads, invading Iraq or whatever. When Congress votes on a new healthcare bill no-one seems to care too much about that bottom line, as the Medicare Modernization Act cost fiasco proves. Note that this is not how Walmart governs relations with its suppliers.

The second question is harder to answer. In some ways it’s easy to say that we don’t do as well as other countries on several outcomes measures and that we’re not getting our money’s worth.  On the other hand several of the things that used to kill people are now relatively easily surmountable — at a cost.  And then there’s the paying for comfort issue.  It used to be that if you had real heart trouble, you needed to have your chest cracked and have a full CABG.  No fun.  Now getting a stent put in is a relatively painless procedure that they don’t even put you to sleep for. Does that lower the bar on the decision to do invasive cardiology? Indeed. Does it cost more for the payer per individual? Probably, as in the end many of those stent patients need a by-pass anyway. Does it cost the payers and society more overall? You betcha. And the parking lots outside the cardiologist suites are filled with physicians’ Porsches as are those outside the executive offices at J&J and BSC.

Is that a good or a bad thing?  Complex. In aggregate the cheapest thing is to let the heart (and therefore patient) go when it’s time, but we’re never going to do that. So should we restrict procedures to only those in real trouble, and only give them a CABG?  Fine if you say so, but let me ask you two questions. What do you define as real trouble?  And would you rather have a stent put in while you lie there listening to Lite jazz, or have your chest cracked?

And that uncertainty is what drives our system and drives that cost barometer up.

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gadflyTim GeeSueRon GreinerGregory D. Pawelski Recent comment authors
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gadfly
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gadfly

Thank goodness that someone finally flipped the common sense switch in congress about subsidizing Viagra. HMOs also market to the young in hopes of creating magic revenue streams, while raising fees to cover nebulous “technology” costs (mostly paying for administration and incompetence rework). The mission of recruiters is to hire people who will make “business decisions” – which has led to the absurdity that skilled people are screened out from jobs that require their skills because their bias toward their skill might inhibit them from making pure “business” decisions. HMO leadership is setting this tone, but they were hired for… Read more »

Sue
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Sue

Tim, I don’t like the government handling anything, but unfortunately what I’m seeing in the insurance market suggests to me that insurers are not capable of creating a competitive market themselves. What is killing us now is that because every state regulates differently and there are tons of insurance pools, insurance companies can stack the deck in favor of the young and healthy or the largest pools and make it up with middle class folks like us. There is virtually no limit on their ability to raise premiums or requirement for them to cost justify the raises. If we had… Read more »

Sue
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Sue

Great news. The House just killed coverage of Viagra in Medicare and Medicaid. Hopefully the Senate will get some common sense too. Believe it or not I’d support loss of Viagra coverage from all insurance premiums. I’m sorry for guys with sexual dysfunction, but it isn’t a life or death matter and those of us struggling to pay for insurance coverage don’t deserve to see our premiums rise for elective prescriptions. I am definitely an advocate of the “make them pay to play” mentality when it comes to Viagra and other ED drugs. Affordable health care requires some common sense… Read more »

Tim Gee
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Sue, I too am self employed with the same insurance options as you. And I agree with your assessment. I did not mean to imply that there is not room for considerable improvement. What we have now is a very heavily regulated industry with little thought as to the big picture. It seems to me that the biggest cause of many of the problems you mention are not the result of the “market”, but the result of the actions of politicians and regulators. Moving to a national health system will only put more into the hands of politicians and regulators.

Sue
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Sue

Tim, until I left corporate life and started my own business I shared your beliefs. People who thought there was a health care crisis were just hangers on who felt they should be “entitled” to free healthcare. If we actually had a consumer-driven health care market I’d still support that view, but we don’t. We have a market where the costs of those who can’t pay are being borne by those carrying insurance and paying taxes. The HSA concept is great if you’ve a plan that fully covers you except for the deductible, but if the insurance company chooses to… Read more »

Tim Gee
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The elephant in the living room here is rationing. As technology and science advances, more expensive therapies become available. As populations age, demand increases. The bottom line is whether government will ration health care in a technocratic way, or the market will be allowed to deal with the situation. I think it’s rather cynical to proclaim health care a “right” and then ration that right away to some degree with nationalized health care. The alternative market approach is more honest; make good choices and work hard and become able to pay your health care costs — make poor choices, don’t… Read more »

Ron Greiner
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Ron Greiner

I can’t tell you about Wal-Mart but I can tell you about 7-Eleven because I have first hand experience in the “Original Pilot Test” of MSAs (now HSA) in January of 1996, the first month of MSA eligibility. 7-Eleven has 28,000 stores and the people they hire could easily be from the ranks of the unemployed and on Medicaid. They teach people how to get up and go to work, important skills for successful employment. Once these skills are mastered, they may move on to higher paying positions in a small business. In short, these employees are like tourists in… Read more »

Sue
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Sue

Gregory, the problem is that we reward the Wal-Mart business model by shopping there. We reward politicians whose current tax policies incentivize loss of U.S. jobs to low wage countries by continuing to vote for them. We reward lawyers who file malpractice and class action suits by using their services or as jury members awarding large settlements. We reward illegal immigrants by looking for ways to allow them to “cut” in the immigration line and obtain the same level of services that legal residents get. We reward an inefficient healthcare system by paying the prices until we can’t afford it… Read more »

Gregory D. Pawelski
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Gregory D. Pawelski

At Walmart, many of its employees are forced to enroll in Medicaid for health coverage. Sen. Ted Kennedy, Sen. John Corzine and Rep. Anthony Weiner introduced the Health Care Accountability Act which would require states to report annually on the number of workers relying on taxpayer-funded health programs. Kennedy said programs like Medicaid provide a critical safety net for low-income women and children, the disabled, and the elderly and shouldn’t be a profit center for large companies like Wal-Mart. Kennedy and the other bill sponsors estimate that 600,000 of Wal-Mart’s 1.3 million workers do not have company insurance. As a… Read more »

Ron Greiner
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Ron Greiner

There is another bright spot in the Medicare Rx Bill and that is tax-free HSAs. The bill was passed because of the HSA inclusion. Matthew didn’t spend enough time on fraud making costs go up in my opinion. I have a friend, retired hospital administrator on Medicare, who was just in an auto accident in Colorado. The other driver was ticketed and State Farm is suppose to pay the bills. My friend has already had one spinal surgery. His passenger, who was also hurt, is on Medicaid. His Medicare customer service is a nightmare, but that’s a different story. Medicaid… Read more »

Gregory D. Pawelski
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Gregory D. Pawelski

You say that when Congress votes on a new healthcare bill no-one seems to care too much about that bottom line, as the Medicare Modernization Act cost fiasco proves. However, the PricewaterhouseCoopers study that the Community Oncology Alliance (COA) commissioned shows that an estimated $13 billion will be saved from Medicare spending for cancer care through 2013. This is $8.8 billion more than the original intent of Congress in passing the Medicare Modernization Act (MMA). There is at least one silver lining in the new Medicare bill. It offers patients benefits benefits they did not have before, some coverage for… Read more »