Health care has become increasingly expensive as technology
and treatments have improved. The growth in the cost of healthcare has outpaced
the GDP for more than 30 years. Topping $2T in 2010, healthcare consumes 17% of
the US GDP and seems headed for 20%. Other advanced nations spend 10% of their
GDP on healthcare.
Treatment of chronic conditions has improved to the extent
that more people than ever are living with long term treatment of what in the
past were fatal conditions. Malpractice standards and litigation have raised
the cost of care and created an environment in which doctors practice
“defensive medicine.” Doctors order tests
and prescribe procedures which they might not without the threat of litigation.
US healthcare is more expensive as a percentage of the GDP
than healthcare in other OECD countries, nearly all of whom use some sort of
“single payer” system. Individual medical
procedures are more expensive in the US than in other countries creating a
practice of medical tourism by US citizens to places like Mexico, Costa Rica
and India for cheaper procedures. This
provides a direct contrast with the practice of wealthy foreigners coming to
the U.S. for easy access to premium care. In 2010 ten times as many Americans
went abroad for treatment than foreigners came to America.
On average, US healthcare outcomes are at the bottom of the
top tier globally primarily because of uneven access to care; however among
those with full access, the US standard of care is world class. Additional
treatment options have raised all sorts of new ethical issues. Those affecting
life and death are the most difficult (e.g. abortion and euthanasia) with organ
donations creating more havoc.
Payment through private and public insurers has become
problematic, expensive, and the target of regulation. Insurance companies consume 20% of their
budgets in administration and profits with 80% or less of their income going to
medical payments. The ACA targeted this 80% number by requiring insurance
companies to refund any premiums they collected in excess of 125% of their
medical payments. Government programs like Medicare typically transfer over 95%
of their budgets to medical payments, but the DHH which administers Medicare is
not charged for the cost of collecting taxes, the IRS pays that, nor is it
charged for the cost of capital (which shows up as profit in private
companies).
Compounding the growth rates reveals that national healthcare
spending is 11 times what it was in 1980. Inflation since 1980 has been 272% so
real growth of healthcare costs is 400%. The population is 40% higher than it
was in 1980 making the real dollar per person increase in medical costs 288%. Life
expectancy is up from 73.7 to 78.2 years. Another way to put it is that each of
us is paying triple what we paid in 1980 for healthcare products and
services. Why isn’t the US healthcare market
working? Did something change that by
the 1980’s began to affect the market?
Employer paid health insurance was not popular before WW II.
Between 1940 and 1950 health insurance coverage exploded from 20 million to 142
million insured. The first bump came when Roosevelt exempted “fringe benefits”
from WW II wage controls and then the second came under Truman when politics
favored employer funded health insurance over a public (government) plan and
memorialized it in the tax code. Medicaid and Medicare were introduced in 1965.
By 1980 the vast majority of Americans no longer bought their healthcare from
doctors and hospitals, they bought it through insurance companies, or their
employer or government provided insurance for them. No one, especially the insurance companies
had the slightest motivation to shop for the lowest cost.
One economist observed,” A common lament is that we don’t
know how to control costs. That’s false. Other nations with broad health
programs have a much better track record than we do, and even the Medicare
program has controlled costs better than the private sector. These experiences
suggest that a big reason health care in America is so expensive is that
there’s too little countervailing power in the markets for health insurance and
health services.”
“Insurers, pharmaceutical companies, device manufacturers,
doctors and hospitals are all able to drive up prices with limited pushback. On
the one side, insurers have virtual monopoly power in many markets. Without
serious competition for their business, they often have little incentive to
contain costs. On the other side, providers of health care services have
enormous market power in many local markets. Without insurers jawboning them to
bring down rates and improve efficiency, they continue to charge too much and
operate without proper economy.”