Monday, May 5, 2008

Sizing The Causes Of High US Health Costs

I've just updated my work on quantifying the causes (or villains if you will) behind soaring US healthcare costs. This is now posted on our globalhealthnet website.

The article answers a very obvious question that isn't addressed elsewhere: What are all the reasons for US healthcare costs to be over twice those in other first world economies, and what is the precise contribution (in dollars per capita) of each of these factors? Identifying and then understanding the relative magnitude of the problems goes to the heart of the political and policy debates in this election season before proposing any solutions.

In other words if the OECD median healthcare cost is $2,922 per capita in 2005 and the corresponding US figure is a whopping $6,401, what contributes (and how much) to this difference? I list, quantify and briefly discuss the seven factors responsible for this difference. Interestingly, the two smallest factors are the ones that US healthcare apologists play up the most: malpractice insurance premiums that add 1.5% and "more" care and services that add 3.5% to the total bill.

The other five factors adding to US costs in order of their percent contribution are medical resource waste (15%), administrative waste (14%), defensive medicine (9%), inflated physician salaries because of artificially induced scarcity (6%) and higher drug prices (5%).

You'd have expected this topic to have been widely addressed and talked about by the healthcare industry pundits, experts, academics and researchers. Publications like Health Affairs or the New England Journal of Medicine should have been full of peer-reviewed articles on this. But there may be a good reason that hasn't happened.

The industry players collectively benefit enormously from the high US health expenditures. So long as they point fingers at one another without precise quantification it is easier to escape the spotlight and let the existing system continue. A publication like this will offend all players, and anyone dependent on the industry risks losing a career, tenure, research grants, consulting assignments and speaking engagements. People also tend to be protective of their own interest groups. For example in my July 16, 2007 post I had described the distorted reporting by Dr. Sanjay Gupta while critiquing "Sicko" even as he posed as an objective journalist.

Even from my perspective, high US health costs and a dysfunctional system with lots of uninsured people helps boost medical tourism. So why did I write this article? I'd like to think it's a matter of conscience or the satisfaction of working towards a better system for consumers. A more cynical view by others can be that I don't really expect much change from my good-guy efforts. It's like electric utility companies that make their money selling power, and yet send those mailings urging us to conserve energy and offer tips on how to do so.


kenrod said...

Every year we get our insurance premium increases of over 10% and we wonder how much more we can pay?

Not being an expert and armed with numbers like you, I can point to common sensical anecdotes alone. I think we spend way too much on the back end of life and too little on the front and middle end. Medicare for the over 65 is hogging up too many resources. There is way too much fraud in that sector and too few doctors are accepting it as payment in full. So I predict abysmal failure if your plan to extend Medicare to all comes about.

My friend in Canada waited 2 years for a cyst on her spine to be removed. Finally, tired of the pain, she changed her name to her husband's which was the same as the surgeon's nationality, and appealed to his parochial interests. It worked. But she could have waited another 2 years. Therefore, I conclude that a national plan is no panacea either.

I think the Obama solution is way off base. It's employer based. That's cumbersome and fundamentally unfair. Unfortunately, the GOP is trying to be sweet and egalitarian like the Dems and selling out their souls. The solution is market based. If it's market based people would use more low cost solutions like medical tourism. Right now with the employer based system, noone knows who or how much is being paid. And no one cares. Patients overuse the system, doctors overprescribe and things have gone awry. McCain must not sell out and keep to his high deductible plans. Keep pushing HSA's. Keep it individually tax decuctible and portible. The culture and education level has to change. The govt cannot infuse culture. In fact every govt program is being abused. Seniors don't care how much it costs so the program is bankrupting itself. I know seniors who go to the doctor because they feel lonely and it only cost them $5 to spend the afternoon at Dr. Smith's, coffee and sexy nurses included.

The GOP must not sell out to give away programs in the name of "equality". We will drown equally. I make no apolgies for sacrifing to go to college and therefore, can afford some of my luxuries, like healthcare today. Yes, good healthcare is a luxury today. Even though I shake a bit thinking how much it'll cost tomorrow. But we must reform the system and it's not with more govt programs.

Sandip Madan said...

It's dangerous to draw broad conclusions from anecdotes, Kenrod. :-) Your Canadian friend at least had some safety net of healthcare in Canada. In the US she's have had none until she turned 65. I'm also a little confused as to how her Canadian doctor accommodated her if it was an insurance or waiting time issue. Unless he reclassified her case as an emergency.

Besides, universal care that we aspire to in the US (the France and Germany model) allows the better off to obtain better care. That's the meaning of a safety net (a minimal standard of available care) afforded by universal coverage. And Europe achieves it with half of our resources, with better results on average.

That said, I agree with your view about having limits to how much to spend, especially in terminal cases. 28% of all medical expenses are incurred on US patients in their last year of life. Such care can be rationed either formally or in practice when it is at the taxpayers' expense.

kenrod said...

In regard to my Canadian friend, how the doctor accomodated her was to do it on an outpatient basis. So her performed the surgery but didn't have the room at the hospital. So she went to the hotel a block away and recovered.

Let me preface the rest of my answer by stating Plato, whose philosophy is "The masses are asses." While I'm not I elitist, I think what ever becomes too popular is no good anymore. Let's look at Mcdonalds. It is designed to accomodate the masses. Now look at Americans. They are obese, sluggish and heart diseased prone. Look at the French. Their food is twice as expensive but everyone is healthy.

So what's so good about universal medical coverage. If it's for everyone it's no good anymore.

Sandip Madan said...

That's an interesting angle, Kenrod. Since you have a good opinion of the French, why not emulate their healthcare system? :-)

kenrod said...

Oh, I like the French, but it doesn't mean I should keep a mistress on the side.

I know their healthcare system is slightly more market driven than the Canadians but the costs are skyhigh.

I mean the Obama plan is just so "employer based". Let me explain why that's wrong. First, the employer alone gets the tax deduction. Second, the emplyer gets to decide which kind of plan to choose for the workers. Third, there is no portability so when the worker leaves he has to requalify.

McCain's plan is simple. Everyone gets to deduct their premiums. Everyone gets to choose their plan and affordability. Everyone gets to apply for any plan across state lines. So if a Floridian wants a plan in New York, he can buy it. Everyone gets to keep their plan where ever they work. HSA's are available and encouraged so they can sock away pretax dollars for future emergencies or premiums. If your tax bracket is not high you can still benefit like an IRA, so it is protected from bankruptcies and creditors. Welcome to the 21st century.

Universal Access not Universal Coverage.

Sandip Madan said...

It's good that you eschew mistresses. :-) Sky high French costs of healthcare? Their costs are much lower than in the US, even for private coverage.

McCain's portability and cross-state plans are all very well. But there's a fundamental flaw in his "market driven" approach - what happens after you develop a chronic and costly condition? After your current coverage period (say one to two years) runs out, no market driven insurer will offer you rates that are less than the expected cost of your treatment.

So are you okay with a market driven lowest insurance premium quote of say, half a million dollars a year? Your HSA savings of $40,000 won't help much. As Elizabeth Edwards pointed out the irony, neither she nor McCain would get covered under his own plan. And we're not even talking about those who were previously uninsured...

McCain seems to be thinking about this and recently talked of a fall-back government plan. Or he may mandate pooled rates or limit premium increases, which moves him much closer to Democratic positions. But then, so much for the miracle of unrestricted free market forces.

kenrod said...

Well, the French plan has one cheap govt plan and one expensive private plan. There are no choices in terms of coverage in France. Look at a private company like Healthnet or Aetna which have nothing less than 30 different plans in their portfolios.

But let's not mistake market driven for wanton wild west unregulated programs. All of them will have minimum standards to adhere to. Amongst them:

1. Guaranteed renewable. That means the carrier cannot cancel an insured despite their change of health conditions. Nor can they raise their premium unless they raise it for the entire class of policyholders. So if Mr. Smith in Manhattan gets cancer, he cannot be terminated unless he doesn't pay his premium. Nor can his rates go up unless the whole of Manhattan goes up for that class of policies. Insurance cos have forced people off in the past by raising a persons premium by 1000% when they got sick.

2. If someone is uninsured and has a pre-ex condition they will be able to apply for any policy with a six month rider on that condition. You can't expect people to be covered when they are not responsible, but you can't penalize them forever.

Now I don't know what plan Ms. Edwards has but all my plans have covered cancer. The lifetime benefits on my plan is 6 million. However, they will not pay for experimental cures. My friend contrated cancer and she wanted to go to Mexico for some unproven "vegetable diet" treatment. The claim was denied, understandably. But I also understand my friend, who is 71, not wanting to shoot her veins with chemo.

Your argument against HSA's doesn't hold up either. I have a friend who got a $2500 deductible plan, and is allowed to sock away $5600 a year in an HSA. She's got $35,000 put away. Now if she got sick, this will pay for her deductible of $2500 for 14 years. How can that be that bad? If she doesn't she can continue to save it for her later years. For her she got a high deductible plan to keep her premiums down because she hardly gets sick.

Yes, you are correct that McCain has sold out the GOP by trying to achieve universality. There has to be market driven system otherwise people don't know how much they are using.

What I think is lacking is a market system to choose doctors. People don't know how to rate a doc with a cost/benefit analysis.

Sandip Madan said...

Kenrod, free market allows insurers in France to offer as many plans as they like - it's just that 90% of the French stick with the government plan.

From your comments at least we agree on one thing - we do need some regulation, and how much is a matter of discussion. Even some of the "basic" steps you describe have not been signed off on by most Republican politicians. And yes on the flip side, there's always the risk of over-regulation or just plain dumb regulation.