It’s the Cost Structure, Stupid — Healthcare Reform

by Greg Petty
August 2009

The recent focus in Washington has been on healthcare reform and we have seen competing bills in both the House and the Senate.

The Beltway gnashing and grinding of teeth has begun and the hordes of lobbyists have descended and opened their fat pocketbooks to steer our elected civil servants into protecting the interests of their clients. Everyman is lost in the conversation.

I have a few problems with the current national non-debate:

• The media is doing a horrendously poor job of summarizing and presenting the competing bills being debated and considered. All of us outside the Beltway are left wondering which proposals truly address the problems of our existing system.
• The buzz is all about the cost to our budget and how we pay for expanded care. While this is important, it is the wrong cost discussion. The system costs discussion will be the focus of this article. But before we go there I present some options for paying for reform below.

Here are some straightforward ways we can pay for the cost of reforms:

• Are our elected officials so timid as to never discuss and consider cutting the defense budget? Is our defense budget absolutely inviolate? My proposal — Reduce the annual defense budget of $680B in 2010 (with Wars) by $100B. U. S. military spending is 48% of the total world’s total military spending. It is more than the next 46 highest spending countries in the world combined! There is no reason on God’s green earth that we need to spend that much money. This proposed cut still leaves an astounding budget of $580B!⁵
• OR If you don’t like the defense cut how about phasing in a tax on healthcare benefits provided by employers. CBO estimates this tax break costs us $250B a year. We can even ease the pain by phasing it in over a few years.⁴
• Increase "Sin" taxes on alcohol, cigarettes and soda.
• Means test Medicare benefits and stop paying doctors on a fee-for-service basis. Use the Mayo Clinic and Kaiser Permanente models for payment.

But I digress. In my opinion, the debate and proposals we should be having first are about how the reforms will wring the ever-rising costs out of all portions of the healthcare system. Everyone agrees the private system has failed us. It is far past time that we had a public option. In spite of the fear mongering ads out there, a public option will not kill private system options. Next month’s article will reprint my previous article (May 2007) on the government mandated but decentralized Swiss healthcare model that preserves individual choice and private competition.

So let’s focus on the system costs. I am reprinting portions of the healthcare article that originally appeared in Boom’s April 2007 issue. These facts address the cost issues. I have updated the figures where possible.

Current Conditions
How can we devise a public-private system that provides quality care for all Americans, how do we pay for it, and what compromises are necessary? Appropriate solutions must be based on solid analysis of the problems and inefficiencies that have the largest impacts on our system. Here are some of the issues and facts I have managed to gather concerning our health care insurance, care and delivery systems:

• 50 million uninsured, 63 million uninsured or under-insured. (Revised estimate) We spend the largest amount for healthcare but are the only major industrialized nation not to provide health coverage for all.
  Costs for those without insurance or under-insured are passed along to the system. Actual medical costs for these patients are much higher because they have neglected their care. These costs are in addition to estimates of lost productivity. The Institute of Medicine estimates we can recover $130 billion of lost productivity if we cover the uninsured.
• In 2007 Americans spent $7,200 per person on healthcare, the next highest country expenditure was $4,200 by the Swiss. Spending passed 16.0% of GDP. Public and private spending for care is the highest in the world with private expenditures more than five times the median OECD cost. (Organization for Economic Development) The July 3, 2009 issue of The Economist notes, "Others note that the Swiss healthcare costs are high by European standards. But they are a third less, as a share of GDP, than America’s, and the country’s excellent health outcomes should be the envy of American reformers." (Revised) ⁴
• Costs throughout the system are increasing dramatically. We have allowed oligopolistic consolidation in the operators of our hospitals and have lost almost all price competition that could hold down hospitalization costs. Reinstitute anti-trust provisions and reject their recent pledge behind closed doors to Obama that they would save a measly $155 billion in costs in the next decade as their contribution to reform. This is only 1.4 percent of their projected $11.1 trillion in revenue over the next decade. Shame on you Mr. Obama — this is no time to accept timid and clearly inadequate offers. (Revised) ^{4, 6}
• Health insurance premiums have been increasing 10-15% per year.³
• Administrative costs, already the highest in the world because of the private payer system, increasing at 11% per year. Current cost for administration alone is $111 billion dollars.³
• Prescription drugs are the fastest growing care item followed by hospitalization costs.³
• New medical technology accounts for 50-66% of increased spending costs.2 America has 25.9 MRI machines per 1m people. OECD countries have 11 and America uses them 92.1 times per 1,000 people as opposed to 39.1 for OECD countries. This suggests we should charge patients more for elective test requests. (Revised)⁴
• We need to increase competition and transparency throughout the system. Institute an independent agency to study and oversee the cost effectiveness of drugs, devices and medical treatments. Federal regulators can and should overrule state-level obstacles to competition. (e.g. preventing doctors from treating a patient in another state) (Revised)⁴
• Institute sensible malpractice insurance and tort reforms.

According to the benchmark scorecard produced by the Commonwealth Fund and the Alliance for Health Reform, the U.S. ranks 15th out of 19 countries for mortality from preventative causes before the age of 75 (Timely and effective care). To quote Health Affairs: It’s The Prices Stupid, "The researchers estimated that Americans paid 40 percent more per capita than Germans did but received 15 percent fewer real health care resources."