Random Thoughts

Some notes on Health Care costs and payment systems

First, I wish to quote from an article I saved that was in the Boston Globe on 1/15/04:

"Haas estimated that someone who retires at age 55 would spend $400,000 over a remaining lifetime for healthcare if he or she picks up the entire tab."

I am going to ignore the "retiring at age 55" part for a moment, since that is ludricrous to most of us. The key here is the cost estimate, no matter who pays for it.

If we ignore the (probably) much lower average costs of health care while younger, what he is saying is that the average health care cost per person is in the vicinity of $400,000. Now, taking a more realistic productive working lifetime of 40 years (say, 25 to 65), that cost turns out to be $10,000 per earning year. This is roughly $833 per month, for every month of every person's working life! I don't count "payments" made during the retired years, or on behalf of the person during their pre-working years, because the money-per-person still has to come from somewhere, and the only source is essentially whatever wealth is produced, again, per person, during their productive years.

In other words, the "cost to society," or, speaking more financially, the "cost to the economy" of health care is over $800 for every month of productive work, from everyone, to pay for our health care. At this point, I am not speaking about the attribution of this cost, that is, where the money appears to "come from," or the allocation, which is where the money eventually "goes."

But it at least gives us a number to work with if we want to talk about health care resources (in the U.S.) and how to distribute them efficiently and effectively.

Obviously, the "solution" can range from pure individualism at one end - we each have to save up the money and hope we end up close to the "average," to pure socialist solutions at the other end - we tax "ourselves" to raise the money, and then use that money to pay for everyone's care.

The current system is a patchwork of the two, of course, with only the working poor having to use the strict individualist system, the luckier of the middle class (and up) having some sort of private health insurance (a free market form of socialism), and the children of the very poor and the elderly enjoying at least a partial socialized system, via the Medicaid and Medicare programs.

The questions that must be asked if we are to try to "reform" this system start with basics - for instance, as a society, do we agree with the attribution of costs and the allocation of resources, as a whole, that this "system" provides? If we agree, there is no "crisis" or problem to solve.

If we don't agree, we must carefully list and describe what parts we don't agree with. For instance, one part of the system I have an issue with is that some of the allocation of resources consists of profits to insurance companies, which I don't see as being a useful way to spend some of the money, since all insurance companies do is provide a narrowly distributed form of socialized medicine. Taken as a whole, the health insurance industry is a 'single payer" system for those lucky enough to be part of it.

By the way, here's another bit of math, that is rather suspect for a few reasons. The U.S. currently boasts a population of roughly 300 million people. That means that to provide for all their health care, at this rate, would cost $120 trillion. The math is suspect because we get to pay over time, and for older people, we have already spent some or all of the money. But we might be able to do a "constant dollar" calculation by spreading this cost out over the life expectancy (the average cost might drop slightly due to those who die younger or "cheaper" to the system). Life expectancy in the U.S is currently roughly 78 (and this might go up a bit with better health care distribution, lowering the cost per year!), so the "per year in constant dollar" total cost is about $1.5 trillion.

U.S. GDP in 2005 was roughly $12.5 trillion - so health care should only cost us about 12 percent of GDP. Even if we allow for costs not factored into that "post retirement" estimate, they should stay no higher than 15%.

Fifteen percent is not that bad, really, is it? What we are saying is that for every man, woman and child in the U.S. to have the highest current quality of health care, using today's perhaps inefficient allocation methods, but with some sort of single fund/single payer system for clarity, it should only require a 15% tax on all income. Interestingly enough, we already have a 15% tax on income - but only income below about $100,000 (the figure changes a bit each year), that is used to pay for Social Security retirement payments and the two socialized health care systems. Remember, saying that the "employee contribution" is 7.51% and the "employer contribution" is also 7.51% is sleight of hand. It is a 15.2% payroll tax, but we pretend that employers don't see it as a cost of hiring an employee.

The trouble with this tax, is that since it was essentially set up as a retirement program for the working and to an extent, middle class, people only pay the tax on the "middle class" portion of their income. Income beyond the cut off point, and corporate income, is not touched.

Without being rigorous, I suspect we could pay for complete socialized health care, and the Social Security retirement "safety net," by doing little more than extending this 15% income tax to all income.

While this may seem terribly anti-free market and socialistic to some, it actually relieves businesses of their archaic (arose during wage and price controls - add benefits) role in managing health care access for their employees. It also in the same way takes the burden, sometimes expected, that they will pay for health insurance, from businesses that are struggling. If they aren't making much money, they won't pay as much taxes into the health pool.

Of course, these pipe dreams crash into three partially free market obstacles (and when I say "free market," I mean the combinations, coalitions and cartels of for-profit companies that desire to minimize competition and maximise returns) that are now entrenched in our society.

The first, and most complicated to deal with is the health insurance industry. Not only would single payer care totally disrupt their business model (which, perfectly reasonably, is based on the way things are right now), potentially dislocating a large number of middle class professionals, but there is the added complexity of how to deal with the money they have already collected (which they invest to make money so they can pay claims), and how that money relates to ongoing obligations to pay for future care, in the absence of future premiums. Obviously, some percentage of the displaced workers would be able to work for the single-payer bureaucracy, but not all of them. Far from all of them, if the evidence of the overheads of the existing government-run programs compared to that of the private programs are any indication. Perhaps some enterprising economist could establish a humanistic "supply side" analysis showing that if we make this huge chunk of our economy more efficient, the result will be a surge in jobs and wealth creation elsewhere.

The second are the health care providers, where the main issue is what care should cost and what they should be paid. I am not sure we want some committee of bureaucrats deciding what people with MD's, RN's, etc. will get paid. At the same time, as the "single payer," we probably don't want them to simply charge us whatever they feel like. of course, since HMO's have been making them miserable for years by addressing this problem without the onerous phrase "government interference," they might be glad to have it all out in the open - and perhaps have a voice at the table when the decisions are made.

The third, in a similar vein are the providers "one step removed" - drug and medical equipment manufacturers. Especially with the former, there is a knotty problem, which to our political credit, we are discussing, relating to the sometimes enormous costs of research that leads to breakthroughs, versus the relatively low costs per unit of actually manufacturing and distributing the results of this research. This basically ends up with us paying, via our patchwork health care system, for the research that leads to useful treatments and that that does not, via the cost of treatments that reach the market and sell sufficiently well.

While our relatively free market model of drug development (I am temporarily ignoring the scandal of government supported University research that ends up being the intellectual property of privte corporations) may work reasonably well, compared to any alternatives, we might need to examine how the eventual rewards for success are distributed - for instance, reforming the patent laws that provide a temorary monopoly so a company can earn back its investment. If the window were longer, and perhaps did not start until sales are possible, perhaps unit prices could be lower if the company could ook forward to a longer period in which to recoup their investment. One minor bug in the ointment of this system, as I mentioned above in another context, is that of course one of the returns the company rightfully expects is a profit return on the investment that was required to operate through making a useful discovery.

The basic issue over private versus public development here is whether or not publicly guided research would yield similar breakthroughs and understanding - that is, whether University researchers working on government and University funded projects would be just as effective as researchers (in private labs and those of academe) funded through private investment. Somehow, at some idealistic level, I find it hard to see why a researcher working on, say, a treatment for Alzheimer's, or some specific cancer, would be motivated differently or more or less able to do good work if their labs were owned by Harvard as opposed to Pfizer.

At least with medical devices and equipment, there is a "visible" and obviously expensive "thing" that gets sold. While it might be hard to imagine why 20 mG of Prozac would cost $7 to deliver to the patient (and if I researched this, I could come up with more expensive examples), it's easier to see why an MRI machine would cost hundreds of thousands of dollars. Machinery is also easier to "reverse engineer" one way or another - to reinvent, doing the task in a way that avoids the patent on the first version - than a drug is. If a company has patented the formula for a drug, and it certainly should be allowed to if it invents it, it doesn't matter how you make the drug, it's their patent still. A similar but different chemical is usually not the solution.

In both these cases, however, if the public sector were to fund and own the results of productive research (how MRI works, what fluoxetine (sp?) is), private companies could certainly compete in the marketplace to build or make products that deliver the final results. They would be rewarded by the marketplace based on their efficiency (in all business meanings of the word) at meeting the same result. The public sector could kick in and produce things deemed useful by the public but not profitable by Wall Street.


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© Huw Powell

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