Friday, October 31, 2008

Healthcare Rising: "Safety Net" or Stealth Tax?

Way back in September 2006 BusinessWeek ran a feature story What's Really Propping Up The Economy: Since 2001, the health-care industry has added 1.7 million jobs. The rest of the private sector? None.

For years, everyone from politicians on both sides of the aisle to corporate execs to your Aunt Tilly have justifiably bemoaned American health care -- the out-of-control costs, the vast inefficiencies, the lack of access, and the often inexplicable blunders.

But the very real problems with the health-care system mask a simple fact: Without it the nation's labor market would be in a deep coma. Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago.

Almost invisibly, health care has become the main American job program for the 21st century, replacing, at least for the moment, all the other industries that are vanishing from the landscape. With more than $2 trillion in spending -- half public, half private -- health care is propping up local job markets.

Health care is highly labor intensive, so most of that $2 trillion ends up in the pockets of workers. And at least so far, there's little leakage abroad in terms of patient care. "Health care is all home-produced," says Princeton University economist and health-care expert Uwe Reinhardt.

John Maynard Keynes would nod approvingly if he were alive. Seventy years ago, the elegant British economist proposed that in tough times the government could and should spend large sums of money to create jobs and stimulate growth. His theories are out of fashion, but substitute "health care" for "government," and that's exactly what is happening today.

Make no mistake, though: The U.S. could eventually pay a big economic price for all these jobs. Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured.

Moreover, as the high cost of health care lowers the competitiveness of U.S. corporations, it may accelerate the outflow of jobs in a self-reinforcing cycle. In fact, one explanation for the huge U.S. trade deficit is that the country is borrowing from overseas to fund creation of health-care jobs.
There's another enormous long-term problem: If current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in health care. That sort of lopsided job creation is not the blueprint for a well-functioning economy."

In other words, from the point of view of government-supported employment, healthcare looks like a "safety net," but from the point of view of productive allocation of scarce resources, it looks like a stealth tax on our entire economy.

Healthcare costs are rising at double the official rate of inflation and already make up 16% of the $14 trillion U.S. GDP: from the National Coalition on Health Care website's Health Insurance Costs:

"By several measures, health care spending continues to rise at the fastest rate in our history.
In 2007, total national health expenditures were expected to rise 6.9 percent — two times the rate of inflation.1 Total spending was $2.3 TRILLION in 2007, or $7600 per person. Total health care spending represented 16 percent of the gross domestic product (GDP).

U.S. health care spending is expected to increase at similar levels for the next decade reaching $4.2 TRILLION in 2016, or 20 percent of GDP.

In 2007, employer health insurance premiums increased by 6.1 percent - two times the rate of inflation. The annual premium for an employer health plan covering a family of four averaged nearly $12,100. The annual premium for single coverage averaged over $4,400.

Experts agree that our health care system is riddled with inefficiencies, excessive administrative expenses, inflated prices, poor management, and inappropriate care, waste and fraud. These problems significantly increase the cost of medical care and health insurance for employers and workers and affect the security of families."

This is not intended as a slam on everyone working in healthcare. Many nurses and doctors read this site and I know their work is difficult, and often made more difficult by the above-mentioned inefficiencies and excessive administration.

Yet isn't there some similarity between the healthcare complex and the Pentagon, that other famous sinkhole for trillions of dollars wasted in inefficiency, politically mandated pork, and excessive administration? How can we be spending $2.3 trillion a year (and rising) and be getting so little "health" for all that money?

If we're ill, then we all want the finest care; that's understood. But the problem seems to be that much of the "care" isn't making us better; in the case of costly pharmaceuticals, it seems many drugs are giving us new health problems or simply ending our lives. People go into hospitals to get well and instead catch life-threatening bacteria and viruses.

It seems that healthcare has morphed into "the third rail" of American politics: you touch it, you "die." Every effort at reform is stymied by powerful interest groups, and of course there's a positive feedback loop at work: the more people who are employed in the complex, the more powerful their lobbying efforts, and thus there is more resistance to reforms.

Everyone knows the system is hopelessly riddled with corruption, inefficiency and needless procedures, but nobody wants to lose their own piece of the action. This is understandable.
But we as a society have to ask: is this the best place to be spending $2.3 trillion, soon to be $3 trillion, a year? What about energy and food security? How "well" will be be if we run short of food and energy?

It would be nice if we could declare a "peace dividend" so beloved by liberals and slash $100 billion or even $200 billion from Pentagon spending and "solve" the healthcare funding issue "painlessly" (painless unless you're in the military or related industries). But the scale of healthcare spending now dwarfs the Pentagon to such a degree that $200 billion isn't even 10% of what we spend on healthcare; with healthcare costs rising 6% a year, a $200 billion "gift" carved off the Pentagon would only cover about 18 months of the healthcare complex's increased spending.

As I have noted here many times, no program which grows at 6% can be sustained by an economy which grows over the long-term at 2% or 3%. We all know the Baby Boom is starting to retire, putting even more pressure on healthcare spending--but that spending has been growing by leaps and bounds even without the Baby Boom retiring.
Clearly, something has to give.

One alternative is to let healthcare costs spiral out of control until the Federal government becomes insolvent i.e. can no longer pay its expenses with newly printed Treasury bonds (debt/borrowed money) at which point Medicare and everything else freezes up and goes bust. I would say the likelihood of this increases every year, and a 2015-2021 window for such Federal insolvency is already baked in if the various interest groups are able to sustain their deathgrip on serious reforms.

This national bankruptcy won't be pleasant, but it does have the advantage of wiping the slate clean and enabling a fresh start.

Another alternative is to introduce the same global competitive forces which reduced costs in electronics and other industries. This is unpopular with those whose jobs will be at risk, and popular with consumers. This is already happening on the fringes, as people (some even sent by health providers) fly to India or Thailand to have surgeries performed for 20% of the cost of the operation in the U.S.

If energy costs spiral up, then 5,000 mile flights might become prohibitive, at which point alternatives based in Mexico or Central America become attractive from a cost basis. I have covered the emergence of cash-only dental clinics in Mexico designed to serve American customers, so the precedent is already firmly in place.

As Americans, we believe it is our birthright to avoid hard choices; we deserve to "have it all": super-costly medical care, new infrastructure, a new energy complex, the best military forces, etc. without any trade-off required. Our various trading partners have enabled this fantasy by funding our trillions in new debt/ Federal deficit spending. Should that gravy-train ever grind to a halt, and we are unable to borrow another couple trillion a year to fund "everything we want and need and care about," then we will collectively have to start making the difficult trade-offs.
Perhaps we will then finally get serious about demanding some basic efficiencies in these vast, sprawling industries.

It's hard not to look at the Pentagon (which is basically viewed as a jobs/pork program by Congress) and the healthcare complex and speculate that waste and inefficiency is the result of being protected from foreign competition. The same could be said of the entire education complex in the U.S., another "protected" domestic industry with costs that rise 6% or more a year even as the underlying economy grows at about a third of that rate.

If we look at these growth rates in cost structure, we discern unsustainable trends. It is tempting to hope that tinkering with the edges can "fix" the problems--easier student loans, higher co-pays, etc.

But none of these tinkering schemes address the core issue, which is the structural costs cannot be controlled without systemic transformation of the entire models of healthcare, Armed Forces and education. Competition provides the leverage which "consensual political reform" cannot, because no one will allow their sacred cows to be slaughtered for the common good.
There is one final structural dilemma embedded in the healthcare complex. By some measures (for instance, chronic diseases), our collective health has declined even as our spending has skyrocketed, and this forces us to ask why this is so.

Certainly one answer is the combination of lax marketing regulations, profit motive and Madison Avenue persuasion which together have created a toxic brew of questionable drugs being hyped and fear-mongered to a credulous frightened public and an overworked cadre of health providers.

Another is the very ambiguity of so many procedures, tests and drugs. If we spend $1 trillion on new power lines and solar-power arrays, regardless of what choices were made (perhaps not the best systems, perhaps politically influenced decision-making, etc.), at the conclusion we have new, measurable infrastructure in place which we can deploy to generate electrical power.

If we spend $1 trillion on more tests, procedures and drugs, the actual measurable improvement in health is at best ambiguous and at worst near-zero. Via Medicare we pay for drugs which my parents faithfully consume which may or may not even work. For instance, statins appear to be essentially useless; blood-pressure reduction drugs don't seem to lower heart attack rates, and so on.

Toss in needless hospital visits (hey, Medicare is paying, you better follow our orders and consent to being hospitalized at $30K a day) and the resulting infections/ deaths, botched operations, needless procedures, redundant/needless tests and we have to conclude that it is entirely likely we got very little improved health for that $1 trillion investment--much of which is borrowed, and hence once interest is added in, it's actually $1.5 trillion.

This is not to say some lives won't be saved or extended by the $1 trillion, it is only to point out the inherent ambiguity in measuring the results. If the patients didn't consume the 7 drugs a day, didn't go in the hospital, didn't get the 3 extra tests, didn't consent to the operation--would they actually be healthier? There is no way to know.

One obvious idea is to set up a triage which funds those medical procedures and drugs which we know work for specific conditions like infections, injuries, removal of tumors, etc. Beyond that, patients are instructed to first do whatever lifestyle changes may improve their condition; beyond that, whatever cheap generic drugs might help are paid for, and beyond that, it's on the patient's dime.

While we can borrow $1 trillion a year to put off any trade-offs, it's nice to "debate" whether this would "work." But when we can no longer pay for our "must-haves" with borrowed trillions, then we'll have to make the hard choices anyway.

It seems wise to start thinking about the fairest, most efficient forms of financial and healthcare triage now, before insolvency forces our hand.

Thank you, Michael M. ($5) for your much-appreciated donation to this site. I am greatly honored by your support and readership.

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