Healthcare: the Other Vampire Squid

Make no mistake: total U. S. healthcare spending bears no resemblance to that of any other country in the world. Consider the chart above. Do you see that bar sticking way above the others on the far left side of the chart? That’s U. S. healthcare spending as a proportion of GDP. We spend more as a proportion of GDP, overall, and per capita than any other country in the world and by a substantial margin. And it’s growing fast.

The obvious retort to that is that, as people grow wealthier, since healthcare is a superior good they will, naturally, spend more money on healthcare. Unfortunately, income hasn’t grown for a decade but healthcare costs keep growing up.

My main gripe about the rapid growth of healthcare spending is that it’s underwritten by tax dollars with 3/5s or more of healthcare spending is from tax dollars. I believe that attracts investment into healthcare and away from other sectors of the economy.

Why is healthcare spending rising so fast? As has been the case at several points in the past, e.g. 1976-1980, costs are rising because providers are charging more. It’s not technology or utilization or improved quality. As Uwe Reinhardt put it, it’s the prices stupid.

“Vampire squid” is the evocative description Matt Tabibi gave to Goldman Sachs. Others have since applied it to the whole banking system. This should give you the general idea:

It ain’t just the banks. Healthcare spending accounted for 12% of GDP in 1992 and 8.8%R of GDP in 1980. Growing by 10% a year in 1980 was one thing. In 2011 it’s something entirely different and it’s sucking the life out of the economy.

12 comments… add one
  • steve

    I guess I should point out that Massachusetts is a little bit different than most states. Even before its reform, it already had a high percentage of people covered. Therefore, increases would mostly come from prices. In other studies, utilization is also a key factor. Most of the growth has actually come in outpatient care, specifically procedures and testing. As surgery has shifted to ASCs, the procedures are usually reimbursed at lower rates than for hospitals, but what we see is a lot more procedures being done, especially if docs have ownership in the facilities.

    Steve

  • In the final analysis I don’t think whether increasing costs are due to rising costs or increased utilization makes a difference. It certainly doesn’t make a difference to whether we can afford it or not. Arithmetically, that point arrives when healthcare costs comprise 60% of the economy. Practically, I strongly suspect that the number is is a lot lower, possibly where we are now or even less.

    I’m not as convinced as you are that utilization is being properly disaggregated from simple rising costs. My way of saying “doctors creasing their own demand” viz:

    Most of the growth has actually come in outpatient care, specifically procedures and testing. As surgery has shifted to ASCs, the procedures are usually reimbursed at lower rates than for hospitals, but what we see is a lot more procedures being done,

    When it requires increasing inputs to produce the same outputs, I’d characterize it as “increased costs”.

    Does it make a difference on the strategy used to remediate the situation? I’m not sure of that, either.

  • steve

    “Does it make a difference on the strategy used to remediate the situation? ”

    It is the spending that docs control which matters more than salary. If you decrease fees by 10% they may increase their number of procedures to offset that cut. When their pay is back to neutral, total costs will have gone up 10%. If you can (big if I know) cut back utilization by 10%, you cut doc salaries, but more importantly, total spending. Secondarily, I think it will be easier to get docs on board if their fees are not actually being cut.

    Steve

  • What would prohibit physicians from increasing the procedures they prescribe for those still using their services in the event of decreased utilization?

    I don’t see much of a difference between the approaches since the keystone is wages in the sector. You’ve got to constrain cost per procedure and total procedures in a way that’s consistent with public health. Constraining one, the other, or letting the chips fall where they may in public health terms doesn’t get it done.

  • Mercer

    “costs are rising because providers are charging more. It’s not technology or utilization or improved quality”

    I agree. I am amazed that more people don’t question why providers in the US charge so much more then in other countries.

    I frequently hear that doctors lose money with Medicare patients. Medicare pays more then any other country so why do doctors say they lose money with Medicare? It can’t be only liability insurance. It might be that US doctors have longer or more expensive schooling then other countries. Whatever the reason costs should be brought under control instead of treating medical costs as if they were handed down by God.

  • steve

    “What would prohibit physicians from increasing the procedures they prescribe for those still using their services in the event of decreased utilization?”

    One would hope that method used to decrease utilization would persist. If we tighten standards for requiring procedures or take away physician ownership of facilities, I am hoping that those effects become permanent.

    Just to be clear, I am not saying that cost per procedure is not an issue. I am saying that if all you do is cut fees, it may be counterproductive.

    Steve

  • I don’t see much of a difference between the approaches since the keystone is wages in the sector.

    Whose wages, though? According to Reinhardt, doctor takehome accounts for 10% of health care spending (the McKinney report puts it at a little under 9%). Cut that in half, and we’d still be only 5% below where are (if the end result is not doctors drumming up more business). According to the McKinney report, if you bring doctors’ pay in line with where they “should be”, you’re looking at maybe a 3% reduction.

    That may be a start, but it’s not a solution. Also worth noting is that for a number of docs, take-home pay is about the same as it is in Canada. My wife would likely be making marginally more up there.

    How much more do our nurses get paid? Our hospital CEOs? How much larger are our support staffs (including billing)? How much money is spent on nice, but unnecessary, facilities*? To the extent that providers are charging a whole lot more than they should be, we need to figure out where, precisely, that money is going.

    On the other hand, if you lower payments, maybe it’ll force hospitals and doctors to figure out where to make the cuts?

    * – The hospital where my wife works is about to be replaced with a nicer, newer, bigger hospital. As near as I can see, there’s nothing wrong with the current hospital. I’m not sure exactly why they’re doing it. But one thing they have mentioned internally is that newer and nicer hospitals lead to increased utilization, which means more money.

  • If we tighten standards for requiring procedures or take away physician ownership of facilities, I am hoping that those effects become permanent.

    That’s sort of taking care of itself. Doctors are increasingly employees of the hospitals at which they work. The current hospital bought up 2/3 of the local practices a few years ago and my wife now works for the hospital (over half of the job offers she got involved similar setups). The Wall Street Journal actually wrote an article about this a while back.

  • Whose wages, though?

    I read a quote from the head of the Mayo Clinic recently that put it quite succinctly: there are too many people making too much money. Layers of administrators. Overhead. IT people. Physicians. Technicians.

    People in the healthcare insurance business. Their overhead and administration. The whole sector is problematic.

    In my view the key problem is the degree to which the field is publicly financed. If healthcare were like, say, the hospitality industry in which people paid their own way, I wouldn’t have a gripe. But it’s as though everybody is on expense account.

    But it isn’t, it won’t be, and, IMO, it shouldn’t be. And that means that we’ve got to impose limits.

  • Drew

    So many of the observations about why health care costs have escalated disproportionately have merit. Its the Rube Goldberg piece by piece strategies………….or the meat ax let govt officials restrict access approaches that make one cringe.

    At the risk of boring, and taking a few arrows in the abdomen……..once again: we have a third party payer system for comprehensive health maintenance, not consumer purchased health insurance. We have divorced the health care consumer from routine expenditures, and price, and therefore reality. You fix that and you solve the problem. You won’t need those Rube Goldberg regulations. And I bet those layers of non-vital administrators etc fade away over time. I bet you.

  • Drew

    Oh, and the proliferation of procedures also.

  • You can get an MRI for $400 and for $4000 in the same area. It’s the same diagnostic test done to the same quality standard. Honest, ordinary people with lousy insurance pay more than $400 in copays for the $4000 test because they have been socialized to go to the hospital and get the test instead of price shopping and doing it where it’s cheaper.

    Until this socialization is undone and the norms of the rest of american life replace them, we will continue to have out of control medical spending.

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