More “It’s the Prices, Stupid”

If you have the stomach for it you can read Steve Brill’s lengthy and distressing article at Time on why we pay such high prices for healthcare here in the United States. If you don’t, I’ll summarize it in one sentence for you. We pay more for healthcare than anybody else in the world due to overcharging, too much treatment (AKA “churning”), and inefficient care.

Attributing our high costs to the cost of technology is laughable. Such high technology costs are not reflected in the balance sheets of hospitals and other healthcare providers. Further, other countries where technology is used even more extensively than it is here do not pay nearly as much as we do. The high prices go to wages.

18 comments… add one

  • Drew

    For what its worth, in three of our portfolio companies we have introduced higher co-pays and deductibles. Useage (cost) has declined significantly; people are tailoring packages to specific needs and situations. As one HR manager quipped “they don’t run to the doctor for the sniffles anymore.”

  • Here’s my prediction on that, Drew. Patient-induced excess consumption will be wrung out of the system rapidly for ordinary market discipline reasons. That’s a relatively small component of the whole. Healthcare spending will continue to rise far faster than non-healthcare sector revenues do or, in other words, healthcare will continue to demand an ever-increasing proportion of the national wealth.

  • michael reynolds

    I thought government spending on health care was actually slowing.

    http://www.epi.org/publication/health-care-costs-slow/

    In this week’s release of the February Budget and Economic Outlook report, the Congressional Budget Office reported that we are experiencing slower health care spending growth than historical rates would have indicated, and that this slowdown is projected to have significant budgetary effects. From the March 2010 baseline report to the current baseline, this slowdown has lowered estimates of federal spending for Medicare and Medicaid in 2020 by $200 billion, or around 15 percent for each program.

    For years, health spending has been growing significantly faster than the economy and remains the main driver behind projected long-term debt growth. However, in recent years, CBO’s long-term debt outlook (under the extended baseline scenario) has improved, partly due to slower growth in health care costs. In August, CBO projected that federal spending on mandatory health programs—Medicare, Medicaid, SCHIP, health exchanges, etc.—would grow at an average annual 8.3 percent, or 3.5 percentage points faster than economic growth from 2012-2022. February’s budget report lowers this growth rate to 3 percent over this same period, a 16 percent drop.

  • Several things, Michael. First, “slowing” does not mean “declining”. When federal spending on healthcare rises at 3% and GDP rises at 2.7%, that means that healthcare is still absorbing an IMO unacceptably increasing amount of the national wealth and, importantly, that federal healthcare spending is increasing relative to revenue. Second, nobody knows why the rate of increase is slowing or if it’s permanent. The rate of increase has slowed temporarily before only to increase by a multiple of non-healthcare GDP growth later.

    Third, private sector healthcare spending is increasing at an alarming rate. Many insurance companies are poised to double the premiums they’re charging.

    Finally, when you say “the average wage in healthcare is higher than in other sectors” that’s mathematically equivalent to saying “healthcare produces fewer jobs per dollar spent than other sectors”. Combine that with “healthcare spending is increasing” and it’s another way of saying “fewer jobs”.

  • BTW, using the data from the source to which you linked, that’s another way of lying with statistics. They should be comparing the healthcare sector to the non-healthcare sector rather than with overall GDP.

    Just to give an example of how that works, assume that year-to-year overall GDP growth is 4.8%, healthcare growth is 8.3%, and healthcare comprises 20% of GDP. That means that the rate of growth in the non-healthcare part of the economy is 3.1%. Healthcare spending is then growing more than twice as fast as the rest of the economy (and, assuming that revenue remains fixed as a proportion of GDP), twice as fast as revenues.

  • Drew

    “Here’s my prediction on that, Drew. Patient-induced excess consumption will be wrung out of the system rapidly for ordinary market discipline reasons. That’s a relatively small component of the whole.”

    I don’t know how you arrive at that conclusion (although you may be correct). I do know that in the admittedly limited sample of companies we deal with yearly increases have gone from double digits to low single digits. Its a major movement. And – this is really anecdotal – my comment about the sniffles was only half in jest. I know a lot of people who have finally figured out that a flu shot is probably wise, but running to the doctor if you get it is an expensive fools errand. Same if you are over 40 and have rusty joints etc.

    I don’t know how to prove it, but I’d make you a gentlemen’s bet that uneeded health care expenditures are far greater than you think.

  • steve

    First, the guy writing the article does not know much about medical care. A lot of the things he says are reusable are not. He gets so many facts wrong, I dont know if he is worth reading in detail, but he does get some of the big stuff correct. There is extreme variability in what facilities charge. If you do not have insurance, you are charged very high rates, unless you are in a position to negotiate ahead of time. Those with low cost, minimal insurance can get hit hard.

    Second, if Medicare rates were paid for everything, our care would cost about the same as the rest of the OECD. The problem with costs has always been that private insurance drives the costs. They have no need or desire to control costs, at least in the past. When people talk about getting rid of Medicare and letting the private sector run things, I always shudder at what the costs would be.

    Drew makes some good points, but like everything in health care, this is also mixed. He is correct that there are a lot of not needed procedures. Medicine as a business has been quite good at attracting customers. Look at all of the Taj Mahal like surgicenters. You dont see those in Europe or Canada much. IN the US, those fancy places draw in pts like flies. Our local entrepreneurial orthopedist has a 24 hr on call gourmet chef at his total joint facility. Pts love it. MInd you, they mostly have big deductibles and co-pays now. One of the problem is that deductibles have limits. They may help limit spending on little stuff, but little stuff does not drive our costs. Remember that 50% of people account for 3% of our costs. If you dont remember the demographics of the spending, you will make bad assumptions.

    There is a bit of good news. For the first time since I have been in medicine, I was a corpsman at age 18, I see real efforts to work on costs. Hospitals are concerned about the coming cuts in Medicare reimbursement and working to cut costs. I am working for the next couple of nights on a plan to expand into three or four more hospitals, increase quality and cut costs that I need to present to my group and then to the network. This is different than the little blip in the 90s when managed care just didnt allow any care. This is being driven by players in the system. Note that we havent even thought about private insurance.

    Steve

  • sam

    Speaking of unneeded procedures, see Kevin Drum, Today’s Advice: The Doctor Will Not See You Now

    “I was a corpsman at age 18.” I was a Marine at 17. You guys were and are the best.

  • Second, if Medicare rates were paid for everything, our care would cost about the same as the rest of the OECD.

    I’m not contradicting you, steve, and I’d like that to be true but how do you figure that?

    As an example of why I’m puzzled, see this chart of spending by country from the World Bank.

  • Drew

    “There is extreme variability in what facilities charge. If you do not have insurance, you are charged very high rates, unless you are in a position to negotiate ahead of time.”

    This is a fascinating comment, and in direct contradiction to my experience. However, consistent with my general philosophy, I know what I know, and I also know what I don’t know. steve is in a better position to know, but I’d like him to elaborate. My experience has been that when insurance covers the fees can be double to triple. (and I know that there is a titanic negotiation all the time) But uninsurds get tremendous breaks. And why would that be? Because they won’t buy, and no one eats hamburger on an expense account…….

    “The problem with costs has always been that private insurance drives the costs. They have no need or desire to control costs, at least in the past. When people talk about getting rid of Medicare and letting the private sector run things, I always shudder at what the costs would be.”

    Once again. No one spends as dear as with their own money. As long as employer based insurance is considered “free” you are going to have excess utilization. This is the point I’ve made here for years, and with my reference to higher deducts and co-pays. You need incidence of cost to the consumer, just like every other good or service. To put it bombastically – no stranger to me – when the employee says “holy shit, you mean its going to cost me $120 bucks for the doc to tell me its a flu virus so just get some rest, Tylenol and wait a few days?”………..they will stop going to the doc.

    I know Dave disagrees that this is a significant contributor, but I come from a medical family and they would beg to differ. You know, no one eats hamburger……..oh, never mind.

  • Drew

    “Remember that 50% of people account for 3% of our costs. If you dont remember the demographics of the spending, you will make bad assumptions.”

    Once again citing my medical family……..

    My grandfather and father used to say that the two big issues were a) most people who came to the office weren’t really sick, or had things like colds and flu that just had to run their course and b) pre-me babies and end of life – and I mean the last couple months. (not years)

    Is that what you are implying?

  • steve

    Drew- Groups have a rate they charge, which is usually paid only by a few commercial insurers and those w/o insurance. Smaller insurers get a small cut in fees. Large insurers get a bigger discount. Groups also will accept less from those who can prove need. Then there are those w/o insurance, but have some means. If they are not in urgent need and have the time, they can usually negotiate lower fees. Like everyone else, docs have fixed costs also. As long as you can get paid above those you still come out ahead. The article describes the system fairly well. As a corollary, check out costs on the individual market.

    “Once again. No one spends as dear as with their own money.”

    Sure, and for that small percentage of medical care that is amenable to this, we could see some savings. I say could, because we have studies showing that when people have to decide which things to skimp on, they often skimp on those things that lead to bigger expenditures in the long run. Blood pressure pills are a good example. Now, what happens when it comes to the big expenditures like most surgeries, trauma care, cancer care or chronic illnesses. You are going way over any deductible. You stop caring about them.

    “Is that what you are implying?”

    Premies cost a lot. So do heart stents and heart surgery. Total joint replacements, nearly any belly surgery, nearly any cancer therapy, prostate cancer surgery or radiation therapy. Chronic care for diabetes in its advanced stages, lung disease, congestive heart failure. Now, throw in the fact that people are more geographically limited than you realize, and there is less room for savings than is commonly thought for medical costs. Those not necessary visits for colds are annoying, but they dont add up to that much.

    End of life care is difficult. It is hard to predict the end. we do know that if people at least talk about end of life care ahead of time, they are less likely to engage in futile care, have a higher quality of life in their last weeks, have more satisfied families and save money.

    Steve

  • steve

    @sam- Joined the Navy at 17, but didnt finish corps school until 18. I have told my share of jarhead jokes over the years, but if I was in a shi$storm, I’d want Marines hauling my ass out.

    Steve

  • TastyBits

    @steve

    You the man. Some of the hardest Marines I ever knew were Corpsmen. Doc Pfeiffer would hump his field surgical kit in addition to everything we were humping, and he would run up and down the line. He was an E-6, and he should not have been with our platoon. I think he pissed off somebody.

    Thanks.

  • steve

    Thanks guys. I didn’t personally do anything to deserve such accolades, but there have been a number of outstanding corpsmen. I think it comes from having to live up to the standards of those with whom you serve. And I suspect Tasty is correct. Corpsmen had a habit of pissing people off.

    Steve

  • Drew
  • sam

    “Corpsmen had a habit of pissing people off.”

    Maybe, but never the only important people, the 03 groundpounders.

  • TastyBits

    @steve

    It must be a Marine Corp Infantry thing. My wife does not get it, but she knows there is some weird bond. She tried to explain to one of her friends why a Corpsman was upset about losing “one of his Marines.” I do not think they ever got it.

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