The Costs of Healthcare, Again

There’s been a heated discussion of the viability of Medicare in the comments of this post, largely prompted by this rather depressing comment:

The truth of the matter is that Medicare cannot be fixed. Forcing doctors and hospitals to take less money will insure shortages of coverage. No one will accept that. And failing to reduce costs will simply bankrupt the country. Obama and Co. are attempting another path, which is to destroy the whole goddamned US medical system. They’ll probably succeed. After all, if EVERYONE is getting crappy rationed medical care, then those old people can’t complain when we don’t give them anything.

Medicare won’t be fixed. It WILL go bankrupt, and soon. What happens after that wreck? Who knows? Personally I suspect that the effort to keep it afloat will end up destroying a large chunk of the American economy and will definitely destroy the last vestiges of the republic, slight as those vestiges are.

The comment is worth reading in its entirety.

It should be obvious to all but the most stubborn that healthcare reform in the form that has been taken will do little or nothing to reduce the rapid escalation of healthcare costs, focused as it was on expanding coverage. In the near term it certainly increases costs and, barring some epiphany on the part of the Congress, is likely to induce costs to rise even faster over time. I’ve also made my preferences clear around here: cost reduction first with concentration on both the supply and demand sides.

To hone in on one of the several driving factors behind the rapid increase in healthcosts, consider the graph above, taken from the book Who’s Not Working and Why? by Frederick Pryor and David Schaffer. It shows hourly wages across a broad range of occupations. The authors needed to place a special note on the graph to indicate that the wages of physicians are so much higher than those of the other occupations lists that they don’t fit on the graph at all. That wasn’t always the case.

Here (also from the book) are the median hourly wages of some professionals in 1970:

Physicians 22.30
Lawyers 22.70
Electrical engineers 23.00
Dentists 35.60

By 1993 the median hourly wages of lawyers had risen to $28.79; during the same period the wages of physicians had doubled to $52.84.

In the paper Trends in Physician Incomes, Gregory Pope and John Schneider consider what factors have spurred the greatly increased net incomes of physicians, reaching the conclusion that the change can’t be explained by specialization, greater physician work effort, that they’re treating more patients, or that their practice expenses have decreased:

Most of physician income gains in the 1980s [ed. the period being considered in the paper] were due to higher average hourly earnings, not to greater work effort.

They were performing more procedures with higher per-unit profit margins with, unfortunately, ambiguous effects on morbidity and mortality.

See also this paper on physicians incomes in 1970. Unfortunately, it only reports averages.

I’ve been over this before but it’s worth repeating. You can’t gain an understanding of the changes in the costs in healthcare without considering the entire period since the enactment of Medicare in 1965. During the first few years of the period, physician incomes rose sharply, driven almost entirely by increased utilization. They were treating more people and getting paid more. Once the new patients had been absorbed a new period began, characterized by physicians receiving more for, essentially, the same services. The prices went up. That ended in the late 1970s when Congress, alarmed at how rapidly Medicare had grown beyond its initial cost estimates, began looking at the increases more closely. Since that period and, particularly, in the late 1990s and early 2000s, much of the increase in cost can be explained on the basis of inflation alone.

However, that, too, is misleading. Since so much of inflation is actually medical inflation comparing healthcare cost increases to general cost increases is inappropriate—it justifies a positive feedback condition. Better to compare these increases with the non-healthcare rate of inflation, of which it is a multiple with some consistency.

There’s one more point I’d like to make before leaving this subject. If you believe, as I do, that it is best to consider total compensation rather than just 1040 wages when thinking about the changes in income over time, the increases in the cost of healthcare insurance have constituted an increasingly large component of compensation for some time, particularly among those in the lowest income quintiles. Since benefits (which mostly means healthcare insurance) aren’t subject to income taxes or FICA that has an impact on all sorts of things, from the amount in the Social Security Trust Fund to property tax rates to interest rates.

It’s obvious to anybody who takes the time to look at the numbers that Medicare as it’s presently constituted is unsustainable and that unsustainability is likely to come sooner rather than later—not decades away but years away or, maybe, right now. The notion of Medicare for all is so fatuous as to be beneath discussion. It’s like the old joke about the guy who lost $1 on every sale trying to make it up in volume.

We can’t make people live forever. We can’t give everybody all the healthcare they might want whenever they might want it. And healthcare providers, physicians and hospitals, can’t make as much money as they might wish and as they might think that they deserve. These are all fantasies and the reality is that, having failed to do what’s necessary in healthcare reform this time around, we still need healthcare reform.

The future of our healthcare system might be as bleak as suggested by the commenter cited above. If that’s the case, it will be bleakest for healthcare providers who, as I’ve demonstrated above, have benefited mightily from our system as it is.

5 comments… add one
  • Andy Link


    Good post, but I think using mean wages for providers might be a bit misleading since there are substantial differences in provider pay. Specialists are topping the pay scales and it’s no surprise that many doctors want to be specialists and not primary care physicians. It would be useful to categorize physicians to see where they pay increases have gone. I suspect that primary care physicians have not doubled their income, but that’s just a guess.

    Also, it would be interesting to see (and I’m not sure if the data is available) how many specialists, relative to all doctors, there are today vs 1970. I suspect again (no solid evidence) that medicine’s become increasingly specialized with many more specialist MD’s than 40 years ago.

    So average physician pay may be heavily influenced by two factors: The great increases in pay for specialists (see this guy, for example from a show I happened to see), and a substantial increase in the number of those specialists relative to the total number of doctors.

  • One of the sources cited above goes into the issue of specialization specifically and found that the increase could not be explained on that basis. I agree that it has an effect but it doesn’t explain all of the cost increases.

    BTW the issue of GP’s is an interesting one. Wages for GP’s are pretty close across OECD countries while the wages of specialists are not.

  • Maxwell James Link

    Great, great post.

    Icepick’s comment really brings home how poor the design of Medicare is. The truth is we already do have Medicare for all – you just have to wait until you’re 65 for the actual benefits to kick in. No one in their right mind would pay for (or set up) a private insurance program of this sort, where you have to pay in for forty years but then get virtually unlimited care. It creates terribly perverse incentives. And as you’ve pointed out, it sets up a massive price floor, seemingl controlled by physician’s groups, for the entire industry.

  • steve Link

    “You can’t gain an understanding of the changes in the costs in healthcare without considering the entire period since the enactment of Medicare in 1965. During the first few years of the period, physician incomes rose sharply, driven almost entirely by increased utilization. They were treating more people and getting paid more. Once the new patients had been absorbed a new period began, characterized by physicians receiving more for, essentially, the same services.”

    I was the one arguing that doc salaries will need to come down, but I do need to correct some of this. In 1965 we had no advanced imaging, so we could diagnose very little. We did not have ICUs yet. Preemies born at 36 weeks gestation often died. We barely had heart surgery and catheter techniques were still in their infancy, awaiting the needed developments in plastics.

    So, we were not doing the same things as we are now. The population also lived a much better lifestyle in many ways. The fund of knowledge and intelligence needed for practice in 1965 is much different than that needed now. There just were not as many things you could actually do.

    Medicare implementation coincided with a burst of medical innovation. One could make a case that it played a part in that. Why bother developing care for gramps heart disease if he cannot pay for it? Why develop CAT scanners and MRIs to diagnose strokes and brain tumors if you have no way to pay for it or for the follow on interventions?

    The other part we forget is that people are out of work for much shorter times when they do require procedures. Cataracts used to be a week long hospitalization. Gall bladder surgery required a few days stay. Those kinds of values are missed in calculating productivity.

    It is possible that lawyers had a similar burst of innovation in that same time period, but I doubt it. Same for dentists. Electrical engineers I cannot comment on, but they do face overseas competition much more directly. Add it all up, and maybe docs, if correctly rewarded by the market, should have seen a real increase in salary.

    But so what? Now, too much money goes into medicine in general and Medicare in particular. I see no way to get costs under control, regardless of method, without including doc salaries and hospital payments as part of the solution.


  • Jimbino Link

    The problem could be solved by forcing all healthcare providers to publish their prices for all offerings, as do Walmart, Sears, Home Depot and Lowe’s.

    This is already done indirectly for Medicare and Medicaid. I can’t see how anyone can expect to rationalize the general healthcare market in the absence of all price signals.

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