Our Healthcare Spending Trend and Why It’s Killing Us

I wrote a post a little while back explaining that there are two types of healthcare costs: care costs and non-care costs. Well, taking a step back, those are actually both related only to our level of spending. But there is another aspect of spending that is not talked about nearly as much, and about which I am much more concerned: trend.

The U.S. Department of Labor keeps track of the U.S. inflation rate, and they say it has been under 4 percent every year since 1991. Estimates of yearly health spending growth range from 5 to 15 percent, but most come in over the 10 percent mark. If you’ve done your math correctly, you probably figured out that healthcare spending is increasing faster than inflation.

So, is this bad? Well, as a country, we’re getting wealthier, and with more wealth comes more health spending, which is a great thing. There are tons of things that people choose to get healthcare-wise when they have more money. Maybe it’s plastic surgery, maybe it’s other cosmetic surgeries, maybe it’s eye surgery, maybe it’s weight-loss surgery, maybe it’s the more expensive treatment option for longtime joint or back pain, . . . you get the picture.

So yes, some spending increases are a good sign. But that crazy spending growth can’t all be attributed to wealth increases in our country. Two other big causes of spending growth can probably be labeled as (1) medical technology and (2) chronic diseases, and both of these are causing me some concern. First, a little explanation of each.

Medical technology causes spending growth because it allows us to spend tons of money saving someone or fixing someone when we used to have to just watch from the sidelines. It also allows us to treat things more effectively and more expensively. For example, a robot for use in surgeries is super expensive, but it reduces invasiveness and increases the range of things that are considered operable. These are positive things as well.

And as for chronic diseases, this refers to kidney disease, heart disease, diabetes, those sorts of things. And some estimates say that two thirds of our healthcare expenditures are generated by them. Crazy, I know.

So there’s a basic overview of why healthcare costs are increasing faster than our economy is growing. And here is why I’m concerned about it: it’s pricing low-income Americans out of healthcare insurance and contributing to a growing national debt.

As insurance companies have to deal with more expensive beneficiaries (especially the ones with chronic diseases), they have to raise insurance rates. And as new (more expensive) treatment options become available, they have to cover many of those (or risk losing beneficiaries), which means (again) raising insurance rates. All of this raising insurance rates business means it gets too expensive for people and employers, so they just make the decision to just get rid of health insurance and hope for the best.

And then there’s the government debt. Medicare and Medicaid are not immune to all the insurance cost increases. Yeah, they get to decide how much they pay providers, but they still have to decide what to do about new expensive treatments, and they also have to fork out more dough for people with chronic diseases, especially since the over-65 population is the main chronic-disease population. It’s just getting more expensive for the government to pay for healthcare!

So there you have it. Our spending trend is causing some major problems, and it is definitely exacerbating our quality and access problems. But never fear! There are some amazingly good solutions out there for all of this, but I’ll save those for another post, same bat time, same bat channel.

Numbers Don’t Lie . . . People Do

Yes, I’ve strayed from the healthcare basics focus that I intended to take. I’ll get back to that, I promise. But this is something I’ve been wanting to post about for a while now.

Picture a child learning how to count. Now picture that child trying to use that new skill to count trees on her way home from school. She walks past a tree and says, “One.” Then she walks past another, even bigger one, and says, “Two.” And then she walks past a little tiny bush. She ignores it, confidently praising herself for knowing that that’s not a tree. But then she walks past a pretty tall bush. It has a trunk. It has leaves. Is it a tree? She gets confused and decides not to apply stuff she learns in school to her life anymore.

What was her problem, and what does that have to do with healthcare? She had a problem with identifying what she should count and what she shouldn’t. This is an essential fact of counting–it’s a game of categorization. By counting trees, you have to define what a tree is and what a tree isn’t. And this has everything to do with healthcare! Have you ever heard the number 46 million come up in healthcare debates before? You got it! It’s the number of “uninsured” people in the U.S.

I always took that number at face value. After all, numbers don’t lie. Right? Right. But that number was obtained by some people somewhere deciding who should be considered “uninsured” and who shouldn’t. So are they completely unbiased when they are deciding what to count and what not to count? I argue that they are not.

Numbers are almost always used for political purposes! The mere fact that you’re counting something presupposes that it’s worth counting, probably because you think it will help you know if you’re right in suspecting something’s wrong. In the case of healthcare, people were probably hearing anecdotes about how someone didn’t have insurance died because of it (probably leaving her kids behind as orphans). “Wow! I think the number of uninsured people in the U.S. is a problem! I’m going to check that by counting them.” And then, after they decide how to count uninsured people, they get a number. And they don’t stop there. They use that number to incite action. Why else would someone count something? “Look, that’s really neat that I got that number. Let’s stare at it.”

So, am I saying that the people advocating universal health coverage are the ones who are counting (and skewing) the number of uninsured people in the U.S.? Glenn Beck certainly thinks so. He estimates that number of uninsured people to be closer to 9 million, not 46 million. And I don’t know if he’s right or wrong. I haven’t done the research to find out how the powers that be get to that 46 million number.

What I am sure of, though, is that the principle is correct. It seems cynical to say that you shouldn’t trust any numbers or statistics, but it also seems naive to completely ignore the politics that goes into obtaining a number. I’ve seen charts that show health spending growth by country. Depending on which countries are included on the chart, some make it look like the United States’ health spending growth is pretty average, others make it look like we’re an extreme outlier (implying something should be done about it NOW!). But maybe this is all a good thing. I mean, if no one was convinced that healthcare is a problem, would we be going through this whole “let’s improve healthcare” movement? Probably not.

Innovation, Infrastructure, and a Bankrupt Government

Since I’m on the topic of healthcare costs lately (and will be for a while, probably), I’d like to talk about the potentiality of healthcare spending bankrupting our national government. Is it possible? I don’t really know, but that’s obviously the worst-case scenario with all this crazy spending we’re doing. I’ve heard a number of different quotes that say effective, cost-curve-flattening health reforms would solve virtually all of the federal government’s fiscal woes. At 18-ish percent of GDP, that’s not that hard to believe.

But there is a little-known upside and a somewhat-known upside to huge amounts of spending.

The somewhat-known upside: innovation. Yes, America’s health system is best known for more than just spending. It’s the source of more healthcare innovations than anywhere else. So maybe that means we’re just subsidizing the world’s cures to . . . everything. This aspect of our system is what I always think about when I wonder how we could reduce spending, because if we reduce spending at the expense of the strong incentive to innovate, is that a net positive or negative?

The little-known upside: infrastructure. Yes, investors follow the money, and why do you think the United States has the nicest hospital facilities and technologies in the world? There’s money in healthcare! This health infrastructure might be the best thing that ever happened to healthcare in the U.S., because it will keep on giving after we’ve found a way to spend less. Think of the internet bubble. Remember how this country spent tons and tons of money on the internet in the ’90s, and then there was that huge stock-market crash? Well, most people probably don’t know that, even after that huge crash, we now have tons and tons of fiber-optic cable all over our country. That infrastructure is said to be one of the leading factors that allowed the internet to grow as fast as it did in the U.S., probably helping us maintain a world-power economy in the midst of huge changes in the structure of business. So a long-term upside to crazy health spending is the infrastructure that it gives us.

I guess what I’m saying is, yes, we’re spending a ton of money on healthcare, but we are also reaping some benefits too, namely innovation and infrastructure. So here’s the final question: Do we think it’s better to have healthcare innovation and infrastructure or a fiscally solid federal government?

Kinds of Healthcare Costs

I learned that there are two kinds of medical costs, broadly categorized: care costs and managerial costs. They’re kind of self explanatory, don’t you think?

The interesting thing about the U.S. healthcare system is that I’ve never seen an aggregate percentage estimate of just how much of our total healthcare spending (you know, that 18-ish percent of GDP) goes to managerial costs. Maybe some health economist has come up with that number somewhere, but I haven’t seen it. Think about it–you would have to estimate and add the total managerial costs of Medicare, Medicaid, the private insurance sector, CHIP, the VA system, the system for congress and for those with kidney failure and for native Americans. . . . Sounds fun. Other countries have anywhere between 2 to 5 percent estimates for their total managerial costs.

What I have heard, though, are estimates for the total managerial costs of Medicare (2 percent) and the private insurance industry (20 percent). You’d think the 2 percent is awesome and the 20 percent is horrible. Well, the 20 percent is horrible, but not bad considering they’ve got to spend so much money on screening applicants and trying to find ways to deny claims and developing thousands of new compensation plans and payment schedules and paying awesome executives. (It is the private sector, after all.)

And as for the 2 percent, I think it might be a little too low. Maybe a little more spending on managerial stuff could go towards ways to prevent fraud, cause apparently that’s a pretty big thing with Medicare. So maybe every extra dollar of fraud prevention would save a few dollars of fake claims, up to a point. That would maybe leave the Medicare number up around 3 percent, which is still not too bad. Unless you don’t trust government’s estimates of their own efficiency. They want to look good, right? Number-fudging isn’t that hard to do, especially with something so complex as healthcare.