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Yes Donald Trump, health care is complicated

June 28, 2017

                              Donald Trump 2017 photo from Wikimedia.org

 

As President Trump has said about United States health care, “Nobody knew that health care could be so complicated.”

 

The U.S. Senate Republican bill on health care is in the news. The latest development is that a vote in the Senate will be postponed until after the 4th of July Senate recess. The news on the bill is not good for Republicans, as the Congressional Budget Office estimates that over the next 10 years it will knock  22 million Americans off of health care coverage.

 

The  Republican senate bill doesn't address the real causes of the rising costs of health care in the United States. But it does cut U.S. government spending on health care and thereby reduces the government budget deficit by an estimated $321 billion dollars over a ten year period. It does this primarily by reducing public support for many Americans' access to health care coverage.  Reports are that the Republicans want to use these budget savings to pass a tax cut bill, the benefits of which will go largely to Americans with higher incomes.

 

We won't dwell on the Republican bill here. There is ample analysis elsewhere in the media. Here we want to sketch out some issues to help in our understanding of the American health care system and the challenges it faces.

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How much does the U.S. spend on health care?

 

U.S. health care spending is tracked by the National Health Expenditure Accounts (NHEA). According to the NHEA data, between 1960 and 2013 nominal U.S health care spending increased by an average of 9.2 percent per year while U.S. nominal Gross Domestic Product, a measure of total current dollar income produced by the economy, increased 6.7 percent per year. As a result, as the years go by, the United States is spending an ever higher percentage of its national income on health care. In 2015, as a nation we spent 17.8  percent of our income on health care. By 2025, projections are that we will be spend 19.9 percent of our income on health care. That is almost one dollar on health care for every five dollars of income produced in the United States.

 

And if these trends were to continue, half of total U.S. income will go to cover health care by 2050. By the year 2082, the U.S. would be spending over 98 percent of its total income on health care. These trends are of course unsustainable. No one believes that by the end of the century the U.S. population will want to spend just about all its income on health care. Sure people want to live healthy lives as long as possible, but to be healthy with no income to spend on anything else may be too much of a good thing.

 

If these numbers don't grab you, then let's put the spending in terms of dollars. In 2015 as a nation we spent $3.2 trillion dollars on health care. Spending through Medicare, the program for those over 65 years old, amounted to $646.2 billion, 20 percent of the total. Medicaid, the program for the poor spent $545.1 billion, 17 percent of the total. Private health insurance covered $1,072 billion, or 33 percent of total health spending. Out of pocket spending by consumers of health care was $338.1 billion, or 11 percent of the total spending.

 

If we could slow the growth in health care spending to just one percent more than the growth in Gross Domestic Product, the U.S. would still be spending almost half of its total income on health care by the end of the century. That’s still a large chunk of available income going to health care, but it would at least leave half of all income for spending on other things.

 

This is the back drop to the health care debate in the United States. Are we spending too much, and can we arrange the system so that we spend less, while still achieving quality health care?

 

Health care is different from other goods and services.

 

For most goods and services we seldom ask the question of whether or not we are spending too much on them. If spending on computers or leisure travel or vacation homes increases, we don't usually asks whether that spending is too much. Consumers decide what they want to buy, spurred on by their tastes and constrained only by their budgets.

 

But health care is different. For one thing it is often crucial to quality of life, and for life itself. That is why almost all major fully developed countries have programs that provide health care coverage for all their citizens.

 

The United States has been an outlier among the developed countries. We don't have a universal system of coverage.

 

The United States approach to health care is compartmentalized. Many of us get it through health care coverage policies offered by our employers. Once we reach 65 years old we get coverage via Medicare, a decidedly government program. And some of us who are poor enough get coverage via Medicaid, another government program. But many of us fall through the cracks in this system. Some of us have jobs that don't provide health care benefits. Some of us are not poor enough to be eligible for Medicaid, but don't earn enough to be able to afford a health care policy on the private market. Many of us without health care coverage get care at emergency hospital rooms and when we cannot pay the bill, hospitals and doctors must increase the charges on the rest of us to cover those costs.

 

Obamacare added another path to coverage within the United States health care system via health care policies available on health care market place exchanges with government subsidies for those with lower income to purchase these policies. And Obamacare required health insurers to offer policies to those with preexisting conditions without charging more for their coverage. Also under Obamacare children could stay on their family's health care policy until they reach age 26. Obamacare also required Americans to be covered by health insurance or pay a penalty when they filed their income tax returns. The official name of Obamacare is the Affordable Care Act. Under that law, the federal government paid for expansion of Medicaid coverage in states that opted to increase eligibility for Medicaid to the near poor. Thirty-one states opted into the Medicaid expansion. Under Obamacare, the United States health care coverage rate increased to 90.6 percent of the United States population. Prior to Obamacare, coverage rates were for the most part hovering below 85 percent. In 2017 the U.S. Congressional Budget Office estimates that 12 million more Americans get health care coverage through the Medicaid expansion and 10 million get coverage by purchasing health care policies via the health care market place exchanges

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What drives the increasing cost of health care costs?

 

There are very few natural checks and balances focusing on the most cost effective health care treatments, though insurance companies and government programs like Medicaid and Medicare have tried to constrain costs by limiting what they will pay for specific treatments. But for the most part, these attempts have been largely ineffectual in constraining spending on health care. There have been vague references to savings through computerizing patient health records, and some talk of evidence based medicine, i.e., using research about what are the most cost effective treatments for specific illnesses, and putting more emphasis on preventive medicine like attacking obesity, stronger campaigns against tobacco and illicit drug use and encouraging more exercise and healthier life styles. Those are worthy goals, and if effective they could help, but the Republican health care bills have little to say about measures like these that may help constrain health care expenditures. There are some signs that some of these efforts begun under Obamacare have begun to bend the growth curve of health care cost downward a bit.

 

To be fair, we must be realistic about our ability to constrain the growth of health care spending. The real drivers of health care spending may not be what you might think at first blush.

 

One favorite culprit for excessive health care cost growth in the U.S. is usually cited by advocates of a ‘single payer’ system, the high administrative costs of having many different private health insurance providers with different provisions of coverage and exclusions and co-payments. And most of us would lay the blame on doctors and hospitals, since some of those bills would seem to be outrageously high.

But it turns out that health care provider costs, i.e., payments to doctors and hospitals, and high administrative costs are not the major contributors to the growth in health care spending. With regard to administrative costs it is probably true that a system with so many different health insurance providers leads to high administrative costs and if these costs could be reduced, health care spending would go down. But it would mostly be a onetime drop in costs, and not affect the growth rate of spending. Still it would be useful to wring excessive administrative costs out of the system.

 

According to a U.S. Congressional Budget Office report,  price increases by providers of health care accounted for between 11 and 22 percent of the growth in health care spending. And the report concluded that administrative costs in the U.S. health care system caused only 3 to, at most, 13 percent of the growth of our spending on health care.

 

The CBO report finds that medical advances – new and better treatments and new and more effective prescription drugs – are the biggest driver in health care cost. The report concludes that an estimated 40 to 65 percent of the long-term increase in the growth in health care spending has been driven by new treatments being made available. Examples of major technological advances in treatment include coronary procedures to treat heart disease, such as angiography, angioplasty, pacemakers and bypass operations; dialysis procedures for kidney disease and knee and hip replacements. New and more expensive drugs to treat all kinds of illnesses are also examples of technological drivers of increased spending on health care.

 

Drug prices are one area that may be ripe for cost savings. Drug prices in the United States are higher than in other countries. An article in the Journal of the American Medical Association in 2016 concludes that United States high drug prices are the result of the approach the United States has taken to granting government-protected monopolies to drug manufacturers, combined with coverage requirements imposed on government-funded drug benefits. So far congressional lobbying efforts by drug companies have been successful in preventing any reform, including allowing government health programs from negotiating lower drug prices with pharmaceutical companies.

  

The CBO study also cited factors that might be considered natural economic forces acting to cause increased health care spending. One is the rise in our personal incomes. For those of us who are lucky enough or who have been successful enough as to have discretionary income, we tend to use a higher share of our increased income for health care spending. The CBO study reported that the increased demand for health care attributable to the increase in personal incomes caused between 11 and 23 percent of the growth in spending on health care. If you think about it, this is a natural consequence of economic progress. Some or our increased national spending on health care is by choice. It is exactly what one should expect as our national income grows. After feeding and sheltering and clothing ourselves sufficiently, it is natural to think about attending more completely to our health care needs.

 

The other economic cause of the growth in health care spending cited by the CBO report is the growth in health insurance coverage. Those of us who have coverage tend to use more health care than those who are not covered, and we tend to use more expensive treatments than those who are not covered. And we tend to live longer than those without coverage. The long term rise in the percentage of the population with health insurance coverage contributed to between 10 to 13 percent of the growth in health care spending. And it is in this fact that Senate Republicans think they have found a gold mine. They propose to cut spending on health care by knocking 22 million Americans off of health care coverage.

 

The United States spends more on health care but ranks low on good health outcomes.

 

The United States, by a large margin spends more on health care than other developed countries, but ranks low on many health outcomes. The Organization for Economic Cooperation and  Development (OECD) compiles comparative data on country health care spending and health outcomes. According to their numbers the United States spending as a percentage of Gross Domestic Product far outranks other developed countries, spending 16.4 percent of GDP on health care in 2013. The next tier of countries in terms of percent of GDP spent on health care were the Netherlands, Switzerland, Sweden, Germany, France, Denmark, Japan, Belgium, Canada and Austria - all spending between 10 to 11 percent of their GDP on health care.

 

But the United States does not rank near the top in health outcomes. For example among 45 countries listed in and OECD report, in 2013 the United States was in the lower half of the pack in life expectancy at birth at 78.8 years. Countries like Japan, France, Sweden and Canada had life expectancy of 83.4 to 81.4 years. And in terms of infant mortality per 1000 births, the United States was in the upper half of the pack with 5 deaths per1000 live births, while many countries were well below 3 deaths per 1000 live births and others below 4.

 

And again, in deaths from cardiovascular disease, the United States again was in the upper half of countries with 117 deaths per 100,000  population. The leading countries in this statistic were Japan, France, South Korea and the Netherlands with 50 or fewer deaths per 100.000 population.

The United States does somewhat better in terms of  deaths from cancer per 100,000 population, landing just below the middle of the pack, well below 200 deaths from cancer per 100,000 population in 2013.This is among the countries with the smaller cancer death rates.

 

But overall we can't escape the conclusion that the United States spends more on health care and has less good health care outcomes on most measures than other developed countries.

To paraphrase Donald Trump, who knew health care could be so complicated.

 

References:

 

CBO report on factors contributing to increased health care spending:

https://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/89xx/doc8948/01-31-healthtestimony.pdf

Data on U.S. health care spending from the National Health Care Expenditure Accounts:

https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/HistoricalNHEPaper.pdf

https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html

How the United States compares with other countries on health care spending and health outcomes:

http://www.oecd.org/unitedstates/Health-at-a-Glance-2015-Key-Findings-UNITED-STATES.pdf

http://www.keepeek.com/Digital-Asset-Management/oecd/social-issues-migration-health/health-at-a-glance-2015/life-expectancy-at-birth_health_glance-2015-6-en#page2

http://www.keepeek.com/Digital-Asset-Management/oecd/social-issues-migration-health/health-at-a-glance-2015/infant-mortality_health_glance-2015-12-en#.WVMAVWjyuUk#page2

http://www.keepeek.com/Digital-Asset-Management/oecd/social-issues-migration-health/health-at-a-glance-2015/mortality-from-cardiovascular-diseases_health_glance-2015-8-en#.WVMBvGjyuUk#page2

http://www.keepeek.com/Digital-Asset-Management/oecd/social-issues-migration-health/health-at-a-glance-2015/mortality-from-cancer_health_glance-2015-9-en#.WVPHwmjyuUk#page2

CBO estimates of numbers who got health care coverage via Medicaid expansion and via health care market place exchanges:

https://www.cbo.gov/sites/default/files/recurringdata/51298-2017-01-healthinsurance.pdf

High drug prices in the United States

http://jamanetwork.com/journals/jama/article-abstract/2545691

 

 

 

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