The Cost of Healtcare (Part 3) - The Political Case for Healthcare Reform

It is important to understand when talking about the 1/6th of the economy (almost 16% - or $2.28 Trillion a year) dedicated to healthcare that this number is substantially greater in the U.S. than in other countries. The healthcare sector includes medical and healthcare goods and services, pharmaceutical, biotechnology and other products and technologies, as well as health management organizations, hospitals, and healthcare insurance. The U.S. spends more overall and more per capita on healthcare than any other nation, but this number does not say it all. In an analysis by the previously cited Dr. Reinhardt, a regression curve analysis (his graph is shown) is applied to different per capita spending in comparable countries, and the result is that per capita spending on healthcare is directly correlated to GDP per capita. In other words, if you have more money to spend, you will spend more money. The richer a country is the more each citizen of that country spends on the country’s healthcare sector. Yet, despite that the over $16,000 a year spent more than in the comparable economies and systems can be compared to a substantial “healthcare tax” on the average American family, no accountability or better results seems to come from that money spent.

Dr. Reinhardt argues that this regression curve also predicts what the per capita spending should be, given the GDP per capita of a country. The U.S.’ in 2006 should have been around $4,819, but was actually $6,714, approximately 40% more than what would be the norm for other economies and countries, according to the curve. It begs the question, is that almost 16% of the economy dedicated to the healthcare sector a sign of its strength or of its inefficiency?

The Political Case for Health Care Reform: We Can Do better

When comparing five capitalist democracies approaches to healthcare, the size of the healthcare sector in the U.S. is 32% greater than it’s closest comparable, Switzerland. Switzerland is home to some of the largest pharmaceutical and insurance companies in the world, so this sector is sizable for its economy. In the U.S. there are other large components of the healthcare sector, each of which has a role in contributing to or reducing costs as a whole. Let us examine further.

Medical Technologies and Research

The largest number of medical innovations worldwide is commercially developed in the U.S., due to greater spending in research in America. In 2006 it was reported that out of the 22 most recent Nobel prizes in medicine, 15 had gone to Americans or researchers in American universities, while 7 had gone to researchers in other countries. The U.S. government spends over 7 times as much as European governments on medical research, and private companies spend over four times as much in America as they do in Europe. Out of the six major medical innovations of the last 25 years, one is from Switzerland (angioplasty), one that was developed in Germany (mammography) one in Japan (statins) and one in the UK (CT Scans/MRI) were improved in the U.S., and two are considered American (coronary bypass, and ACE inhibitors). While whether medicine is "socialized" as it is in Germany, Switzerland, Japan, the UK or Canada (where recently a non invasive technique for confirming breast cancer has been developed) does not in and of itself promote or hinder technological development in the field, investment does. Investment in medical technology research is proportionally greater in the U.S. than in the rest of the world, and that drives up that healthcare dollar per capita number. These innovations and developments create worldwide benefits, so in effect there is some “free riding” occurring, where the rest of the world benefits from the investments made within America. The total spent in research and innovation, however, amounts to less than 3% of the whole healthcare sector GDP, i.e. much less than 0.5% of U.S. GDP. The savings are not to be found by cutting spending here, quite the contrary. By encouraging more investment in this sector to make medical prevention and care more effective, by expanding immigration policies to encourage more intellectual capital to come and remain in the U.S., and by improving the educational baseline at elementary and high school levels—especially in math and science—more effective healthcare may develop.

Medical Drug Use and Development

Pharmaceutical research and development has given us a cornucopia of medications and drugs that have improved and prolonged the life of many throughout the world. This has been done riding on the back of a patent protection framework which allows funding and long development pipelines; but it is possible that there are excessive costs generated by this sub sector because profit margins, as reflected by the financial statements, are very much above the average corporate profit margin. It is not the role of the government to determine when a particular industry is “making too much money”, as there are many different factors that make any particular industry more profitable than another. In the case of the pharmaceutical industry, the risk of a particular investment is high, as product development pipelines can be very expensive and lead to negative outcomes after years of funding. This financial risk is partially protected by the government in the form of patents. A successful product will be allowed to be monopolized by a company so it can get greater than normal returns for its investment in this product to cover investments in other, failed product lines. Patent protection should allow major pharmaceutical companies to have profit margins in line with the profit margins of major corporations of other sectors, so why are the margins so much higher?

It is said that Americans are overmedicated. There is a pill and a supplement for everything that ails us, as in a type of “Jetson” cartoonish mentality. The public and the medical providers are constantly bombarded with marketing campaigns for over the counter or prescription drugs that will help us defeat the problems caused by our lifestyles—as well as for problems we did no know we had. As Americans we are willing to buy large amounts of products from the pharmaceutical companies and from the unregulated health supplement manufacturers to compensate for our unhealthy lifestyles. Ineffective or redundant overmedication is part of the “excess” spending in health care, an excess driven by the market and lifestyle choices of our society. Other drivers of these costs however should be looked at.

While the development of new drugs is to be encouraged, there is no mechanism that allows establishing true comparables between new drugs, drugs they replace (as the patents run out), and existing alternate remedies. That is, there does not seem to be a clear channel between the patent office, the FDA and independent testing researchers to determine if a new expensive drug has the same effect as an existing one, a health supplement or perhaps even a traditional home remedy—the analyses are narrow. The current regulatory structure is skewed towards the development and patent protection of new drugs, leading thus to the creation and marketing of new drugs—and a pill for everything that ails us. Likewise the unregulated nature of the health and natural supplement market makes Americans spend inordinate amounts of money in little more than compacted dirt and pulverized herbs with great claims but no proven effectiveness. The under funding of the FDA has not allowed it to address these two areas (broad analyses and supplements) where savings by the way of effective and cheaper medication and improved wellness for the American consumer may exist. The political deal to push healthcare included a hands-off arrangement to the current structure of the pharmaceutical industry. It is in this industry’s interest that the incentives as they exist are kept for the development of new drugs over existing ones and remedies, that food, diet and health supplements not be regulated or certified for medical and wellness use, and that the pool of people buying medicine increase. There is a discussion to be had on this point down the road; but pharmaceutical lobbyists have been very effective in postponing it.

Medical and Health Administration

As we go down the list of healthcare sub sectors, the administration systems for providing health care seem to be one where true savings can be found. Particularly the area of medical records is ripe for this streamlining and even the insurance companies would garner substantial savings if this relatively simple step, in conceptual terms, could be enacted. The idea is straightforward: every time you go to a new doctor you have to fill out you medical history, which then is placed in a folder, which goes into that holder in front of the examination room and later into a filing cabinet in the back room of the doctor’s office. The amount of time spent by you and countless other Americans just filling out and handling these forms, and the potential errors and omissions in doing so, represent billions of dollars of inefficiency; a clear opportunity for savings exists here. A networked information system, sharing information in a centralized database, and accessible by the patients through passwords, PINs or even biometrics could streamline medical histories and avoid many costly mistakes. The privacy concerns in constructing such information repository are as great as those of the existing centralized record keeping of Americans’ financial records used for determining credit scores i.e., surmountable. Secure access to this information by a patient authorized provider can be guaranteed, and record checking and updating by the patient can be done from his or her home.

There is a significant business opportunity here, a business that by eliminating all the man-hours wasted in duplicate and faulty recordkeeping can accrue great value. The technology and the data exist; they just need to be put together by the software and minor hardware technologies. This process can also flag fraudulent claims within Medicare, for example, with the consequent savings that have already been projected. The possibilities for streamlining costs, reducing fraud, and producing real substantial savings while providing better care make this area one in which special interests may interfere to appropriate these savings. It is critical that special care be taken to ensure that in fact this sector truly generates its potential for better care, efficiently delivered in a cost effective way to reduce that per capita healthcare dollar number.

The Medical Insurance Sector

The pressure is currently on insurers to become more efficient and reduce costs, so great portion of the debate has been on reforming this sector. However, the insurance sector as a whole does not have excessive profit margins when compared cross-industry to other corporations of similar size. It has already been demonstrated that it is the administrative and overhead costs that are excessive when compared with similar companies in similar countries, and this may be attributed in part to the underwriting component of the administration. This is the part dedicated to examining particular cases and individuals to ensure that coverage is allowed, either before issuing the policy or when presenting the claim. It is sadly ironic that the resources dedicated to excluding and denying claims are what bring down the profit margin of the insurance industry to cross-industry comparable levels, when the cost to the consumer is up to 40% higher than in other comparable countries.

But another major component of this sector requires a close look. Cost savings can be achieved by examining the use of defensive medicine in order to shield practitioners and administrators. This practice raises costs both by increasing the amount of interventions and by forcing up malpractice insurance rates. Different interests are involved in this quandary that balances treatment, responsibility, liability, fairness and justice tugging at each other within a complex issue. In the pursuit of better care, the practice of defensive medicine can do harm, but doctors and medical administrators may feel forced to engage in it to protect themselves from future liability.

We Can Do Better

In reviewing the political issues related to health care we can see that action resulting in bringing down the costs should focus mostly on administrative practices of the medical field and of the insurance companies. There can be substantial savings in the pharmaceutical sector as well, and a clear drive to encourage healthy lifestyle choices should be part of public health policy. In medical administration, incentives to encourage the pooling and sharing of records and histories could make the delivery of medical services more effective at the same time as saving billions of dollars. It is also a way to decrease fraud within the existing Medicare and Medicaid programs.

The insurance companies have no economic incentive but to cater evermore and increasingly to the healthier and the wealthier, despite that the increased marginal cost of doing this has brought down their profit margins. This is why they want to increase the pool of the insured to include individuals that are healthy and do not believe they need to buy insurance, so they do not buy any. It would be a political mistake to mandate insurance to all without including a control mechanism that made sure that “cherry picking” by the companies still left out those in need of medical treatment and created more "free riding" on emergency and public services (as it occurred with the “health co-ops”). The insurance sector is in need of an additional player that can bring some sanity to the existing perverse incentives within it that give us an expensive system with inadequate coverage.

The public option is that player, a new part in that structure that will help adjust the shortcomings of the present system, not perpetuate them, and an effective correction to the bloated and inefficient healthcare sector that crowds out resources for wage growth and new investment, while delivering mediocre results for the money spent. Opponents to such an option argue that in the UK or Canada, for example, when the sector has such a direct intervention by the government the standard of care decreases, including preposterous arguments such as shortages of medical services and supplies—as if the market would not compensate for that. While this is a lie brought out to light by the fact that the wellness factor is greater in these countries as measured by such things as average lifespan, heart disease rates, obesity, chronic disease treatment, and the like, it begs the question to these opponents when they say no to reform: do you really think the U.S. cannot do better?

• Link to  NPR "Five Capitalist Democracies Countries" healthcare comparison.
• Link to Dr. Reinhardt's Article on Health Care and Insurance costs: "Why Does Healthcare Cost So Much?"
• Link to health sector in the U.S. and Medical Nobel prizes
• Link to underperforming wellness in the U.S.