The Ludites Were Right — Technology Costs Threaten to Bankrupt US Healthcare
Testifying before the Senate Budget Committee on January 31, 2008, Congressional Budget Office Director Peter R. Orszag described the impact of technological change on the current healthcare environment as follows:
“Most analysts agree that the most important factor driving the long-term growth
of health care costs has been the emergence, adoption, and widespread diffusion
of new medical technologies and services by the U.S. health care system.
Other factors, including rising personal income, a growing share of health care
costs borne by third-party payers, and the aging of the population, contributed
to historical spending growth by increasing the demand for medical services.
Even taken together, however, those factors appear to explain less than half of
long-term spending growth.
Technological advances are likely to yield new, desired medical services in the
future, fueling further spending growth and imposing difficult choices between
health care and other priorities.
CBO projects that, without changes in law, total spending on health care will
rise from 16 percent of GDP in 2007 to 25 percent in 2025 and 49 percent in
2082. Federal spending on Medicare (net of beneficiaries’ premiums) and Medicaid
would rise from 4 percent of GDP in 2007 to 7 percent in 2025 and 19 percent
in 2082.”
In other words, it is not the retirement of the boomer generation, the sedentary lifestyle of Americans, or the greed of hospitals, providers, or health insurance firms prompting health care inflation in the United States. It is, as indicated in previous postings here, the advance of medical science and the patent-protected products that follow.
This is enormously important. Our natural inclination is to point the finger of guilt at those whose practices and behaviors prompt in us a comforting sense of arrogance and superiority. The woman with the expansive bottom wearing tight shorts, the beer-bellied commission salesman at Sears, and the raspy voiced slot machine player in Vegas, with a cigarette dangling from the lips, have their health issues, to be sure, but they are not the principal cause of health care inflation in the United States. Not even close.
“· If health care spending per capita remained at 1987 levels for each category of body weight but the prevalence of obesity changed to reflect the 2001 distribution, health care spending would have risen by only 1.4 percent per capita on average. Because actual spending per capita rose by 34.6 percent, this implies that the change in the prevalence of obesity could account for only about 4 percent of all spending growth from 1987 to 2001.
· In other words, most of the increased spending on obese people occurred not because of greater obesity prevalence, but rather because spending increased on each obese person – which itself likely reflected changes in technology. In 1987, spending per morbidly obese person was about 18 percent higher than spending per person of normal weight, but by 2001 it was 70 percent higher.” According to the Director’s Blog at the Congressional Budget Office.
Nor can we blame the Boomer Generation for living too long and not departing quickly enough.
“· Under CBO’s projections, health care spending will double by 2035, reaching 31 percent of GDP. Thereafter, health care costs will continue to account for a steadily growing share of GDP, reaching 41 percent by 2060 and 49 percent by the end of the 75-year projection period.
· Net federal spending on Medicare and Medicaid now accounts for about 4 percent of GDP. That rises to 12 percent by 2050 and 19 percent by 2082.
· Most of that increase is due to excess cost growth, not to an aging population”
It does not take the director of the Congressional Budget Office to tell us what common sense should make abundantly clear. Each of us confronts two immutable certainties, according to Mark Twain – death and taxes. For married couples, filing jointly, earning between $68,000 and just over $120,000, the government stake in our incomes is 25%. One dollar in four. For average two-income household, the majority of the second / lesser income goes toward paying taxes. While some may argue that the wealthy pay an insufficient portion, the fiscal problems related to health care are not a consequence of insufficient taxation.
On the other side of the scale (i.e., death), all those that we commonly blame as the source of health care inflation (the smoker, the obese, and the sedentary) tend to live productive and taxable working lives. Indeed, we may be more obese and sedentary today because we are more productive – having invented computers, robotics, and other automating and mechanical approaches to accomplish work more efficiently, with less effort, and with more reliable precision. While the health-care costs of the obese, diabetic, or nicotine-addicted senior citizen may be more expensive, they tend to die sooner, on average.
Besides, even if we were to reform them and pursuade them to die more cheaply, their passing does nothing to abate the desire of the medical technology economy to alleviate the age-prompted discomfort of even relatively healthy senior citizens or cure that which prompts their demise. This is, in fact, the imperative of the pharmaceutical industry and the medical device manufacturing industry. Their very business model requires the presence of death and the advance of medical science sufficient to incrementally palliate or cure disease. Such a model assumes that, with each cure or extension of life expectancy, death will eventually prevail and provide the next target for medical research.
American patients have always died of heart conditions and cancer — the two leading causes of death. It is not as though we discovered these DRGs only recently. With cardiac diagnoses, the advance of new surgical techniques and medications now make such conditions chronic (even if not curable), but the treatment of the condition is an addiction unto itself, where, both, the condition and its treatment become “chronic.” It guarantees a return customer and a recurrent expense.
It has long been a realization in the military arts that three of the enemy are required to care for a wounded comrade – consuming the focus and attention of four soldiers –, while a soldier killed in combat consumes the labors of only the deceased. When it comes to health care costs, the treatment is often more costly than the cure.
In the case of cancer, medical science has significantly advanced the capabilities of radiation therapy, for example. With 3-D conformal treatment and combination chemo/radiation, cancer patients are living longer but at higher cost. In fact, some cancer patients are not dying from the neoplasm prompting their original diagnosis but, rather, from the side effects of their life-extending treatment. An increasing number of lung cancer patients (presumably prompted by a long history of smoking) are now diagnosed with brain cancer. This is not from metastasis of their lung cancer but, rather, from the radiation therapy designed to treat their lung cancer. [This is so common, in fact, that some radiation oncologists openly debate using prophylactic cranial radiation to preemptively treat those at risk for radiation-induced brain cancer]. All those who abhor smoking may advocate denying such costly treatments to former smokers, but the same threat confronts breast cancer patients whose only sin was inhaling oxygen and possessing breasts.
The problems confronting healthcare are significant and, interestingly, fewer in number and cause then we might believe. It is a convenience to blame the patient for their condition and the subsequent expense to society, but it is not the patient that is the cause of our problems. [Ours is the only industry to blame the customer for cost of purchasing our services.]
Instead, it is the unintended consequence of the human animal being intelligent, curious, and creative. We have the ability to identify a problem and seek solutions, to craft products based on those solutions, and the desire to profit from them. It is evident, however, that we cannot afford our own brilliance, unless we turn our intellect toward the resource-scarcity challenge that threatens to bankrupt us.
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Laurent Haug’s blog » Blog Archive » New technologies driving health costs up
October 26, 2008 at 9:26 pm
It’s really easy to write an equation that shows you can make more money providing expensive high-end health care to a minority of the population while providing rather minimal care to those at the other end of the scale, than you can providing good preventative care. It’s no secret that the latter will keep a larger segment of your population healthier over the long run. It’s just not as profitable.
So that’s what the medical “industry” – I use the word in it’s dictionary sense – has chosen to do. Nothing to see here, is there?
Our failure to rectify this glaring problem before now has made it very hard for US companies to compete on a global scale. Rather than bailouts after the fact, wouldn’t it be better to pay into a real health care system that did make us healthier in the long run while simultaneously freeing up business from that burden? As a taxpayer that would be my personal choice.
Incidentally, it should make you crack at least a small smile that Peter Orszag will be the budget director in the new Obama administration! Heard him speak once on C-SPAN and I was mightily impressed. This is just a blast of fresh air.
Norm
November 19, 2008 at 11:51 am
Norm,
Thank you for the comment.
The problem with the equation you reference is the specter of adverse selection and what amounts to a balance of trade in the financing of America’s health care. Those who benefit from the provision of expensive high-end health care are the institutional providers (practitioners, hospitals, and specialty hospitals), but this amounts to a zero-sum game as the insurance providers suffer the expense, pass those costs on to patients and their employers, and employers passed the costs along to their customers. This model, however, is something of a red herring, as most of those expensive treatments arrive in the last years of life and, therefore, impact Medicare and, to a lesser extent, Medicaid. Starting in 13 ½ months, the baby boom generation will begin retiring (some are already in early retirement), and this problem will continue growing, but at a faster rate.
The provision of minimal care benefits the insurance companies; although, it would benefit Medicaid and Medicare, as well. This practice is largely in the form of high deductible plans, which are most attractive to a small segment of the population – specifically, healthy young adults without children. This pursuit of the profitable patient, however, represents a form of adverse selection all its own, as the defined pool of profitable patients becomes smaller and smaller in the face of rising health care costs, employers exiting the market of employer-sponsored provision of health care insurance, and the lost diversification across which to spread the growing cost of health care.
The net effect is to create a bifurcated system, in which insurance coverage targets an increasingly narrow pool of young adults, while government covers an increasingly larger percentage of Americans confronting higher health care costs. This is having the effect of driving Medicare into insolvency sooner and shifting and increasing the cost burden to the states in the form of lower federal government compensation for Medicaid.
In other words, those who need it least are paying increasingly higher insurance costs for less care, while those who need it most are an increasing burden on federal coffers. Both represent a problem of adverse selection within a broader system that is the picture of adverse selection, and this seems unlikely to resolve as long as we fail to recognize the source of the problem – namely, health care inflation.
While it may be convenient to think of health care as a collective industry, doing so does nothing to assist in breaking out the sources and uses of capital, in order to identify the principal drivers of health care inflation. That is what the Congressional Budget Office did in its report. It found that providers of care, hospitals, and insurance are not to blame. Instead, the principal driver of health-care inflation is the advance of medical science – via the pharmaceutical industry and the medical device manufacturing industry… or, more accurately, sub-industries.
Personally, I believe it is necessary to lengthen the period of patent exclusivity in order to diversify the number of years during which these sub industries are able to generate a return on investment. In theory the period of patent exclusivity is 17 years, but more than 12 of those 17 years are consumed by research and development and the FDA approval process. The Bush administration’s decision in its first term to prevent patent extensions had the effect of reducing the number of return-on-investment years, which, in addition to increasing costs during the smaller number of available years, exacerbated the cost problem by compelling industry to churn new products into the market place at an increasing pace – in order to sustain revenues and earnings for stockholders. [Note: Stockholders most prominently include anyone with a diversified mutual fund, 401(k) retirement account, etc..]
The problems associated with preventative care follow from the competitive marketplace. This is because the benefits of preventative care primarily arrive in the patient’s senior years. In other words, the cost of preventative care through insurance coverage of working-age Americans provides a questionable return on investment to the company’s financing that coverage. Add to this the frequent churning of patients from one insurance firm to the next, and there is insufficient transparency to determine an assured return on investment.
The issue of health care costs contributing to a reduction in the competitive posture of American industry is interesting. Where other countries operate under a different model, in which government covers the healthcare needs of its citizenry, their industries presumably enjoy a competitive benefit. This practice, however, should generate a higher cost to government, leading to higher taxes, and less efficient utilization of capital within their broader economies. In many socialized medicine countries, this is seen in the higher level of static unemployment, the use of a value added tax, and less pronounced GDP growth. In other words, at minimum, the expense should be a wash and, to the extent that it leans in one direction or the other, our system should enjoy a competitive benefit. This, however, has not been the reality – as you note.
So, why is this the case? In my view, socialized medicine countries enjoy a pricing benefit attributable to volume-purchase discounts for medical devices, equipment, and pharmaceuticals. In theory, similar discounts should be available to large group purchasers within the United States – especially, Medicare and Medicaid. Under US law, however, volume discount negotiations are prohibited to these government agencies. Indeed, the pharmaceutical industry argues that such discounts would undermine the incentive to research and develop the next generation of medical advance.
If this is the case, it is reasonable asked why the industry is willing to accommodate volume discounts to socialized medicine countries but not in the United States. In management theory it is well understood that discounted pricing and sales are profitable once the fixed costs of production are met, assuming the revenues generated from incremental sales (i.e., those being discounted) cover the variable cost of production. In other words, if the US consumer covers the fixed costs of production (in its entirety) and the variable cost of production for the product consumed in the United States, it is beneficial to the industry to discount units sold to socialize medicine countries, as long as revenues generated from the socialize medicine countries cover their variable costs of production. This means that the US consumer is effectively supplementing the lower costs enjoyed by consumers in socialized medicine countries – including, Canada, Great Britain, France, Germany, etc.
This is why it is important to understand the sources and uses of capital within the US healthcare system. So, I disagree with your assertion “So that is what the medical “industry”… has chosen to do. Nothing to see here, is there?” Not only is there an abundance to see, it is a mistake to view healthcare as a single industry. Instead, ours is an amalgam of separate sub-industries, each working to its own ends, under a structure that includes a competitive market, socialized medicine (Medicare and Medicaid), public health, and the adjacent influences of the international marketplace.
All this is why I believe the Congressional Budget Office report is so important. Not only does it confirm positions I’ve held for years, it identifies Peter Orszag and his colleagues as creative investigators of the current healthcare environment in the United States – questioning and, where supported, debunking conventional wisdom. It is the presence of this creativity that gives me some measure of hope (although, it is dwindling). I am, therefore, pleased that Orszag will continue to provide public service in the next administration. On that we are in agreement.
Thank you for the thought-provoking comments.
Robert
rcrawford
November 19, 2008 at 9:57 pm