Tuesday, March 1, 2011

Health care and fiscal reform

This is one for everyone who thinks the US is insolvent.

The US budget is clearly problematic.  Social security is not a big problem (and people who argue otherwise clearly have not thought strongly about the numbers).  Medicare however is a huge problem - and extraordinarily underfunded.

But a picture on the Wall Street cheat sheet shows how large the opportunities are...






The USA health care spend is at least 3000 dollars per capital too high relative to outcomes versus any other OECD country.  It is probably closer to 4000 per capita.  Times 307 million people there is 900 billion to 1.2 trillion dollars on the table in dealing with health expenditure.

I have written about how you might squeeze the roughly trillion dollars out before - but there may be other ways of doing it.  

However that roughly trillion dollars of excess costs is a lot of peoples' income.  They are not going to want to get squeezed and they will lobby (probably very effectively).  It ain't gonna be easy no matter how you do it.

Still any government that gets this right can right America's fiscal situation with almost no other policy action at all.  What others see as waste I see as an opportunity for America - and a reason why America is ultimately more solvent than the bears imagine.

Comments.




John

23 comments:

Anonymous said...

Check out this interactive graphic: http://www.mckinsey.com/mgi/publications/US_healthcare/images/interactive.asp

From this McKinsey report on healthcare: http://www.mckinsey.com/mgi/publications/US_healthcare/

Page 5 of that graphic actually shows that 68% of the outsized spending is in outpatient care. The report makes clear that this is coming from the numerous tests done.

The best way to save money without significantly reducing outcomes would be to do away with half of the MRIs and lab tests that are done "just in case." Good luck getting rid of that, though. Like Americans buying SUVs despite control issues, costs, and gas usage, it's hard to tell people they're making things worse by inefficiently overprotecting themselves.

Anonymous said...

not sure how many peoples incomes are involved or their influence inside the beltway. corporate stakeholders on the other hand...

But What do I Know? said...

>>However that roughly trillion dollars of excess costs is a lot of peoples' income.<<

This cuts right to the heart of the problem with astounding clarity, JH. Thanks for saying it.

Unfortunately, you have also stated clearly why the problem won't be fixed.

Matthew said...

You are correct. Healthcare is the only substantial fiscal problem the US has. However, a bear would suggest that the main overall problem the US has is the US political system, and that system may well not permit this relatively low-hanging fruit to be plucked.

Anonymous said...

The problem with your argument is that you proxy overall healthcare outcomes solely by longevity. While longevity should be a primary goal and is certainly subpar given the level of US healthcare expenditures, it is not the only outcome. A single chart that purports to capture everything wrong with the system is akin to claiming military spending gave the US Vietnam and Iraq while ignoring the substantial R&D that went into the Internet, cellular phone technology, and GPS and safe maritime trading/supply routes and a nuclear umbrella for countries like Japan and South Korea.

There are many areas where US healthcare spending yields inexcusable, subpar outcomes like longevity and infant mortality, but there are also many areas where it yields superior outcomes like pharma innovation, advanced oncology research/treatment, and pioneering surgical procedures. Much, but not all, of elevated US healthcare spending subsidizes these activities that much of the advanced world free rides on. When people laud Canada's healthcare system for controlling costs particularly in pharma orders, they ignore that the premiums American individuals and insurance companies pay allow the Canadian single payer system to barter with pharma companies for that price. The same applies to drug sales in much of EM.

I don't claim the system is perfect and there are many areas where the US does need to improve and I do agree that healthcare costs is THE fiscal issue of the next decade. I do believe that 'one-ring-to-rule-them-all' analysis with one chart for such a complicated, immense system is very much an insufficient line of reasoning.

Frozen in the North said...

Whoever believes that health care expenditure in the U.S. twice as high as anyone else is smoking very strong weed!

Those who bat on the side of the American health care system will usually decree longevity as the wrong yard stick, but in fact it is only one indicator that is used by the world heatlh orgranisation. In fact, the number for many cancers are poor in the U.S. quality of life is also poorer than many other OECD countries.

What is inexcusable is that on the majority of metrics used to quantify quality of life, America is only average, and yet it outspends everyone else by a factor of two.

That alone is proof that the system is broken.

Alaric Investments said...

I would be interested in your thoughts on social security, as I have done a bit of research and have reached a rather different conclusion.

While it is impossible to disagree with your conclusion based on the information provided, you should be very careful indeed to make such a broad conclusion based on this aggregate data from the US as a whole.

If you were to parse the data say along wealth and location you would probably receive very different results.

For example, the cost and level of care for an urban individual in New York vs suburban or rural communities is very different. Indeed, the cost of things generally is very different between New York and say Arkansas.

As such, it is frequently misleading to analyze anything in the US in aggregate, because the experience of living in the US is highly variable.

That said, it seems to me that if you taxed employer health care plans now provided for free to employees, you would have a much simpler cost control structure as right now there is absolutely no incentive for employees with fully paid health care to spend whatever they can (McCain actually suggested this in his campaign....).

Instead there will be more operational bureaucracy with the new health care structures put in place and ultimately explicit rationing....

yul said...

are there people who wants free health care service !?

Will said...

I don't see how this tackles the fiscal problem. The majority of the healthcare spending is done via the private sector. And medicare typically charges alot less for the same procedure than the private sector. So the wasteful spending that accounts for the high % of GDP spent on the same outcome is a transfer of wealth between 2 parts of the private sector- from members of healthcare plans to doctors/ diagnostic test labs.

Anonymous said...

The US can't be insolvent when all its debt is denominated in the currency of which it is a monopoly supplier. There is no default risk on US government bonds... There's only inflation risk. The bond market is solely a monetary policy tool, by which the Fed controls excess reserves in the system. Thus, the US isn't constrained by taxing or anything.

David said...

A very good point John, and universal coverage with capitation as in UK would work in USA. And yes doctors and drug companies would scream, but the companies funding the current mess that is the US health system would applaud a lot louder as there are far more of them suffering from the current mess.

David

Anonymous said...

Americans (and their lawyers) that confuse maloccurance for malpractice drive the defensive use of excessive testing and procedures which bear few fruit in terms of quantity or quality of life.
Lawyers need to be held accountable for their own malpractice a'la Great Britian!

Godfree Roberts said...

It's not a technical problem, it's a moral problem. Our politicians are bribed with billions of dollars to maintain the current system which channels taxpayer dollars to "health care" companies. When the bribes stop, so will the waste.

John Haskell said...

it is not really from the "Wall Street Cheat Sheet," it is the WSCS's ripoff of Mary Meeker's big presentation as you can easily see from the KPCB logo and page number 316 at the bottom.

Andrew S said...

Krugman, and many many others, have been banging on about this for some time.
Problem is even Republicans love this kind of corporate welfare (they hate big government, unless its military, healthcare corporate welfare, mega contracts for giant industrials 'big government'... big government for the little guy is wrong wrong wrong!) The last thing any political org. wants is to change the system. That was the 'hope' in the 'hope and change' schtick and the core reason Obama has failed by every measure his friends hold him to and can never ever succed by any measure his enemies do. Civil war by proxy, it never ended after the Rights movement.
Private hospitals send you for every single test / exam / operation / etc. going cos they know the government will pick up the cheque. The end result isn't as good as European options, but hey look, I own a number of hospitals that rely on this and ~I can afford to fund both parties to block changes, left and right.
Add to that mega food corporations bloating out a continent with sugar and fat subsidised happy meals (that make you sad) and you've a economy predicated on causing and fixing misery. Path dependancys are so strong it needs revolutionary vision FDR, Lincoln, Bartlett :) etc. to change It's the grand version of Keynesian pot holes, and as Keynes pointed out it's facile. This food lobby / cigarettes lobby / health care lobby modus is fixable, but neither "side" of the American political establishment will gain from it. It's classic American political fudge, Dems are meek, Reps are loud and triples all round. It's desperately sad, but really 'twas ever thus.

Fiscally, the US doesn't need to right its budget, no one will ever call its bluff. That would be suicide, the kind you go to Switzerland for. If America tooled up against naked economic attack it would be the end for whatever actors united against them.

donrod said...

While it is true that this single issue could be a significant part of the solution, everyone has used a redundant medical procedure (specially tests).

Therefore, I don't see this palatable for any politician that REALLY wanted to tackle the issue, since it would affect a decades long behavior regarding medical procedures ingrained in all of us. Unfortunately, it seems to me that this would be a political sudden death, with no takers on the horizon.

As John Haskell stated, that very telling chart comes from Mary Meeker's presentation. You might want to check the full presentation out. It has some interesting analysis when looking at the US as a corporation...

http://www.kpcb.com/usainc/

The Half Baked Lunatic said...

I agree wholeheartedly - it's the actual "cost" of healthcare that's killing us, not the insurance coverage. I wrote about this issue in my blog last fall and have some specific recomendations:
http://www.halfbakedlunatic.com/post/2010/10/25/Tackling-the-Healthcare-Issue.aspx

Anonymous said...

I wonder if we are confusing causation and correlation.

To oversimplify:

America probably eats more mcdonalds, and their equivalent than any planet on the country. America combines that with a pretty bimodal approach to drinking (overall on average we arent so bad but alot of people drink very little and some drink way too much).

Last i looked outside a few of the pacific islands I think we have the worst incidence of diabetes in the world.

We are ridiculously unhealthy. There are lots of causes for that unhealth.

Pigovian taxes to some degree helped slightly on cigarettes, I used to vehemently think they might on junk food too, now I am a little less sure.

It's a huge problem, almost collectively large swathes of the population (ESPECIALLY) the poor, and older just have accumulated bad health, which leads to things that cause all sorts of costly problems later down the road.

Americans foot the bill for that.

It is now 2nd and 3rd generation, and embedded in our culture. You could tax HFC's (or remove the subsidies), and people would find other ways to get fat, drink, smoke, or destroy their bodies.

It's depressing.

Our system has some clear failures, don't mistake me, but even with a much improved system, my guess is we would end up on the wrong end of that graph.

For what it's worth, socially it's kind of going to be the last major battle for rights in america too

~TheUnrepentantGunner

Adrian Meli said...

Good post, I just think we need to get started sooner than later rather than just kicking the can down the road and forever talking about how we can solve the problems later. There are lots of ways to curb expenses, so let's hope we find someone who is willing to confront hard challenges. I am optimistic over long periods of time we figure things out but it is less clear to me that in the next few years we will even attempt to tackle health care. - Adrian Meli

buyersstrike said...

Another aspect of high health care costs, but not improved outcomes comes from the drug development process.

Often companies spend time and money to develop me-too compounds that are mere variations on an existing drug, or a single isomer of an existing racemic drug.

Repros Therapeutics (RPRX), a current retail investor favorite, has a lead compound, "Androxal" that is just a single isomer version of an existing, cheap, generic drug called Clomid.

Equally egregious are the attempts to patent new uses for existing generics. Think of Orexigen (OREX), Vivus (VVUS), Somaxon (SOMX), etc.

Compare the price for SOMX's Silenor with the price for generic Doxepin, which are the exact same substance.

Laban said...

Slightly o/t (and I agree on your main thrust - the US bang per buck on healthcare is poor), but why does copyright on a song or a book last for so long compared with the copyright on a drug ? 70 years after the death of the composer for a song or book, 120 years if it's a corporate product (Disney).

For a drug, 20 years from filing date - and how long does it take to get a drug to market ?

buyersstrike said...

@Laban - Copyrights and Patents are quite different things. Copyrights are longer, but there is an exemption for "fair use".

Patents, on the other hand, are shorter, but have no "fair use" exemption.

One cannot get a copyright on a drug, though one can obtain a patent. Some drugs are covered by "composition of matter" patents, others by so-called "use" patents.

My own view is that "use" patents are weaker, and more likely to be overturned.

Hope that helped.

Milton Recht said...

The chart as presented is misleading if not outright wrong. Life expectancy is not an internationally standard measurement. When the measurement of life expectancy is standardized among OECD countries, the US has the highest life expectancy.

The US includes deaths of short-lived premature births and short-lived high-risk births in life expectancy numbers. Other OECD countries do not include these and other short-lived births. The exclusion of these under 1-year-old babies' deaths increases OECD life expectancy averages.

Deaths come from three causes; accidents, homicides and disease/illness/heath.

The US has a much higher accident death rate, including auto, and homicide rate than other OECD countries. Accidents and homicides tend to be higher among younger adults. The US has a younger average aged population than other OECD countries, which leads it to have more homicide and accident deaths and consequently a lower life expectancy. Japan's longer life expectancy measure comes from an older population having fewer homicides and accidents.

The US also has more wide-open spaces and highways, which lead to more auto related deaths than OECD countries.

When each country's life expectancy is recomputed to eliminate the effects on life expectancy averages of the different accident and homicide rates death causes, and short-lived births, the US has the highest life expectancy among OECD countries. In other words, the higher US rate of accidents, homicides and high-risk premature births negatively distort US life expectancy numbers. For example, Ohsfeldt and Schneider among others have recomputed life expectancy numbers and the US does much better than the OECD charts.

While there has been an effort to standardize medical related costs, one area where there is still a big difference is medical education costs.

The US government does not pay a doctor's cost of a medical education. In OECD countries, the government often pays the cost of a doctor's education. The OECD country cost of educating doctors is not included as a medical cost. OECD countries count that cost as an education cost. In the US, doctors pay for their own education. Doctors are making a capital investment in themselves and as such price their services to recoup their costs and to make a fair return on that investment in addition to their economic base salary for the value of their services. In other words, doctors are compensated for their previous investment. In OECD, doctors do not make the same economic investment in themselves and as such do not need to recoup their education costs. OECD does not get a free ride. The cost of educating doctors is pay for from taxes on their citizens instead of through doctors' fees. A fair comparison of medical costs in OECD countries and the US should include in OECD medical costs, the costs of educating doctors.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.