Thursday, March 18, 2010

The Healthcare Elephant in the Room

Since my home in the 8th Dimension has been without electricity for five days now (and still counting), it's given me lots of time to think up a new post.

Apparently there's some sort of discussion going on about healthcare reform, so I figured that would be a good topic.

But I don't want to comment on the proposed reform(s) in Congress. For sure, my political philosophy gives me a point of view. But I think most of the arguments over these bills are really fueled by philosophy rather than an actual disagreement over facts that can be ascertained. There's plenty of blogging already on that, I'm sure.

Nor did I want to blog about whether conceptually we have a systemic cost crisis on our hands. For the record, I don't understand why everyone gets so freaked out about a rising percentage of GDP going to healthcare. For individuals on the margin, this is a legitimate issue. But as a country, where else do people think that money should be spent by individuals? More entertainment? Travel? Bigger (or second) houses? More food? More technological gadgets? Defense?

I personally think that Americans generally have the type of healthcare system we want already. We want to have hospitals be somewhat local even if they're half full, we want lots of extra tests to make sure no one misses even a low-probability terrible outcome, we want to be seen by specialists even if the outcome isn't better, we want lots of intensive end-of-life care rather than be told it's time to give up, etc. We have more disposable income per capita than other countries, so this is how we spend it. I'm not too worried about healthcare eventually becoming 100% of GDP-- I'm a strong believer in Herbert Stein's Law. ("If something cannot go on forever, it will stop.") How it would stop and what Americans would agree to live without, no one knows.

Wait, I guess I did want to blog about that part a little bit.

Here's the part I had in mind -- a simple math exercise to analyze how to cut healthcare costs if that is one's goal.

The first place most people would look are medical devices, pharmaceuticals and biotechnology products. The prices are more visible to most healthcare consumers and often have a sticker-shock effect. Not to mention all the political rhetoric. Unfortunately, it turns out that these products comprise only about 10% of healthcare spending.

These industries have average after-tax profits of about 15%. So, in other words, of that 10% contribution to healthcare spending about 1.5% is pure profit. This means that even if all those industries were nationalized and run permanently on a breakeven basis, healthcare spending would drop only 1.5% in the first year. Then presumably, the cost trend would resume.

Where does the real money go? This is the elephant in the room that everyone seems to be avoiding but must be obvious to anyone who has studied the issue. About 35% of healthcare spending goes directly to physicians - the largest single slice of the pie. How do other countries keep costs down? This is where.

In Canada, physicians make 40% less than their U.S. counterparts. In Germany, the average physician annual income is $80,000. This is less than electricians and plumbers make in Germany.

If you want to take 5% or 10% off of healthcare spending, this is how you can do it. Cutting physician salaries by 20% would take seven hundred basis points out of healthcare spending. (The other way to do it would essentially be to ban end-of-life procedures but this is very difficult to imagine happening. About 25% of the Medicare budget is spent on the last four weeks of 5% of enrollees' lives. But you never know going in which ones will pull through.)

Some people argue that physicians in those countries haven't accumulated huge debts as medical schools are heavily subsidized. This is a true point, but the math doesn't work. If the average doctor enters the field with $200,000 in debt, that's only 18 months of average salary to pay off. It's not enough of an argument (on its own) to justify the high salaries compared to the rest of the world.

Why does no one want to acknowledge this when the math is so obvious? I believe it is because doctors are well respected both as a profession and (almost always) when it comes to one's personal physicians, and because everyone in Congress knows this is a lobby that cannot be defeated politically.

Image: State Library of New South Wales via Flickr.


Jake Miller said...

Another way to achieve some of the savings you're talking about would be to flood the market with more physician assistants, nurse practitioners and other non-MD medics.

This has even more problems than simply cutting the salaries of physicians (because so many of us are too special and important to have our special and important flus and plantar warts treated by anyone less than an MD, so in addition to the physician's lobby, you'd also have to overcome the initial animosity of many patients. (FWIW, most of my favorite "doctors" in the last 40 years have been PAs and NPs.)

This is probably a big part of the reason that the legislation being debated is health insurance reform (and barely that), not really health care reform. Real health care reform would also have to address things like the health costs of our industrialized food system.

C - Log said...

And who gets blamed for the protectionist behavior of the professional guilds? Industrial labor unions like the UAW of course! Meanwhile, the doctors, the ones who are actually pocketing all that supposedly lavish UAW compensation, are somehow blameless in all this.

It is amazing that the big cross-border difference in doctor compensation is not more well-known, but, as you say, it is apparently unthinkable to go after the AMA. The insurance companies are just doing their fiduciary duty to their shareholders, after all, and yet they take all the flak. Atul Gawande had a much-mentioned New Yorker article last year about how doctors in some places -- he looked at McAllen, TX specifically -- are now starting up their own diagnostic and imaging labs so that they can refer wasteful tests to themselves.

There's this economist Dean Baker who's always going on and on about how the protectionist doctors and lawyers and accountants and engineers make it tough for their foreign counterparts to come to the U.S. and compete with them on price. He suggests that Americans ought to be able to buy into the health insurance system of whatever country they want. Say it's Canada's. Instead of giving my doctor a Blue Cross Blue Shield card, I give him my Canadian Medicare card and he bills them. Knock down those trade barriers I say!

Lord John Whorfin said...

Yes to both analyses! And yes to whoever put that elephant on the post. I actually might appear to be a legitimate blogger to anyone who doesn't know better.

It's clear that a much bigger supply of physicians or physician-equivalents would drive prices down. It will definitely give insurers more bargaining power. Just look at what's happened with Lasik and that doesn't even have an intermediary tasked with beating down prices.

Interestingly, there's an argument it might not help the system overall. You can already see the early evidence: doctors claiming they can't spend as much time as they like per patient because of the low reimbursement. This is just another way of saying they're trying to cram more patients in each day to maintain their annual income.

That may be okay to a point, but it's hard to imagine it can continue indefinitely.

On the point of insurance companies seeking to make a profit, I'm very sympathetic with that argument. Speaking of math analyses, though, I'm surprised (intellectually at least, I understand the political aspects of it) by the attacks on insurance companies. It's very easy to see (if you look) that not-for-profit insurance companies are raising rates at generally the same pace as the for-profits. And it's also easy to see that for-profit insurance companies haven't been getting more profitable over the last few years.

So it's clearly that the cost of healthcare is going up and premiums reflect that. Whether the costs are going up due to an aging population consuming more healthcare per capita, technological advances (that may or may not be worth it), marginal tests and procedures, malpractice-driven over-treatments, or state mandates to cover more and more things, is much harder to say. Probably a mix of everything like most things in life.

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