Health Care Financing Reform: (2) Costs

     I thank the readers who posted comments to last Friday's entry about health care financing reform.  In this post I respond briefly to those comments, report on differing views about the causes of the high cost of medical care in the United States, and provide some links to informative sources on the subject.

     The cost of medical care in the United States is very high – approximately 17% of gross domestic product is attributed to health care, and this percentage is growing quickly.  On average, the cost of health care is increasing about twice as fast as inflation. 

     Family U.S.A. is tracking the increase in the cost of medical care in every state of the union.  You may obtain these reports from this website.  Essentially, over the past decade the cost of health care has almost doubled, while family incomes have only increased about 20%.  Obviously that rate of growth in health care costs is not sustainable.  We have to reform the way we pay for health care.

     As noted in last Friday's post, we would all like for medical care to be cheaper, better, and available to everybody, but as several readers pointed out these goals are be in competition with each other.  It is difficult to raise quality and improve access without increasing the total overall cost of medical care.  Also, several readers suggested what the principal cause of the high cost of medical care might be.

     Dan suggests that the principal problems causing the high costs of medical care are greed and the poor health choices that Americans make.  Dan, several of the health care reform proposals contain provisions regarding preventative care, and I certainly agree that there should be incentives promoting healthy lifestyles – stop smoking, less drinking, no illegal drugs, healthy diet, and regular exercise.  I am not sure what we can do about eliminating "greed" from the human psyche, but it should be possible to reduce the opportunities for individuals and corporations to siphon off funds from the health care system.

     Susan believes that automated billing will create significant savings.  As the husband of a physician I can attest that although the billing system has become more efficient in recent years, administrative costs related to billing are still very burdensome on every private medical practice. 

     More generally, the high administrative costs relating to health care in the United States are a major piece of the puzzle.  A study authored by Steffi Wollhandler, Terry Campbell, and David Himmelstein and published by the New England Journal of Medicine in 2003 found that 27% of health care workers in the United States are administrators, as compared to 16% in Canada – and that excludes  persons employed by insurers.  They also found that administrative costs constitute 31% of all health care expenditures in the United States.  Out of the $13,000 per year that the average family of four spends on health care, over $4000 is for administrative costs. 

     Alice expresses faith in capitalism and believes that President Obama should simply let capitalism work.  I agree with Alice that in general capitalism is a superior economic system – it is far more efficient than feudalism or communism, for instance.  However, neither the United States nor any other country embraces a pure system of capitalism.  Government builds roads and operates public schools, and even in the field of heath care there is government involvement in myriad ways – government insurance programs like Medicare and Medicaid, government-run health care systems like the Veterans Administration and county and city hospitals, and fairly significant government regulation of the health care industry - health lawyers advise their clients on matters of antitrust law, tax law, medicare and medicaid fraud and abuse law.  And very few people would contend that we would be better off under a system of laissez faire capitalism.  The question is not whether we should repeal all government involvement and regulation altogether, but rather whether there are any steps we can take to eliminate some of the inefficiencies that currently inhabit our system of paying for health care.  Basically, Alice, what specific steps would you suggest to bring down the cost of health care in this country?

     Two of my favorite fellow bloggers and contributors, Dave and The Reverend, have competing views about the role and value of private health insurance companies.  The Reverend, like Dan, decries the greed of the private sector, while Dave believes that insurers are not realizing undue profits and that in fact private insurance companies keep the costs of medical care down by denying coverage for unnecessary treatment, thus requiring people to pay for this treatment out of their own pockets.

     In response to Dave's and the Reverend's comments I consulted Edgar Online to check the most recent financial statements that two of the country's largest health insurers, Aetna and Humana, submitted to the Securities and Exchange Commission.  For the six months ending on June 30, 2009, Aetna earned about $17 billion in premiums and fees paid by customers, and of that it paid about $13 billion to health care providers.  The remaining $4 billion represents Aetna's costs and profit, which is in line with the Woolhandler study finding that administrative costs constitute over 30% of health care spending in the U.S.  Furthermore, remember that over one-fourth of persons employed by health care providers are engaged in administration, so in fact far less than $13 billion of Aetna's payout was actually received by doctors and medical clinics.  The figures for Humana are similar.  During the first six months of 2009 Humana earned $15.4 billion in premiums and fees, and paid out $12.6 billion to health care providers.  Of the remaining $2.8 billion, approximately $2 billion was for Human's sales and administrative expenses and $500 million was profit.  Again, it would appear that there are significant potential savings that could be achieved through a more efficient system of paying for health care.

     I am reminded of Reinhold Niebuhr's central thesis from "Moral Man and Immoral Society" – as individuals, most people are kind and idealistic, but groups of people usually act upon selfish impulses.  The same principle applies both to government and to corporations.  In this process we are all seeking a solution that will improve the lives of ourselves, our families, and our communities. 

     Tomorrow's posting will again address the causes of the high cost of medical care in the United States.

Tagged as: cost of medical care, health care, health care financing reflorm, health care reform