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Why Health Care and Insurance Costs Are Out Of Control

Health care and insurance costs have been growing at many times the rate of inflation for years. Slowing or reversing the growth in costs can happen, but not by nationalizing health care. Fixing the tractable systemic issues and moving to a free market structure will lead to a “healthier” solution for everyone.

Economics

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The debate over health care is heating up. Total national health expenditures have increased over 9.9% per year from 1961-2007, compared to the average inflation rate of 4.3% over the same period [1,2]. As a percentage of nominal GDP, national health expenditures went from 5.5% in 1962 to 16.2% in 2007. To put this cost growth into perspective, consider that national defense spending was only 4.8% of GDP in 2007 and all U.S. exports were ~12% of GDP. Over certain periods, such as from 1999-2007, health expenditures grew 7.4% per year, compared to an average inflation rate of 2.7%. Private health insurance premiums have risen 9.3% per year from 1999-2007, in response to the care cost growth [3], almost 3.5 times the inflation rate. Estimates for future total national health expenditures vary, but the expected value of 20.3% of GDP for the year 2018 [1], which implies a compounded annual growth rate (CAGR) of 6.2% from 2008-2018, is feasible considering historical growth rates and the current cost drivers.

Everyone wants to see changes that will bring down costs and make health care and insurance more affordable. What is at stake here is major: the current administration wants to see health care morph into yet another major entitlement program, with sweeping consequences for our national debt and an inevitable impact on personal freedom and quality of care.

This research essay will argue that there is another choice to nationalized health care (NHC): (1) employ a methodical process of recognizing and fixing the systemic issues that contribute to the high costs and lack of health insurance availability to everyone, reversing those trends; (2) ensure a free market model for health care and insurance to allow for more efficient price discovery within the given universe of supply and demand.

The Major Sources of Health Care Cost Growth

The causes or drivers of health care cost growth are controversial and are not widely available in one place, where coherent patterns and trends can be observed and addressed. A chart of the total national expenditures by private or public funds is shown in Chart 1; the same data set is broken out by primary cost areas in Chart 2 (click links to see charts). Both are from comprehensive data that is publicly available [1,5,6].

Chart 1 – National Health Expenditures

Chart 2 – Primary Health Care Costs

   A. The Growth of Medicare and Prescription Drug Costs

Chart 1 shows that Medicare and Medicaid together grew substantially from 1961-2007, at a compounded rate of almost 15% per year, and in 2007 make up roughly the same percentage of total spending as private health insurance (~35%). From 1999-2007 the annual growth rates of private insurance and Medicaid settled to ~8%, almost three times the average inflation rate, while Medicare grew over 9%. On the other hand, the average number of people over 65 covered by Medicare did not grow substantially, as shown in Table 1. The growth of Medicare and Medicaid slowed in the mid-late 90s due to the Balanced Budget Act of 1997

, but as soon as those amendments were lifted and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 passed, the growth resumed. Over a shorter time period, 2001-2007, Medicare grew by 9.7% and Medicaid and private insurance grew by 6.8% and 7.7% respectively. The recently higher growth rate in Medicare spending stems from the large increase from 2005 to 2006 of 18.6%. The source of this increase can be traced to a whopping 892% jump in Medicare prescription drug spending from the newly enacted Medicare Part D Prescription drug program. Spending went from $4B to almost $40B in one year. But the growth story doesn’t stop there. Medicare prescription drug spending growth grew 43.6% per year from 1985-2005, the years that the metric was tracked before the 2006 jump (54.9% compounded annual rate from 1985-2007 to include the 892% and 19% increases in 2006 and 2007, as shown in Table 2). Compare this to compounded growth rates of 19.5% and 15.6% for prescription drug spending from private insurance and Medicaid respectively, from 1962-2005. Very telling, out-of-pocket payments for prescription drugs grew only 6.9% annually from 1962-2005. In 2006 and 2007 there was a marked decline in growth of prescription drug spending by private insurance and out-of-pocket, to 3.4% and –2.2% respectively – likely because of the shift of payments for seniors to Medicare Part D. What can we deduce from these trends? Prescription drug costs for the elderly (age 65 and over) are clearly a cost driver and is the largest single contributor to the aggregate 11.1% average increase from 1999-2007 shown in Chart 2, which in turn is a cost driver to total spending growth. Out-of-pocket growth is the smallest, indicating the shift away from out-of-pocket cost payments, but also perhaps an indication that there is more cost control when individuals are paying with their own money as opposed to a billed payment from Medicare or a private insurance company. Referring to Table 2, other areas where Medicare cost trends are above the total expenditure growth averages is under Other Professional Services, Home Health Care, Nursing Home Care and Administrative Costs, including the costs of separate private insurance. All four of these areas grew such that the Medicare expenditure within the categories as a whole increased substantially (%category). There are some positive trends in the Medicare data, but they may be illusive: hospital cost growth for Medicare recipients has been cut substantially since 1999: the compounded growth rate from 1966-2007 was 13.1%, and has slowed dramatically to 6.1% from 1999-2007. It may be that the rise in prescription drug usage and better preventative senior care are together keeping seniors out of the hospital, or that hospital billing for drugs after 2005 has simply been shifted to Medicare D – the majority of the drop in hospital care growth was in 2006 and 2007. Also, Home Health Care and Nursing Home Care may have increased as a result of shorter hospital stays. Nevertheless, this has not translated into a control of spending for the Medicare aggregate.


Table 1: Average Coverages (in Millions of People) [7]      
Category 1999 2007 CAGR
Private/Other Insurance 173.5 180.1 0.46%
Medicare (over 65) 39.3 40.6 0.41%
Medicaid/SCHIP 25.0 36.3 4.77%
Uninsured Estimates 42.1 45.0 0.82%
U.S. Population 280.0 302.0 0.95%


Table 2: Medicare Expenditures [8] %Category    
Category 1966-2007 1999-2007 1970 1999 2007
Hospital Care 13.1% 6.1% 19.3% 30.9% 28.2%
Physician & Clinical Services 14.0% 7.7% 11.8% 19.7% 20.1%
Other Prof. Services 20.3% 10.4% 4.8% 16.8% 22.2%
Dental Services 26.3% 10.1% 0.0% 0.1% 0.2%
Home Health Care 21.2% 14.3% 26.8% 26.0% 40.4%
Medical Products 18.8% 7.7% 0.7% 10.5% 15.1%
Prescription Drugs 54.9% 49.2% 0.0% 1.8% 20.7%
Nursing Home Care 12.8% 12.6% 3.5% 10.0% 17.7%
Admin. & Net Cost Priv. Ins. 13.5% 14.8% 14.3% 10.0% 13.9%
Total Expenditures 14.2% 9.2% 10% 17% 19%

   B. Out-of-Pocket Payments Show The Lowest Cost Growth

As mentioned in the previous section on prescription drug costs, out-of-pocket payments by far show the lowest cost growth over a 35-year period. This trend is observed for almost all the other health cost categories where consumers can pay from their own pocketbook, as seen in Table 3. For most cases growth has declined recently, but so has the share of out-of-pocket payments except for a few cases, such as dental services and medical products. The declines in out-of-pocket category expenditures are matched by marked increases in Medicare and private insurance like-category expenditures – indicating a dramatic shift away from having the patient-consumer directly pay the bill. When consumers have to pay the bill directly, costs are more transparent to them than when the bill is paid by another source, such as private insurance or Medicare. Transparency of direct costs to consumers is important, since there are indirect costs added by private insurance or Medicare. These indirect costs can be billing markups or the cost of administration or both. Clearly this is a major systemic driver of cost growth being out-of-control for private insurance and Medicare. Let us do a thought experiment to estimate the impact. If cost growth for all areas in Charts 1 and 2 were contained to the typical growth rate we see with out-of-pocket payments, which conservatively appears to be around 6.8% per annum, we would have had in 2007 (from 1961 levels) a total national expenditure of $606 Billion instead of the actual $2,242 Billion, or 4.4% of nominal GDP vs. 16.2%. This is an extreme example, but everyone should get the idea of extremes. Let’s consider a lesser extreme, a growth of 5% annum from 1985 levels, twenty years after Medicare came online and the year that data first showed separate Medicare payments for prescription drugs. A 5% growth rate is what we see as the per annum value for all out-of-pocket payments from 1999-2007. As a reference, the average inflation rate from 1985-2007 was 3.1%. In this case we get total expenditures in 2007 of $1,285 Billion, or 9.3% of nominal GDP. Clearly we cannot go back and change history, but we can learn from this experiment to shape policy. If consumers have greater transparency to costs and are the direct payer there is likely a better chance of keeping growth under control or even reversing the rate of growth.


Table 3: Out-of-Pocket Expenditures [8] %Category    
Category 1961-2007 1999-2007 1970 1999 2007
Hospital Care 5.5% 7.7% 9.0% 3.2% 3.3%
Physician & Clinical Services 6.0% 6.2% 46.2% 11.4% 10.4%
Other Prof. Services 8.7% 5.4% 43.5% 27.1% 25.6%
Dental Services 6.8% 6.6% 91.0% 44.1% 44.2%
Home Health Care 15.5% -0.7% 9.5% 19.9% 10.1%
Medical Products 6.9% 2.2% 95.7% 80.1% 79.2%
Prescription Drugs 6.5% 5.8% 82.4% 29.1% 20.9%
Nursing Home Care 9.3% 3.2% 52.0% 30.4% 26.9%
Total Expenditures 6.8% 4.9% 33% 15% 12%

   C. The Growth of Administrative Costs and Net Costs of Private Health Insurance

Administrative and net insurance costs, like prescription drug costs, are outpacing the aggregate growth rate, as shown in Chart 2. Referring to Tables 2-6, we see these costs are particularly higher for Medicare, a compounded rate of 14.5% per year from 1999-2007 vs. 9.2% for the Medicare aggregate. These cost increases under Medicaid and private insurance are not nearly as dramatic, but are still above the aggregate spend rates. Clearly this is an area for cost control measures, especially under Medicare. Administrative costs for Medicare (and Medicaid) include claims processing and adjudicating, claims fraud investigation, record keeping and analysis. For Medicare and private insurance there are additional costs for collecting premiums to pay claims. All of these are necessary functions, but the costs to perform them are hitting patient-consumers harder every year, and are growing faster than the health benefits. Efficiencies are needed.

   D. The Growth of Medicaid: The Uninsured Safety Net

In 2007, Medicaid/SCHIP covered 36.3 Million people, as shown in Table 1. These are average enrollments, with one-time enrollment highs during the year reaching an estimated 53.8 Million [9], due to part-year enrollments of people dropping in and out of the system. The average enrollment numbers grew almost 5% from 1999 to 2007. The 2007 estimate is that there are ~45 Million uninsured in the U.S. [10], but this is a controversial number. Some sources cite that there are 15 Million that are insurable but don’t sign up for private insurance and another 15 Million that are self-insured, due to higher incomes and better health [11]. Clearly some of the uninsured dip into the Medicaid/SCHIP net but historically have not stayed there on a sustained basis – the fluctuating enrollment data [9] confirm this. The expenditure growth rate of Medicaid/SCHIP has been closest to the aggregate from 1999-2007 (Chart 1/Table 4), and this could be due to a relatively good economy during this period. Americans will lose their insurance due to job loss in the recent downturn, and the COBRA

program has been extended to mitigate this effect, but with high COBRA premiums many may opt for no insurance. Medicaid/SCHIP has been allocated large increases (over $120 Billion) on federal and state levels in the 2009 $787 Billion Stimulus and SCHIP Expansion Bills. So there is no reason to believe (as government estimates have for 2008-2018 [1]) that the growth rates for Medicaid/SCHIP will hold to the recent historical CAGR of 7.8% as the programs cover more people and eligibility rules are relaxed. A contraction of growth can only occur if less people are covered and there are program efficiencies enacted. So clearly this points to making health insurance more affordable for those who do not have it, whether they are eligible for Medicaid/SCHIP or not.


Table 4: Medicaid/SCHIP Expenditures [8] %Category    
Category 1961-2007 1999-2007 1970 1999 2007
Hospital Care 14.7% 7.9% 9.6% 17.0% 17.6%
Physician & Clinical Services 14.6% 8.9% 4.6% 6.6% 7.4%
Other Prof. Services 17.7% 12.6% 5.4% 3.8% 5.9%
Dental Services 13.4% 11.7% 3.5% 4.0% 5.8%
Home Health Care 25.3% 16.7% 6.8% 18.9% 34.7%
Other Personal Care 17.9% 10.4% 13.6% 65.1% 73.6%
Medical Products 44.4% 15.4% 0.0% 0.1% 0.3%
Prescription Drugs 13.3% 2.1% 7.6% 16.4% 8.9%
Nursing Home Care 13.2% 4.4% 37.6% 43.0% 41.7%
Admin. Costs 16.3% 9.9% 9.1% 17.5% 17.1%
Total Expenditures 14.7% 7.8% 8% 15% 15%

   E. The Growth of Private Insurance Costs

As shown in Table 5, the recent growth rate of private insurance costs runs above the overall health expenditure aggregate (8.1% vs. 7.4%), and this growth is driven by several factors: marked cost increases in hospital care, physician care, prescription drugs and administrative functions. Estimates show the number of people covered by private insurance grew less than 1% annually from 1999-2007 (Table 1), so the intrinsic cost increases in the benefits provided are approx. as high as the annual growth rates suggest in Table 5. To fully address the affordability of health insurance, the cost growth of the benefits must be addressed – and this means looking at the cost drivers with a critical eye. We start to do this in the next section.


Table 5: Private Insurance Exp. [8]   %Category    
Category 1961-2007 1999-2007 1970 1999 2007
Hospital Care 9.6% 8.7% 32.5% 33.3% 36.9%
Physician & Clinical Services 11.3% 8.0% 30.1% 47.3% 49.4%
Other Prof. Services 17.8% 7.0% 5.8% 35.4% 36.5%
Dental Services 16.8% 6.1% 4.5% 51.2% 49.3%
Home Health Care 18.8% -4.1% 3.2% 24.7% 9.4%
Medical Products 10.2% 2.0% 7.8% 13.4% 12.2%
Prescription Drugs 18.6% 8.7% 8.8% 48.8% 43.6%
Nursing Home Care 22.4% 2.3% 0.2% 9.0% 7.5%
Admin. & Net Cost Priv. Ins. 10.6% 9.5% 51.8% 64.4% 60.8%
Total Expenditures 11.0% 8.1% 21% 33% 35%


Table 6: DoD/VA Expenditures [8] %Category    
Category 1961-2007 1999-2007 1970 1999 2007
Hospital Care 7.4% 7.8% 10.0% 5.3% 5.5%
Physician & Clinical Services 12.0% 14.9% 1.1% 1.2% 2.0%
Other Prof. Services - - - - -
Dental Services 9.4% 25.6% 0.6% 0.0% 0.1%
Home Health Care 12.6% 21.7% 1.4% 0.3% 0.8%
Other Personal Care 5.7% 4.2% 20.3% 5.8% 4.2%
Medical Products - - - - -
Prescription Drugs 17.8% 24.0% 0.1% 1.3% 3.3%
Nursing Home Care 15.8% 8.0% 1.5% 2.0% 2.5%
Admin. Costs 13.0% 27.0% 1.2% 0.7% 2.1%
Total Expenditures 8.2% 10.3% 4% 2% 3%

The Major Systemic Issues Driving Cost Growth That Must Be Addressed

From the primary data sets in Charts 1 and 2, Tables 1-6 and the analyses in the previous section, it is important to posit what the underlying systemic issues are that drive the observed cost growth, and back those assertions up with further research data. A list of those underlying systemic cost drivers is assembled in Table 7, along with an estimate of their relative weights in contributing to overall cost growth. The estimates apply to the annual growth in costs as well as the principle costs, but we focus on the growth for exemplary purposes. The medical malpractice estimate is based on my own calculation from the weighted growth rates of hospital and physician costs, adjusted for inflation, and is commensurate with a similar estimate by the CBO based on actual malpractice cost data [12]. These are direct medical malpractice costs as measured by malpractice insurance premiums and the net costs to settle claims. Indirect costs associated with malpractice, such as the marked increase in medical tests, diagnostic services and the prescription of multiple drugs to avoid lawsuits, are not included in this factor, and are likely a substantial additional factor. These costs are sometimes called “defensive medicine” costs [12]. It has been shown in some studies that 93% of physicians in high-liability specialties practice defensive medicine [13]. Consumer non-transparency to costs is the next highest factor. Consumers only pay 12% of their health costs out-of-pocket – it used to be 33% in 1970. Private insurance and Medicare pick up the bill for the vast majority of the costs, for benefits that the consumer has less and less scrutiny over. The impact estimate is based on the weighted growth rate of private insurance and Medicare costs, inflation adjusted, where the customer could have more scrutiny, and is a very conservative estimate, as Medicaid and other cost sources are not included. Prescription drug development is the third factor, estimated from the straight weighted growth rate of prescription drug costs, inflation adjusted. In the NHED data [1] prescription drug costs include all research and development costs, and the separate cost category “Research” in Chart 2 excludes these costs. Medicare/Medicaid fraud and inefficiencies is based on a percentage of the weighted average of Medicare/Medicaid growth rates, inflation adjusted, and is equivalent to ~$4 Billion in losses per year based on 2007 expenditures. This is above the annual average $1-2 Billion in losses reported by CMS [1], but those were only for Medicare and do not include fraud that is not prosecuted and settled. The remainder factor is the effect of federal and state mandates on private health insurance companies that require them to structure insurance policies to include certain benefit coverages that are excessive or are not medically necessary, and that drive up the costs of premiums. The factor is based on the weighted growth rate of private insurance costs (premiums), inflation adjusted.

Solutions To Reversing Health Care Cost Growth Trends:
Tort Reform, Consumer As Direct Payer, and a Free Market Model

So how do we eliminate or reverse the cost growth drivers delineated in Table 7? In Table 8 a set of systemic solutions is proposed, along with estimated minimum and maximum annual growth savings targets. Tort reform is needed to address both medical malpractice costs and the rising costs of prescription drugs, where liability is included in the development costs. Some critics have complained that tort reform that focuses on limiting or capping damage awards, such as non-economic or punitive damages, does little to reverse the cost growth of malpractice insurance premium costs [14], but this is unsubstantiated from studies that show the measure does have an effect [15]. Capping damage awards is but one part of a complete solution to tort reform. Adopting tort law from other countries, such as in the British-style tort of “loser pays” and allowing judges to dismiss cases that have a weak basis or that would have a negative impact to all parties, or the German and British practices of limiting lawyer fees and jury cases, are structural reforms that should be seriously considered here in the U.S. [16]. Another factor in tort reform is the reduction of “defensive medicine” practices, which was discussed above – the propensity of doctors and providers to over-prescribe tests, procedures and drug treatments that are not medically necessary but that protect a provider if something should go wrong with the patient. Estimates show this indirect cost can be as much as 30% of the bill from the physician [17] and is in vast excess of direct malpractice costs. Taking all these measures, the min-max growth rate savings estimates are based on a portion of the factors in Table 7 (min: % of cost factors due to direct medical malpractice and drug development) and an additional portion of the cost principle (max: up to 30% of physician and 5% of hospital costs). The next systemic solution: returning the patient-consumer back to a direct payer of costs, where “home economies” such as cost scrutiny and realism within the scope of the patient’s personal budget can be leveraged to keep costs under control. The minimum cost savings target is based on a portion of the factors in Table 7 that apply, such as factors 2/4/5, and the max target is a truly conservative estimate of what we could shave off the principle costs if we fully applied this systemic solution. The final systemic solution: move to a free market model for our health care coverage, in which Medicare and Medicaid are eliminated in favor of affordable private health insurance coverage for everyone, with few exceptions. To get to a free market model, employers/employees must not be the only ones to enjoy a tax subsidy for their health insurance premiums – this must either be extended to everyone, including small business owners and private partnerships, which are not current beneficiaries of this subsidy, or eliminated altogether. Keeping the tax break would encourage everyone who files a tax return to comply with the shift to this system. Current federal and state mandates that impose restrictions on health insurance plans, like requiring the inclusion of excessive or medically unnecessary benefits, must be eliminated, allowing consumers to choose among product offerings and benefits that meet their personal needs. High-deductible ‘catastrophic’ plans that focus the patient-consumer toward out-of-pocket payments for routine maintenance care and supplies would form the basis of offerings, and would cost the least. For an individual in good health this might amount to under $50/mo depending on age and location, and even less if there is a tax subsidy. The minimum cost savings target is a portion of factors 3 and 5 in Table 7, and the max target is a conservative estimate of what might be shaved off the cost principle, particularly given the elimination of wasteful government health programs in favor of an all-private free market. The bottom line maximum net annual growth target (-12.6%, adjusted for inflation) would apply for the first year and then increase to a steady-state run rate, and that may be as high as the min target cited (5.2%), but certainly that could (and should) be less if we want to contain costs.

What will it take to put the targeted solutions in Table 8 into action? Tort Reform was attempted under the Bush Administration but met significant resistance from the Association of Trial Lawyers of America (ATLA) and other lobby groups. This resistance will only be higher under the Obama Administration, as the ATLA was a significant campaign donor, with an estimated 93% of ATLA donations going to Democratic candidates. The cost of tort cases across the board continues to grow at a substantial pace, over 9% average per annum [18]. Doctors and hospitals will continue to practice ‘defensive medicine’ until tort reform is enacted, so the red herring that malpractice costs are contained is simply not true, as the indirect costs are substantial and underreported. We are left with asserting political pressure on Congress and the Administration to see that these ‘defensive medicine’ costs are the real driver and are the raison d’etre for Tort Reform. Customer As Direct-Payer is a measure that can be adopted without delay – start removing the layers between the provider-biller and the patient-consumer and return to a greater degree of out-of-pocket payments. This will meet political resistance within the ranks of the ‘middlemen,’ both on the government and private side, so a tough stand is required. The Free Market Model will take longer, as it requires the elimination of all government health programs, which are by their very nature inefficient. The political headwinds here are formidable: the plethora of lobby groups that have spent millions to fight for greater Medicare and Medicaid benefits, in effect being part of the cost growth problem, will be out in full force to block such a move to eliminate the programs. They must be reassured that a private insurance system will work better, and that the point is to get the government out of health care. This reassurance will best be met by a free market, where medical services and supplies are adjusted by the laws of competitive supply and demand, with price discovery, not price fixing. Insurance companies would compete vigorously for business directly from the patient-consumer. The government will not pick winners and losers on a political basis; the patient-consumer will choose insurance based on price, value, reputation, etc., just as they prefer to choose their medical practitioners and make choices among available medical supplies and services.

The Arguments Against Nationalized Health Care (NHC)

Nationalized health care (NHC) has once again surfaced as a leading contender for health care reform, since the Clinton Health Care Plan

was handily defeated in 1994 in a Democratically-controlled Congress. This time NHC finds strong supporters in the Senate [19] and the House, and is staunchly championed by the Obama Administration. Significant outlays (over $22B) were made in the recent 2009 $787B Stimulus Bill to pave the way for NHC, in the form of payments to physician groups and hospitals to “computerize medical records systems” and for a massive digital medical records (DMR) project. The Administration claims that DMR is required for cost savings in general, but this is wholly unsubstantiated [20]. What DMR does do is seek to put all Americans in a database to further enable NHC, no matter whether NHC is the right way to go or not. On its own merits, DMR is costly and there are lingering issues with privacy and property rights that have yet to be reconciled. What is NHC likely to look like if it is implemented by this Congress and Administration? In the words of Congressman Barney Frank: “A single payer system like Medicare” [21]. Given the out-of-control cost growth rates of Medicare, which we have pointedly highlighted from the NHED data in Table 2 and deconstructed in the first section, this prospect should scare the heck out of everyone. At a 9.2% annual growth rate that shows no possibility of abatement without major reforms, Medicare is clearly not the model to adopt, unless we want to literally bankrupt the Treasury and send the U.S. into default. Perpetuating another massive entitlement that will attain unfunded liabilities should be avoided at all costs. Supporters have championed other NHC models, such as those adopted by Euro-zone countries, Britain and Canada. Their first argument for this is that these countries on average spend less on a % GDP basis than the U.S., the reported 9-10% GDP for Canada, vs. our current 17% GDP, for example. But the 9-10% GDP figure is very misleading because it only encompasses government-reported NHC expenditures, not the additional costs from private care that people seek to make up for the quality and more severe availability shortfalls that are commonly cited in these other NHC systems [22,23]. In Canada, much of the costs for private care and unavailable procedures and tests go unreported, as many provinces have bans on private care. Canadians travel across the border to the U.S. for care that is unavailable on a timely basis, or simply unavailable. Surveys of the Canadian NHC system show that it fails to meet patient-consumer needs [23]. It is true that Canadians are healthier on average and have a greater life expectancy [24], but this is cultural. Americans on the other hand like the flexibility of current U.S. health care system, with all its flaws, over a single-payer solution [25]. As broadcast at the beginning of this story, everyone agrees that costs must be contained, but moving toward the Canadian model or other NHC models is not the way. Americans defend the high quality of care and the myriad of innovations that our rag-tag system produces, in medical diagnostics, drug development, surgical technology, etc. We must look for a way to maintain such a productive system without the cost inefficiencies, but also without shortages and rationing. We must reconcile that we are not Canada or Britain or Europe: we lead the world in medical breakthroughs and clinical care. The straightforward and targeted solutions presented in the previous section encompass the right direction: Tort Reform, Consumer As Direct-Payer, and a Free Market Model. Let’s not wait to move on reforms in these areas.

References and Endnotes:

[1] National Health Expenditure Data – Dept. of HHS, 2007

. Note that “total national health expenditures” includes both public and private expenditures. Summary data and complete data sets from 1960-2007 are found on this site, as well as projections of expenditures from 2008-2018. Quoted growth rates from this data set are calculated as compounded annual growth rates (CAGRs), not average annual growth rates. This is important, as the fluctuations in the data are quite large and straight averages are misleading. All charts, tables and analyses in this paper from the NHED data set were prepared independently by the author.

[2] Macroeconomic data from Econstats.com.

[3] Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999–2008.

Note that other data on private employer health insurance premiums are available from Table 13 in NHED Tables , and from the Bureau of Labor Statistics (BLS) as part of their Employment Cost Index (ECI) Surveys (BLS .pdf source ). The latter two sources give average growth rates of 7.7% and 7.4% respectively from 1999-2007, but both of these sources provide a disclaimer that the data errors may be several %-points, as employer non-response on health insurance components of benefits is substantial in their surveys.

[4] Data on individual health insurance premiums is very limited, but from two studies (2004

and 2006 ) done by AHIPresearch.org , an industry supported research group, average national premiums for single and family coverage increased 15.2% and 31.1% respectively from 2004-2006. Coverage benefits under individual plans vs. employer-based plans differ substantially, they are not common – individual plans tend to have higher deductibles and less benefits and the average premiums reflect that: in 2006, AHIP reported average annual premiums of $5799 for family and $2613 for single individual plan coverage, while Kaiser [3] reported $11480 for family and $4242 for single under employer-sponsored plans.

[5] Notes on data from [1] shown in Chart 1: “Out-of-Pocket” includes direct spending by consumers for all health care goods and services, including coinsurance, deductibles, and any amounts not covered by insurance (note private health insurance premiums are included under private insurance, not here). “Private Insurance” includes health insurance premiums paid to insurance companies by individuals, and the net cost of premiums earned and benefits paid out by the insurance companies. “Other Private” includes industrial in-plant, privately funded construction, and non-patient revenues, including philanthropy. “Other Public” includes workers’ compensation, public health activity, Department of Defense, Department of Veterans Affairs, Indian Health Service, State and local hospital subsidies and school health.

[6] Notes on data from [1] shown in Chart 2: “Other Services” includes Other Professional Services, Dental Services, Home Health Care, and Other Personal Care. “Medical Products” includes durable and non-durable medical products, such as wheelchairs to hearing aids and non-prescription drugs to sundries. “Admin and Net Cost Private Insurance” includes administrative costs of the government programs and the net cost of insurance premiums received and benefits paid out by insurance companies that translates to insurers’ costs of paying bills, advertising, sales commissions, and other administrative costs; net additions to reserves; rate credits and dividends; premium taxes; and profits or losses. The complete formal definitions of all of these categories can be found at the NHED site [1]. See also [9] below.

[7] The data in Table 1 is drawn from a combination of data from the U.S. Census

and studies by the Kaiser Family Foundation . “Private/Other Insurance” includes employer-based coverage, other private insurance, and other public insurance, such as Medicare under-65 disabled and military-related coverage. In 2007 the percentage ratios of all coverage vs. the total population were employer insurance (52.7%), other private insurance (4.8%) and other public insurance (2.2%), Medicare over-65 (13.4%), Medicaid/SCHIP (12%), and the uninsured (14.9%).

[8] Notes on data from [1] shown in Tables 2-6: “Other Professional Services” includes services provided by private-duty nurses, chiropractors, podiatrists, optometrists, and physical, occupational and speech therapists, among others. “Other Personal Care” includes government expenditures for care not specified by service and Home and Community-based waivers in the Medicaid program.

[9] 2008 Medicaid Actuarial Report

, NHED/Dept. of HHS.

[10] Income, Poverty, and Health Insurance Coverage in the United States: 2007.

U.S. Census Bureau. Issued August 2008.

[11] Understanding the Uninsured Crisis in America

, CoverageForAll.com.

[12] Limiting Tort Liability for Medical Malpractice

, CBO Report 2004.

[13] “Defensive Medicine Among High-Risk Specialist Physicians in a Volatile Malpractice Environment

,” D.M. Studdert et al, June 1, 2005, JAMA.

[14] Myths Debunked: Rising Cost of Medical Malpractice Insurance Is Due to High Jury Awards

[15] Medical Malpractice: Implications of Rising Premiums on Access to Health Care

, GAO Report 2003. “Messing With Malpractice Reform,” Dec. 1, 2008, Wall Street Journal.

[16] “Malpractice: Do other countries hold the key?

” R. Lowes, July 23, 2003, Medical Economics.

[17] “The Supreme Court and the Tyranny of Lawyers,” L. Gordon Crovitz, March 9, 2009, Wall Street Journal. “Practicing defensive medicine—Not good for patients or physicians

,” P. Manner, Jan/Feb 2007 AAOS.

[18] “U.S. Tort Costs Up Slightly in 2007; Significant Increases Anticipated for 2008

,” Nov. 2008, Towers-Perrin Report.

[19] “We Cannot Delay Health-Care Reform,” T. Kennedy and M. Baucus, Feb. 26, 2009, Wall Street Journal.

[20] “Obama’s $80 Billion Exaggeration,” J. Groopman and P. Hartzband, March 11, 2009, Wall Street Journal.

[21] Fox News Sunday Interview, March 15, 2009.

[22] “The Trouble with Canadian Healthcare

,” Brett Skinner, Dec. 6, 2008, The American.

[23] “Canadians and Health Care

,” Nov. 21, 2005, “The Rise of Private Care in Canada ,” Apr. 25, 2006, “Adding Fuel to the Doctor Crisis ,” Jan 2, 2008, Macleans Magazine.

[24] “Good Health, For Less

,” June 25, 2008, Macleans Magazine.                                                                 

[25] “Health ‘Reformers’ Ignore Facts,” S. Pipes, March 6, 2009, Wall Street Journal. 


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