The Phony Medicare Crisis

Those not wringing their hands over the the looming Social Security collapse are crying wolf over Medicare/Medicaid instead.

This is mostly unwarranted. A quick look at some factors will illustrate this.

  1. Growth rate of medical costs: Over the past several decades medical costs have grown faster than the cost of living and have become an increasing percentage of the GDP. There are several reasons for this, increasing number of people (especially the elderly) being covered, cost of new technology, transition to a corporate delivery system from a mixed local and non-profit one, and the cost of patented drugs.
  2. Aging of population: An older population will require, on average, more health care. The old population is increasing in absolute numbers, as well as a percentage of the total. The life span is also increasing.

Lets analyze each of these in turn.

The growth in coverage is mostly over. There are at present about 40 million under covered out of about 300 million. So full coverage would only be an additional 10-15% over the next decade (including population growth).

The cost of new technology. There has been a growth spurt in expensive medical equipment such as MRI and PET scans. There was a bulge in expenses as these went into general use. We can expect some short term bulges in the future when similar inventions occur, but overall new technology lowers cost. The cost of laser vision correction has now dropped so low that doctors are dropping out of the field, for example. A new scan for heart attack victims promises to greatly reduce the cost of diagnosis in an emergency situation. Fifty years ago a computer cost as much as an airplane (and was almost as large) and now they are throw-aways in cell phones. Why not expect the same price/performance for medical devices.

We have moved from the family doctor and the local non-profit hospital to the corporate group practice and the for-profit medical facility. This has added about 30% to the cost of delivering services. The claims about competition lowering costs have not been borne out. Companies do not enter a business unless they can make a profit, unlike charities. Therefore they need to gross enough over the actual costs to generate this profit. As a society we have decided to add a layer of expense to the health care delivery system in the form of insurance, benefits monitoring, purchasing agents, etc. These are mostly unnecessary expenses when compared to a universal system and are lumped into the health budget, but are really a way to subsidize employment.

There has been a burst of patented drugs, commanding excessive prices, over the past several decades. Much of this has been the result of prior government-sponsored basic research. The amount of this research has now decreased so the pipeline is not as full. In addition the most widely used drugs are nearing the end of their patent period and can be expected to fall dramatically in price. Even if new patented drugs are released they will only amount to a small percentage of overall drug usage. Simple adjustments to marketing such as prohibiting prescription drug advertising to consumers and over prescribing of highly promoted drugs can also do a lot.

Just as medical technology can lead to lower costs, new treatments can be expected to do the same as well. Stem cell research and the like promises to cure, as opposed to treat, some chronic diseases. If someone is once again able to produce insulin because of gene therapy, then they cease to be a life long customer for diabetes medication.

The population is aging, however the old tend to be healthier than previous generations. Thus, the projected costs to cover this segment will not be as great as before. A small change in overall health can have a dramatic change in eventual costs. Just being able to treat a single chronic disease such as Alzheimer's Disease could move thousands of people out of expensive chronic care centers as a per capita savings of $20,000 - $50,000 per year. Multiply this by the average three to five year stay and you can see a dramatic change in costs.

So what should be done now?

  1. Decide if non-health related expenses (middle men) are going to accepted as part of the system, and if so stop using them as an excuse to restrict benefits. Society can decide to be deliberately inefficient if it wishes. Just look at farm subsides, or Amtrak. The costs just need to be accepted for what they are.
  2. Rein in drug costs or, again, accept the deliberate market distortion. When the Medicare drug benefit starts and people can choose alternative private plans there will be downward pressure on prices, they just won't come from the government.
  3. Alter the revenue collection system. This can be done through a change in the present tax code, or by establishing a universal health taxation mechanism or the imposition of an entirely new tax scheme such as a VAT. If the public wants to meet the expense of the health care system, including the deliberate inefficiencies, it just has to decide to pay for it. The economy can afford it. Just buy a 42" inch TV instead of a 50" next year.

It's obvious that many developed countries are providing equal or better care than the US at lower per capita cost, so there are plenty of models to choose from. If these examples were not staring us in the face the doomsday predictions might carry a bit more weight. But, its hard to argue with reality. We have set up a system where a private health management sector absorbs 30-40% of the nominal health budget and then we decry the associated costs.

The real motivation behind the current "crisis" is to shift even more of the health care budget from services to profit. What we are willing to accept is up to us.

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If you have any comments you would like to add email me at robert.feinman@gmail.com
Copyright © 2005 Robert D Feinman
Feel free to use the ideas, but the words are mine.