The 40 years of data tells a lot. Study it and form your own conclusion.

Data Counts in all Policy formation

Trends/History of Cost in Healthcare:

Back in the 60’s healthcare around the world was simple, less expensive.   Most countries were close to 5% of GDP, including the US.   A lot has happened since then.   At that time patients were making the purchase dollar decisions over 40% of the time, with insurance at a much higher percentage than today, and government at a much lower percentage then.   Government has grown significantly with both patient and insurance percentages falling since then.   There are a great many trends and analyses of these trends in the literature.   A few sites are given at right.   It is however most important to assess the meaning of these trends and how they have affected the current situation and problem of a lack of competition. 

During the past 40 years there has been over 1900 mandates issued by State and Federal governments.   Some are itemized in the links at right.   Patients cannot obtain insurance from outside the State they reside in.  This means that one cannot pick and choose the restrictions that State governments place on the market for fear that a competitive situation would occur.   Insurance restrictions and basic financial numbers are discussed on the page “Insurance”, a link is found at left.   Suffice it to say that insurance companies choose to not offer their products in every State.   What would happen if this market was opened up?

Doctors cannot also operate in every State, just the ones that they are licensed in.   What happens to competition as a result of this mandate?   One can go on to examine the growth of regulation over this 40 year period.  See the link at right on regulation costs.    With the advent of Medicare the basic economics, procedures, and market conditions changed.   Imagine that you are managing an insurance company in the 60’s when these programs are passed.   It is quite apparent that the government will grow its percentage of control over healthcare over time.   If you are simply interested in maximizing the growth of the company, then you would clearly assess the market differently, and in turn would place more emphasis on lobbying in Washington DC than in customer satisfaction.   Once the government entered the market it declared itself the big gorilla and was setting the pricing and care for a sizeable percentage of the population.  It is safe to say that it became the largest provider of healthcare benefits in the country.  

Having control over pricing and procedures has no doubt affected the entire industry from the early portion of its active tenure of Medicare and Medicaid.    The pricing is set low, especially for Medicaid, to the extent that a growing portion of doctors do not accept Medicaid.  This puts a further strain on the market place and its competitiveness, due to the lack of supply of care.  Hospitals have long shifted the real cost of Medicare and Emergency care (which they are required to provide to the general public, regardless if they have insurance or not) onto the private insurance companies and private customers.    Today the pile of paperwork done by it seems all healthcare providers seems to smell and taste like government paperwork and levels of inefficiency.   Is this a result of the big gorilla being in the market place?   Safe to say yes, as it would affect efficiency, as has other in other industries. 

The trends in healthcare % of GDP are gradual and real, averaging 3.6% with inflation removed, versus 1.2% growth in GDP per year (from 1962 to 2007).    The current percentage increase in healthcare (before the current economic downturn) is actually less than in most countries, according to Kaiser, which generally is a good source of information.   So the deviation in % growth for healthcare as compared to that for GDP occurred during the 70’s.   There were only 7 years, from 1962 to 2007, where the % increase in healthcare was at or below that for GDP.   There were also 7 years when the % increase in healthcare was greater than 2x that for GDP.   So the gradual increase has occurred steadily, with no decreasing years, to the point where it is nearly 17% of GDP today. 

There clearly is no correct answer to the question: what is the right amount of healthcare expense.      Everyone generally wants to live a long, healthy life.    As treatments become introduced, either drugs or treatments, one would hope that the effect is a saving of lives.  It would also stand to reason that one should expect that the cost of new treatments would come down as time proceeds forward, and yet that does not seem to be the case over a large sampling of treatments.  Otherwise healthcare would most likely rise more slowly in total expense.   It is the case however in some selective surgeries that the cost of treatment has come down, such as with laser eye surgery and cornea transplants.    Both have come down a cost curve.   It is also true that patients largely pay the bills for these treatments.   What might happen to competitiveness if all treatments fell into that category?

Since most patient care in this country falls into the category of third party payer, with currently only 13% of all expenses paid for by the patient, the force of this trend is huge, if you are a healthcare business.   For hospitals, only 2% of patients currently pay their own bills.   The analogy for this condition would seem to be: suppose you entered a store and the selection was limited and there were no prices.  Also to procure a service or product you had to be qualified, and you had little to no say as to who, when and where this service would be provided to you.   Since almost all of the services are paid by a third party, how much emphasis would there be on customer satisfaction.  Suppose the third party payer could pass on the cost to employers and to the government, and that this payer was a large company, then how well would competitive pricing work?    And one saw that the trend was to become more entrenched, and less competitive over time.   What recourse is there?  If the controlling agent and largest player in an industry is the government then would not that keep the competition low?   The outcome then becomes a desperate situation.    This analogy largely describes the healthcare industry today.     With the cost of healthcare exceeding their profits, the Fortune 500 companies are worried about the outcome.     

What we have is a strong trend over the past 40+ years of a gradual reduction in competition, coupled with a rapidly growing incorporation of new technology that is also for the most part not subject to competitive forces.    What you would expect in this situation is a ever increasing expense curve, with a high reward for new technology.    CBO estimates that over half of the increase in healthcare costs is due to new technology.   It is also true that in their analysis that they lumped together in this category everything that they could not explain into other categories.   There is in the overall industry an incomplete analysis as to how competition could affect the healthcare costs, but to do so, of course, would require a massive simulator of the industry, which is not possible.     

In Washington DC there are thousands of lobbyists for healthcare concerns.   Their aim is to support their clients in protecting their position.  In general this means reduce competition.   It is the curse of most capitalists that they optimize given the circumstances and boundary conditions that are presented in their industry.   Such optimization occurs in any market based industry and economy.   However when the industry has access to setting the rules for their industry, the game changes.   No worse participant in this lobbyist debacle is there than the AMA.  The trend for exclusion of the number of new doctors (US has one of the lowest number of doctors per 1000 population in the OECD countries) is not good, and the restrictions even on nurse practioners is more than just restrictive and non-competitive.   There are many such organizations and their sole purpose is to restrict any legislation that would adversely affect their client, moreover they want to orchestrate legislation that favors their client.   There are many examples of this behavior that cover the landscape and history of healthcare.   The % of that legislation that is conducive to competition has not been reported, but it must be quite small.

The trend that is also a key to making this industry more competitive is the development of the true business acumen that occurs in competitive industries.  With the above lack of reward for competition on the large scale, the expertise, skill level, business experience within the healthcare industry is much lower than one would expect, given its size.   There is also perhaps a tendency to form larger companies than might otherwise occur.   Investments are made in new technology, not new business models.   This would encourage large companies to be the dominant force and rule, as they can afford the means to optimize under a centrist controlled industry, which healthcare has become.   As the reader will observe, the best reports on the overall industry comes from outside consultants.   This is not possible within a competitive industry, and speaks to the low level of business acumen that exists today.   There are doctors’ organizations that today want single payer, for they see that as a means to eliminate their frustration with the insurance companies.   Little do they know that they are trading a restrictive partner for a controlling one, for they cannot see past the immediate return.   The lobby group AARP wants to extend Medicare to ages above 50 years old, which would accelerate the demise of the economy, and sink the retirement funds that their members so depend on.   It is short sighted and desperate, for most of these organizations believe that there are few options that are achievable.   This apathy and defeatism has gotten this country, and any country, into serious problems, when incremental solutions are sought when fundamental solutions were needed.   What happens in such a society is a gradual erosion of efficacy of institutions and perhaps industries.   Since healthcare is the largest single industry should this risk be continued in the future?