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Three reasons for the high cost of healthcare 

During the great debate on healthcare during their first administration, the Clintons had a simple and straightforward explanation for the uncontrolled growth in healthcare spending.  To paraphrase loosely: there are just too many greedy doctors using too much expensive technology.

The problem when one tries to refute this synthesis, at least for those of us physicians who do not like being characterized as avaricious (and for the biomedical engineers who do not like their remarkable efforts being characterized primarily as expensive), is that there is at least some truth to it.

Most economists agree, however, that there are actually three main factors driving up the cost of healthcare.  These are:

    * waste and fraud

    * increasing use of expensive technology

    * rapidly aging population

The first two factors correspond, more or less, to the Clintons’ explanation of the problem.  The difficulty with their explanation (aside from the minor sin of being insulting to some of us) is that it downplays the most pressing reason for the rising cost of healthcare.  And with good reason.  It is easy, even advisable, to criticize doctors for being greedy.  It’s even okay to criticize technology as long as you don’t get too specific about it.  But it’s not nice, or politically smart, to criticize the population for getting older.

Let us examine these three factors briefly, to see if we can begin to characterize the degree to which each of them contributes to the rising cost of healthcare.

Waste and fraud 

There can be no doubt that there is a substantial amount of inefficiency in the American healthcare system. Eliminating inefficiency, in fact, is the major reason usually given for the great surge in the 1990s toward managed care. And without a doubt the American healthcare system during the over the past decade or so has made great strides toward eliminating waste.

Unfortunately for managed care organizations, however, it looks as if this variety of efficiency – the kind that finally culminated with disastrous attempts at enforcing drive-through childbirth and mastectomies – has been taken as far as it can go.  The public has informed managed care organizations they’ve had about as much of this kind of “efficiency” as they are willing to tolerate, and to further improve efficiencies, managed care will have to look elsewhere.

Another point is worth mentioning here.  As I point out in my Grand Unification Theory of Healthcare, a healthcare system operating under a scheme of covert rationing – like ours is, as I will shortly demonstrate – requires waste and inefficiency in order to create many of the subtle incentives necessary to facilitate covert rationing. This is why each of the efforts that are periodically initiated to simplify and streamline healthcare, sometimes introduced with great fanfare, invariably becomes gummed quietly to a halt within the bureaucratic molasses, just one more layer of glom in a vast conglomeration of regulations.  All this systematic confusion is hugely inefficient and wasteful, and ironically, negates most if not all the savings produced by the covert rationing itself.  This vignette offers an illuminating illustration of this phenomenon.

As for fraud, nobody knows for sure how much exists in the healthcare system. Any amount of fraud is inexcusable, and the federal government has identified the rooting out of fraud as a potentially very fruitful means of cutting the cost of healthcare.  The Health Insurance Portability and Accountability Act of 1996 has many new powerful anti-fraud provisions, and accordingly, a recent Clinton budget specifies that $10 billion is to be recovered over the next few years by going after fraudulent practices.  To the extent that true fraud is rooted out, the anti-fraud activity by the federal government will be good.  However, it is almost certain that the heavy-handed means that are to be used in this effort will have an extremely chilling effect on every healthcare provider.  In fact, the mandate to eliminate fraud presents a potentially powerful and particularly devious mechanism for covertly rationing healthcare.  (This topic will be discussed in detail in a later section.)

But the politically popular notion that enough fraud exists to offset the rising cost of healthcare, even as broadly as the regulators are now beginning to define “fraud,” is not taken seriously by healthcare economists.

Increasingly expensive medical technology 

The increasing use of technology in medicine clearly is driving up the cost of healthcare. The problem is that both patients and physicians perceive technology as offering substantial value to medical care, and often it undeniably does so.

Thanks again to managed care, the use of high-cost technology in medicine is not quite the free-for-all it was a few years ago.  Hospitals and practitioners, faced with reduced reimbursement, have had to begin controlling high cost interventions (and, for that matter, low cost interventions), in order to stay in business.

The problem is, most of this high-tech stuff works as advertised.  High-cost medical technologies most often provide at least some benefit, even if that benefit is sometimes only marginal.  If the technology exists to help patients, both physicians and their patients want to use it.  If the technology does not exist, congress is lobbied and telethons are held to pay someone to invent it.

But technology is hugely expensive.  Consider, for instance, what it will do to our healthcare budget when we finally succeed in developing a practical, safe, fully implantable artificial heart. Such a device will probably cost $100,000 per each, give or take a few tens of thousands, and upwards of a half million Americans each year will become potential candidates for it. This one new (highly sought after, fervently desired) technology alone would break the bank.

Even reconsidering our use of technology, however, will take a major adjustment in attitude.  Advanced medical technology clearly is included in the “no limits” paradigm, and Americans fully expect to receive whatever medical benefits the biotech industry has to offer. Furthermore, as we have noted, Americans also fully expect continuing advances in technology to eventually cure every medical disorder we can think of, up to and including death itself.

If we are to rein in the cost of healthcare by addressing the high cost of technology, either a sober reevaluation of our insistence on more technology will have to take place (a proposition that currently seems out of the question), or we will have to stifle innovation through covert rationing. So far, obviously, the latter approach has been chosen.

A rapidly aging population 

This, I will argue, is where the real money is.

Old people use a lot of healthcare resources, because the aging process even in the best of circumstances is accompanied by health problems.  The population of the United States has been gradually aging for decades, both because of simple demographics and because (thanks in part to all that technology) people are living longer. The increased costs incurred by our aging population dwarf the costs accounted for by waste and fraud in the healthcare system.  While economists can argue about whether the aging population or medical technology accounts for the bulk of the increase in medical spending, the fact remains that technology won’t cost much if there aren’t a lot of patients who need it.  Since the elderly will always need more healthcare technology than the young, a rapidly aging population acts as a potent multiplier of the cost of that technology.  These two factors go hand in hand.

We will soon have a lot more old people than we have ever had before.  The baby boomer generation, of which I am a proud member, is 76 million strong, 50% larger than the previous generation.  As we boomers start to retire, American society will be transformed, and the magnitude of the transformation will be wondrous to behold.  By 2020, when you walk the streets of an American city you won’t know if you’re in Tampa or Denver, because the proportion of old people across the entire United States will be the same as it is in Florida today.  By that time one in five Americans will be over 65.  And the number of “super-old” individuals, those 85 and older, is skyrocketing.  It has been predicted that, by 2040, there may be as many of the super-old as there will be preschoolers. 

Such demographics will have a profound impact on our healthcare spending. Taking into account both the absolute number of old people that will be alive, and the fact that so many of them will be in the super-consuming super-old category, by the year 2030 the cost of healthcare has been projected to be as high as $12,000 per capita (in 1994 dollars).  This figure, which doesn’t even take into account the massive new Medicare drug entitlement, is even more alarming when you consider that Medicare is already going bankrupt – at a time when we’re spending “only” about $6000 per capita, when the number of retired elderly is still relatively small, and when most of the huge boomer generation is still in its productive, tax-paying years.

It has been estimated from Social Security actuarial data that paying for Medicare and other federal healthcare programs in the year 2040 will require nearly 50% of the nation’s taxable payroll.  If you add Social Security payroll taxes to the mix, then more than two-thirds of every working person’s paycheck will be confiscated in payroll deductions just to cover federal entitlements to the elderly.  While there is always some degree of speculation in these sorts of calculations, in this case the speculation seems relatively minimal.  After all, everybody who has been promised these entitlements for the next 50 years is alive today. You can count them.

Add to this one final fact.  By 2030, it is expected that more than 25% of younger working Americans will be members of non-white minorities.  This means that our present plan is to confiscate two thirds of each paycheck from vast numbers of minorities in order to buy Winnebago’s and artificial hips for a bunch of retired, middle-class white people.

I don’t think so.  It won’t happen.  The only question is how it won’t happen.  In some manner federal entitlements to the elderly, especially the healthcare entitlements that account for a major portion of our looming fiscal burden, will be significantly reduced.  They can be reduced through violent revolution or through some more civilized process, but one way or another they will be reduced.