Health Care Inflation Statistics

W. A. Barrett

San Jose, CA

May 16, 2011

wbarrett1076@comcast.net

 


Insurance Fraud

Mr. Reg Jensen distributed a seven page paper at the SCCDC (Santa Clara County Democratic Club)  meeting on Monday, April 18, 2011.

His paper purports to show that various statements in support of the California Senate Bill 810 are false or misleading, and that the SCCDC should therefore not endorse Senate Bill 810. 

Senate Bill 810, sponsored by Mark Leno, proposes a single-payer universal health care plan for all California residents.  See http://dist03.casen.govoffice.com/ for Mark Leno’s web site.

See RegJensenPaper.pdf for a PDF copy of Jensen’s paper.

 

I read Jensen’s paper and decided to see if the claims made in it are supported by the evidence of the web pages that he cites.

Let me issue a disclaimer -- I don’t claim to be a medical statistician.  Health care is a complex, many-faceted issue.  However, I can read and evaluate reports.  I have advanced degrees in mathematics, including probability and statistics.  And I’ve read Money-driven Medicine, by Maggie Mahar, a thickly documented, analytical and objective survey of health care in the U.S., as of 2006 [1].

Medical Cost Inflation Claims

On page 1 of his paper, Mr. Jensen presents a table of “medical insurance inflation rates”, from 2000 to 2007:

Germany     8.5%

France      11.0%

United Kingdom    12.0%

Norway      13.0%

Denmark     12.0%

Canada      11.0%

United States     6.0%

If these rates are in fact true, and continue for a period of 20 years, one dollar spent on medical insurance today would become (1+r)^20 dollars in 20 years, given rate r (as a fraction), through compounding interest.   Here’s what my Excel spreadsheet gives for that:

 

 

 

Rate

20 year

Country

(percent)

cost

Germany

8.5

 $       5.11

France

11

 $       8.06

England

12

 $       9.65

Norway

13

 $    11.52

Denmark

12

 $       9.65

Canada

11

 $       8.06

United States

6

 $       3.21

 

These are essentially the figures that Jensen states on his page 1.  (A quibble:  his figure for France is incorrect, he claims 8.6 where the correct figure should be 8.06).

If these inflation rates are reasonably accurate, and hold for a 20 year period, clearly health care costs will bankrupt many of these nations.  Inflation will hit hardest those with a universal health care system.  Sounds ominous!

Also, the United States, with its “capitalistic” health care system, looks pretty good in comparison to all of the “socialistic” countries.  Our costs will “only” go up by a factor of 3 whereas those foolish Norwegians will find themselves paying out over 11 times as much as today.

 

But -- are these inflation figures valid?  Mr. Jensen cites page 130-137 of a World Health Organization report.  I found it at the web site he cites:  http://www.who.int/whosis/whostat/EN_WHS10_FULL.pdf. 

[NB:  this link is now dead -- the “whosis” report web site has changed -- but separate reports by year are still available].

 

What’s in this report?

Pages 130-137 reports the percentage of GDP spent by each member nation on health care, in year 2000 and year 2007.  There are twelve separate columns, with the first six labelled “health expenditure ratios”.  The numbers in the table are in percentages of some base.

 

Column 1 caught my attention -- its title is “Total expenditures on health as % of gross domestic product”.   Under column 1 are two subcolumns, one for year 2000 and another for 2007.  So we have a seven year period in which to estimate the inflation in health care costs -- but only in terms of the GDP for those two years.  If the GDP doubled in that period, and so did health care costs, then the two percentages should be the same.  Please note that in comparing health care costs for two separate years for a nation, that nation’s general ability to absorb increasing costs must be considered -- and the GDP is arguably a reasonable indicator of the nation’s “ability to pay”.

Here are the figures extracted from that table, for our countries.  I also added Japan and China for comparison purposes.  (Taiwan is not listed in the WHO table for unknown reasons, but T. R. Reid [2] claims that Taiwan has one of the most advanced and well thought-out health care systems in the world).

 

 

health $/GDP

 health $/GDP

yearly

health $/GDP

2000

2007

inflation rate, %

2027

Germany

10.3

10.4

0.14

10.691

France

10.1

11

1.23

14.038

England

7

8.4

2.64

14.142

Norway

8.4

8.9

0.83

10.499

Denmark

8.3

9.8

2.40

15.753

Canada

8.8

10.1

1.99

14.972

United States

13.4

15.7

2.29

24.686

Japan

7.7

8

0.55

8.923

China

4.6

4.3

-0.96

3.546

 

What does this mean?  Let’s look at Norway, which, according to Jensen, would have an enormous increase in health care costs over a 20 year period: an increase of 11.5 times, or 1,150%. 

According to the WHO figures, Norway spent 8.4% of its GDP on health care in year 2000, and 8.9% in year 2007.  That’s a yearly increase of less than 1% relative to Norway’s GDP.  I doubt that the good Norwegians would even notice the increase, and, in any case, would likely take some steps to keep it under control.  In any case, the projected percentage of health care to GDP in 2027 for Norway would be about 10.5, vs. 8.9 in 2007 and 8.4 in 2000.  That’s an increase, and cause for some concern, but would hardly bankrupt the nation.

 

The yearly “inflation” increase for the United States is 2.3%, and that should give us concern -- our projection suggests we will be paying 25% of our GDP on health costs in 2020, much larger than any of the other nations.  And that would be with a health system that will likely cover less than half our citizens, and with an overall poor health index.

 

So these WHO figures suggest that the United States has a serious health care inflation problem, exceedingly that of any of several other industrialized countries by a large factor -- a projected 25% growth (relative to GDP) for the United States, and 16% for the next highest nation, Denmark.

 

I have no idea how Mr. Jensen arrived at his extreme inflationary figures, or even how he could claim that the United States looks so much better than these other countries.   In fact, the above estimates, drawn from the celebrated WHO statistical tables, suggests that while Denmark and England seem to approach us inflation-wise, all the others would be doing much better than we in holding down medical costs.

 

A more cogent criticism is whether this means anything at all.  To claim that a seven-year inflation rate of health care costs will remain over a twenty year period is specious at best.  Health care costs depend on a large number of factors that cannot be predicted, including:

·         advances in medical technology which may call for more expenditures of major medical equipment,

·         significant reduction in costs of standardized medical equipment (e.g. MRI scanners) through advances in technology, increased scale of production, patent expiration, and competition.

·         new proprietary drugs widely distributed, reducing the need for more expensive curative procedures,

·         existing drugs going from proprietary (patent-protected) to generic status, reducing their cost,

·         advances in general public health, reducing the need for expensive curative procedures,

·         extended life spans, which will generally increase medical costs,

·         changes in politically-based government health care policies,

·         trend in the population toward healthier (or unhealthier) life styles,

·         reduction in administrative costs through computer automation,

·         reduction in the cost of a medical degree, resulting in less need for high salaries of medical professionals.

 

In short, Mr. Jensen’s projections of huge medical inflation in the “socialized” countries vs. a modest inflation in the US is not supported by the WHO statistics that he cites, instead the opposite.  It is the United States that appears to have a serious long-term medical inflation problem, not Norway, Denmark, the United Kingdom, etc.

Declining clinical quality

On page 2, Mr. Jensen cites a Japanese study of long-range health care costs for Japan and other nations, including the US and Germany.  See  http://www.ihep.jp/english/product/pro11.htm. 

This is a lengthy and detailed academic report.  I don’t question its credibility -- it was generated by several distinguished Japanese economists working as a team to try to understand the economic and political ramifications of health care policy as it will affect the future of Japan and other similar nations.  I do question the relevance of this report to Mr. Jensen’s general thesis that the new health care law will bankrupt the US Treasury.

An interesting point made in this paper is the proposed measure of the general “regressiveness” of  a nation’s health policy, through two factors, called the expenditure index, and the Kakwani index.   If either or both are high, the nation is considered to have a regressive policy.  A highly regressive policy essentially means that considerable excess tax money will be flowing from healthy wage-earners to those less healthy.   Obviously regressive tax policies tend to generate political problems along the lines of “why should I, as a prudent person, pay for someone else’s carelessness?”  Such policies are a form of income redistribution from one population class to another.

Here’s a summary section from this report regarding this issue:

 

a) Countries with high expenditure ratio and high Kakwani index (e.g. Germany)
Countries with a high expenditure ratio usually either have undeveloped public health insurance schemes or low insurance benefit rates. As medical demand is not dependent on income, such systems are considered to be regressive. Accordingly, there are few countries with a high expenditure ratio and high Kakwani index. Where there are arrangements for high-income earners to opt out of the public health insurance, however, out-of-pocket expenses including the private medical insurance premiums of high-income earners increase. As a consequence, the overall expenditure ratio and Kakwani index may also increase. One example of a country in this group is Germany, where high-income earners are allowed to opt out of public health insurance.

b) Countries with high expenditure ratio and low Kakwani index (e.g. United States)

As described above, a high expenditure ratio is usually associated with a high level of regressiveness. An example of a country that belongs to this group is the U.S., where only the elderly are covered by public health insurance. As insurance is not universal, patients must pay high out-of-pocket expenses, and the burden of medical-related expenditures on low-income earners is relatively high. Such systems are thus highly regressive.

c) Countries with low expenditure ratio and high Kakwani index (e.g. United Kingdom)

Countries with compulsory universal insurance systems have low expenditure ratios. Provided that it is easy to obtain private treatment outside of the public health insurance system, high-income earners in particular will take active steps to obtain private treatment, giving the system a low level of regressiveness.

Although out-of-pocket expenses under the NHS are low, patients (principally high-income earners) use pay beds and private hospitals, and so the U.K. belongs to this group.

d) Countries with a low expenditure ratio and low Kakwani index (e.g. Japan)

Countries with universal insurance and a negative policy toward non-insured treatment belong to this group. One such country is Japan, where the universal insurance system prohibits patients from receiving a mix of insured and non-insured treatment. (Because of the difficulty of calculating private insurance premiums, however, Japan was excluded from the analysis.)

 

The authors clearly point out that Medicare and Medicaid causes the US to have a highly regressively health policy.   These draw upon the general tax revenues of the US and provide benefits to the poor and elderly considerably beyond what this population segment pay in taxes.  We know that.

However, regarding the elderly, one can argue that taxing the younger working segment to pay for some form of support of the elderly is not a bad way for a nation to go, provided that the nation continues to do just that.  The younger generation may resent the taxes, but if they understand that they will eventually be a recipient, the system works.  Social security is about 80 years old now, and is an immensely popular program, although the social security tax is highly regressive, with its fixed rate and maximum taxed income limit.  People generally trust that the system will be there for them when they need it.

By the way, the social security system is not “welfare” -- it’s a collection of insurance policies provided to every American citizen, with no means tests, administered by the federal government, and provided through the same “full faith and credit” that almost everyone has of our currency.

 

Japan does face a problem with large numbers of elderly, the result of decades of a shrinking population and greater longevity.  China will be facing a similar problem, due to its policy of restricting numbers of children per family.  Providing for our elders is easy with a growing population with higher productivity and incomes.  What is a nation to do if productivity levels off and the population shrinks?  Fewer wage-earners will be around to support a relatively larger group of elderly.  Japan is investing heavily in affordable, personal robotics as a way of addressing an expected shortage of care-givers for the elderly.

From an environmental point of view, I and many others feel that a considerably smaller population would be a good thing for earth and us all -- but there are some terrifying long-range consequences of a shrinking population that we not yet come to grips with.  Medicare is going to be a problem for us, one that we need to confront.  There is no national consensus on just how to manage health care for an aging population.

 

I’m not sure what Mr. Jensen’s point is in listing this study.  The report addresses the problem of maintaining health care quality in the face of an aging population, a problem that the Japanese are well aware of, and who (I believe) will find a way to manage.  That’s also going to be a problem for the United States, whether we continue to have a totally privatized, competitive health care system or a government-managed Medicare.

Bankruptcy Issues

On page 2, Mr. Jensen looks at bankruptcy statistics in 2006 and 2010.  How many of these were due to medical bills that a homeowner was unable to cover, even with a large home mortgage?

Jensen seems to be saying that because most of the personal bankruptcies in 2010 were due to other factors, e.g. the housing mortgage market collapse, that the medical bankruptcies no longer matter. 

But they do matter.  Too many good hard-working conscientious Americans have been ruined through an unexpected medical emergency as a result of inadequate or fraudulent medical insurance coverage.

I see a figure of some 166,000 bankruptcies due to medical bills in 2006, before the housing market collapsed.  That was estimated at 29% of all bankruptcies.  Of course, applying the same 29% in 2010 makes no sense, and there probably were considerably fewer than 443,724 medical bankruptcies in 2010.  One would expect roughly the same level of bankruptcies, or somewhat more, given the negative housing market situation -- there’s less housing equity generally to draw upon to pay medical bills.

But 166,000 American bankruptcies per year is still far too many for my taste.  T. R. Reid [2] asked about medical bankruptcies reported in Canada, England, France, Germany, Taiwan and Japan.  The answer was -- zero, none!  There’s no way for it to happen, since no one gets a big bill from a hospital after an operation.  There are also virtually no malpractice lawsuits in these countries, either.  That’s understandable, because malpractice lawsuits are typically launched to recover huge medical bills, and only rarely to put incompetent doctors out of business.  With no threat of malpractice lawsuits, few of the doctors feel a need to purchase malpractice insurance.

 

The fact remains that there are large numbers of personal bankruptcies in the US (alone most other industrialized nations) due to excessive medical bills.  The pain that these must cause ordinary people, who, after going through expensive surgery or other treatment, find themselves denied insurance coverage and driven out of their home, should be of concern to us all.

Mr. Jensen’s unstated position seems to be that every American should have enough foresight to purchase adequate medical insurance early in life to forestall all possible personal catastrophes. 

That’s easier said than done, given the ease by which people can be laid off, the high cost of housing, and the generally borderline paycheck-to-paycheck existence that so many of our citizens find themselves trapped in.  We’ve also seen increased medical insurance fraud, in the form of claims denials and refusals to ensure people with a “pre-existing condition”.  The new health care law now makes that form of fraud illegal.

How convenient that some can so easily brush off what amounts to a national catastrophe!

The Medicare system ... is a disaster?

Here, Mr. Jensen pulls a report from the 2010 Medicare trust fund about the fund not adequately financed over the next 10 years.

I can accept that.  It isn’t “adequately financed”.  Neither is Social Security, for that matter -- benefits to the SS recipients are paid out of current receipts rather than some big investment fund earning income, and providing a cushion against lower receipts.  But SS has survived by paying out benefits from current tax receipts, and there’s no reason it can’t continue in that mode for another hundred years.

Medicare’s receipts from its wage tax are not keeping up with its expenses, and that is a problem.  The difference is made up now through general budget allocations, which is to say, other tax sources and borrowing.

 

But -- why do we not claim that our military isn’t “adequately financed” for the next 10 years?  Shouldn’t the DOD be told they must set aside 10% of their allotments in a trust fund each year so that future wars can be paid for out of their trust fund?

“Adequate financing” is a standard that we correctly apply to private insurance companies.  They can go bankrupt from excessive claims and inadequate reserves, leaving their policy holders stranded and defrauded.   That’s why insurance companies are regulated in every state -- the average policy holder otherwise has no way of determining whether his insurance is going to be there when he/she needs it.

But the federal government had better not go bankrupt, or there are consequences to public welfare far beyond the failure of some insurance program.  It also has the sovereign and unrestricted power of tax collection, something that no private company has.  So there’s no reason to demand some form of “adequate financing” of a government program, other than ensuring that it can be financed through a special tax or the general revenues on a year-by-year basis.

 

 

But there’s more to the story.  Here’s what Mr. Jensen failed to point out about Medicare --

·         It is providing health care to the most expensive segment of our population -- our seniors.

·         Under the law, Medicare has few, if any, ways of negotiating prices with medical suppliers, even for drug costs.

·         Care is provided and largely paid for (80% of most hospital and medical bills), regardless of the wealth or income of the recipient.

·         Because Medicare is the largest provider of medical services, its payments to suppliers effectively set a market price on those services and goods.  Its willingness to pay whatever the market asks for is part of the problem of inflationary medical costs.

·         The payments must cover various physician and hospital administrative costs -- and the cost of servicing a myriad medical plans by staff specialists is part of that package.

·         Another factor working against Medicare is the tendency of doctors and hospitals to charge off their total costs against the payer that won’t fail to pay -- Medicare.  Given that half the population has no health insurance, are unlikely to be able to pay their medical bills, and that the doctors and hospitals treat them anyway, how is the system to be paid for?  Easy -- by jacked up, phony bills levied against those who actually pay up!

 

So we have a truly absurd situation of a government payer that has no say about the fees charged or the level of services provided.  That’s not a “free market” situation -- it’s one with three parties: the treated, the providers and the payers.  The treated will be treated, given a serious illness, rather than be left to die on a rubbish heap, whether or not they can pay.  The providers are happy to provide the treatment, but demand to be compensated for it.  The payer pays, but has little or no say regarding whether the treatment is necessary nor what the bill will be. 

This is a three-way game in which the costs will just escalate over time.  There’s little incentive for the patients to consider whether the care is needed or not, or to adopt a more healthy life style.  There’s also little incentive for the health providers to find more efficient ways of providing health services.  In fact, competition between health groups and hospitals generally causes both to over-invest in facilities, which drive up costs.  Finally, the Medicare law effectively prevents this agency from engaging in aggressive negotiations with the pharmaceutical, hospital and other medical suppliers on service practices and costs.

Ms. Mahar [1] compares Medicare with the Veteran’s Administration, with regard to drugs and medical services.  The VA can aggressively negotiate, and has demonstrated significant cost reductions in caring for the vets, without degrading the level of service.  If the VA were authorized to take over Medicare, we’d see a significant reduction in cost, probably eliminating the Medicare deficits now incurred.  See pages 257-264 in Mahar’s book for a review of the VA.

Also see Mahar [4] for an amusing conversation between a drug manufacturer and a health minister of some unnamed nation.  The negotiations are centered around whether a new pain reliever should be provided as a prescription drug and paid for through the health ministry.  The manufacturer claims a 5% improvement in “pain relief” through some field studies, but wants $2 per pill, compared to an existing product at ten cents per pill.  Minister says “no”, it’s a poor bargain.  So the manufacturer counters with $1/pill, then 50 cents/pill.  The answer is still “no”.

Summary

·         Mr. Jensen’s health care inflation comparisons are not supported by the evidence.  Rather than the U.S. expected to have modest health care inflation compared to several other countries with universal health care, the opposite appears to be the case.

·         Mr. Jensen correctly points out that US healthcare outcomes consistently rank at the bottom of all industrial nations -- but this undercuts his central argument that free enterprise health care is better than socialized health care.

·         Regarding declining clinical quality, Mr. Jensen cites a Japanese study related to the problem of the aging population in Japan, and how that nation can best cope with the rising medical costs implied by more people retiring and living longer.  We, too, need to confront that problem.  But the issue is irrelevant to the question of how to provide affordable medical care.

·         Regarding medical bankruptcies, Mr. Jensen cites some 166,000 personal medical bankruptcies in 2006, before the housing crisis, then insists that a figure of 443,000 in 2010 is based on a false projection.  I can accept that, but what I cannot accept is some 166,000+ personal medical bankruptcies in any year.  There should be none.

·         Mr. Jensen claims that “single payer health care as exhibited by Medicare is a disaster”.  Why?  Because the 2010 Medicare trust fund report states, correctly, that the fund is not “adequately funded”.  What a surprise!  But name any government agency that is “adequately funded” -- that isn’t the way government works.  Social security isn’t “adequately funded”, either, although there is a trust fund designed to cover the payments during periods in which Congress fails to adjust benefits, retirement age or SS tax levels.  Congress has also consistently held down the SS tax level, yet kept the payment levels as high as possible, for political reasons, ever since the system was launched in the 1930s.  Also, the “trust fund” is a block of US Treasury bonds, which depend on the good faith and trust of the US government, which is to say, the ability of the nation to continue to raise sufficient taxes to pay the interest on its Treasure bonds.

 

References

[1]  Money-driven Medicine, Maggie Mahar, 2006, Collins Press, 450 pages.  \

[2]  The Healing of America, T. R. Reid, 2009, Penguin Press, 277 pages

[3]  Reg Jensen paper.  See http://www.wbarrett.us/political/RegJensenPaper.pdf for a PDF copy.

[4]  Money-driven Medicine, Maggie Mahar, 2006, Collins Press, pages 289-292.