Health Care: Where does the Money Go?

Great Debates
1

Lots of people believe that they know where health care spending goes (i.e. why American spending is roughly double that of any other modern nations.) You probably believe you know. Most likely, though, you are wrong.

So first, let’s get rid of some myths. (PPPY = Per Person Per Year)

  • 1 –
    Universal Health Care Cuts Spending

If you look at this image from the NY Times, you will see that of 30 nations, their year-to-year spending increase has been largely consistent. Several of these nations have changed to UHC during the period of time that is shown, but there is no way to tell from looking at this graph which nations these were, nor at what time it was that they changed their system of health care. If UHC changed the course of health care spending, you would be able to see that in this graph.

  • 2 –
    Private Insurance Explains Our Spending

Firstly, both Israel and Switzerland rely on private insurance and their spending is in range of other European nations.

Now let’s look at actual administration costs of private insurance. Numbers vary; this survey says that average health care administration costs are about $1000 PPPY in the US, and about $300 per person in Canada. This review (PDF), however, lists Medicare administrative spending as 5% of revenue and private insurance as at about 9%. Medicare revenue is about $6600 PPPY, so this would be $330 in administration cost. Calculating private insurance cost from what information is in the document is a bit more difficult. Assuming a similar $6600 per person value at 9%, cost would be ~$590 per person. Assuming 160 million people covered by private insurance and a total administrative cost of $85 billion, administrative costs of private insurance per person would be ~$530. This table from the Canadian National Health Expenditure Database puts administration costs as wavering around 3.6% of total costs per year. This table, gives total spending as $3300CA or ~$3000US, which would be only $100US per person.

Really about all we can say is that somewhere between $200 to $700 can theoretically be saved in there, so we’ll average that to $450.

Since the US pays about $3000 more in health care than any other nation, even saving that $450 wouldn’t bring us to norm (nor would the $700).

I will also note that the likely reason for private insurance administration costing more is due to scale. Many more, smaller organizations have to spend more on administration than one large organization. Switzerland, for example, has 85 private insurance companies and a relatively small population. Both of these probably are factors in its spending being higher than most other nations in Europe.

  • 3 –
    The US Pays More for Pharmaceuticals

We do (PDF). The OECD average is about $366 dollars per person per year. The US is at about $728. So theoretically, we could save maybe $200 spending PPPY.

Again, this isn’t nearly enough to bring us down by $3000.

  • 4 –
    The US Has Too Many Cases of Elective Surgery

This one you might not have heard of. The idea is that countries who don’t have wait lines for health care have fewer cases of elective surgery. This does appear to be true (PDF). However, outside of heart bypass surgery, the US actually seems to generally come in below other countries without waiting lines. (Here’s another chart of just plastic surgery.)

  • 5 –
    Preventative Medicine Costs Less

More likely it doesn’t change the cost in any meaningful way:

http://www.nytimes.com/2007/08/08/business/08leonhardt.html?ex=1344225600&en=d7df12bae3f08026&ei=5090&partner=rssuserland&emc=rss
http://content.nejm.org/cgi/content/full/358/7/661

  • 6 –
    Uncapped Malpractice Awards Mean Higher Doctors Fees

The idea, with this one, is that if doctors and hospitals have to pay less in malpractice insurance, they will have to charge less. A more thorough discussion can be read here, but personally I would have to agree that the amount of health care spending which goes towards malpractice insurance is sufficiently small that it’s largely unrelated to our discussion here.

POSSIBLY NOT MYTHS

  • 7 –
    Uncapped Malpractice Awards Mean Defensive Medicine

The idea is that doctors, fearing lawsuit, order an excessive number of tests and hence waste a lot of money that isn’t justified by the actual odds of there being some, more rare condition.

The answer: Dunno

If people could help search for answers to this one (e.g. how many tests are run PPPY and how much that costs on average, by nation), it would be very helpful.

  • 8 –
    The US Buys the Newest, Bestest Stuff

Similar to the idea that we pay more for pharmaceuticals in the US, possibly we also buy most of our equipment for a higher price.

Again, if people can try and find information on this, it would be helpful.

  • 9 –
    The US Tries to Keep Old People Alive Longer

I can’t find where I saw this. Basically, supposedly the US tries to keep people who are dying on artificial support more often and for longer than other nations.

Again, I would be interested in verifying and quantifying this.

Some further items that I have checked: The number of doctors per person is roughly equivalent between the US, Canada, and the UK. ~2.2 per person. The average yearly wage of a doctor is about the same between the US, Canada, and the UK. I don’t have cites for these because this is the third time I’ve started this thread without completing it, and I’ve since lost cites for this information. I don’t feel like looking it up again, but it’s true.

Since we can quantify items 1-6, for the most part, we can say for certain that at most we could save maybe $700 through any of these, leaving another $2300 to make up. 7-9 are possibly culprits of this. I have a feeling like I forgot a #10 that I intended to include. Ideally we could focus on these items or any further theories.

2

This document seems to deny that we spend more on medical equipment, but I will need to look for the OECD data they are using to see what their definition of equipment is.

3

Doctors have to have a large staff to deal with health care and government billing procedures. They do not provide any addition to health care . They are a waste of money.
Insurance companies should not be part of the solution. They are the problem.
To get a universal system in place would end the need to waste millions on lobbyists , political donations and bribing politicians.

4

http://www.harp.org/hmoexecs.htm You could save a few bucks here too. This is just HMO exec salaries. The execs suck billions out of health care.

5

The medical equipment falls under a category of durable goods. Medicare spends much more for wheel chairs, crutches ,pap machines etc. than you could buy them for. However congress refused to allow competitive bidding. They can not face up to those who give big donations.

6

According to budget director Peter Orszag, about $700 billion in medical spending has no real benefits that we know of. There is a spending curve, and after a certain point more money either makes no difference or makes things worse. In some parts of the country the spending per medicare beneficiary is twice what it is in other parts of the country (15k vs 7.5k), but outcomes are the same.

Orszag said it was because of a lack of transparency when it came to offering treatments, and that we do not have an idea about which treatments are most effective in some situations. So he supports comparative effectiveness research, which we got in the stimulus bill. The bill devoted $1.1 billion to comparative effectiveness.

7

Single payer combined with negotiation power can save $300-400 billion a year. So the concept that UHC doesn’t cut costs isn’t something I agree with.

http://www.pnhp.org/facts/single_payer_resources.php

That is on the nationwide level. On the statewide level California could save $344 billion over 10 years with single payer and Illinois would save $17 billion a year.

http://www.pnhp.org/facts/single_payer_system_cost.php?page=3

So a well run UHC program can cut costs, at least in the US.

8

gonzo, mind providing cites from decently reputable sources?

9

How do you explain that the slope of the US curve is much steeper than any of the others?

10

There is a huge amount of waste in the bureaucratic inefficiencies of the U.S. private insurance system. I do not have numbers on this, but I have many years of experience of the British NHS and various American insurance plans. The average consumer of NHS Health care has a trivial amount of bureaucratic hassle to deal with.

In America:

1. Every time I go to a new doctor's office, or hospital, I have to fill out a thick wadge of forms and the office has to verify my insurance.

2. Every time my coverage changes, because of a job change, or because an employer switches plans, there is a whole lot more form filling and verification to be done.

3. Presumably because the rules about what is covered are so complex, various from plan to plan, and ever changing (not to mention the inherent financial incentives to deny claims whenever possible), legitimate claims are disputed on a regular basis, leading to a lot of back and forth to get things set right (if they ever are).

Now, my point is not just that this all wastes a lot of my and my family’s time, but that it also must be wasting very much more of the time of the staff of the doctor’s offices, employer’s Human Resources Departments, and especially the staff of the insurance companies. In a universal system this bureaucracy could be cut to a tiny fraction of what it is now, because there simply would not be nearly so many bureaucratic tasks needing to be done. (And this would remain true even if it really were true - which I very much doubt - that American government bureaucracy is always significantly less efficient than corporate bureaucracies.) In a universal system, the rules are the same for everybody, and coverage does not need to be checked and verified all the time.

Actually, to my mind about the only legitimate argument against introducing UHC in the U.S.A. (the only argument that is not easily refuted by comparisons to other countries*) is that rather a lot of the current healthcare bureaucrats will, through no fault of their own, be thrown out of work. It is not an insuperable problem, but it is a real one. (I trust I do not have to explain why the anti-healthcare lobby - yeah, that is the right name for them - does not want to use it.)

*Incidentally, I already debunked that graph of yours, from the New York Times, in another thread. It does not support your claims. First of all, it only goes back to 1970, and certainly many of the countries (including, but not limited to, all the former Communist countries) had UHC well before then. For several countries shown, it does not go back that far: For some, only to 1990. The burden is on you to tell us which, IF ANY, of the countries shown introduced UHC during the period over which their spending levels are shown. Then we can look to se if there is an inflection point hidden in the spaghetti.

In any case, the reason for introducing UHC in most countries was not primarily to bring costs under control, but to benefit the people. What the graph does show is that, at least by comparison with the U.S., costs never have been out of control in the rest of the world. Costs everywhere have been rising steadily at about the same rate since 1970, except that from about 1980 onwards the U.S. costs (already higher than everyone else’s) start rising much more steeply than those of all the places that have UHC. That is what needs to be reversed (quite aside from considerations such as treating the people of your nation decently.)

11

The OP gives an estimate for administrative costs of insurance companies, but not for doctors’ offices. Much of that is due to the cost of different paperwork for each of hundreds of different insurance companies. I thought that probably added 30% to total overhead, but then I spoke with a lady who is in the business of providing billing services for medical practices. She said it’s about 50%! Hard to believe, I know, but there you have it.

Have insurance company profits been mentioned yet? That’s got to be 10 or 20%.

12

Everything is more expensive in some parts of the world than in others. Maybe paying the US doctors more has something to do with it? If we reduce the requirements, (i.e. require fewer years of expensive medical school or allow certification from foreign countries), then there would be more doctors and they wouldn’t charge as much.

13

In my experience, the hospitals are huge luxury boxes. Everything inside is expensive. Beds cost more than cars. Bedpans are made of platinum. Tongue depressors and Q-tips are individually wrapped and later tossed into high-cost biowaste disposal bags, and billed to the insurer at $1 each. (I’m guessing).

14

The number of physicians in the US is controlled by the AMA. There is talk of expanding the powers of physician assistants and nurse practitioners to do the work of physicians.

15

I’ll just note again that I’m not seeing a lot of cites in this thread, njtt, Duality, Controvert, supraliminal.

http://boards.straightdope.com/sdmb/showpost.php?p=11384929&postcount=39

Trying to determine that is the goal of this thread.

16

That’s a quantity of $1000 PPPY, which is about how much I calculated ($700 plus or minus a few hundred either way). Like I said, there’s still at least $2000 missing.

And I’ll note that you’re simply looking at the economies of scale. If insurance companies are allowed to cross state lines and merge, they’ll be able to achieve a similar price, and probably this will allow the insurance companies to shed workers at a rate the market can bear.

17

Okay, I’ll start out assuming I’m wrong (wink), but I would add a “10” to the list – taxes.

My state, like many others, taxes health insurance premiums. As much as 10% off the top, but more like 3-5% for most plans.

Then we tax all doctors’ visits, lab tests, copays, etc. at 9.63%. Someone is paying that, whether it’s you or your insurance company or the provider. The only time you don’t have to pay this tax is if you are uninsured. If you’re paying your deductible, or are insured and “fronting” the costs, you’ll be hit with a 9.63% sales tax. Otherwise, the insurance company or the provider pays it.

My state also says that health insurance is not tax deductible, so it’s taxed again as income. For the middle class, that would be another 5 or 6% tax on health insurance premiums. Suddenly, it becomes easy to see why health care is so much more expensive per person than in other countries.

These additional taxes must add into the per person costs, it would seem. Of course, I’m still trying to figure out exactly what goes into the figures that get tossed around.

Does the state tax Medicare and Medicaid payments at the same rate? I don’t know, but would tend to doubt it. It’s not so easy to get this information, though.

Anyhow, it would seem that the state is addicted to the tax money, which brings up a separate issue (not to hijack) – would a public option be subject to the same state, local, and income taxes that other residents have to pay?

If so, it would erode those so-called cost cutting mechanisms pretty quickly.

Cheers.

18

This link

http://money.cnn.com/magazines/fortune/fortune500/industries/Health_Care_Insurance_Managed_Care/1.html

shows the top 12 US private health insurance financials (2006). Take a look at the profits column.

Pretty impressive huh? Those profits are money being spent on health insurance but which do not end up being used to pay for any health care. That’s a huge drain right there. Surely that money could be better spent, you know, actually paying for health care, right?

19

Here’s a cite putting insurance company profits at nearly 20%.

Don’t have time to find the rest.

20

http://whirledview.typepad.com/whirledview/2008/06/senators-mccain.html Bingo.