It’s Basic Math: You Can’t Lower US Health Care Costs

Either I’m crazy or you can’t lower the price of health care in the US. Despite the political grandstanding, our costs have nothing to do with Obamacare, Republicans, Democrats or even pharmaceutical and insurance companies.   America’s costs will always be high, and always much higher than other countries and it is simply because of basic math.

How much higher? The following are the per capita 2013 annual health care costs of the US and other industrialized countries the US is most often compared to: US $9,086; Switzerland $6,325; Norway $6,170; Sweden $5,153; Germany $4,920; Canada $4,569; France $4,361, United Kingdom $3,364. These numbers are taken from here: US Health Care From A Global Perspective.  

But why are our costs higher?

1 – We Weigh More. Our costs are higher because America has a higher rate of obesity.  Over 1/3 of Americans (35.3%) are obese.  Obesity rates for other OECD nations (Organisation for Economic Co-operation and Development) are as follows: Japan 3.7%; Switzerland 9%; Sweden 11.7%; France 14.5%; United Kingdom 24.9%; Canada 25.8%.

I’m not saying obesity is right or wrong, but I am saying that it costs more.  A lot more. Obese individuals incur health care costs that are 150% higher than normal weight individuals.  Heart disease, diabetes, high blood pressure, cancer – the costliest conditions in America – are all directly connected to obesity.  40% of US cancers and 8 of the 10 most used prescription drugs in the US are related to obesity.

Obesity is also responsible for skewing statistics to make it appear that the US has inferior health care relative to other countries.  The “we pay more but have worse outcomes” discussion – obesity decreases life expectancy. When Bernie Sanders and others highlight that the US has a higher infant mortality rate relative to other developed nations they fail to mention infant mortality is connected to obesity (they also fail to mention that other nations don’t report infants born under 500g in weight who pass away while the US does). The US has outstanding health outcomes when accounting for our elevated rate of obesity.

It’s basic math. We cost more than other countries because we weigh more.

2 – We Use More Pharmaceutical Drugs. More on drug prices later.  But it is also irrelevant. Our costs are higher because we use more prescription drugs.  A lot more as in the US alone consumes 80% of the word’s opioids.  The average American takes 2.2 prescription pills per day while other countries are as follows: Canada 1.8, Sweden 1.6, Germany 1.6, Norway 1.5, France 1.5, United Kingdom 1.3, Switzerland 1.3 for an average of 1.5 pills per person per day. The difference between 1.5 pills per day and 2.2 pills per day may not seem like a lot, but it is a difference of 68%. Even if the US adopted another country’s prices overnight, exact same prices, we would still spend 68% more on prescription drugs because we use 68% more.

It’s basic math.  We cost more because we use more prescriptions.

3 – We Have More Procedures. Simple. Americans have 107 MRIs per 1,000 people per year and 240 CTs per 1,000. The OECD country averages are 50.6 and 17.6 per 1,000 people.  And despite these numbers, America suffers from the undersuse of services – people not going to the hospital when they should.  That’s right, we need to use even more care. We also provide more timely care. The Canadian province of Ontario has roughly the same population as Pennsylvania. Ontario has 11 hospitals that can do open heart surgery while Pennsylvania has 60.

It’s basic math.  We cost more because we have more medical devices. We cost more because we utilize these devices more. We cost more because we have more facilities for expensive procedures than other countries.

4 – We Pay Our Doctors and Nurses More.  Note that I did not say we pay too much, just more.  Average physicians in the US are paid 78% higher relative to other industrialized nations. And although income varies across general practitioners and specialists, higher relative US doctor compensation contributes to 5% of America’s total health care cost.

It is more than just physicians; essentially all health care professionals in the US have a higher salary relative to other countries.  The average nurse in the US is paid $70,000 compared to $51,000 in Canada, $47,000 in Germany and $44,000 in the United Kingdom.

It’s basic math. The majority of US health care spending is hospital costs. And we know this – we all hear of high hospital bills – but we ignore this point.  We cost more because our hospitals need to generate more revenue to cover salaries, and those pesky items from above like MRI machines and surgical facilities.

And there you have it.  Those are the main reasons that our costs are high. And yes, health care is that easy. And that is why people make it hard. Nobody likes the math. Nobody likes what the math implies. But this basic math is precisely why we can’t “fix” health care in the US, which I assume means more people covered and lower costs.

1 – “It’s the Greedy Pharmaceutical Companies” I’ll keep this simple.  Let’s reduce drug costs to $0. Happy? No cost at all. Not a single dollar of health care spending towards pharmaceuticals. That reduces the US from a 2013 international per capita overall spending high of $9,086 to, well, an international 2013 high of $8,228. The argument “America’s costs are the highest in the world because of drugs prices” is mathematically impossible. When a politician blames drug costs immediately decide not to vote for them – they are either lying or they are incompetent. This is because total prescription drug spending is only 9.4% of total health care costs.

How is that so? After all, I’m sure you’ve heard about the outrageous profits of pharmaceutical companies. They make less than you may think.  Here is a piece by the Huffington Post lamenting the $711 billion 10-year profit margin of Big Pharma. Huffington Post is no fan of Big Pharma but $70 billion a year profit? Out of $3 trillion in total US health care spending?  That’s only 2% of total US health care spending.

If you magically make Big Pharma work for $0 profit (this only makes sense if you own no pharmaceutical stock, of course) you would save the US 2% in health care spending.  And I’m not sure where new drugs would come from.

Negotiate lower prices for prescription drugs? Sure. The VA and Medicaid already receive lower prices.  As a result they make fewer drugs available to patients just as other countries negotiate by saying no to certain drugs.  Without a willingness to say no (cue politicians and their death panel speak) it remains somewhat of a mystery as to what power the US has to lower prices.

And yes, I said I’d keep it simple but here’s some food for thought: US Generic Drugs Cost Less Than Canadian Drugs. If we adopt Canadian drugs and their prices overnight, we would increase the total we spend on prescription drugs due to the US having the highest generic drug usage rate in the world.  We. Just. Use. More.

2 – “It’s the Greedy Health Insurance Companies” See above. Same phenomenon. Focus on profits, not revenues. The 3-4% profit margin of health insurers is not the cause of higher costs in America and conversely, eliminating them will not lower costs enough to account for higher US spending.

The most important and overlooked aspect of health care spending is our high concentration of costs; very few Americans consume the vast majority of care. The per capita amount I referenced at the beginning ($9,086) is accurate but highly lacking and misleading. The top 1% of users (3 million Americans) consume $342 billion in care (an average of $107,000 per person) which is 20% of total health care spending. The top 5% (19 million Americans) consume 1/2 of the total health care spending. The bottom 50% of the country only consumes $42 billion. That’s right – 160 million Americans only consume on average $264 in care per year.

This concentration of costs means that of course health insurance seems overpriced – it is – for the 95% of the population that is not in the 5% of chronically ill who use half the care in the US.  $10,000 per year for insurance seems fair when you use $100,000 in care but outlandishly overpriced when you consume $264.

I don’t begrudge this 5% of the population – at any point any American can be in that group and everyone who is not should be thankful – but we can’t ignore the obvious that sick Americans are the driver of costs, not insurance companies.

The concentration of costs was seen in Alaska’s Obamacare exchanges where just 37 people each consumed an average of $300,000 of care in 6 months, about $11 million in total, forcing a rate increase on the other 8,500 exchange members of 40% in 2016, following a rate increase of 30% in 2015.  These increases weren’t because of “greedy insurance companies” but rather concentration of costs.  One of the law’s key architects, John Gruber, said Obamacare only passed because of the “stupidity of voters” because Americans wouldn’t realize the law was a massive tax increase on the healthy to cover the 5% of costly consumers (in Alaska, an $11 million tax increase for the 8,500 people). Well, Americans do realize it and this is why Obamacare is horribly flawed; a the majority of healthy people face premium increases, they leave the exchanges, and the sick stay, further skewing the concentration of costs.

If you think health insurance companies are evil I can’t change that perception. They spend the money on advertising.  They have high paid CEOs.  But it is a small slice of the pie. Only 35% of Americans even get their health insurance via private health insurance companies.  Over half of employers are self-insured; they don’t buy insurance through an insurance company but simply pay claims directly.  My employer-based coverage has this model and it costs $21,400 a year for a family plan but only 3% of that price goes to an insurance company to administer the plan.  40% of Americans already receive health insurance through the government.  The argument “High costs are because of the minority of Americans enrolled in private health insurance plans” isn’t mathematically logical.

3 – “Medicare and Medicaid Have Lower Administration Rates than Private Insurance”  This comment usually goes hand in hand with the above statement.  It is just not true. Any Medicare cost estimates need to factor in that Medicare uses the IRS, Health and Human Services and Social Security to function and do many jobs for them, like collecting money. They also use the FBI to investigate billions of dollars in fraud each year.  You know what efficient entities don’t do? Send payments to fake doctors.  Once the costs of the other agencies’ Medicare responsibilities are factored in, Medicare’s administrative rates are higher than private insurers.

And I know you always hear the opposite, but of course Medicare has a higher per person administrative rate than private insurance companies.  Don’t forget, when Vermont tried to implement single payer the state calculated it was cheaper for the state to keep private companies rather than administer everything through the state.

Either I’m crazy, but Americans need to look no further than the Pentagon to understand inefficient spending. Or the disaster in the Veterans Administration. You know what efficient governments that know about health care don’t do? Let Walter Reed, a government run hospital located 11 miles from the capitol building turn into a national embarrassment.

I could go on and on. Health savings accounts. High deductible plans (Read this: High Deductibles Make Health Insurance All but Useless). Health reimbursement accounts. Co-pays. Public Option. Medicare-for-More. Medicare-for-All. Hillarycare. Berniecare. Obamacare. Trumpcare. Romneycare. Universal Coverage. Universal Access. Cadillac Tax. Cost Shifting. Deadweight. Fee for Service. Employer Mandate. Individual Mandate – none of these lower costs unless you actually do the obvious and cut spending on sick people.

Lowering costs has to include rationing health care, prioritizing surgeries, limiting prescription drugs and paying providers less just as in the countries we are always compared to.  It would also need to focus on the top 5% and have serious and difficult conversations about how we treat the chronically ill, especially in the last few months of life.

Even systems that do just that, with coverage for all, still have systemic basic math problems: this week the Red Cross announced their concern the UK’s National Health Service (NHS) is facing a humanitarian crisis. Universal coverage is easy. It just requires large sums of money and limits on unlimited care.

Instead of thinking about costs in the abstract, simply try this: lose weight, tell a doctor you don’t need your next prescription, tell your doctor you don’t think you need the next surgery they recommend, tell your doctor you’ll pass on that MRI, tell your doctor they are overpaid, and tell your politicians you would like higher taxes. Also be ready to answer this question: who at St. Jude’s Children Hospital is overpaid and which of its patients should receive less care?

Here’s another question: is there any reason that the United States of America should not have the highest health care costs?

We need to stop pretending we can’t do math. Politicians are liars, but fortunately for them, Americans don’t like the truth.  But until we discuss the truth we can never have a honest debate regarding policies. The costs are what the costs are.  If you believe you can somehow cover more people and lower costs and not impact availability of services and not reduce the availability of prescription drugs you might want to see a doctor. Repeat after me: we’re screwed.

Thanks for reading. Be sure to check out the hyperlinks ~ Nick

 

 

 

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