Health care has been receiving lot of well deserved attention after the economy showed trends of recovery. As a common man, be it the bail out money or health care expense the sheer magnitude of money involved is overwhelming. For instance, the health care expenditures are about $1.6 trillion in 2002 and projected to rise to $3.6 trillion in 2013. To put in perspective with the GDP of the country, the spending goes from a 15% to 18% of the GDP. It is hard to fathom the magnitude of problem, just by looking at the numbers.
A better way to look at the problem will be to compare US against other developed countries, on a per capita basis. In general, the health care cost per capita is a linear function with the GDP per capita for all developed countries except US which doesn't fit in the trend. Check out the plot
http://www.annals.org/cgi/content/full/142/10/847/F3In 2006, US spent about 40% more than what it should have spent. That tells you how inefficient the system is, rather how much better can the system be. In terms of health care expense per capita is roughly $7000 (about 15% of the GDP per capita), instead of $5000 per capita had US followed other developed countries.
Apparently health insurance costs have been consistently rising by about 8~10% from the late 1980s to now, except for a period of slowdown between mid 90s to 2000. It is interesting to note how the health care industry evolved. The dynamics of the health care providers and insurance companies pushed the cost in the wrong direction.
Pre-1980s, hospitals in an effort to attract best physicians, tried to outdo the competition by having better facilities, resulting in higher cost. This didn't last quite long, as health insurance companies began contracting hospitals which agreed for a lower fee. The priorities changed for the hospitals, as they competed for patients, rather than physicians, driving the cost down. Unfortunately this desirable trend didn't last long either. The hospitals began to consolidate , resulting in multihospital systems. Now the hospitals dictated terms in price, as there were fewer hospital entities, and insurance companies have to contract them inorder to guarantee geographical coverage. Studies have shown how hospital mergers have contributed to increase in cost.
Breaking down the expenditure and finding the major contributors can be quite complicated and involved. Much of these statistics about health care spending can be easily distorted, either inadvertently or deliberately.
For instance, this nytimes article states that the US doctors make $200,000 to $300,000 a year compared to doctors in Europe who make $60,000 to $120,000. The author claims that as one of the prime health care expenditures. (http://www.nytimes.com/2007/07/29/weekinreview/29berenson.html?_r=2)
Professor Reinhardt's (an economics professor at Princeton) reply to the same issue states that how half of physician's salary goes to " physician's practice expenses" including that of malpractice premiums. This makes their take home pay half of the quoted numbers. On top of it, even if we were to cut their salary down by 20% to bring their pay on par to their counterparts in Europe, it will only reduce the US health care expenditure by 2% (http://economix.blogs.nytimes.com/2008/11/14/do-doctors-salaries-drive-up-health-care-costs/)
Often times, statistics can be difficult to interpret correctly. This one is a bad example.
Nevertheless without going too much into statistics, it is surprising to note that one of the prime contributors to the health care cost apparently is "technological innovation". It might be a little difficult to digest how technology drives the cost so high. Apparently in the medical field, technological innovations in some areas can lead to more capital, more labor and more cost in spreading the knowledge. One such area has been the treatment of myocardial infarction claims Thomas Bodenheimer. In his paper (http://www.annals.org/cgi/reprint/142/11/932.pdf) , he also explains how new technology can lead to overuse. For instance laproscopic chloecystectomy (removal of gall bladder) is 25% cheaper compared to open surgery. But 60% increase in chloecystectomy procedures since the introduction of laproscopy, increased the total outlay. He also cites examples of overuse of MRI and tomographic techniques. New technology diffusion happens rapidly because specialists encourage them (and receive income from them).
Looking back at one of my own personal experience, when I had to undergo a minor knee surgery ,and had to stay in the hospital for about 4 days. It so happened that I had a minor neck strain , during my stay in the hospital. One of the pathologist who was doing a routine check up on me was a little too concerned about my neck pain (inspite of me complaning about the fluffy pillows to be the main cause of it) and speculated that it could be meningitis. Neck stiffness is just one of the symptoms of meningitis. He suggested doing a MRI to make sure it's not meningitis. I was a little surprised by the doctor's suggestion. Doctor's response was "You have the insurance to cover for it, then why take the risk?" . Well that is one example of overuse of technology.
Infact Atul Gawande's article in the Newyorker "http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande" compares two towns which are geographically and culturally closer, yet incur remarkably different medicare expense per capita. Increased expenditure didn't result in the improvement of general health of the people. The conclusion he comes up is that the hospital cultures are very different in both these towns. He claims as to how one of the towns had a more business oriented approach to treating patients, by overusing technology and raking up profits.
Thomas Bodenheimer states that it is important to assess the influence of new technology before it gets adopted widely. In countries like UK, they have what is called health technology assessment, which provide scientific reports that answers questions like, Do the new technologies really improve on existing technology ?, What are the harms, benefits and cost-effectiveness of a technology? before adopting it widely. Other possible measures such as expenditure caps on physician services is an excellent technique.
There are other straightforward reasons for the rising cost, one such thing is the administrative overhead. In 1999, it was about 24% of the health care expenditure. Uwe Reinhardt in his article claims that excess spending in administration is enough to attain truly universal health coverage.
http://economix.blogs.nytimes.com/2008/11/21/why-does-us-health-care-cost-so-much-part-ii-indefensible-administrative-costs/
Private insurances are notorious for higher administrative costs, compared to government managed Medicare insurance. Apparently medicare pays one employee for 10,000 beneficiaries, where as private insurance has 15 or more employees. Hence public option is favorable in terms of cutting the costs.
