Health Care Costs: A Steady Climb
The life expectancy of a U.S. citizen in 2020 was nearly 79 years, about 11 years longer than in 1950. The shorter life spans of past decades were at least partially due to behavior: adults smoked, ate more salty, sugary, greasy food, and weren’t as exercise conscious as twenty-first century Americans. Many in their mid-sixties had heart attacks—and died. Today, we do much better, from about 600 deaths from heart disease per one hundred thousand Americans in 1950—700 per hundred thousand males—to fewer than 165 per hundred thousand in 2017 (www.cdc.gov/nchs/data/hus/2018/005.pdf). Heart disease remains the number one killer of Americans, but only about 2 percent of the 30 million people diagnosed with heart disease in 2019 perished. Generally we recover, even if it does cost us enormous sums of money in cardiac care.
We enjoy improved health in part because we live healthier lifestyles. But life has also been lengthened considerably by improvements in medical technology and services. The health care economy continues to grow, increasing in 2018 to about 17 percent of GDP. You’re pleased to make that contribution, particularly if you are insured, because you would probably be less healthy if you didn’t. But apart from its chunk of GDP, the cost of health care is concerning, particularly to the uninsured. In evaluating health care spending, we need to distinguish between simple inflation in health services—simply paying more for the same thing—and an improvement in what we are buying that costs more.
It’s not easy to distinguish costs on a quality-adjusted basis. You’re paying more for the treatment of your cardiac event but getting a bigger payoff by not dying. How much of that higher cardiac care bill is due to health care inflation and how much to a better quality product? Sorting that out is compounded by the common practice of cost-shifting, whereby hospitals charge different clients different prices for the same treatment based on whether or not they have insurance, or if they do, what their insurance companies have negotiated with the hospital or other health care provider.
Cost Versus Outcomes
The United States spends more per capita on health care than any other industrialized nation. But our health care metrics are not correspondingly superior. We don’t lead the pack in outcomes; in fact, we lead only in spending. Part of that is the bifurcation of outcomes. If you are relatively well employed and well insured you enjoy some of best health care in the world and good outcomes. But for a large segment of the U.S. population, people who do not have high incomes and are not insured, the outcomes are not good. Among a multitude of evidence is the decline in average life expectancy among poorly educated white women, a turn never before seen in the United States. While widespread drug use in some communities contributes to the decline, it is more a function of the split in the ways health care is delivered. It is also a primary consideration in the debate over how we deal with health care going forward.
As health care costs continue to soar and cost containment becomes an increasingly pressing issue, much of the focus is on paying for treating the uninsured. Consider the micro-clinics that have sprung up in pharmacies. If you have health insurance and are marginally ill—a sore throat, a fever—you go to a micro-clinic or urgent care center and in a relatively short time and for relatively little money, typically a small insurance copay, you get a test for strep throat and a prescription for a drug to treat it and you go on with your life. It’s an easy and cost-efficient way to address and cure your illness before it becomes a serious disease. But if you are uninsured and don’t have the cash to pay for your visit, test, and drugs, you stay home, get sicker, and wind up in an emergency room. The cost of being treated that way is extremely high, and paid for by people who have insurance.
The United States doesn’t generally let people die on the streets, but delivering health care to the poor and uninsured is far more expensive than for people who are insured. It’s not necessarily an argument for a national insurance plan, just the result of a variety of choices the country has made over time that a lot of people end up getting very expensive health care that needn’t be so expensive.
COVID-19 drew a line under the distinction. When the pandemic hit, hospitals saw more patients but were restricted from performing—demand also declined—elective procedures. Hospitals use high-dollar elective procedures to underwrite losses associated with their services to the uninsured and others who can’t cover the costs of their treatments. When COVID-19 hit, the lack of elective procedures posed enormous challenges for hospitals. Many hospitals became financially distressed during the pandemic as their case loads shifted from revenue producers to emergency services. And while the new patient mix was similar to other countries, it took a bigger toll on U.S. hospitals and the U.S. economy than on other developed nations where hospitals are part of a national health program and reimbursed by the government for their costs. U.S. practitioners have jumped through those hoops for a long time, and been compensated for it, but COVID-19 magnified a weakness in the system.
Employer-Sponsored Health Care
After World War II, the U.S. tax code was changed to allow companies to deduct the cost of providing health care insurance for their employees. It quickly became an essential benefit for union shops, then generally across the board, employers buying into the scheme as an opportunity to split the cost of providing benefits with the federal government. Because employees were not able to deduct premiums they pay themselves, employer-provided coverage made economic sense for both sides. It was in some sense a quirky law—employers didn’t get a tax deduction for providing home or auto insurance to their employees—and resulted in an odd break in the insurance markets. Many people get their health care coverage at work, but buy their own auto, home, and life insurance, even though everyone who drives is required to have auto insurance and anyone with a mortgage is required to have homeowners insurance.
Employer-provided insurance is working less well today because coverage is taking an increasingly large bite out of company profits. Companies are looking for ways out of those costs. But there’s also the changing nature of work. Part-timers, freelancers, and contract employees don’t have access to a company policy. Changes in how companies engage workers and changes in how people want to work are stressing a national system that relied heavily on employer-provided health care insurance.
From a global perspective, the U.S. system has put employers at a competitive disadvantage. Because all other developed nations offer government-provided health care as well as retirement and other social programs, foreign-based competitors operate free of some of those direct costs. The United States is also disadvantaged in terms of attracting foreign businesses. If you are an Italian firm thinking about establishing an offshore headquarters and deciding between Canada and the United States, you could be swayed by the fact that you won’t have to pay for employee health care coverage in Canada like you would be expected to do in the United States. The U.S. firm does benefit by some tax differentials, but in Canada, the firm would avoid both the direct cost and the hassle of providing insurance through the firm.
The industry of medicine is changing dramatically in the United States to deal with the quirks of medical treatment financing. For one, large health care organizations that own hospitals are reallocating physician labor by employing doctors as “hospitalists,” doctors who take over from the general practice physician once the patient enters the hospital. If you are a patient of a physician in one of the large health care systems, it is increasingly unlikely that you would see your primary care specialist once you enter the hospital. It’s labor specialization and one way to add efficiencies—the pin factory come again.
Takeaways
• We enjoy improved health in part because we live healthier lifestyles. But life has also been lengthened considerably by improvements in medical technology and services.
• In evaluating health care spending, we need to distinguish between simple inflation in health services—simply paying more for the same thing—and an improvement in what we are buying that costs more.
• Sorting that out is compounded by the common practice of cost-shifting, whereby hospitals charge different clients different prices for the same treatment based on whether or not they have insurance, or if they do, what their insurance companies have negotiated with the hospital or other health care provider.
• If you are relatively well employed and well insured you enjoy some of best health care in the world and good outcomes. But for a large segment of the U.S. population that doesn’t have high incomes and is not insured, outcomes are not good.
• Delivering health care to the poor and uninsured is far more expensive than to people who are insured.
• When COVID-19 hit, the lack of elective procedures posed enormous challenges for hospitals that became financially distressed as their case loads shifted from revenue producers to emergency services.
• Employer-provided insurance is working less well today because coverage is taking an increasingly large bite out of company profits.
• From a global perspective, the U.S. system of employersponsored health care coverage has put U.S. employers at a competitive disadvantage.
Equilibrium
Health care is a large and growing share of the economy. The U.S. population is aging, in part because health care technology has improved and lengthened lives. In turn, maintaining longer lives requires increasing health care expenditures. Health care provision is also politically contentious. In the United States, health care finance is usually a private sector matter until the individual reaches a certain age when the government then assumes most of the insurance burden through Medicare. While private insurance and the provision of health care has produced excellent results for people who can afford the insurance (often subsidized by employers, unlike most other types of insurance), covering the costs of the uninsured has been problematic.
It is also difficult to determine whether a change in the cost of a health care treatment is because it is a better treatment or due solely to health care price inflation. Health care spending has increased substantially, and outcomes are generally better. Distinguishing quality improvements from other price movements makes assessing health care costs difficult.