TANSTAAFL
As each new day brings us another set of numbers from the bean counters on Capitol Hill, there is the inevitable commentary from the sidelines on the cost of health reform. Will the total package cost too much? Can a way be found to make the burden more tolerable? Are there cost cutting ideas no one has thought of yet?
Paul Krugman was absolutely giddy the other day when conferees managed to reduce the cost of the Kennedy bill to $597 billion, down from the previous level of $1 trillion plus. Then, in the same column, he admitted that the total cost is likely to be more than double that amount.
Here's a way to keep score without being privy to the behind-closed-doors deliberations: There Ain't No Such Thing As A Free Lunch (TANSTAAFL). Independent analysts pegged the cost of Obama's health plan last summer at about $1.5 trillion over ten years and predicted it would cut the number of uninsured in half. Nothing has really changed since then except the hard-to-believe spectacle of leading Congressional health reformers — for the first time in their adult lives — actually coming face to face with the economic reality of their ritual campaign rhetoric.
When all is said and done the cost is still going to be about $1.5 trillion. The only real question is: who is going to pay that cost?
Here is the best way to think about all of this. The cost of an average employer-provided family plan is roughly $12,000 a year. In terms of wages, that equals more than $6 an hour (and will soon rival the minimum wage of $7.25). President Obama and leading Democrats in Congress want everyone to have a health plan like this. So, we're not just talking about 47 million uninsured. We are also talking about all of the people who have less generous coverage — the "underinsured." Let's concede, for the sake of argument, that the cost of this enterprise is $150 billion a year, although I think it is much more.
So how do we get from here to there? There are only so many possibilities. We could require employers to pay for the entire benefit. That would lead to massive layoffs and threaten to wipe out entire industries (fast food, for example) — oddly enough, while we are in the middle of a deep recession. Another possibility is to tell employers they only have to pay half the cost — the remainder being paid by the employees. That would also cause huge layoffs and, in addition, major reductions in take-home pay for millions of workers. A third alternative is to sock the taxpayer with the cost of the whole enterprise.
There are also other possibilities. We can shift part of the cost to Medicare or Medicaid enrollees (apparently, the hospitals have already agreed to this). We can try to shift a portion to doctors, nurses, hospital personnel and other providers. We can try to foist part of the costs on pharmaceutical firms (another done deal) and other sectors — even though this ultimately shifts the burden to patients.
Here's the bottom line. None of the discussions in Washington are really about reducing costs. They are all about shifting costs. Which is to say, they are about whose ox is going to be gored.
John:
You bring up some excellent points.
What’s the purpose in lowering the number of uninsured if we’re looking at plans that cost $12,000 per year?
I understand the median household income is around $50,000 per year.
if correct, the health insurance premiums are almost one-fourth of the median household’s budget.
That used to be the figure to qualify for a mortgage!
You’re right, John. There is no such thing as a free lunch. But there ARE better places to eat. The government trough isn’t fit for the finest pigs.
Don Levit
Don, in a real health care market, health insurance would not cost anywhere near that amount.
John,
Seems like everyone uses numbers which are advantageous to their cause and not the solution. $150B (or whatever it is) is based on current expenditures. What is the number if we provide the care we need and not the care we do not need?
How do you propose we stop paying for unwarranted services and the volume based, more-care is better-care system (VBMCIBCS). We live under a wasteful VBMCIBCS which will collapse without redesign.
The current proposal are stop gap, but neither your efforts or the current cost reduction efforts will get to a sustainable future.
John:
I actually heard the hearings of the finance committee… Did you know that the 500 + Billion does NOT include any of the states added costs of Medicaid…. this is only the fed costs which is 57%.
OUCH !
For the most thorough discussion on the absurdity labeled “healthcare reform,” read the op ed piece “Parsing the Health Reform Arguments,” in the WSJ.
To begin a meaningful debate on the matter, we need to acknowledge that the central issue we face is not a matter of who has “coverage,” it is a matter of oppressively high system costs driven by our poor lifestyles. System costs will not be cured by anything being put forth today: electronic records, consumers shopping for care, a government run coverage option, fantasy savings promised by the pharmaceutical industry. These are peripheral issues at best, and are more likely pure nonsense. What is not being discussed and addressed is the hard fact that system costs are 70% driven by our lifestyle CHOICES relative to diet and exercise. The statistics for the prevalence of obesity, diabetes, and prediabetes are staggering. Until we are willing to devise a system where overweight people have to pay more for coverage or care, we are destined to suffer continuously escalating costs.
Paul,
There is a system that charges folks based on lifestyle. It’s the individual market in those states that don’t have guaranteed issue and community rating. Smokers and obese people and others whose lifestyle affects their health pay more. The good news is they can reduce their rates. For example,if they are smoke free for one year and/or have maintained the weight loss for one year they can request a rate reduction. For this reason, healthy people get better rates and those with unhealthy lifestyles pay more but have an incentive to change. If they choose an HDHP/HSA, they often change their lifestyles even more because they control the first 2000-5000 in claims as they pay small premiums. They begin asking their physician for natural ways to control hbp and cholesterol, opt for generics, question unnecessary tests, and get their annual physical.
I saw in one article, that the $600B does not include the cost of administering the public plan… and that cost was the other $400B over 10 years…can you confirm this? http://www.ilovebenefits.wordpress.com
You do great work.
Being one that is very tired of the Krugman logic set, the way of thinking that defies logic, I can only hope that the discussion in DC does turn to the eventual reality of who pays for all of this socialism. I think if it does it is because of folks like you. Thanks.
There is one US population group that costs the least to keep healthy … at least as healthy as all other groups. That is the group of UNINSURED. People spending their own money get the standard outcome while spending less. Why don’t we study this group as the exemplary set and find a way we can all do as well? (The total uncompensated care is only 2-3%, so I know this group is not getting very much care they don’t pay for.)
Faithful reader and dutiful student.
Frank:
It is the govt that fixed prices via medicare and medicaid that “fixed” into play the VBMCIBCS system.
Free market alternatives are out there, but not doing as well due to the overwhelming power of the govt and insurance controlled market.
Look to lower priced retainer options for primary care. Health savings accounts to have individuals have some “skin in the game”.
The object is not to throw more money that we do not have into a bad system, but to reform the system. The govt and insurers own this system. I say lets put them in the back, and let the free market create the new one. That will bring cost efficiences into play.
I disagree with the #1.5 billion estimate; the real cost will be much more. They can wring a few inefficencies out of the system, improve lifestyles a bit, etc. but none of that will compensate for the price increases brought about by adding tens of millions of people to a system where basic purchase decisions are made by third parties. Unless individuals spend their own money, that money will not be spent wisely.
The conventional wisdom is incorrect–it is not health care costs per se that have been the problem–is is the INCREASE in health care costs that have been the problem.
In effect, all these plans are attempts to repeal the law of supply and demand: if demand increases, prices have to rise to attract sufficient capacity.
When President Lyndon Johnson signed the original Medicare bill, he reportedly turned to one of his key advisers and said “And the best thing about this is that it will only cost $500 million.” Yeah, right.
What’s needed is not a plan to give additional services away, but actions that would enocurage more individuals to make their own purchase decisions, increase the influence of true market based decisions, drive inefficiencies out of the system and minimize cost increases. It is disappointing that the market seems to have no constituency.
Surely, you can’t just accept that 12000 figure.
The reason we spend more and get less than the rest of the world is because we have a patchwork system of for-profit payers. Private insurers necessarily waste health dollars on things that have nothing to do with care: overhead, underwriting, billing, sales and marketing departments as well as huge profits and exorbitant executive pay. Doctors and hospitals must maintain costly administrative staffs to deal with the bureaucracy. Combined, this needless administration consumes one-third (31 percent) of Americans’ health dollars.
This is because private insurance bureaucracy and paperwork consume one-third (31 percent) of every health care dollar. Streamlining payment through a single nonprofit payer would save more than $400 billion per year, enough to provide comprehensive, high-quality coverage for all Americans.
Single-payer financing is the only way to recapture this wasted money. The potential savings on paperwork, more than $350 billion per year, are enough to provide comprehensive coverage to everyone without paying any more than we already do.
From Krugman:
That’s all the evidence I need that the savings were just smoke and mirrors. It’s the same as saying, “If we force employers to pay for it, it won’t cost anything.”
Paul, I think you are exaggerating the “lifestyle” impact on overall healthcare costs. It seems to me that in a world of non smoking Tofu eating slim and trim health nuts we would still have similar healthcare costs. Unless you propose that these completely fit health nuts will become immortal, it is apparent that they too will eventually get sick and need healthcare (and probably take a lot longer to die using up even more care).
Seriously, “lifestyle” is the peripheral issue if anything might be so described. The real key is placing the incentives in the right place, and that is at the pocketbook of the consumer, regardless of his eating habits. If the consumer is being impacted negatively financially he will not only seek healthcare differently, but (in the case he has a lifestyle that is expensive from a healthcare standpoint) he might well change that also.
The thing is that there are more than just obese smokers who are contributing to healthcare overuse, and focusing on the whole population is the obvious choice.
Interesting. So our problem is too much competition. I never realized before that single-payer and government option people were diametrically opposed.
John,
I know what you had in mind. However, Congress cannot really legislate the incidence of a tax; nor can it legislate who will “pay” for health care. It would be nice if a sales tax that was hidden by saying the seller paid it actually made sellers pay, however that tax would not be substantially different from a sales tax that was added at the end of the bill and said to be paid by the buyer. The same is true about the incidence of health insurance.
You and I have always recognized that employees pay for their own health care by their productivity — it is not “given“ by employers. So any plan that forces employers to have insurance is akin to forcing them to pay in healthcare rather than dollars. These various “plans” should be viewed as simultaneous taxes and forced wage payments in kind.
Has anyone computed the current cost of the health care of the uninsured: ER admissions, spread of communicable disease, extra cost of a more serious medical condition caused by putting off treatment until things are out of hand, postponed pre-natal care, missed doses of medicines due to the inability to pay (causing drug resistant strains), infant mortality, and so on? Your point below can only be assessed in comparison to this figure.
“Single-payer financing is the only way to recapture this wasted money.”
I guess the Government is much more efficient than private enterprise. That would explain why Amtrak and the Postal Service are so darned profitable. Oh wait….
SAD but very true.
Mike, you don’t have to look at Amtrak and the Postal Service. Just look at healthcare funding today. Between Medicaid, Medicare, Federal Employees, and the military, the feds already control a huge proportion of healthcare spending in the nation. And Obama wants to give them more??
Frank, You must be on the left coast:) It’s quite different here in the Midwest. I do get to study this stuff every day and I can tell you that lifestyles are the root problem. I was just reviewing a medical history application for an individual who was born in 1953, is 5’4″ and weighs 247lbs. I didn’t even have to look at the rest of the form to know the person was a diabetic, had hypertension, heart disease, among other problems. Consider that 25% of the population is diabetic, and another 20% are pre-diabetic. 2/3 of U.S. adults are overweight or obese and 1/3 of U.S. adults are obese, and that is only getting worse. Heart disease is almost entirely preventable with diet, exercise, and medication. People with Type 2 diabetes and who are over 50 almost always are obese and carry many co-morbidities, such as heart disease, hypertension, organ failure, and cancer. Most cancers are at least impacted by diet/exercise. We would need to make a relatively small on the top 25% of at risk individuals to have a large impact on costs!
Beverly,
You are correct about the individual markets in some states. There is also the ability to offer incentives in a group health plan, tied to outcomes such as body mass, cholesterol, and blood sugar. The incentives cannot exceed 20% of the insured rate for employee only and 20% of employee/spouse rate if the spouse is included. This equates to roughly $70/month for employee and $140/month for employee/spouse. So it is permissable to require that an employee pay a reasonably large surcharge based on health outcomes.
Historical note: Robert A. Heinlein popularized the use of TANSTAAFL in “The Moon is a Harsh Mistress.”
A quicker read than Atlas Shrugged, and an entertaining exploration of ways of organizing a society that differ radically from those proposed by the leftists that have been on the long march through U.S. institutions.
I guess it’s time to throw in a bit of history if it makes any difference. I’m sorry I didn’t keep track of when everybody had a “right” you know all these “entitlement issues.” Back in the old days, before there was health insurance, people paid their own way and there were lots of us who had it in a bad way but we knew who we were and we knew how to make it better. The burden of our expenses were on our own shoulders and if it became to much we turned to the “city funded hospital programs.” When insurance came along so did the cost of medical care. I guess I’m having trouble being “my brothers keeper” when I believe my brother can do more or live with less. It’s not a new concept.
Paul, I don’t deny the existence of 5’4″ 247 pound diabetics, and I don’t deny that many of these people could improve their health with lifestyle changes. What I object to is the notion that a bureaucrat who has the arrogance to presume he knows the best lifestyle choices for others might be given the power to financially penalize others for their non adherence to his point of view. That is a slippery slope, and the presumed short term financial advantage is hardly worth the long term penalty paid in Statist gains from increased top down personal management.
On the other hand, if that 247 pound diabetic has to foot the bills for much of his healthcare, he might very well pay attention to the reasons for his extensive healthcare expenses. Let him pay directly for his shortcomings, not through an institutionalized underwriting process. If we offer high deductible (catastrophic) insurance at an appropriate rate, there should be as miminal medical underwriting as possible, and an absence of prejudicial lifestyle engineering.
John,
As a letter to the editor in the Wall Street J. asked today, when 40 countries have greater life expectancy than USA, they must be doing something right.
Vested Interest on all sides. Who do you trust? Health Care Insurance Companies and private hospitals? Is Medicare more efficient than Private Insurance Companies? Medicare would win this honor– a secret that industry does not want to discuss. Is the public more satisfied with Medicare, a public insurance organization, or private insurance companies? Medicare seems to win again.
What is the most efficient organization in doing a job with less waste in administrative costs? Social Security.
When the opposition gets up to speak in Congress it is very interesting how they are not able to think for themselves. They use the same wording, same lines given to them from industry– called private health care industry.
Bottom line, can we continue to have no cost controls and spend 18, 20 or 25% of our GNP and get less per dollar spent than any country in the world every year? Now, the industry will be very happy to have 50 million new clients added to private insurance with bills paid by US Citizens or tax payers that they claim to be worried about so much. Similar results to the misguided Part D Drug Plan add on to Medicare. At least it did not cost as much as predicted. However it may have been the most poorly designed approach to expanding access that man on this planet could have designed. Who designed it? Pharmacy Industry?
Many of my physician friends now understand that private insurance world is not their friend. They all pay vast amounts of money to pay for staffs or others to bill over 1000 insurance companies. Why are so many physicians now in favor of a public system alternative or single payer model? Have they gone brain dead?
what about the 2000 pound elefant in the room? namely what it costs doctors and clinics and hospitals each year in excessive liability insurance premiums because we are a sue everybody you can society. tort reform on the national level is the first order of business if you want to reduce and stabilize the cost of health care. all those 100,000.00 a year liability ins. premiums are “not” paid by the medical establishment – they are paid by all of us as passed along costs drastically raising the cost of all health care and health ins. premiums. everybody contact their congressmen and senators and “demand” tort reform and we’ll all be able to better afford health care and health care insurance no matter what form it finally takes.
John,
One of the major problems is that no one can agree on the basic facts/numbers used to calculate all the cost projections that we all argue about. Each number is sourced from a famous “think tank” which therefore means it’s accurate. As an example in this alert (July 13th) you quote the that “good old” 47 uninsured number as does the Administration and every talk show host–yet you and many others have presented data that clearly shows this number is significantly overstated. If the data upon which we are designing the solution to our Health Care crisis is significantly flawed then it doesn’t take an expert to predict the outcome–whatever the solution it will be DOA. It would be great if you and at least a critical mass of respected experts would compile THE BOOK of basic data/facts– the Holy Grail of Health Care. Then we could have one source upon which all the ensuing arguments relative to the design and efficacy of proposed solutions could be based and quoted by the Administration and David Letterman.
Life expectancy is at best a crude measure of health care as it is affected by such things as drug abuse, homicide rates, accidental death, automobile accidents, and a variety of genetic factors that are not well understood.
As for physicians having to deal with 1,000 insurance companies, if physicians supported cash payment rather than some kludge of a government payments system, they could replace dealing with third party payers with dealing with Visa, MasterCard and Discover. Much easier according physicians who have shifted to cash practices.
I really enjoy reading your column.