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Healthcare Spending in America

This surprised me.

It is widely assumed that health care, like most aspects of American life, shamefully shortchanges the poor. This is less true than it seems. Economist Gary Burtless of the Brookings Institution recently discovered this astonishing data: on average, annual health spending per person -- from all private and government sources -- is equal for the poorest and the richest Americans. In 2003, it was $4,477 for the poorest fifth and $4,451 for the richest.

Probably in no other area, notes Burtless, is spending so equal -- not in housing, clothes, transportation or anything. Why? One reason: government already insures more than a quarter of the population, including many poor. Medicare covers the elderly; Medicaid, many of the poor and their children; SCHIP (State Children's Health Insurance Program), more children. Another reason stems from the skewing of health spending toward the very sick; 10 percent of patients account for two-thirds of spending. Regardless of income, people get thrust onto a conveyor belt of costly care: long hospital stays, many tests, therapies and surgeries.

That includes the uninsured. In 2008, their care will cost about $86 billion, estimates a study for the Kaiser Family Foundation. The uninsured pay about $30 billion themselves; the rest is uncompensated. Of course, no sane person wants to be without health insurance, and the uninsured receive less care and, by some studies, suffer abnormally high death rates. But other studies suggest only minor disadvantages for the uninsured. One study compared the insured and uninsured after the onset of a chronic illness -- say, heart disease or diabetes. Outcomes differed little. After about six months, 20.4 percent of the insured and 20.9 percent of the uninsured judged themselves "better"; 32.2 percent of the insured and 35.2 percent of the uninsured rated themselves "worse." The rest saw no change.

The Rise in Health Care Costs

From Economist's View

Private Health Care Expenditures

Out-of-pocket payments for health care in the United States account for 16% of total expenditures.  That is down from 55% in 1960. 

I did not know that.

Sicko - Misconceptions about Socialized Medicine

It's free.

So said, Michael Moore, on Wall Street outside of the New York Stock Exchange, when asked by Breathless Maria why he supported socialized medicine on Bubblevision today.

I'm sure he didn't really mean it because socialized medicine isn't free.  It costs thousands and thousands of tax dollars for each citizen every single year. 

But his reflexive response is interesting. 

I grew up in Canada, where Medicare is drilled into Canadians' heads as the single most important differentiator of Canadian culture on the planet (well, that and hockey),  even though, as Michael Moore stated today, 24 of the 25 first-world industrialized countries have a government-payer system for medical insurance similar to Canada's.

And, as a kid, you are told the myth that medical insurance is free. 

Which is why, at least in part, it brings out such a strong emotive response in people who believe in socialized medicine.  It may not really be free, but it sure seems like it. 

This is form of what economists term "money illusion."  It is not free but it seems like it.  And even though logically one knows it isn't, it feels great to believe it is. 

And economists perpetuate this myth that people act rationally over infinite utility curves.

Anyways, that misconception is fairly easy to dispel.  Even those who perpetuate it know it isn't true.

There is another misconception about the costs of socialized medicine that is far more nuanced and not widely understood by its advocates.  Michael Moore spoke about it today, and it goes something like this

Profits should not be made off of health care. 

Moore then went on to say that socialized medicine would "cut out the middleman." Indeed, it would.  But it wouldn't cut out profits.  Here is why.

Profits are the return on an investment.  An investment - any investment - requires capital.  Capital comes from savings.  Wealth is generated by growing savings.  If savings do not grow, wealth does not grow.  If savings decline - i.e. the expenditures from an activity results in less savings - then wealth is destroyed.  Thus, any capital investment requires a return, no matter what the investment, no matter what the use of capital, including health care infrastructure such as health care insurance.

In fact, to avoid destroying wealth, an industry must grow at the rate of its cost of capital.  For example, if your cost of capital is 8% and you earn 4%, you are destroying wealth. 

For any government program that requires capital investment, that cost of capital is either the cost of capital for the industry, adjusted for risk, or the opportunity cost of capital that could generate a return elsewhere, i.e. the return on citizens' collective capital had it not been used in taxation to fund capital investment in the medical system. 

Since the cost of capital must equal the return of capital over time, all other things being equal, and since in the long run, the nominal return on capital for the economy as a whole is equal to the growth rate of the economy, capital investment which is used to support an economy, i.e. infrastructure, or a population, i.e. health care, must generate a return approximating nominal rate of economic growth, otherwise the capital expenditure is destroying economic wealth.

In a for-profit system, the return on capital is captured by the owners of the capital structure funding health care insurance.  In a socialized medical system, the "profits" are dispersed amongst the general population in the form of lower payments for health care services (all else being equal).  The owners of capital in a private system generate a direct return on capital.  In a socialized system, the public generates an indirect, implicit return on capital in the form of lower health premiums, and is the money consumers save which otherwise would have gone to private health insurance companies. 

When looking at the economic benefits of a socialized system, what matters are the returns generated by the savings filtered back to the general public that otherwise would have gone to the shareholders of private health insurance companies.  Assuming the returns of private health insurance approximate the growth in the economy, the returns generated from the savings in the public health care system must be greater than the nominal growth rate of the economy since the returns from a public health care investment is zero as there are no profits.  If those returns do not compensate for the lost returns generated by private  health care, then that is a cost of a socialized medical system.

Thus, removing profits from the system is not necessarily beneficial, as the proponents advocate.  In fact, it may be detrimental to the economy as a whole if the returns generated by the savings are not re-invested at a higher rate than the nominal growth rate of the economy.

Now, there are many, many variables I have not included in this discussion, such as economies of scale, the allocation of capital arising from market signals, etc.  Nor is this a discussion that should focus only on economics.  Far from it.  But we must understand all the costs of our health care system to society, and the opportunity cost of capital is one often overlooked. 

I look forward to watching the movie.

Wal-Mart and Drug Prices - The Political Angle

I'm sure you've heard about Wal-Mart offering over 300 generic drugs at $4 a pop in Florida.  This, obviously, isn't good for the drug retailers such as Walgreen, CVS, Rite Aid, et. al.  Even though much of the Wall Street analyst community has rushed to the defense of the drug stores, increasing competition is a bad investment thesis no matter what the industry.

The drug retailers are saying this will not significantly effect their bottom line. Most of the drugs discounted by Wal-Mart, they argue, are already at the bottom of the pricing list. Also, the drugs offered are a fraction of the thousands of drugs retailed in the United States, which are more expensive than the drugs being discounted. Wal-Mart would be operating at a significant loss if they expand this program, and thus Wal-Mart is unlikely to do so.

I'm not so sure.  One aspect not being picked up by Wall Street and the press is the political angle.  Wal-Mart has been on the receiving end of a lot of bad publiclity over the past several years for allegedly offering low wages and benefits, driving local retailers out of business, and being a catalyst for outsourcing of American jobs overseas.  It has been nothing but bad, bad, bad for Wal-Mart.

How does a savvy corporation shift perception?  Do something for the people you are accused of exploiting, of course!  And what better way to do this than addressing an emotional issue that has hit Americans in the pocketbook - rising healthcare costs. So big, bad Wal-Mart offers cut rate prices on pharmaceuticals. Wal-Mart, like all retailers, offers loss-leaders to get shoppers in the door. Why not make some pharmaceuticals loss leaders? 

This is great PR. Lower drug prices has garnered a whole host of good press for Wal-Mart, and it buys currency in the halls of Washington and legislatures across the country.  That's why I don't think this policy is quite as benign as the drug retailers are spinning.  Surely Wal-Mart will will expand this pricing scheme nationwide, and perhaps they will offer more pharmaceutical products at lower prices.

That spells trouble for drug retailers.

Pharmaceutical Profits

I also found this study of pharma profits on Greg Mankiw's blog.

By standard accounting measures, the pharmaceutical industry consistently ranks as one of the most profitable industries in the United States. Those measures, however, treat most R&D outlays as expenditures rather than as investments that add to the value of a firm. Thus, they omit from a firm’s asset base the value of its accumulated stock of knowledge. For R&D-intensive industries, such as pharmaceuticals, that omission can significantly overstate profitability. Adjusted for the value of its R&D assets, the drug industry’s actual profitability still appears to be somewhat higher than the average for all U.S. industries, but not two to three times higher, as standard measures of profitability indicate.