Wednesday, October 4, 2017

US Healthcare Structure, Costs, and Potential Solutions

In this post, I'll discuss the financial structures of American healthcare. This post will mainly be about the cost structure and also relative comparisons to the rest of the developed world. First comes first: the US healthcare system is mostly private (unlike most OECD). Secondly, the US spends more on healthcare as a percentage of its income (GDP) than any other country in the planet. And when we look at absolute costs, there's only 1-2 countries that have higher healthcare costs and that's only because they're smaller and much wealthier per capita--largely cuz those aforementioned places are international financial centers (ex. Switzerland).

The basic structure of US healthcare is that it's mostly driven by employers providing health insurance for their employees. In addition to that, the US government provides health insurance for the elderly (those >65). The bill passed in 2009 called the Affordable Care Act ("Obamacare") set in place some set of laws that banned insurance companies from discrimination for those with pre-existing conditions, it forced employers with >50 employees to provide health insurance for their employees, it forced all insurance companies to cover some basic services called "Essential Health Benefits", set up state exchanges where insurance plans could be purchased, and set up an insurance mandate so that everyone who doesn't buy insurance must pay a fine.
Note: There were many other changes in the ACA, but they're way too long to cover. If you care that much, just read the entire bill.

Problems and Cost Structure of US Healthcare:
As I said, the primary problem in US healthcare is the cost. In relation to every other OECD country, the US is the only country to not have a universal healthcare system. Not only does the US not have a universal healthcare system, but the US also pays more for healthcare per capita by any other country BY FAR. It is not close (as seen in the chart below).

If we look at the cost of health care as a histogram of the population, we notice something very interesting about the US. It turns out that the total costs of the American healthcare system are actually quite low for most of the population, BUT a small percent of the population every year accounts for a disproportionate amount of total cost. I have found distributions for 1996, 2002, 2009, and 2012 and virtually all of them look almost exactly the same in terms of the structure of the histogram. Since 2012 data is the closest to today, I'll use 2012 data.

As we can see from the histogram above, ~1% of the population accounts for ~22% of total cost, ~5% accounts for ~50% of total cost, and ~10% accounts for >65% of total healthcare costs. What does that mean? It means that most of the cost is only accounted for by a few percentage of people. If we look at spending on sicknesses like heart disease, cancer, asthma, trauma, and mental disorders, we see that most of the spending from those key factors are from only 5% of the population.

On top of this, we have a rapidly aging population that's relatively unhealthy. Naturally, there'll be more sick people as a population ages. That will mean total costs will rise unless there's some kinda cap or government directed rationing or something of the sort put in place (which can happen by high prices for certain treatments). We've also seen a rise in the amount of administrators relative to doctors and medical practitioners. The rise in administration as a part of healthcare is also a part of what's driving rising costs.

So that brings me to my final point: the biggest problem with US healthcare is THE COST. It is extremely expensive and there isn't much bang for our buck. Due to the fact that employers pay for most of their employees' healthcare costs, it becomes very costly for businesses and employers to ensure that their employees have decent insurance. I have spoken before about wage stagnation in the US for the past ~40-50 years. If we include wages and fringe benefits as employee compensation, they have risen but most of those "fringe benefits" are healthcare costs. When we add in that corporate margins have been rising for ~35 years and have effectively tripled in the last ~30 years.

When you have an explosion in employer side costs for employment due to rising healthcare costs and combine that with surging corporate margins, that means it'll be very difficult for wages to rise. Increases in nominal income, in the end, have to end up in either business profits or higher wages unless they're sucked up by costs. It's commonly thought that the problem with wage gains and the economy in the US is a demand-side issue. That is not correct. The problem with wage stagnation in the US is actually a supply-side issue.

Due to the structure of the American healthcare system and the structure of American business, we've seen wage stagnation driven by supply-side factors. The first factor in driving these costs is rising healthcare costs that're primarily borne by employers. The second factor is rising corporate margins for 30 years that've happened for a whole host of reasons. If we look at inflation, US inflation has been well below the Fed's 2% target but it's also been entirely driven by housing costs, healthcare costs, and education costs. If it weren't for the skyrocketing cost of healthcare and education, US inflation would be close to 0% and we might even be seeing deflation and falling prices. Note that all of this excess cost in healthcare reduces labor productivity and total factor productivity.

Possible Solutions:
Single-payer--The basic premise of a single-payer system is that the government nationalizes health insurance to some degree. This can happen to various degrees. For something like the NHS in the UK, almost all of health insurance and health care is nationalized wherein doctors are actually employees of the government. In Singapore, there's catastrophic single-payer which means that it's a single-payer program with high deductibles. So this would be like a Medicare for All system of health insurance with $5,000 or $7,000 or $10,000 deductibles. For procedures or medical appointments below that threshold, there's other options like HSAs or reimbursements or whatever. One possible solution in the US is some kind of government nationalization of health insurance that allows the government to capture the tail of the cost distribution (or more) and then crush costs by direct rationing or government decisions.

Individual Mandate System--The ACA was designed to be an individual mandate system, but the design of the ACA from 2010 (along with its sabotage) was inherently unstable. As discussed earlier, most of the costs are in the tail of the distribution, so if you place a ban on companies discriminating against those with pre-existing conditions, companies can no longer remove themselves of the costs of clients in the tail of the distribution. So now the costs must be borne by everyone across the distribution, which means the healthy will see their coverage drop and their premiums/copays rise substantially. In essence, we now have a private sector rent-seeking insurance oligopoly of a few large providers that's effectively acting like a monopolized cartel. In that, there's large amounts of rent-seeking which's affecting consumers overall. The most common parallel of an individual mandate system working properly is Switzerland. In Switzerland, they effectively restrict insurance companies from increasing in size and force them to work with healthcare providers in local networks to keep a lid on costs.

Hybrid (Government Tail Support) System--The basic idea here is to use private insurance as the norm for low-risk cases and public support for those who're very sick or have high-cost pre-existing conditions (like cancer). So in other words, the essential idea here is a "high-risk pool" separate from the rest of the insurance pool. There's several ways to design this. One way is to just let anyone with high-cost pre-existing conditions enroll into a single-payer government program (like Medicare) and let everyone else be on private insurance. Then use government bargaining power and direct rationing to bring down costs. Another way to ensure the same thing is to effectively separate the population by age. So older people are either on a direct single-payer program (like Medicare for those >65) or are allowed to buy into Medicare if they're >50-55. Considering most of the healthcare costs are in the tail of the distribution and older people are far more likely to be in the tail, such a system is a way of splitting up the federal insurance pool into two groups: a relatively healthy one consisting of mostly younger people and a sicker one consisting of mostly older people. The latter group will have a single-payer program while the former will be on private insurance. In essence, you'd end up creating a high-risk pool on one side and a low-risk pool on the other.

Hybrid System (Bismarckian social insurance)--The basic idea here is that there's a few things that're necessities which everyone needs and other things are simply things that we want or may desire, but aren't necessities. So in the set of "necessities" like emergency room care or preventative coverage or so forth, the government will provide those to everyone at either affordable levels or totally free of charge at the point of service (it usually depends on income). For all of the healthcare that isn't a "necessity", the system is entirely private. So it's usually the upper-middle class, upper-income, and the wealthy who use the partially private part of the system and the rest is public.

Note: There are many ways to design and structure such systems, but that'd entail a very long, long list that I do not have the time for. Not only that, but it seems rather pointless when I outlined the basic ideas of each solution.

No comments:

Post a Comment