Healthcare from 85,000 feet

Health care spending is growing faster than GDP across all advanced economies. OECD average spending per capita was up 3.9% in 2009. Results in the US were far worse. We spent $7,860 per capita vs the $3.223 OECD average. Our life expectancy was 77.7 years vs 79.2 for the OECD. What’s going on?

Life expectancy was low everywhere a century ago because if you got sick you died.  It was 47 years in the US. Then came antibiotics that could restore you to full health and productivity.  But more recently came treatments to keep you alive when you cannot be returned to full health.  This is a fundamental problem for all advanced nations, an increasing percentage of their population costs more than average to keep alive and is less productive.

Obese people, for example, now live longer although much of their extra time is spent in ill health.  Their annual medical bills are 42% higher because they are prone to diabetes and other diseases. The CDC recently attributed $147B a year in US medical costs to obesity, over 9% of the total. Obesity-related health care costs are projected to rise by nearly $265B p.a. between 2008 and 2018 while annual Medicare expenditures increase by about $360B. That means much of the rise in Medicare spending will go toward treating obesity-related diseases.

But why is US healthcare spending so much higher than other advanced economies with poorer results? First, a few more stats because it’s said by those who can afford the best US health care that our system is the world’s finest. The truth is that while our best facilities and practitioners are among the world’s best, our system is not.  It is in fact fast growing worse.

US health care spending was 8.8% of GDP in 1980 vs the OECD average of 7.1%. Sweden’s spending was higher at 9.0%, Canada spent exactly the average and Japan spent less at 6.5%. By 2009, US spending had grown to 17.4% of GDP vs the OECD average of 9.5%. Sweden spent just over the average at 10.0%, Canada’s spending rose faster to 11.4% and Japan’s remained below average at 8.5%. Despite Japan’s relative under-spending, however, its life expectancy was the highest at 82.1 years. Sweden’s at 80.5 and Canada’s at 80.2 were also above the OECD average of 79.2. US life expectancy was a year and a half below average. US child mortality is the highest among all OECD nations.  We spend too much and get too little.

US health care delivers poorer results at higher cost because it is based on the flawed assumption that market based systems always deliver the best results. While in most cases they do, for health care they do not. The incentives are perverse.  In the US we pay per procedure which means providers are incented to provide procedures, the more profitable the better.  UK and other OECD doctors are paid a straight salary or per patient so their decisions are guided by their profession’s code of ethics not their own profit.  Incentives drive results.  That’s why we put so much effort into sales force compensation systems.

The second problem results from the fact that US health care services are paid for chiefly by insurance. This produces bad results because of asymmetric information, adverse selection and administrative/legal costs. Asymmetric information means the customer inevitably knows more than the insurer. The insurer must assume the customer is a higher than average risk, so he increases prices for all customers to cover that risk. Adverse selection means that because prices are artificially high those who take out insurance are likely to be high risk. Lower risk customers self-insure. High administrative and legal costs are inevitable to control such a system.

So how will this change? I have no prediction for the US except that the current system is so far from sustainable that it will change radically.  If something cannot continue, it does not.  The approach I believe our Founding Fathers would adopt if they were alive today would be similar to other OECD nations. Contributions to Medicare would be increased to make it self-supporting and all citizens would be covered, both the sick and the healthy. But we may move further toward a system where only those who can pay for health care can get it, the same as emerging nations.

The overall direction of health care is toward increasing automation and globalization, especially chronic-disease management which accounts for 75% of health care spending in many OECD countries. France Telecom, for example, is partnering with health care providers to offer services that constantly monitor diabetics and cardiac patients remotely. Low-cost mobile-monitoring devices ensure better compliance with treatments and reduce the number of high-cost, life-threatening events. Germany’s T-Systems has linked with health insurance provider Barmer to provide mobile systems that track and monitor exercise patterns so patients and doctors can monitor progress and reduce risk.  Cheap EKG monitors can be attached to smart phones. US and other “medical tourists” already go to Bangkok, Singapore and etc for dental and other high cost elective surgery just as US enterprises buy components manufactured in China. In the long term, only automation and globalization can cut the cost of supplying health care services.

The greater question is whether we can cut demand. Every one of us will die but most of us behave as if we will not. Most of us will get sick as we approach the time of our death.  A high fraction of lifetime health care spending for most people is in their final months.  It would be better to redeploy spending to forestall inevitable death on making the rest of our life happier.