$2 Trillion of Fun (Part I).....

The Presidential election is swinging into full gear, and Michael Moore has a new documentary out. Throw the two in a blender and today’s topic to puree is healthcare.

Depending on who you talk to our nation’s healthcare system is either tops in the world, in a state of crisis, or just plain sicko. When it comes to healthcare, “experts” and lawmakers don’t agree on much of anything. That is except for the costs, which are unanimously agreed upon as: “exorbitant and increasing every day."

As a nation we spent $2.1 trillion on healthcare expenditures in 2006 according to estimates by the Center for Medicare and Medicaid Services (CMS). And the buck doesn’t stop there. CMS projects expenditures will be over $4 trillion by 2015. Per person healthcare spending, currently around $7,000, is projected to be over $12,000.

Of perhaps more relevance, healthcare spending continues to increase faster than the overall economy (particularly when compared to GDP and wages). Since 1970, health care spending has grown at an average annual rate of 9.9% (about 2.5 percentage points faster than GDP). As a share of the economy, health care has risen from 7.2% of GDP in 1965 to over 16% of GDP today. Meanwhile, the national wage average has increased only 4.5% annually over that same interval.

Nonetheless, most corporate employees under the age of 50 nonchalantly shrug off those eye-popping figures; employers still pick up the lion’s share of their healthcare costs. A typical employee might see $30 - $60 subtracted from every paycheck. Employees also incur co-pays when visiting a doctor or paying for drugs, but it's typically a nominal amount. In turn, our $2 trillion healthcare tab doesn’t hit home for most white-collar Americans.

Also in the “not overly concerned” category are approximately two million young Americans who choose to be uninsured. Most lack year-round employment and access to insurance from an employer. This backpacking age group rationalizes that youthful vitality will carry them through any (sure to be minor) illnesses. $1200 a year for insurance hardly seems like money well spent when Advil cures 99% of maladies.

At the other end of the age spectrum are a set of retirees who vote and take their healthcare coverage extremely seriously. Lawmakers know this. Accordingly, the chances that elected officials will suggest that retirees pay noticeably more for their Medicare coverage are nil (about as likely as a congressman signing up for an exploratory mission to Neptune). Said another way, if our healthcare system is going to need an overhaul, the elderly shouldn’t be counted on to foot the bill.

Hopefully these examples show the starkly contrasting nature of the issue. Healthcare entirely depends on an individual’s needs, in conjunction with the onus to pay. For a young, employed American, healthcare is barely a blimp on their radar. For an elderly citizen or an uninsured, middle-age worker, there isn’t a single topic of greater importance. Now consider those realities in conjunction with the Zeus-like influence of insurance and pharmaceutical lobbyists; healthcare becomes a real-life (over-sized) Rubik’s cube.

And so with this and every election cycle, this divisive, multi-trillion dollar issue goes back under the microscope. Knowing as much, this entry will attempt to offer some historical perspective and outline the lay of the land. It will only scratch the surface. Later this week (part II), I’ll look underneath the hood of this political monster.

First things first. Why is health insurance so expensive?
The short answer is that health insurance is expensive because healthcare is expensive. If you only read newspaper headlines you might think that medical malpractice lawsuits, an archaic, poorly administered system, and profit-seeking insurance companies were entirely to blame. In truth those factors are important, leaving canyon-like room for improvement, but they represent only a fraction of our nation’s healthcare costs.

In reality the vast majority of our nation’s healthcare costs come from an increasingly sickly, aging population which wants access to the best doctors, the most specialized medicines, and the most technologically advanced medical equipment in the world (24-hours a day). That reality, in its current framework, just happens to cost more than $2 trillion on an annualized basis.

In 2004 Emory University researchers found that more than 25% of the growth in health care spending over the previous 15 years was attributable to obesity. Treatment for diabetes alone cost more that $150 billion in 2005 (affecting over 21 million Americans). Meanwhile, heart disease -- another condition which stems from controllable characteristics like high blood pressure & cholesterol, tobacco use, and poor nutrition – accounted for nearly $250 billion in healthcare costs in 2005.

I can't help but think of Occam in conjunctions with the $250 billion line items. More to the point, I think the best way to “improve our healthcare system” is also the simple answer: have less healthcare expenditures. In short, we need to become a healthier, better-informed nation of consumers. Not an easy prescription for an increasingly overweight, fast-food nation. Still, there isn’t a scenario under the sun whereby our nation makes a serious dent in healthcare inflation without focusing on preventive medicine, wellness, & healthier lifestyles.

How did the system become so expensive?
Now we’re getting to the heart of the matter. If employers could reverse any one decision over the last thirty years, they would rescind the employer-sponsored healthcare system. What started as an enticement to attract and retain employees has turned into a galactic nightmare for most large employers who face exorbitant legacy costs for aging employees and retirees. Ford Motor Company pays more than $1500 per vehicle in healthcare costs, that’s more than $700 more than they pay for steel.

Admittedly, the system wasn’t always so costly. In the late 1970s when employers began to sponsor healthcare coverage for their employees, the annual cost was less than $400 per person. Three decades later, corporations pay $3500 per person (the previous reference to $7,000 per person includes Medicare enrollees). In recent decades, entrepreneurial drug and medical device companies recognized huge opportunities for profits. Insurers, which have a not-so-altruistic reason to want healthcare costs to rise (more on this in Part II), were quick to bundle newly approved drugs and medical procedures into health insurance plans. The runaway costs sanctioned by insurers and the government were, and continue to be, a major contributor to our nation's ever-increasing healthcare tab.

General Electric is a great example. Using capital and clout, the healthcare division of the corporate giant has grown more than any other business unit. Today, GE Healthcare employs over 46,000 people worldwide, specializing in “medical information technologies, diagnostics, drug discovery, and biopharmaceutical manufacturing technologies.” Not surprisingly, this cash-cow also contributes over $17B in revenue to the company’s bottom line.

It’s hard to fault GE for their capitalistic intentions while simultaneously bringing advanced products to market that improve lives. But therein lies the crux of the healthcare discussion for the coming decades: at what point will the supply/demand curve for superior products (at obese prices) prove too costly for the general populace? In turn, at what point will standardized insurance products be scaled back to cover primary and catastrophic care only, eliminating most specialty drugs and procedures in order to reduce costs? Finally, what will voters and lawmakers say about healthcare then?

Your Taxpayer Dollars at Work (Medicare and Medicaid)
Medicare, a program administered by the U.S. government for people who are 65 and over, is like daddy’s gun rack in the basement: mess with it and you’re asking for a biggie size spanking. As previously mentioned the 65 and over demographic is a huge voting block (with similar feelings about healthcare as a four-year old has about Santa Claus). If an elected official even mentally ponders a curb on Medicare funding, the AARP sends a telepathic message with a byline from Dante.

The government’s current Medicare bill is in the neighborhood of $300B. Knowing what we know, it’s safe to say that tab is going to increase for decades to come (think about all those voting baby boomers about to retire). With life expectancy steadily on the rise and another prescription drug bill recently passing through Congress, it’s realistic to start thinking about Medicare in trillion dollar terms.

Medicaid, on the other hand, is targeted towards individuals and families with little income and resources. It is jointly managed (and funded) by all fifty states and the federal government. It is estimated that nearly 43 million Americans received health insurance through Medicaid in 2004, nearly 20 million of which were children. Medicaid payments assist nearly 60% of all nursing home residents and about 37% of all childbirths in the United States. Medicaid funding ebbs and flows with the political party in power, but the overall federal budget is currently in the neighborhood of $175B.

Consumer-Driven Healthcare
Consumer-driven healthcare is a marketing term created by insurance companies to describe a series of tax-advantaged healthcare plans that were passed by Congress. It is today's en vogue solution, designed for the private sector, in response to escalating healthcare costs. These consumer-driven plans combine a traditional health insurance plan (PPO) with a tax deductible Health Savings Account (HSA) or a Health Reimbursement Account (HRA).

The primary goal of these plans, as argued by advocates, was to empower consumers -- allowing individuals and employers to fund a special (tax deductible) bank account to cover healthcare costs. The account could belong to the employee (HSA) or the employer (HRA), either of which would have the same tax benefits. These insurance plans were required by law to have a deductible of $1050 or more for an individual ($2050 for a family). Thereby, theoretically, enticing the consumer to make cost-centric decisions before scampering off to the emergency room for a checkup.

The inherent reality is that consumer-driven insurance plans do not address the underlying cost of care. Rather, they merely repackage a standardized plan with a tax incentive and a higher deductible. Still, these plans are being touted by the likes of Newt Gingrich as the way forward. Employers are also warming up to the plans as they look to defray additional costs onto employees.

If you haven’t heard about consumer-driven healthcare plans yet, you're likely to before long. Insurers and employers have been looking for creative ways to force healthcare costs onto employees. These plans look like their primary answer.

Some advocates suggest that the federal government should manage every American’s health insurance (called a single-payor system). Would this framework reduce our nation’s healthcare costs?
This is the most hotly contested question of the last twenty years amongst lobbyists and special interest groups. Having acknowledged as much, the short answer to the question is: “yes, yes (you bet your bottom dollar) yes!” The government could use its leverage to negotiate standardized rates with doctors and drug companies while administering each individual’s insurance in a cost effective manner. In doing so the government’s goal wouldn’t be to maximize profits (as is the case with today’s insurance companies), but to provide the best possible suite of healthcare solutions to the American public at the lowest possible price.

Not only that, but if every American received insurance from the government, the burdensome “risk-sharing” element of private insurance would be a non-issue. Currently, small employers and/or individuals who buy private insurance are unable to adequately spread out their risk: one sickly individual will always do a small group in (typically causing the group’s insurance premiums to be raised to the maximum allowed by law). Accordingly, these small employers (or individuals) always pay more than the average employee of a large corporation -- or worse, they are completely denied coverage by private insurers.

If the government bundled everyone into one system, the collective risk would be spread out across every American. Then, a portion of each individual’s premium would be set aside to cover expensive, outlier cases (like pre-mature triplets or kidney disease patients). It would be the ideal means to manage the nation’s cumulative health risk.

Unfortunately, a single-payor system is incredibly unlikely despite its merits. Later this week, we'll drill down into that and a variety of other politically charged issues and motivations.