A Reflective Christian

All for God’s Kingdom

Reason for the high costs of health care

With the recent media attention on the costs of medical care and reforming of the health care system, I figured it would be a good idea to try to articulate some of the different factors in the US health care system that is causing the rise in health care costs.

1) Desire for profit – I am purposefully avoiding using a term such as greed, which has no real agreed upon qualifications (Is any profit greed? Is profit a certain amount greed? Or is greed performing certain types of behaviors to make a profit?). However, I will readily agree that there is greed in the system that helps raise prices, but that there is also a lot of “justifiable” profit.

For every person who has a part in the medical field, as with any other career field, the person expects to receive “more” (although no necessarily in money) than they put in. Otherwise, they would be recieving nothing for their time and effort, and with their own individuals needs cutting into what they have, they would eventually be left with nothing. Now, if society took it upon themselves to take care of all the needs of people working in the medical fields, they would not have to make a profit on their services and goods in order to continue to thrive.

There are also some practices that are made to ensure or increase the profit of a particular group, frequently at the monetary loss of another group (although, money is not everything, and there may still be a gain as whole). This becomes especially frequent when there is little resistance against rising prices, where there is relatively little competition in the field.

This is rather a generic observation, but because it is one that is true for all career fields and not just medical fields.

2) High costs of discovering medications – The costs of discovering new medications are enormous, sometimes reaching into the billions. The amount of employees, time, resources, machines, and knowledge needed to be able to produce a new medication is real high. Furthermore, many medications never make it to market and thus create costs that must be made up elsewhere if the company is to continue to thrive. Otherwise, one failed medication could potentially bankrupt a company.

3) Patenting – After a company develops a medication, in order to be able to regain the money they lost, they would need to be able to recieve a monopoly on the product for a number of years before generic pharmaceutical companies would be able to make it also, forcing the costs to go down. Without patenting, any company could immediately make a drug that another company discovered, increasing the risk that a pharmaceutical company would lose money on making a medication. Therefore, there would be the reduction in companies that actually discover medications because it would in fact be determental to the owners/shareholders of the company.

4) Socialized medicine in other countries – When other countries regulate the amount medications cost in their borders, it will naturally raise the costs for medication in countries where pharmaceuticals is part of a free market. For illustration, say it costs $1 billion dollars to discover and produce 100 million pills of a medicine. If half are sold in free markets and half are sold in regulated markets that average $2 a pill (meaning they make $200 million in those countries), it would require $800 millon dollars to be made from the free markets in order to ensure a break even point. That means that each pill would have to cost 300% more at $8 a pill.

Not that that illustration accurately conveys the actual costs and distributions for pharameceuticals, nor does it include profits, but it illustrates that where some countries regulate costs, others have to make up for it. But it still make financial sense for pharmaceutical to sell in regulated countries (so far as the costs of each indivudal pill is exceeded by the set price).

5) Barriers for corporations to enter into the medical field – The more regulated a particular field is, the more barriers there are to entering into the field. When it pertains to medical care, regulation is involved in many aspects by the US government. This insures a higher level of quality for medical care, as I am sure no one wants to go back to the day where you have snake oil salesmen, but it also decreases competition by creating greater overhead and continuing costs to enter into the field. So the higher costs get trasmitted to individuals, along with a lack of lowering force against the costs.

6) Barriers for individuals to enter into the medical field – This is related to the previous point, but it manifests itself is some subtly different ways. For instance, for people to become physicians, they have to spend nearly in a decade in school (when one takes in college, medical school, and residency) where the individuals have to incur enourmous debt and are unable to bring in substantial income (as opposed to an engineer, for instance, who can enter into the field after four years and make a substantial incomce relatively quickly). Firstly, this reduces the number of people willing/capable to enter into the field. However, it also raises prices of medical care by doctors who have to pay back their school loans and also are behind in accumulating wealth (not necessarily in a greedy sense, but other things such as funding retirement). Again though, these barriers to entering into the field insure that physicians as a whole can provide better quality care.

7) Medicare and Medicade – Medicare and Medicade do not agree with physician groups a rate of reimbursement (unlike insurance companies) but rather develop prices that are fixed. For instance, Medicare reimburses a fixed amount based upon the diagnoses, not the different things necessary to determine the diagnoses. For instance if a certain diagnoses can be generally be determined without using an MRI, but in certain instances it will require it, reimbursement that was determined without the costs of MRI will not cover that procedure. Thus doctors and hospitals either raise the severity of the diagnosis or they are left to cover the costs elsewhere, typically from other persons. That is just one instance where government reimbursements do not cover the costs of medical care.

8) Lack of payment of medical bills – This is a big factor that amplifies all the other factors to raise medical costs. In principle, for every dollar that a person is billed that is not paid for, another dollar is charged to other persons to make up for the lack of reimbursement.

To illustrate and assuming a minimim medical cost, for every $5 worth of billing, $1 is not paid. In order to make up for that, the people who would pay $4 actually would be billed $5 for a total billing of $6. That is a 20% markup. However, it doesn’t simply end there. Some of those persons who could afford medical care previously would not be able to afford it at the 20% markup. If default rate goes to 10%, then 50 cents would would have to be made up from the people who could pay, so then they would pay $5.50, with total billing reaching $6.50. And again, certain person who could pay couldn’t with the second increase. So in this hypothetical case (the percentages were determined for ease of illustration, not based upon any statistical data), in order for the hosptials and doctors to be reimbursed for every $5 of costs, they would have to bill $6.50, a 30% increase.

One this my illustration does not take into consideraton is population distributions tend to follow a bell shape curve, so wealth was presumably follow that curve. However, for every dollar you raise costs (up to the mid point of the bell curve), you get more people who could not pay than you had with the prevous dollar increase. Theoretically then, as you raise medical costs to make up for other’s inability to pay, you create more people who can not pay at a greater rate relative to rising costs. To put this simply, if true, this would mean rapidly escalating medical billing. This hurts particularly those who are already poor though, because people with greater wealth have medical insurance that is essentially a guarantee of payment. Guaranteed payment allows hosptials to bill less (hence why medical insurance becomes a bargain), but in doing that, they do not make up the losses from others as much from the insurance companies, thus placing the burden on those without medical insurance who can not guarantee payment.

9) Demand for high quality care – Whether it be accomplished through regulation or through market forces, Americans demand high quality care, which naturally increases medical costs. However, because there is not great amount of competition, most hospitals and medical care facilities move towards providing higher quality care, including things that are not directly related to medical care such as private rooms. That means that there are relatively few places that are geared towards less wealthy individuals. In the free market, universally demanded goods generally generate different sub industrties, some geared towards the wealthy (producing higher quality for high prices) and some geared towards those who have less (cheaper prices for less quality). A good example is the difference between Target (higher quality) and Wal-Mart (cheaper prices). But with the relative lack of organizations and corporations in the medical field, they tend to be move towards where profit is maximized, that is by providing higher cost, higher quality care. But there is little alternative for the less wealthy, so they have to use the medical systems that are geared to the wealthier, with the costs that come with it.

10) Stagnating economy – When insurance companies take a premium from people they insure, the premiums they take from all individuals do not necessarily cover the medical costs for all the medical costs they incur over the long haul. Medical insurance is in fact a bargain, as expensive as it might be. Insurance companies (and not just medical insurance) rely upon investing the insurance premiums into the market, in hopes that investment returns will make up in the difference in premiums and medical costs.

So, when the economy has been stagnating (as it really has over the past decade), you will naturally have a rise in insurance premiums to insure that medical costs, present and future, can be covered. While this creates volatility in insurance premiums, it means that people being insured do not have to bear all the costs themselves for medical insurance.

11) Increase in life expectancy – As people live longer, their bodies are more susceptible to health problems. Thus as age increases, so do medical costs to insure longevity and quality of life. So when a society as a whole is having higher life expectancy, they will naturally incur greater expenses as a whole later in life. However, if some do not reimburse (either out of pocket, government programs, or insurance) hosptials, doctors, etc. for their expenses, it has to made up elsewhere. So increase in life expectancy of a nation would tend towards an increase in medical costs across the board.

12) Low infant mortality rate and better pre-natal care – With the ability to save the lives of infants who would have otherwise died, you bring in a group of peoplewho on the average would not be as hardy as other persons might (though this is not true for ever individual case). By doing this, you raise the potential number of medical problems that have to be addressed in the future, along with the ensuing raising of costs of everyone. (To be clear, I am definitely NOT complaining about this, as I myself was a person who could have been still-born if not for the intervention of a physician).

13) Baby boomers – As the baby boomer populaton continues to age, they are having more and more medical issues that require more action. Again, this relates to higher costs across the board.

14) “Far-flung” medical infrastucture – In principle, it is cheaper for one hosptial to serve a certain population in one location than for two hosptials to serve the same number of people in two different locations. But in the US, you have a large number of people who live in rural areas that are being provided medical care. This requires an infrastructure that is wide spread, incurring greater costs. For instance, in Mississippi, every county has a hopstial, regardless of the population. But in more rural counties, it costs more per patient than it might in a more populous county. However, with regulation in health care, the billing costs tend to be equalized to some degree for more rural and more urban health care. Thus urbanites tend to pay a higher price than they would otherwise (but they also, as a whole, would tend to be wealthier).

I am not advocating necessarily what should and should not be done in order to address medical care in the US. Rather, my point is to try to show why health care is getting more expensive and to illustrate the trade-offs we have made and the potential trade-offs in the future.

In my own opinion, there is nothing that can be done on the governmental level that can actually reduce medical costs drastically. There are too many systematic difficulties that can not effectively be regulated, nor can market forces address the concerns either. I chalk this one up to inherent human limitation that we can not escape, as staving off death has always been diffcult and will always continue to be so.

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August 22, 2009 - Posted by | Uncategorized | , ,

4 Comments »

  1. You know, I was right with you until the end. To throw up your hands and say the government can’t do anything is simply a cop-out. The fact is that people in other developed nations get better health care than we do, for less cost, should suggest that the government can indeed do something.

    You can be sure that the insurance industry would be very very happy if we all just gave up.

    Something can be done – and the first thing to be done is to eliminate the profit motive. For-profit insurance companies must, by definition, charge higher prices than an identical “public option” or “non-profit co-op plan.” Where do you think the profit comes from? This doesn’t even begin to address the morality of improving profit margin by cutting services. Doesn’t that sound like blood money to you?

    The government can indeed do something, and should do something. Politicians need to act like leaders and do the right thing, even if it means taking some political heat.

    I probably shouldn’t plug my own blog, but if you go here you will find an open letter to Democrats in congress, urging them to act bravely and boldly.

    http://hippieprofessor.com/2009/08/20/an-open-letter…ho-will-listen

    Read the letter. Sign on to it. Pass it on to your representatives.

    Throwing up your hands and giving up should not be an option.

    — hippieprof

    Comment by hippieprof | August 22, 2009

  2. Ack – the link in my comment above is truncated and won’t work. Here is the short link:

    http://wp.me/pCaJo-3

    Please – if you do think the government can and should do something about health care – visit the link, read the letter, and pass it on.

    — hippieprof

    Comment by hippieprof | August 22, 2009

  3. Sure, insurance companies would be happy if nothing would happen. And government officials would be happy to have control over health care, as it centralizes power even more. There are no innocent parties and to trust parties beyond the closest families and friends, whether it be corporations or government entities or something else, will always lead to some forms of injustice.

    To trust government regulation to fix the problem that is complex as this because it involves millions of people trying to prolong their life is foolhardy, because such a huge number of people make the societal system so complex that there is no individual or group who has enough knowledge to be able to adequately determine the best for all the population. To say otherwise is to go back to arrogance of modernist forms of thinking where we think too much of our own capacity and knowledge to manipulate towards our own desired ends (or in other words, ignorance of the law of unintended consequences).

    I don’t trust insurance companies to provide good health care to everyone, nor do I trust government to do it either. You may either get good for some, or subpar for practically everyone, but you will never get both. And the utter reality is we all die, we can not escape that fact, and that there are limitations to our knowledge and resources that do not allow us to give adequate care to everyone (limitations equal demand raising costs also).

    And to erradicate the profit motive is foolhardy also for multiple reasons. First, as I describe, profit is about increasing the resources you currently have for future usage. It is necessary because if you only have a certain amount of resources, and you consume some of them, you will have a dwindling number. Profit is necessary to match consumption. To get rid of the profit motive is to say to people in the insurance field that they are obligated to provide health care totally at their own cost, with nothing in return.

    Secondly, it belies fundamental behavioral psychological principles. People do things for a reward. You take away the reward for something, said behavior will decrease. And to trust it to government institutions, one has to ask what reward is there for ACTUALLY providing good health care to all? Politicians only have to make you believe they are doing the job, as their election is not based upon actual objective performance according to some universal standards, but according to the varying perceptions of performances.

    In other words, the problem with health care isn’t with corporations, it isn’t with the government. It is with everyone involved, with the greed and deceit that all persons may practice regardless of sector (private or public), with the limitations upon knowledge that we all have, with the inescapable fact of death itself. We are running up against a wall we have no way to knock down, and we continue to try to run into it and give ourselves a bigger headache in the process.

    Comment by Owen | August 22, 2009

  4. I know I shouldn’t start online debates unless I have a lot of time – which I don’t today – but here is a quick response.

    I will conceded that healthcare reform is a complex problem. It isn’t just the government or the corporations or the consumers.

    I will NOT concede, however, that nothing can (or should) be done. I think a government-run public plan is part of solution.

    If a government-run public plan will be so horrible and inefficient, then why is our current private health care system more costly than in other developed nations? Why, despite the cost, is the quality lower than in those other developed nations? We are paying more and getting less. Those other countries all have public options – and in many cases that is the only option. Is our government so much more corrupt and inefficient and bureaucratic that we can’t do at least as well?

    I understand the argument that a for-profit system encourages innovation. That is certainly true in lots of industries. But is it really true in the insurance industry? Are there really so many new innovations out there in actuarial science? I doubt it.

    One last quick point. If non-profit options would really be so much less efficient and would really provide such poor care, why are the for-profit companies running so scared? If the private companies believed they could provide a better and cheaper product than the government, they wouldn’t be spending millions to defeat reform.

    But they know they CAN’T compete, and they are running scared….

    — hippieprof

    Comment by hippieprof | August 22, 2009


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