The Hidden Costs of Health Care

I have been following the current Health Care debate, as many Americans have, with great interest. The US currently spends 15% of its GDP on health care. Families can go bankrupt almost instantly from health care costs. Health insurance companies are known for gouging customers while raking in money.

However, it occurs to me that even if the government is able to regulate insurance companies, it may not be enough. (Those who favor ‘free markets’, I ask you to define free market when an entire industry engages in bad practices). Regulation of insurance may help out-of-control costs, such as $1000 reportedly being billed for a single toothbrush (CNN, March 1), but I think there are deeper problems here.

First, a shortage of doctors and nurses in the US may continue to drive costs up. The doctor to patient ratio in the US is 390:1, and rising. However, if we take a global perspective this is not a significant problem. Here is a nice global map of doctor to patient ratios (http://strangemaps.wordpress.com/2007/10/17/185-the-doctorspatients-map-of-the-world/). Notice that the US is about equivalent to most of Europe, and better off than much of the world. Really extreme ratios exist primarily in Africa, at 50,000:1. China is at 950:1, which means that there are on average two doctors in the US for every one doctor in China. So, we’re actually well off in terms of overall doctor to patient ratio. Why then, is healthcare spending in the US so much higher than other nations? See http://en.wikipedia.org/wiki/File:International_Comparison_-_Healthcare_spending_as_%25_GDP.png

I would argue that there are two main reasons. First, the costs of medication. Interesting, it is quite difficult to find global statistics on medicine costs, because these are often folded into the total medical costs per individual. I am willing to bet that the costs of medication itself, not including doctors and nurses, in the US are far higher than those in any other country. Prescriptions in the US alone have jumped by 61% in ten years, 3.4 billion every year. More interestingly, over the same time period retails sales jumped 250% from 72 billion to 250 billion, and the average cost has doubled from $30 to $68 per prescription (http://en.wikipedia.org/wiki/Pharmaceutical_industry#Prescriptions). The pharmecutical companies have doubled the cost of exactly the same medications. To put this in perspective, during the housing bubble of 2008 the average cost of a house doubled, the aftershocks of which basical lead the country into the current recession.

The second is the hidden cost of medical technology. The US has always been a leader in technology, especially in the later half of the 20th century. With this has come a huge number of advances in medical technology: 3D CT scans, MRI, fMRI, ultrasound. The cost of a single new machine such as a CT scanner can be millions of dollars for a hospital.

For both of these items, medicine costs and medical technology, it is difficult to find good global statistics. More interestingly, these items are hardly ever questioned because they are “essential”. In other words, while doctors pay may seem flexible, people ultimately need medicine. And why wouldn’t someone want the absolute best in diagnostic equipment? I’ve been to the doctor myself, where I would hear things like “Lets do a CBC and a blah-de-blah..” And I would be thinking to myself, how much do these tests cost? Sometimes I would even ask, and the response is almost always “Your insurance should cover it, and you need the test.”

There is a hidden assumption that everyone wants the highest medical and technological care. And its difficult to argue against, because people do. I’m arguing that the costs of medicine and technology are actually what drive the health care problems that the US is currently facing. An interesting study, which I don’t have the economic expertise to undertake, would be to look at medicine costs (not including doctor fees) around the world and historically as a percentage of income. A simple example for an American family of four can be found here: http://www.healthpopuli.com/uploaded_images/Medical-Costs-for-a-Typical-Family-of-Four-701939.jpg
We can combine this information with the median income of a four family household: about $65,000. Thus, out of a total $16,700 bill per year (4 people), the family physician is 8% of total income, medicine is 4%, and hospitial visits are 12%. The combined medicine and hospital costs are 16% of a families total income, not even including the doctors fees. Why is a hospital visit so expensive? Because of all the technology. There an implicit social assurance that hospitals have “everything you need” in case of an emergence, and also an assumption that people expect that degree of care. Yet to find this ratio of medical/technical costs relative to total income for other countries, and historically, would be very interesting indeed.

I am concerned that our health care problems won’t be solved until these more fundamental issues are resolved. They are hidden costs because gouging insurance companies and flexible doctors fees buffer and insulate them. We deal with people at insurance companies, we have to call them. We have to work with doctors. We have a direct personal interaction with them, so we can be skeptical that they serve our best interests. But the bottle of medicine, or the CT scanner at the lab, they are just objects – surely they aren’t the cause of the health care deficit of our country. Pharmecutical companies make medicine people need, and they set the costs wherever they like.

One strategy that I favor would be to highly regulate medicine costs. I know, this defies the ‘free market’. But I ask, what is a free market? Consider the drug Advair (http://www.ocregister.com/articles/drug-38339-prescription-costs.html). This article shows the price is $311 in California, but can be had for $170 in Canada. In Tijuana, the same drug is $51. Lets assume the $51 is close to the manufacturing price within 20%. This means the cost of the drug in California has a 600% profit margin. My point is that this is not limited to some drugs, it is the same with nearly every drug you purchase in the US. People go to the doctors office, they find out whats wrong, they are consulted and consoled, and the very last step is purchasing the medicine – which is a happy moment because you’re now on you’re way to resolving the health problem. We easily overlook the drug costs, until they put us into debt. Is it a free market when it is controlled by a few large companies that collectively set the prices for the entire industry? Free market theory fails to account for industry-wide monopolies, and necessary goods such as medicines.

The industry would have you believe that drug costs across the border are cheaper because their “quality is lower”. But how do we separate the truth of a drugs quality from the profit incentive industries have for you to simply believe its of higher quality. A bottle of Ibuprofen in California says on the label “Active ingredient: Ibuprofen”. A similar bottle in Mexico also says “Active ingredient: Ibuprofen.” Where can this hidden lack-of-quality come in? And how do we measure and report it?

Perhaps federal regulation of the pharmecutical industry is unwarranted. We’re not forced to buy medicines locally, we’re just very strongly motivated to because most Americans see no other choice. But I guarantee that if medical and hospital costs are not resolved, as the middle class comes under increasing pressure it will either result in an on-going recession (as people cover necessary medical costs with further debt), or they will seek solutions in other countries that will provide medicines at a fair market price. Reforming health care by targeting medical insurance companies unfair practices is just the beginning. The real underlying costs must be addressed, and these are not doctors, they are the medicines, and the hospital visits.

The average cost of a hospital visit per day is around $2000/day (http://www.rtihs.org/request/index.cfm?fuseaction=display&PID=6465). This can be in the tens of thousands for more serious conditions (http://www.hcup-us.ahrq.gov/reports/factsandfigures/images/2005/ex_2005_2.4.gif). But lets put this into labor terms. Thats $2000/24 hrs = $83/hour. Sounds reasonable, right? A car mechanic makes about the same per hour. Except in that 24 hours how often are you attended to? Twelve of those hours are spent sleeping as you recover. But in a hospital, you’re being billed for every single hour, regardless of how much “work” it takes to attend to you. And while there may be two or three nurses on staff for the night, your costs are not shared with the other patients in the hospital that evening. Each patient individually pays the hospital $83/hour for every hour there. Lets say you’re actually attended to for 2 hours out of a 24 hour, $2000 bill. That would be a $160 bill for hospital care, and a $1840/per night room rate, a price equivalent to nine times a five star hotel.