2008 November 10 Monday
US Health Care Cost Rise Not Sustainable

Princeton U economist Uwe E. Reinhardt argues that if family medical costs continue their over 8% per year increase of recent years their total medical costs will become unsustainable.

To return to our family with an assumed gross wage base of $60,000: If that gross wage base grew by, say, 3 percent per year over the next decade, to $80,600 by 2017, while total family health spending grew by, say, 8 percent per year over the same time frame, to $33,700 by 2017, then about 41 percent of the family’s gross wage base would be taken up by health care alone, before any deductions for taxes or fringe benefits. If the wage base grew by 4 percent, health spending still would absorb about a third of the family gross wage base.

The assumed gross wage base includes all costs paid by an employer for an employee including medical insurance, taxes, and assorted benefits. He's assuming a lower middle class family with two wage earners. Obviously this upward trend in medical costs is not sustainable.

In the short run the Democrats are going to vote in more medical benefits for poor people, starting with more government funding for medical insurance for children. But we also have the problem of retiree health care the costs of which will soar due to more retirees and more medical treatments. The political fight for maintaining the promised benefits for the old folks already will push taxes up so high that living standards for those still working will take a big hit.

Obama's planned tax increase won't even erase the current huge deficit, let alone provide the money for his plans for higher spending on health, education, and other areas.

Financial limits will usher in health care rationing. Long lines and eligibility rules will become more common. The biggest question: how much of the population will be allowed to pay for quick and highly advanced care?

My biggest worry: price controls on new treatments. Price controls would greatly slow the development of new treatments.

Share |      By Randall Parker at 2008 November 10 08:48 PM  Economics Health


Comments
Rijker said at November 10, 2008 9:42 PM:

You hit it on the nail. Obamanomics will be all about controls. Price and wage controls were the reefs that sunk the presidential ship of Jimmy Carter. Barack Obama will not be able to stop himself at raising taxes even beyond what Clinton did. Obama's personality requires control. Price control. Wage control. Control over who succeeds and who fails. All about control. Too bad about any military forces who get caught up in Obama's need to control the international arena. It is likely to get far uglier than the worst of things under Bush.

Stephen said at November 10, 2008 9:50 PM:

Is anyone actually proposing that a public system entirely replaces the private system? I'd have thought that both systems would co-exist as I don't see any reason why they are mutual exclusive.

For instance, in Australia I have private health insurance which pays for treatment exclusively in the private system, but I can still opt to go into the public system, or some mix in-between.

What am I missing about the debate in the USA? Honestly, most of the civilised world has a integrated public/private health system and they're not screaming for an exclusively private system.

Randall Parker said at November 10, 2008 10:13 PM:

Stephen,

North of our border the government places restrictions on a person's right to buy private health care.

In the US the growth of the public system is going to shrink the private sphere. The price controls will reduce incentives for new treatment development. When that happens the more price regulated countries won't be able to free load of the innovations that American health care customers pay for.

HellKaiserRyo said at November 11, 2008 8:12 AM:

Randall,

I'll put it this way:

Will the people will lower income be better with Obama's agenda? If so, his reforms will be crowned as an improvement. Do you think they will care if the innovation for novel monoclonal antibodies would be slowed especially if they cannot afford it? How will they be better off with your preferences in the short run (let's say in ten years)? I suppose they would be better off if you had your way if medical advances were made fast enough AND drove down prices "significantly," but I am not convinced that this would happen.

BTW, with the election of Obama, it seems the chance of disenfranchising lower income people is rendered zero. At least McCain might appoint judges sympathetic to that agenda. Pro-life people were concerned about replacing the three liberal judges with conservatives when McCain was elected to overturn Roe vs. Wade, but I was concerned with voting rights.

To digress:

Regarding ethics, one of my pet peeves is conveying your (a general "your" which does not refer to anyone specifically) preferences as valid normative claims. Poor people will generally want their suffering to be reduced and they will call this "social justice," while wealthy people want to perserve their wealth and call this "liberty." Of course, if their positions are reversed, the former would usually advocate the latter, and the latter the former. I do not see a priori reason to prefer either position since they are not free from any bias. Neither position is morally superior, and are both motivated by selfishness. Randall, I am sure you would agree with that.

I regard myself as a utilitarian, and I want everyone's interests to be factored in. Voting is an imperfect way of accomplishing this. One reason I admire Singer is that he has the rare ability to leave out his biases in normative thinking.

Read this:

http://www.cato-unbound.org/2006/03/07/peter-singer/why-care-about-equality/

Bob Badour said at November 11, 2008 11:00 AM:

HKR,

Singer sounds like an idiot. Suppose a mugger steals $100 from a wealthy banker, according to Singer, that's a good thing because the $100 means more to the mugger than to the banker. What complete and utter horseshit!

R said at November 11, 2008 11:15 AM:

Under Obama, everyone will soon become poor equally. Knowing this, it is vital to build all plans around how they will affect poor people. Because all will be poor. Very poor, under Obama.

Except government employees. They will have good benefits and pensions separate from the poor proles. So apartheid it will be, under Obama. Your 401Ks will be ripped from their perches and scavenged for the funds to assure the budgets cover government worker benefits. It is what we all want. All of us poor, under Obama.

Anon said at November 11, 2008 1:06 PM:

Posted by HellKaiserRyo on November 11, 2008 08:12 AM:

Obama is all about taking from the productive and giving it to the non-hackers. What about this don't you grasp?

PS: nobody is "suffering" in the US, especially not "the poor." I've seen real poverty and suffering and this ain't it.

Bob Badour said at November 11, 2008 2:17 PM:

HKR,

I suggest you read some Hobbes (sans Calvin). The raison d'etre for government is not redistribution. The raison d'etre for government is to hold a monopoly on violence. Ultimately, that is the core role of all governments. Every regime with no exceptions.

When the government directs that violence against its own citizens to redistribute their wealth, we call that tyranny. It doesn't really matter to me whether the tyrant redistributes that wealth into his own pocket or into someone else's pocket.

When the government uses its monopoly on violence to protect its citizens from the violence of those who would usurp its monopoly, we call that a just society.

The question I put to you is very simple: Do you want to live in a just society or in a tyranny?

Please stop and ask yourself that question before supporting any candidate on the basis of how he or she will coerce your neighbors.

HellKaiserRyo said at November 11, 2008 2:49 PM:

Let's not fool ourselves with the moral superiority of our own views.

"The question I put to you is very simple: Do you want to live in a just society or in a tyranny?"

I will not answer that question, but most people care more about physical comfort, relative status, being feed, etc. than living in a "just society." A "just society" might punish the an incompetent person and give him a menial job with low pay through the free market. Would that person want to live in such a society?

To me, ethics is about preference satisfaction, and I do not put much emphasis on coercion. Utiliarian ethics does not regard the non-aggression principle as sarcosant.

.38 said at November 11, 2008 5:58 PM:

"To me, ethics is about preference satisfaction, and I do not put much emphasis on coercion. Utiliarian ethics does not regard the non-aggression principle as sarcosant."

Good to know. So you'll have no problem when I stick a gun in your face and ask for your wallet. It is to relieve suffering!

Bob Badour said at November 11, 2008 6:29 PM:

HKR,

With all due respect, you offered the link to Singer, and Singer is all about using force to coerce some individuals into giving up their resources for the benefit of someone else. When one talks about redistribution, one inherently talks about using the state's monopoly on violence to deprive someone of something they own. Something someone worked hard for.

A just society will reward someone of little competence for whatever he can contribute. It is perverse to call those rewards punishments, and calling them so does not make them so. In a just society, that person of little competence can live safely and according to his means with little fear of violence knowing the state uses its monopoly on violence to protect him. In a tyranny, he lives at the whim of tyrants, and by far the most terrifying tyrant is a tyrant who does things to one for "one's own good."

Given that you endorse a morally bankrupt position, I am not at all fooled about the moral superiority of my own position. Granted, you have not set the bar very high.

HellKaiserRyo said at November 11, 2008 7:24 PM:

You called Singer's position "tyranny," I did not regard his position "tyranny" nor did Singer. In reality, we do not care about "liberty;" we only care about our quality of life. At least Singer has the honesty to acknowledge that so he focuses on the important issues such as quality of life instead of liberty and tries to maintain an unbiased approach to ethics.

The aforementioned person would have a higher quality of live in Sweden (presumably a tyranny by your definition) than in your "just society."

mal said at November 11, 2008 7:26 PM:

OT: Thought yo might find this article by Michael Lewis, the author of "Liar's Poker" .

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

Bob Badour said at November 11, 2008 8:22 PM:

HKR,

With all due respect, I care not a whit what the would-be tyrant calls tyranny. Tyranny by any other name is still tyranny. I care about liberty. Depriving me of liberty causes an absolute and uncompensated reduction in utility. Where does that leave your "utilitarian ethics" ?

Unbiased like shit! His so-called ethics--as morally bankrupt as they are--reek of bias.

The aforementioned person would not have a higher quality of life in Sweden: "The same report also shows that Swedes fare lower than the lowest American socio-economic class, working-class black males."

Hell yes, Sweden is a tyranny! There is absolutely nothing just about a society that impoverishes all its citizens. I have absolutely no desire to move to Sweden. I do desire to move to the US--even with all its flaws including a redistributionist President and Congress.

Randall Parker said at November 11, 2008 8:30 PM:

HKR says:

Will the people will lower income be better with Obama's agenda? If so, his reforms will be crowned as an improvement. Do you think they will care if the innovation for novel monoclonal antibodies would be slowed especially if they cannot afford it? How will they be better off with your preferences in the short run (let's say in ten years)? I suppose they would be better off if you had your way if medical advances were made fast enough AND drove down prices "significantly," but I am not convinced that this would happen.

Where to begin?

1) You claim to be a utilitarian. But if you really want to maximize utility for the maximum number of people then you should include future people and not just present people. Otherwise you overweight utility in the present at the expense of utility in the future.

2) Short run: But the vast majority of us who are alive right now will get deathly ill in the long run. For most people the need for medical treatments lies in their future.

3) Many new medical treatments are very expensive, especially when they are new. Do you want to deny better treatments to every person unless all people can afford them? If we used that rule then some treatments couldn't be developed. Do you want to restrict prices? That'll reduce incentives for treatment development and therefore fewer treatments will be developed.

Then there's this:

I do not see a priori reason to prefer either position since they are not free from any bias. Neither position is morally superior, and are both motivated by selfishness.

4) Is a position that is motivated by selfishness therefore morally inferior?

5) Why should lack of bias make a position better? How can one prefer a position if one is indifferent?

6) Then there's the whole desire to maximize utility for the most number of people: Why? Is there some intergalactic calculator that is counting up the number of people enjoying their lives that grants us all forever life if we can just get a larger number of people happy?

7) Rule of the masses: I'll be for civil war if this goes too far. Be warned.

Randall Parker said at November 11, 2008 8:41 PM:

HKR incorrectly states:

In reality, we do not care about "liberty;" we only care about our quality of life.

Lots of people give up money in exchange for fewer people telling them what to do, more ability to choose what to do in the course of a day, ability to state their own opinion and otherwise to dress, act, speak, and do as they please.

It isn't just about the quality of one's sheets, one's car, one's house. There are non-material considerations of personal freedom that are very important to many people.

Stephen said at November 11, 2008 9:03 PM:

Balance in all things

HellKaiserRyo said at November 11, 2008 10:24 PM:

I stated "quality of life," not money, nor did I mention material goods. Of course, quality of life (by most measures) is positively correlated with money (as Singer correctly notes, more money has a diminishing return to utility or "quality of life."). So I apologize for being vague.

But I will clarify that I meant "economic liberty" as opposed to "liberty" so that's the connotation of my usage of the word "liberty." Certainly some aspects of "liberty" is correlated to "quality of life" as I doubt living in total silence in a monastery improves one's quality of life. Also, remember that FDR emphasized "freedom" not "liberty" in his Four Freedoms.

I think this may be a semantics games as one has to define words such as "liberty," "freedom," and "quality of life." We do have some idea of what these words mean though.

Randall, do you have any information about the marginal costs for biotech treatments such as monoclonal antibodies? Even if one does eliminate patent laws, it would do little to reduce the cost if the marginal costs are high. This is one reason that I am skeptical that more medical innovation would lower costs. In contrast, drugs that target SIRT1 (as you blogged before) might lower costs by reducing morbidity as it would save money by replacing other drugs assuming they work well on humans as they do on mice. I really do not know the time frame from rejuvenation therapies, and if brain rejuvenation would be accomplished in 50 years cheaply, it would be well worth any inequality generated intermittently (as this can be used for enhancement purposes). (To change the subject, do you think that could be accomplished in 50 years if you had your medical policy enacted?)


Regarding Sweden:

"The unfortunate in Sweden often don't roam the streets aimlessly, in fact, few are often found. That's because the state subsidizes them to live in optimal conditions and to provide little work - and if they are put into labor, it's in a public enterprise run by the government, to help reduce the official share of unemployed people. Workers can earn up to 570 paid days off a year (that's no typo - we know there are only 365 days a year - Swedes can earn more paid days off than days they actually work). So where are the poor, crazy, reckless people of Sweden? Living off Swedish tax money and taking up their inequitable residence in Swedish neighborhoods, and growing in numbers since the financial prosperity of the cradle-to-grave system doesn't discourage their lacklazy habits. "

This sounds good. I really like it when the poor people are put away in a nice place because they can not make it in the real world. (Presumably they do not have children like the hikikomori in Japan so this might have a eugenic effect.) Makes the country look a lot better. Sweden also does an excellent job putting unemployed people away in "labor market political activities" too. Randall is correct that keeping low skilled immigrants out would help make this more sustainable. I would like to ask if the Swedish system encourages people on that type of welfare to have children. If it does not, I would consider it an improvement over the American system even if it does involve more redistribution.

The information on lobotomies scares me though.

"The poor are well-off absolutely, not just relatively. Critics of high taxes and generous government benefits sometimes imagine that these destroy economic growth, so that countries like Sweden have low inequality but also low absolute living standards. In fact, the incomes of those at the bottom of the distribution in Sweden are similar to those of their American counterparts. And Swedes work far fewer days and hours to get those incomes. They also enjoy more plentiful and higher-quality public services, from schools to child care to health care to public transportation to roads and parks."

And let's not forget the benefits of being relatively well-off too. I also do not see what is so bad about putting people away like they do in Sweden. If those people weren't put away, they would drive down wages by being in the labor force and they would be in service jobs. They would not be hedge fund managers or cancer researchers so there is little opportunity cost by putting those people away.

http://lanekenworthy.net/2008/05/26/sweden-image-and-reality/

James Bowery said at November 12, 2008 12:20 PM:

Bob Badour writes: Singer sounds like an idiot. Suppose a mugger steals $100 from a wealthy banker, according to Singer, that's a good thing because the $100 means more to the mugger than to the banker. What complete and utter horseshit!

Correct. Now I have two questions for you, Bob:

1) Who pays, and how do they pay, for the monopoly on violence that provides the service of protecting the wealthy banker's right to that $100 of property?

2) When it comes time to build and maintain infrastructure such as, say, roads, how is the government taking $100 from person A to pay for roads used by person B any different from a mugger stealing $100 from a wealthy banker?

obrien said at November 12, 2008 12:33 PM:

Bickering over the political or economic system to me is like pissing into the ocean. A society with a 110 average IQ and (allegedly) horrific economic policies is far better off than a society with a 90 average IQ and (allegedly) wonderful economic policies. Human capital is fundamental to the success of any society. Neither the most ardent free market capitalist nor the most radical socialist can erase this fact. Unless people who understand this can gain power, everything else is mostly BS. Probably I will eventually be forced to move somewhere that has been relatively free of low-IQ immigration like Canada or Australia because people are too dense to see the importance of IQ. Not that Canadians or Australians are necessarily any more politically astute than Americans or Europeans: Canada and Australia just happen to have lucked out geographically.

East Asian countries are somewhat unappealing to me because East Asian languages are so radically different from English, and from each other for that matter. Also, I am not sure how enthusiastic East Asian countries will be to accept large numbers of foreign cognitive elites escaping Mestizo and Muslim anarcho-tyranny.

Bottom line: High IQ socialism and soft totalitarianism is far superior to low IQ "capitalism" and "democracy." Were it not for cultural barriers and my lack of economic means, I'd probably be moving to East Asia now...or at least to a heavily Asian part of Canada or Australia.

Bob Badour said at November 12, 2008 12:58 PM:

James,

1) That's an excellent question, and is in fact a matter of much debate in democratic legislatures all over the world.

2) Public goods, like transportation systems, are an interesting phenomenon. Like a rising tide they float all boats.

James Bowery said at November 12, 2008 3:12 PM:

1) Saying that it is an excellent question is inadequate. Clearly some systems are more obviously "taxation as theft" than others. What is your opinion?

2) Increasing human capital also floats all boats. So what?

Bob Badour said at November 12, 2008 4:46 PM:

1) Obviously, when a government's monopoly on violence increases the opportunity for trade and commerce, the government has some legitimate claim to some fraction of that increase. When first starting a nation, the increase does not yet exist, and the government must rely on those who already have wealth--most likely those who own the land governed--to step up to form the nation. The principle upon which the US was founded was the idea that those who own a place should govern it. Suffrage has, of course, expanded since then.

2) I disagree that increasing human capital necessarily floats all boats. One can increase the availability of skills that are already in ample supply and thereby sink some or all boats.

James Bowery said at November 12, 2008 5:59 PM:

1) So I take it that you would find GDP to be a reasonable source of government revenue. The problem here, of course, is the "G" as in "Gross" producing the need for huge loopholes in the tax code to get at the "Net". Repeated attempts at "tax simplification" keep on running into this problem and keep ending up with all kinds of loopholes to go from "Gross" to "Net" -- starting, of course, with convoluted definitions of what is and what is not "the cost of doing business" extending to all manner of political rent seeking. The basic function of the government is to protect all property rights -- just the right to transfer property (GDP basically arises from the volume of the transfer of property rights).

2) The same malinvestment argument can be made for infrastructure such as roads. Building the wrong roads can detract from maintenance of needed roads. Government is notoriously bad at peacetime investment.

James Bowery said at November 12, 2008 6:31 PM:

Erratum:

just the -> not just the

Bob Badour said at November 12, 2008 7:26 PM:

James,

I cannot make any coherent sense out of what you wrote. The first part doesn't really seem to reply to anything I wrote. Spending on something that is not a public good is not spending on a public good. I fail to see what point you could be trying to make.

Stephen said at November 12, 2008 9:01 PM:

Percentage-of-income taxation is actually one of mankind's greatest inventions.

Honestly!

It act as a counter-cyclical buffer protecting the economy from radical shifts into negative or positive earnings - this feature of taxation policy is called 'automatic stabilisation'. Essentially, the government takes a large amount of money in good times (thereby damping down inflationary effects that rob everyone) and spends it in the bad times on infrastructure (thereby increasing economic activity and lessening the infrastructure capacity constraints that would otherwise push up inflation during the next good-cycle).

Of course, if a nation is stupid enough to have an incompetent government that thinks it good policy to cut high-income taxes during the good times, while at the same time increase spending on non-infrastructure projects, and then compounds its error by charging it all to the national credit-card, then you're left with a real mess when the bad times come.

Thai said at November 16, 2008 6:23 AM:

This discussion seems to miss the primary reason health care costs are going up in the first place.

To discuss health care spending intelligently you need to move from linear to non-linear logic as it is the few who are bringing the system down, not everyone. And America has 1) more of these 'few' than other 'socialized' countries AND 2) does a worse job containing their costs.

Here is a link on how we are spending our money: http://www.ahrq.gov/research/ria19/expendria.htm

Here is a link on how this compares with other nations: http://assets.opencrs.com/rpts/RL34175_20070917.pdf

If you look at America's heavy healthcare spenders, i.e. the 20% of patients who make up 90% of all spending, these patients are becoming more and more prevalent do to a combination of their own personal lifestyle decisions AND the ability of technology to make an impact on their longevity. And while these heavy spender patient's are becoming more prevalent in other countries, their growth is slower in the 'socialized' countries because of 1. cultural issues unique to these countries and 2. unspoken but very real rationing on these heavy spenders.

With cost structure advantages like this over the American system, it doesn't matter what type of health care system these other countries have (socialistic or free market).

And the problem with the national policy debates is that If you are a relatively healthy person, who works and pays taxes (rich or poor) and has no or maybe 1 medical condition, it can be very hard for your life experience to comprehend what is happening since your experience not translate to how and where all the money in health care is actually going.

Remember, in the US 1% of patients spend 25% of all money and 5% spend 50% of all money. This conceptually means that if you had a crowd of 20 people representative of all people in America, and IF the right 1 person vanished, everyone else would see their health care costs drop by 50% with absolutely no change in their quality of care.

I have been trying to find the equivalent to this in other countries and it is nearly impossible to find since other countries do not report their data like we do- I suspect it would look very different and you only need to make a slight change on the 95% who get 50% of the money to make the experience of those 95% (you and me) seem much better.


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