2011 August 05 Friday
58% Rise In US Medical Costs By 2020?

Govít report: US health care tab to hit $4.6 trillion in 2020, averaging $13,710 per person. Currently it is $8,650 per capita. If the trend continues health care will cost over a fifth of the US economy.

Think about that. If the US Medicare Actuary is correct you are going to lose, on average, another $5k per year to medical costs in less than 10 years. I am reminded of Herbert Stein's Law: "If something cannot go on forever, it will stop". Will the US political system, economy, and populace go along with transferring another $5k per capita of output to medical care? I'm thinking no. We are getting close to the end of the trend just because the economy isn't going to grow enough to leave people with enough to spend on food, clothes, housing, et cetera after they spend another $5k each on health care.

A political fight over health care versus everything else in the US federal budget is going to gradually build up. Also, the private sector will shift more of the costs of health care onto employees and the employees will look for ways to economize out of necessity. Already the rate of growth of health care costs has dropped to 4% in 2009 and 3.9% in 2010. The 3.9% growth rate represents a record low spanning over decades of government tracking of health care cost growth. A double dip recession could easily knock it down even further.

The long term trend in college costs is similarly not sustainable.

Since I expect the US economy in the 2010s to dramatically under-perform as compared to the post-WWII era I expect the unsustainable trends of rising health care and educational costs to end during this decade.

Share |      By Randall Parker at 2011 August 05 11:39 AM  Economics Health

Black Death said at August 5, 2011 3:03 PM:

The current rate of increase of US health care costs is unsustainable. And, as you say, it will stop. The major drivers are the aging population and new and improved technology and drugs, which are expensive. When I think of all the medical advances that have occurred in my lifetime - organ transplants, lots of new drugs and devices, gene therapy, open heart surgery, new imaging technologies (MRI, CT, etc.), I am amazed. But this stuff doesn't come cheap, and there isn't enough money to make it all available to everybody. While we can't control the aging of the Baby Boomers or the development of new technology and drugs, we can do something about costs. Medicaid is going to be cut substantially. The federal government will switch to block grants to the states (this has already been proposed). The states will have the option of spending more if they choose, but few will have the funds to do so. This means that the problems that Medicaid patients already have with access will get worse. Fewer doctors will be willing to see these patients, and Medicaid patients needing elective procedures or consultations will face long waits. This isn't too different from the way it works in Canada, the UK and some other countries right now, and really isn't too bad. Access to acute care will be pretty much unimpeded.

Medicare is going to undergo something similar, but this one will be painful and cause lots of distress among beneficiaries and politicians. Medicare recipients have paid into the system all their lives and will be outraged when they no longer have unlimited access to the cookie jar, but they can't and they won't. The cuts won't be as substantial as Medicaid, but they will hurt. There are a lot more Medicare than Medicaid beneficiaries, and the Medicaid ones are viewed as freeloaders, while the Medicare recipients feel they are only getting what they have paid for during their working years. They will experience access problems for chronic conditions too, although not as bad as Medicaid folks. The simplest solution is to maintain everything as it is but push back the age of Medicare eligibility, since folks live longer now than when the program was enacted (this applies to Social Security as well, only more so). Young working people will resist raising the Medicare tax for a program that may not even be there when they retire, and older folks will grumble if lots of doctors stop taking Medicare patients. By the way, the physician population is aging too, and an easy way for a doctor to cut back as he thinks about retirement is to stop treating poorly reimbursed patients. Not what you want to happen as the Baby Boomers age. Also, as most Medicare expenditures occur in the final year of life, the chances of "doing everything" for a critically ill elderly patient will be diminished. If Grandma is in the ICU and the doctors are shaking their heads, "do everything you can for her" will mean that she or her family will have to pony up a substantial portion of the cost.

These are unpleasant realities that Americans are going to have to get used to. For decades, duplicitous funding mechanisms, favorable demographics and tons of borrowing have allowed Americans and American politicians to pretend that the good times would roll on forever. Well, crunch time is here, and it's only going to get worse. The recent budget debates were only a tiny foretaste of what's coming. These debates are going to be a permanent part of the political landscape. But sooner or later, everything will have to be paid for, one way or the other. There's no free lunch.

Check it Out said at August 5, 2011 6:10 PM:

Will we be worrying about medical costs in 2020? Sometimes I believe this whole thing is going to collapse before that.

REN said at August 5, 2011 9:18 PM:

I have a simple way of viewing the marketplace, I ask myself one question: Is it elastic, inelastic, or mixed? This worldview helps me navigate what seem like difficult subjects.

Elastic is when you can buy a good that is easily replaced. For example, if you go down to the local grocery and find out your favorite aspirin isnít on the shelf, you can buy another brand. Elastic mechanisms keep the market rational, because substitutes are readily available.

Inelastic is when an industry or good cannot be easily replaced. Water, wastewater, electricity, roads, bridges, the military, are good examples of inelastic markets.

Mixed is when an industry has both elastic and inelastic elements. The medical industry is a good example. Most of the time when you need basic healthcare you can pick both your doctor and treatments. If you donít like your doctor, you can always choose another. But, what happens if you are unconscious in a hospital. At this point in time, you arenít making choices, they are made for you. The medical system at this juncture becomes ineleastic. Some drugs are only available from one provider, usually due to patents, and this makes said drugs ineleastic.

For inelastic markets, the government is either the sole provider, or the government provides an oversight and regulatory role.

For mixed markets, the Government should stay out of the elastic side, and regulate the inelastic side.

The debate about health care breaks down because we donít define the problem well. We need mixed solutions for mixed markets.

The inefficiency of our medical system is due to both elastic and inelastic mechanisms applied incorrectly. Usually the people that promote confusion, have some sort of monetary reward for themselves in mind. So, they will confuse the issues for their own selfish reasons.

My solution would have people use Medical Savings Accounts, or their own cash to buy elastic care. When people get into an inelastic situation, they can have their medical advocate step in and spend for them. A medical advocate could be required as a condition of buying insurance, only the advocates income comes from you, not the insurance company. The advocate both helps preserve your medical dollars, and also helps you with medical choices. People could have critical care insurance that kicks in at the appropriate inelastic time. There should be laws and oversight in place during ineleastic situations, to keep predatory costs down.

We could also have volunteer hospitals again. Poor people have inelastic needs, becuase they cannot afford healthcare. Therefore they must go to a government type regulated hospital. Doctors could volunteer some of their time in exchange for a tax break. Depending on the tax bracket, the cost of volunteer doctors would be about 30 cents on the dollar.

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