2011 September 12 Monday
Rising Health Care Costs Causing Stagnant Living Standards

The rising costs of medical care have eaten up almost all income gains in the last decade.

Fast-rising health costs have eaten nearly all the income gains made by a median-income American family of four over the past decade, leaving them with just $95 per month in extra income, after accounting for taxes and price increases, according to a new RAND Corporation study.

Had health care costs risen only as fast as the cost of other goods and services in the United States from 1999 to 2009, the same family would have an additional $545 per month to spend in 2009, according to findings published in the September edition of the journal Health Affairs.

"Accelerating health care costs are a primary reason that the so many American families feel like they are just treading water financially," said David Auerbach, the study's lead author and an economist at the RAND Corporation, a nonprofit research organization. "Unless we reverse the trend, Americans increasingly will notice that health costs compromise their other spending options."

Between 1999 and 2009, total spending on health care in the United States nearly doubled, from $1.3 trillion to $2.5 trillion. During the same period, the percentage of the nation's gross domestic product devoted to health care climbed from 13.8 percent to 17.6 percent. Per person health care spending grew from $4,600 to just over $8,000 annually.

The automation of health care has the greatest potential to raise living standards. The growing size of medicine in the US economy (over 17% and rising) means it is pulling in more skilled workers and other resources. Imagine going to a drug store to provide blood, urine, and other samples for testing. Then the result would get sent to a web server that has assorted expert systems for diagnosis. The server would also have your genetic sequence which it would use to inform drug choice and dosage level (e.g. use liver enzyme genetic variants to predict drug break-down rates). Hospitals will use robots to do surgery, clean, deliver food to rooms, and deliver drugs.

What incentives need fixing to bring about a long term trend of rising health care industry productivity?

Share |      By Randall Parker at 2011 September 12 07:26 AM  Economics Health

Kudzu Bob said at September 12, 2011 12:08 PM:

"What incentives need fixing to bring about a long term trend of rising health care industry productivity?"

Trying to make the U.S. health care industry more productive is like trying to fix Soviet Communism. Best of luck with that.

What this country really needs is fewer sick people. To that end, everybody in America should take high-dose vitamin D supplements, thereby slashing cancer rates by three-fourths as well as saving the economy.

Do I get my Nobel Prize now?

bob sykes said at September 13, 2011 6:14 AM:

I think there is real potential for automating medical services. Most doctors are still in the paper age of record-keeping. Digitizing their records would have many benefits, including information sharing among practitioners, increased accuracy in records, quick data retrieval, et al. Also, diagnostic programs and robotic surgery are still in their infancy.

About 40 years ago, I was consulting for a small engineering office that aggressively pursued computerization. The changes over a five-year period were dramatic. First, nearly all the secretaries and bookkeepers disappeared. Then most of the draftsmen were let go when the company adopted a CAD system (McDonnell-Douglas). Finally, the professional engineering staff was pruned as low-level calculations (the ones that paid for my BSCE) were automated. Does anyone remember real, paper spreadsheets?

The result was a much smaller employee base that did as much or more engineering work as before. The owner also thought the design work was of a higher quality because more cases could be analyzed in detail rather than being accounted for by safety factors.

These results have continued. Nowadays, engineering design teams are connected world-wide, and digitized files are distributed from one time zone to another via the internet. The result is a nearly continuous (24/7) design process that integrates the work of people in many countries. Needless to say, the India engineers are paid much less than those in Germany and California. But the work goes much quicker and cheaper.

Automation will not eliminate the general practitioner because much of what he does is psychological support and monitoring, which patients need as much as drugs and cutting.

bbartlog said at September 13, 2011 7:49 AM:

'What incentives need fixing...'
This would be the right question. Seriously, I am a libertarian, but unless you can fix the problem of people not being able to assess the actual value of medical care received, you are better off with a non-profit medical sector. As things stand (and they have stood this way for a thousand years), the most profitable medical care involves selling people services they didn't need and convincing them that their continued good health and/or recovery would not have happened without your intervention. If you need evidence, you can look at
- the continued existence of homeopathy (which to its credit at least doesn't directly *hurt* people with its 'treatments')
- the US obstetric industry and its c-section rate. Compare to Europe - outcomes are the same with rates ~1/5 of those here; US doctors just make more coin via an easy sales job, 'fetal monitor- distress- had to save baby's life'. Mostly they believe their own hype, too.
- the history of other fads in US medicine (colectomy, enema, prefontal lobotomy, TMJ implants, mercury, etc...) and a consideration of the success of those involved
- the business model of fertility clinics. Broadly, they want to recruit mostly women who are not really infertile (because treating infertility is hard/sometimes impossible), so that their treatment numbers look good; then they can extract the most money from the actually infertile, even if they can't actually treat them. After all if they can show a 'success rate' of 70% (by, say, having 65% of their patients actually not having any significant issues), then any treatment failures can be imputed to the difficulties of the patient's case.
- the stats you already mentioned on how much we spend on health care, which are basically just the result of all the above writ large
(and for counterexample consider falling procedure costs in the plastic surgery industry, where customers have a reasonable ability to assess the actual effectiveness of a treatment)

One partial fix to this problem would be to allow doctors form collectives that act as insurers: basically, such a group would
- have the resources and expertise to offer a broad spectrum of medical care
- be permitted to discriminate in who they accepted as subscribers
- take in fees from all subscribers, much as an insurance company would (and charge differing rates depending on expected needs for medical care)
- provide / pay for any needed health care (at no charge, or with a co-pay, or deductible or whatever, as with insurance companies now)

Whether such group would be bound by contract and tort to provide adequate care, or whether it would be practical to use the (possibly apocryphal) Chinese model where the fees are only paid when the subscriber is well, I don't know. But at least the incentive to maximize treatment is removed, and the tug of war between insurance and provider is eliminated. Of course, the problem with this fix is that doctors might not want to join such a group; it likely is not profit maximizing. Given our current situation, however, I know that many doctors are so sick of dealing with insurance companies that I think such an enterprise would find some takers.
Anyway, not-for-profit healthcare as the default model at least avoids institutionalizing these perverse incentives and creating entire corporate entities around them.

Check it Out said at September 13, 2011 2:47 PM:

The Europeans are way ahead of us fellows. Everybody there receives health care for free, that is, they pay for it in the form of taxes.

I wonder why our taxes aren't enough to pay for health care. Believe me, tax collection and revenue is a lot, really a whole, great, big lot of money.

Mthson said at September 13, 2011 3:15 PM:

The US has a large NAM (non-Asian minority) population that brings down metrics, so the US achieving the same overall success rate in an area as European nations means the US is doing it much better than they are.

gig said at September 22, 2011 7:20 AM:


Lingering said at September 23, 2011 4:59 PM:


Diana mp said at September 25, 2011 9:03 PM:

In my opinion the healt services shouldnt have been incremented, because allof us deserve the medical attention in a accesible price.

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