Economic Consequences of Health Care Reform
U.S. healthcare spending is $7,900/year/person., $2.4 trillion dollars or 17% of GDP. Big deal you say? What difference is there to the economy if consumers spend twice as much as other industrial nations on health care? That is the unanswered question of the health care debate, unanswered except in the sense of amorphous claims by those on either side of the issue.
The Democrats say a public option that succeeds in reducing healthcare costs will help the economy. Republicans seem to think reducing health care costs will hurt the economy, at least they are acting as if that is what they believe. As the opinions are diametric opposites, someone is not right, to a greater or lesser extent.
Kaiser Foundation publishes a straightforward summation of the growth of health care expenditures in the U.S.A. From their data, health care expenditures have risen from 5.2% of GDP in 1960 to 16% in 2005, current estimates are 17% in 2008. Some of that increase in cost must be attributed to advances in technology and technique, even in that, U.S. medical outcomes are not as good across the board as are outcomes in countries with "socialized medicine".
The same Kaiser document tells a tale of expenses that just does not make it into the press. The largest burden of health care is in treating the elderly, at 3.7 times the cost per person of every other age group. Medicare bears the brunt of that burden in care. With 2.9% of all income, deducted from all of employer and employee contributions and Social Security benefit payments, Medicare manages to absorb a nominal 80% of the medical expenses of recipients. Since personal income and consumption are essentially equal for the vast majority of Americans, at 70% of the economy, Medicare serves its beneficiaries with 2.9% of 70% of the GDP, or 2% of GDP. Then 15% of GDP is spent on healthcare for the non Medicare age population, 4.5 times as many people whose per person care costs are about a quarter of the cost for a senior citizen. In other words, we, as a nation, could be spending about 5% of GDP for health care if everyone was covered under Medicare. On the face of it then, 10% or so of GDP goes to profit, or waste if you prefer.
Now saving 10% of GDP is not likely a real achievable number. Much of that money is legitimately spent on new life saving technology and improved techniques. Returning to 1960 levels of technology is not likely to go down well with the public. But 10% of GDP is a nice round number, you can negotiate the deltas.
This 10% of GDP that goes to profit/waste should all be economically neutral except for where all the attendant profit ends up. A substantial amount of it, that which is passively invested by individuals who have profited or institutions which are husbanding gains, ends up being useless to the economy. How much is being drained off the economy by health care profits can only be estimated, but it is a certainty that it is part of the explosion of accumulated capital that is the most salient characteristic of the last thirty economic years.
M3 includes increasingly large sums that are fallow in regard to the economy, such as stock funds, hedge funds, commodity trading funds. M3 and M2 components have increased an order of magnitude in the last thirty years while M0 and M1 have just doubled. In other words there is more "money" in the world, by an order of magnitude, than circulates at any economic moment.
This is a hard concept to get across to people. The amount of personal and institutional wealth that is accumulated over and above what the economy needs to create new product or production capacity, is simply removed from the economy for practical purposes. And as an economy declines, the demand for useful employment of that capital declines. Excessive wealth is destructive to an economy for this reason, and tends to perpetuate the decline for which it is, in part, responsible.
Enormous profits in any industry are, ultimately destructive to the underlying economy, converting money that would otherwise be in circulation and powering economic growth, into dross. The only exception with health care is that the non-profit corporate organization operates under different constraints, having to appear to spend enormous cash flows. The one thing that makes it worthwhile for the principals in a non-profit is that there is no public accounting. Were there accounting, it would be very likely to reveal that non-profit providers operate on the old business budget saw, "use it or lose it".
So while it is a certainty that some economic benefit will come from breaking up the health care duopolies, what that benefit amounts to is impossible to calculate with certainty under current accountability practices. Really, honestly, the only way to figure that out exactly is for health care to open its books and to do an end to end accounting. An outsider estimate of what is sequestered out of the economy each year by means of the healthcare industry can be roughly estimated though.
The economy operates on turning over about 1.4-1.6 trillion dollars in money supply (M1) on a moment to moment basis. Out of this, M2 and M3 are built of the excess that is generated by the economy, the profit, the surplus cash. M2 and M3 are a clumsy and gross indication of personal and institutional profit. Over the last 30 years M2 has grown 6.5 trillion and M3 (M2 plus M3 traditional components, now privately estimated) has grown 13 trillion. Over the last 3 years, M2 has grown 2.5 trillion and M3 has grown nearly 5 trillion. M3 now equals the GDP. At current growth rates, M3 grows by an amount equal to GDP every 6 years or so. Put another way, M3 represents that there is enough capital in the U.S. to power the private investment rates of the GDP for 6.5 years without accumulation of any new capital.
Some portion of M3 must represent the profits from health care waste, and M3 is the only summary figure available from which to estimate how much of the 2.4 trillion spent on healthcare is NOT recycled into the economy through pay and capital re-investment. The following calculations then assume that health care is no more or less profitable than any American industry. It might be more so, or less so, profitable, but a rough estimate of economic impact can drawn.
If M3 is growing by 1/6th of the GDP every year and 10% of GDP spent on health care is wasted, then 10% of 1/6th of GDP ends up in M3 as a result of waste. To arrive at a figure representing an impact on the economy, 12-14 trillion in GDP divided by 6 = 2-2.3 trillion, the amount M3 is growing every year. Multiply that times the 10% of GDP that is health care waste, and 200-230 billion is taken out of the economy by excess health care spending every year. The economy could then be 200 billion divided by 12 trillion = 1.6% larger if healthcare dollars were not wasted. Not a lot, but a definite shot in the arm, no irony intended. No means exists to recover the 1.6% drain on the economy that rising healthcare costs and waste have been, but continuing to shrink the economy by 1.6% or more a year, as increasing health care cost then do, is a poor choice for the economy and is insidious.
Tax burdens will rise and fall based on health care costs more so than on any other issue other than defense. The question is whether or not government should facilitate continuing to shrink the economy by inaction in the realm of wasted health care dollars. So, do nothing about health care costs and taxes increase while the economy shrinks. Not a good proposition.
RJ Eskow: Health Reform: Look How Far We've Come. Now Where the Heck Are We?
Putting Sen. Lieberman aside for a moment (and who wouldn't want to?), what can we expect to see if the final health reform bill conforms to Sen. Reid's outline?
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I hate it when people who talk about "waiting lists" in other countries for things like hip replacements.
I reply, what's the waiting list for a hip replacement here if you don't have health insurance or can't afford your @2500/$5000 deductible?
You will be on THAT waiting list until you die.
The administration should have first concentrated on campaign finance reform and public health before trying to tackle the health insurance industry. The power of lobbyists needs to be reduced and people need to improve their diets and lifestyles.
there is a larger picture for an economy on the expense side of the equation but healthcare is a start.
the bottom line is that money saved by not being spent on healthcare can be spent on other, hopefully , more efficient allocations of resources.
I won't pretend to understand the analysis of M0,M1,M2, & M3 supplies. However, we're constantly told that when workers are more productive, the economy benefits. Consequently, a more efficient health care system, a system that produces the same level of service at a reduced cost would seem to have higher productivity, and hence ought to be beneficial to the economy.
That is why I think we should examine the other systems used in the other industrial countries and copy the best one. Some are single payer systems, others are hybrids, but all are cheaper and seem to have a higher degree of "productivity".
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lets pile on this group & insist the usual DC suspects do the right thing
Do the Republicans want us to ignor the fact that Major Corporations just dumped Milliions of Americans on to the Federal Government for health care with the Bankruptizes ?????
Health care's big money wasters
More than $1.2 trillion spent on health care each year is a waste of money. Members of the medical community identify the leading causes.
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Great post Stephen. Please lets have more from you.
I live in Spain, and healthcare I believe takes about 6, 5% of GDP and we are not lacking anything !
We are well taken care of by kind competent people, in our public universal healthcare system
Cheers
Excellent. Really speaks to the issue of excessive wealth and the premise of everything must turn a profit to be considered viable in society.
I will add some numbers ( 2) :
The national health system negociates very hard with pharma companies, and demands a lot of drugs as generics.
The central government gives the funds to the regional governments, who administer health care directly. So, you would be treated by a nurse or doctor with a white robe with the emobroidery " State of Ohio Health system ".
If in addition you want to take out a private health insurance, you can do so, do get for example dental care ( not covered bu public ). Private health insurance is very competitively priced, since it has to compete with a good public sector.
I hope the U.S. has something similar soon. What upsets me is that this reality of public health care, as it works in other countries, is deliberately hidden from the American public.
I hear U.S. politicians pproposing these innnovative new schemes of health care - the U.S. just needs to take a look at what has been proven to work, after yers of trial and error, in other countries. At least for a public option.
I am American, by the way. If I did not have access to a public health system, I might have gone broke in having to provide for the health of my mother, who is quite elderly.
Cheers
I will add some more numbers : ( 1 )
I am self employed, and I pay a monthly fixed fee of about 270 dollars, for unlimited health coverage.
In Spain, the income tax rate for self employed is 35 %. When you retire, your retirement income is guaranteed by the government and is aprox. 70% of your average income in your last 8 years of work. Your retirement is not subjected to the ups and downs of the stock market, and is updated according to inflation figures.
The two employees that I have, I pay about 160 dollars a month for each, so they both can have unlimited health coverage.
The cost of medicines for my mother is free, since she is older than 65. For me, it is a nominal fee, very low. I have a health card, and at the pharmacy they scan the card and give me the medicine that the doctor has prescribed. All medical records are on a computer database.
Once while I was living in the U.S. I had to buy a certain medication, and when I got back to Spain I found out that it cost 10 ( !!!! ) times less, as a generic.
Your data is appreciated enormously. I recommend you cut and paste your comments to any blogs dealing with health care and you find comments against reform. Thanks.
That's why I am so glad my daughter is planning to marry a Spanish man and live in Madrid.
Great information!
The following allows you to compare other countries projected deficit as a % of GDP with America's based on whether the health care expenses (half of which are now paid by government) continue to increase or if they are moderated.
American costs are already double of every other developed country and are getting larger. Projections for next year are already an increase of 9% (about $200 billion). Since 1960, consumer prices have gone up 6 times. Health care costs have gone up 16 times.
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How much have CEO/Executive salaries, bonuses and stock options increased over the same period of time? The average employee?
The top 400 people doubled their salaries in 6 hears or according to the rule of 72, that is 12% per year..and has a GREAT PENSION of well over 1 million per year.... The rest of us if you include the 401K and drop in the house values, well the 60% in the middle have had no increase at alll..and have probably gone backwards.
Wouldn't it make more sense to focus the title of this article on the economic consequences of NO health care reform?
Personally I am disgusted with the people that talk about cost of health care. These are the same people that led us to a nonsense war that is costing life, limbs and more than a trillion dollars in iraq. What is wrong here? They don't care about the costs associated with that war and the construction with faulty Bush contracts but they don't want our citizens to have health care. it is time to pass the health care bill with or without the naysayers, the insurance and the pharmaceutical companies input.
to compare costs by relating them to % of GDP is not a sound approach ------GDP is variable -----it goes up and down so the results are not reliable
it could happen that costs are in fact being constrained but if that happens in a major recession when GSP SHRINKS it could result in the cost as % of GDP would be reported as still rising
Comparing costs to the GDP is a VERY valid way to compare, since it's the measure of ALL economic activity in the country! Even if you keep your costs to the same level in a shrinking economy, that means that you're spending effectively MORE than you did the last year!
Congress & Obama says cost savings will come in GDP . . .
Have you heard them talk about what are the numbers the average familiy will save?
It looks even worse for the U.S. when you compare it in equivalent dollars. That is because the U.S. has a high GDP, which makes the percent of GDP look lower because the U.S. has a higher denominator than most other countries.
Wow, brilliant. Every American should read this. They won't understand it, but they should read it anyway. Unfortunately, people are more innumerative than illiterate.
People don't understand money, M1,2 or 3. They don't understand that when the real assets of a country do not grow, and one group (the rich) get more of the money, everyone else gets poorer. They really do believe that it is not a "zero-sum game".
As software engineers, maybe we understand this because unlike the math we learned in school, computers use finite math. There is no such thing as infinity when programming, memory, storage and even numbers have a limited size and/or precision. Our economy and the world are finite, computers are a good model for them.
Programmers used to be called "systems analysts", and that's what we do: analyze and understand complex systems, practice reductionism. Good job.
TTTWII,
"Programmers used to be called "systems analysts", and that's what we do: analyze and understand complex systems, practice reductioni
Very well put. A computer system is an excellent metaphor. Economies are more or less giant highly distributed operating systems. And the problem is always that some of the distribtued logic is broken at any given time.
I love reading analysis by people whose minds work, not just spin their wheels! A couple points:
- It's striking that the *ten-year* budget impact estimated from enactment of President Obama's insurance reform is on the same order of magnitude (~$250 bn.) as the amount of "waste" drained out of our economy by the health care sector in *one* year by your estimate. This equivalency really ought to be informing our policy choices. Rather than allow reform to be stalled because of medium-term budgetary concerns, we should be exploring reduction of that waste by more than a tenth (ie, $30-50 bn. / year) to make reform *better* than revenue-neutral.
- It sounds like analyzing that waste (to see how much of the ~10% of GDP could be reclaimed without sacrificing health technological improvements) and actually performing that end-to-end industry audit are both things we should be doing *right now*, while discussion of the shape reform should take proceeds on its own track. It also seems like there are potentially thousands, if not tens of thousands of worthwhile, middle-class jobs to be created in that effort. Of course the best-paying would be restricted to those trained in economics or business, but I'm ready to volunteer my services analyzing data or similar to advance that important understanding of our economy. Where should I start looking for people interested in doing that work, and what would I need to know to do it right?
Throw all the numbers out there about the finacial need for health care reform . . .
Bottom line is the bills passed in the house, don't do anything to reduce costs and actually increase the costs moving forward says the CBO.
If there were actual savings in these bills, we would hear about it.
Actually the CBO numbers deliberately assume no savings per patient from a public option. They forecast an increase in budgetary requirements of 239 billion over ten years, to cover the unisured, based on no concessions or savings of any sort, some of which have voluntarily been offered by industry already. The CBO report was an excercise assuming the Bush Administration objectives of just protecting the profits of the industry as in Medicare Part D.
Mr. Herrington,
President Obama claims that 2/3 of the "healthcare reform" bill will be paid for by savings in the current system. If there is truly THAT MUCH money being wasted in our current healthcare system, would it not be prudent to first figure out the way to effect such savings BEFORE making wholesale changes to the entire healthcare system? If there is that much savings to be derived, perhaps that is enough to pay for those who can not get/afford health insurance. To me, that sounds like a no-brainer. It is 3rd down and one yard to go, and rather then punch it through the line for an easy first down, Obama wants to throw the hail mary.
Congress writes the bills these days so that it is just about impossible for the public to know what is in them . . .
I'll trust the CBO's numbers because look what they predicted as far as numbers compared to the White House.
The WH predicted a deficit of $1.75 trillion this year, the CBO said nope your numbers are way low . . . the WH just came out and said deficit will total $1.841 now . . .
The WH predicited unemployment under 8% if the stimulus is passed, the CBO said nope it will go past 9% . . .
Who has the record of being right?
I can't follow all the talk and bull about health care costs. Suggust simple reforms.
1. Base all health care costs on a fixed percent of your family's gross income adjusted for wealth, family size and ages, and for catastrophic illnesses. Include all public and private medical costs, insurance and health plans, deductible costs, home care.
Break an arm - deductible hospital, medical costs for various gross incomes:
$40,000 = $400____ $80,000 = $800____ $100,000 = $1,000____
2. Too much greed and profit in just handling the billing. Centralize.
3. Establish insurance & health care deductions for individuals that eat healthy, exercise aerobically weekly maintaining a healthy weight, heart, blood pressure, cholestrol level and other health indicators per reports by doctors based on visits, exams and lab results.
4. Government fee ceilings for all medical services: visits, exams, operations, therapy...
5. Cut TV staring in half.
6. Affordable heart replacement & stem cell operation/treatment for all. (see item 1 )
7. Round trip to the moon should also be based on a fixed percent of your gross income. To be
be awarded by drawing of all those that qualify by posting bond of 40% gross income.
Enough bull from the rich politicians.
In addition, education costs, property taxes, public and court fees and fines, parking tickets, and in the near future public utilities costs should be based on a fixed percent of your family's gross income.
Come on, It's time for all to pay their fair share.
First, the CBO ALWAYS assumes conservative estimates, because that way if they are surprised it's a good thing.
Second, the CBO isn't allowed to take any new taxes or anything else not specifically written into a bill into consideration when they look at a subject.
This is why they estimate that the Social Security trust fund will run completely out of money in 2025!
"First, the CBO ALWAYS assumes conservative estimates, because that way if they are surprised it's a good thing"
Take a look at the CBO's numbers when it comes to unemployment vs the White House . . .
Take a look at what the CBO would be the deficit vs what the white house said . . .
Another economic benefit if health care costs individuals less would be more money to spend on consumer goods or better yet, to add to personal and retirement savings.
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