POLICY: Health costs and the road to Armageddon

Since I wrote about the Center for Practical Health Reform and their intention to head off a perceived collapse in private sector health insurance at the pass, a little more attention has been focused on the whole issue. How bad is the current cost crisis and how long can the rest of the economy go on pushing money into it?  The press is flowing in two flavors. First, we can't afford the costs. Second, we're going to pay more for more cool technology.

Here's the word from the Detroit insurers that fund their health care programs by selling cars on the side (sorry for stealing Uwe's line): 

Health care costs are moving front and center as the single biggest factor impacting corporate profits and U.S. companies' inability to compete globally......Health expenditures rose from $1.3 trillion in 2000 to $1.7 trillion in 2003. The health sector consumed 15.3 percent of the nation's gross domestic product in 2003, up from 13.3 percent in just three years. Industry observers say the problem is bigger even than in the 1980s, before managed care came on the scene and curbed increases for a little more than a decade before costs started spiraling again.

Those who pay for health care -- businesses, government and individuals -- are becoming more vocal about the need to bring costs in line. But that's about where the agreement begins and ends.

Some rather astute observers of the system think that it can't take much more of this. My old boss Ian Morrison and his colleagues at Harris have been suggesting that the 2008 election is about the time when this issue will get national attention.  THCB regular The Industry Veteran seems to agree:

I've said it for a long time; at a certain point the top 500 (non-Pharma) corporations will no longer be able to pass along the exorbitant health care costs and at that point, they will pose the biggest threat to Big Pharma. It may not come now because, as this article makes plain, some of the big companies are pursuing diversions such as pay-for-performance, evidence-based medicine and so forth. I give it until about 2008 for the big companies to recognize that IT and efforts to rationalize providers wonÂ’t adequately control costs. At that point, if our old buddy John Dingell is still around, he may emerge as a co-grandfather of a national health care system.

The folks at the Center for Practical Health Reform want to get the whole of the industry together to get past their differences, essentially so that the health care industry as a whole can keep manufacturing an affordable product for their customers. The problem is that the pace of the technology change that is the major reason for driving these costs up is not slowing, it's speeding up. Just this weekend here's one article about new scanning technologies, and another about defibrillators. Clearly there are incentives to do too many scans, and clearly there are going to be even more incentives to put defibrillators in even more people now that it's been approved for virtually anyone with any heart condition (such as a pulse). So the system will produce more services connected to those devices. (And perhaps these scans and devices will save other costs down the road--but that's a separate argument we don't yet want to have).

But the point is that as these costs get added onto the system, government will more or less keep paying just as it always has over the last 30 years. Although employers are starting to eject themselves from the system, enough of them will keep paying that disaster will not immediately strike. In no event will there be a huge flow of money out of the system. Why do I have some confidence in saying this?

Health care costs are highly related to recessions, and the relative difference in health costs to overall GDP growth causes alot of fuss. And it does have a big impact. In the early 1970s we had Nixon's plan for universal care and price controls (My, how have those Republicans changed!). In the early 1980s we had DRGs for Medicare inpatient care, and in the 1990s we had managed care. Each of those was a reaction to the high level of health care costs coming out of a recession as this chart shows.