HEALTH CARE IN THE MACRO ECCONOMY
Uwe Reinhardt,
Woodrow Wilson School of Public and International Affairs
and
Department of Economics
Princeton University
MEDICAID LEADERSHIP INSTITUTE
Princeton, New Jersey
September 13, 2011
External factors
beyond out control
Self-Inflicted macroeconomic wounds
U.S.
Health
Care
A health system
carefully calibrated
to be inefficient
Dysfunctional federal
government
OUTLINE
I.
THE MACRO-ECONOMIC CONTEXT
II. THE HEALTH-CARE ECONOMY
III. OPTIONS FOR COST CONTROL IN HEALTH CARE
I. THE MACRO-ECONOMIC CONTEXT
I. THE MACRO-ECONOMIC CONTEXT
A. Factors beyond our control
1. Aging of the population
Ratio of older people to working-age people
SOURCE: Report of the Trustees of the Social Security System,
http://www.socialsecurity.gov/oact/tr/2011/tr2011.pdf
I. THE MACRO-ECONOMIC CONTEXT
A. Factors beyond our control
1. Aging of the population
2. Outsourcing of labor to computers
3. Outsourcing of labor to low-cost countries
SOURCE: Rolfe Larson, Blog: Business Planning, August 18,2011
For an enterprise active in the global market place, the
word “nation” has no meaning. The entire globe is the
“nation.”
This is particularly true of innovative enterprises built on
science and technology.
Consider Apple Inc.’s iPad.
VALUE-CHAIN LINKS IN “OPERATIONS”or MANUFACTURE
Component
A
Korea
∙∙∙
Component
B
Japan
∙∙∙
Component
N
Assembly
Switzerland China
Most of the iPad’s components are procured from Korea and
Japan, and some from Europe, although just where these
components are actually manufactured is not clear to outsiders.
Apple reaps huge profits from the iPad, which costs only
between $230 to $300 to manufacture but sells for $500 to
over $800, depending on the model.
These profits, which accrue for the most part to some
highly paid US based Apple executives and engineers and
to the firm’s owners (with some going to retailing).
Innovation and entrepreneurship by Apple Inc. adds
significantly to US GDP, but less so to U.S. jobs.
This has become the American dilemma with jobs: We
invent new products and manufacture them elsewhere.
Worse (for us) still, many of the emerging markets (BRICs)
are now poised to move into higher and higher value-added
links of the value chain – not only in manufacturing, but
also in services, such as finance.
That development imperils the jobs even of hitherto secure,
higher-skilled, middle class Americans.
Many of them might end up Medicaid eligible.
COUNCIL ON FOREIGN RELATIONS
In this paper, the authors make a distinction between
1. the sectors of our economy that produces goods
or services traded across international borders
(e.g., cars or MRI machines), and
2. The sectors producing goods and services not
traded across borders (e.g., real estate
construction, most healht care services,
government services, etc.)
SECTOR PRODUCING
NON-TRADED OUTPUT
• Almost all 27 million jobs created
since 1990 were created in this
sector, mainly by government, health
care, real-estate construction and
retailing.
• But, these sectors experienced slow
growth in value added per employee.
• Because of government’s fiscal
problems, both sectors not likely to
grow as fast in the future.
• This creates a major dilemma for job
creation in the U.S.
SECTOR PRODUCING
TRADED OUTPUT
• On a net basis, the traded sector
contributed only 0.6 million jobs
during 1990-2008.
• This sector did have more rapid
growth in value added (GDP) per
employee, because its production
moved up the global value-chain,
leaving lower-valued production to
emerging markets.
• But the emerging markets will soon
move up the global value- chain as
well, putting increasing pressure on
employment in the U.S. traded output
sector.
Reference: Michael Spence and Sandile Hlatshwayo, The Evolving Structure of the American Economy, Council on Foreign
relations, (March 2011)
SOURCE: Michael Spence and Sandile Hlatshwayo, The Evolving Structure of the American Economy and the
Employment Challenge, Council on Foreign Relations, March 2011
THE MAJOR JOB CREATORS IN THE UNITED STATES
22.5
Government
18.5
16
Health Care
10
14
Retail
12
Accommodation &
Food services
12
8.5
9
Construction
1990
2008
7
0
5
10
15
Millions of Jobs
SOURCE: Approximated from Spence and Hlatswayo, Figure 6.
20
25
This realignment of jobs in the U.S. has significant and
serious effects on the nation’s income distribution which,
in turn, has significant and serious effects on politics and
thence on the distribution of health care among the
American people.
Although I am not a political scientist, I suspect that this
shift in jobs and incomes adds to the angry tone of our
debate over U.S. health reform.
Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, “Top
Incomes in the Long Run History,” Journal of Economic
Perspectives 2011; 49:1, 3-71.
FIGURE 1 --AVERAGE INCOME GROWTH IN THE UNITED STATES
14%
AVERAGE
TOP 1%
Bottom 99%
Annual percentage growth
12%
10.3%
10.1%
10%
8%
6%
4.4%
4.0%
4%
2.7%
2%
3.0%
1.3%
1.2%
0.6%
0%
1976-2008
1993-2000
2002-2007
FIGURE 2 -- FRACTION OF TOTAL INCOME GROWTH CAPTURED
70%
60%
65%
58%
50%
45%
40%
30%
20%
10%
0%
1976-2007
1992-2000
2002-2007
These long-term structural problems would have
emerged even if the U.S. had been governed by smart
public fiscal, industrial and educational policies.
Unfortunately, these structural problems have been
amplified by some self-inflicted wounds.
I. THE MACRO-ECONOMIC CONTEXT
A. Factors beyond our control
B. Self-inflicted wounds
FIRST SELF-INFLICTED WOUND
A staunch anti-government attitude in the population and
among leading policy makers.
In his first inaugural address as President of the United States,
Ronald Reagan proclaimed:
"Government is not a solution to our problem;
government is the problem." (January 20, 1981)
This idea now dominates American politics and public policy.
Our old, overcrowded and sometimes crumbling public
infrastructure is a monument to this anti-government
sentiment.
It also makes it impossible now to redeploy the idle real
estate construction industry into repairing and
modernizing our infrastructure through a government
stimulus program that would reduce unemployment in
the process.
Americans cannot even dream of such an infrastructure.
CHINESE BULLET TRAIN – FASTEST IN THE WORLD
Even the President’s most recent jobs program – should it
be enacted, which probably it won’t be – is much too timid
to make any dent in this problem.
It’s 10-year cost amounts to 3% of current GDP – too small
a donkey to carry much of a load.
ADDITIONAL FEDERAL SPENDING IN 2012 ON JOBS PROGRAM
Total of $421 billion (Additional infrastructure spending of $35 b in 2013).
Infrastructure
spending in
2012, $55 , 13%
Keynesian
mechanisms
(payroll tax
holiday, UE
insce.etc.),
$218 , 52%
Incentives for
employers to
hire workers,
$118 , 28%
Aid to states
for jobs, $30 ,
7%
SECOND SELF-INFLICTED WOUND
Fiscal mismanagement by the federal government.
U.S. fiscal policy:
How
`` cool!
Sunshine
all around!
© Tsung-Mei Cheng
Nixon/
Ford Carter
Reagan/Bush I
Clinton
Bush II
Obama ????
In the words of Douglas Elmendorf, the Director of the
Congressional Budget Office (CBO):
SOURCE: Congressional Budget Office, http://www.cbo.gov/ftpdocs/110xx/doc11047/05-13-CBO_Presentation_to_AAAS.pdf
The theory among some Americans is that we can solve all
our economic problems – including unemployment – with
yet more major tax cuts.
Can they be serious?
TOTAL TAXES AS PERCENT OF GDP, 2009
Denmark
48.2
Sweden
46.4
OECD AVGE.
Italy
44.8
43.5
42.8
Austria
France
41.9
Netherlands
39.1
Germany
37
United Kingdom
Americans
are not an
overtaxed
people
34.3
Canada
Spain
31.1
30.7
30.3
Switzerland
Japan
28.1
24 26.1% IN 2008
United States
0
5
10
15
20
25
30
35
40
45
50
Source: OECD Tax Data Base,
http://www.oecd.org/document/60/0,3746,en_2649_34533_1942460_1_1_1_1,00.html#A_Revenue
Statistics
55
Unfortunately, America’s home-grown savings have been
insufficient to cover:
1. the depreciation of the existing U.S. capital stock;
2. net new private investments in business and residential
capital stock, and
3. the mounting deficits in the public sector.
PRIVATE PERSONAL AND BUSINESS SAVINGS A SA PERCENTAGE OF GDP, NET
OF DEPRECIATION ALLOWANCE, 1980-2009
PERSONAL SAVINGS
BUSINESS SAVINGS
TOTAL NET PRIVATE SAVINGS
12%
10%
8%
6%
4%
2%
0%
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
SOURCE: Economic Report of the President 2011, Table B-1 AND B-32.
1
2
3
4
5
6
7
8
9
Because domestic savings have been too low to cover
private investments and public deficits, we have had to rely
on foreign savings for many years – notably from China, from
Japan, and from some other countries.
U.S CURRENT ACOUNT DEFICIT (M - X) 1980 - 2009
$900
$800
These are annual net borrowings from abroad.
$700
$600
$500
$400
$300
$200
$100
$80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 1
$(100)
SOURCE: Economic Report of the President 2011, Table B-103.
2
3
4
5
6
7
8
9
Our children will have to repay this external debt in one or
both ways:
1. Paying significantly added taxes to pay of foreign-held
U.S. bonds when they become due, or
2. Surrendering real U.S. assets (land, income-yielding real
estate or entire companies) to the foreign creditors.
And they had no vote on the fiscal policies that begot this
debt.
And why is this macro-economic backdrop relevant to
health-care policy ?
II. THE HEALTH CARE ECONOMY
REAL vs FINANCIAL RESOURCES ABSORBED BY HEALTH CARE
Health spending – now over 17%
of U.S. GDP is measured here. It
is what the providers of care get.
Individuals
who receive
Claims on GDP (i.e., Money)
health care
goods or
who
surrender
Prices
services as
patients
Individuals
real
resources to
Real Resources (i.e., health care)
health care
The utilization of health care is
measured and controlled here
PERCENT OF GDP CLAIMED BY HEALTH CARE, 1980-2009
U.S.
France
Switzerland
Germany
Canada
Sweden
19
Percent of GDP
17
15
13
11
9
7
Source: OECD Data Base, 2011.
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
5
U.K.
Americans have always believed that their health spending
per capita and as percent of GDP towers above those of all
other nations, because we get more and superior health
care than do citizens of other nations.
With the exception of a few procedures – e.g., cancer care
– the evidence for that felicitous belief is weak to nonexistent.
American health care cost so much more per capita for
two major reasons:
1. The enormous complexity of the system and the huge
administrative overhead that entails;
2. Higher prices for most health-care goods and services than
are paid by citizens of other countries.
THE VALUE CHAIN IN U.S. HEALTH CARE
Medical
Research
Operations
Research and
Management
Consulting
Media and
Publ. Rel.
Consulting
Risk
Management
Consultants
Producers of
Products
Wholesalers
The health-care
workforce
Financial
Accounting
and Auditing
Compliance
Consulting
Firms
Producers
of Health
Marketing
Services
Lobbying
Firms
Legal
Services
Others, in
case I forgot
some
Public and Private
Health Insurers
Patients
and the
Care
Services
Informationinfrastructure
Services
Insurance brokers and
others servicing the
insurance industry
Insured
Why are prices so high in the U.S.?
Because at the behest of the supply side, our politicians
have structured the payment side of our health system on
the Divide et Impera principle.
Each private insurers – even those with relatively large
market share in a local market – is too weak to resists
price increases by hospitals, with few exceptions.
The Income--Employment Facet
Health-Care Spending
Health-Care Incomes
HEALTHPrices of
Health-Care
Goods and
Services
Health-Care
CARE
SECTOR
Wage Rates
Rates of
Return to
Capital, etc.
Real resources
OWNERS OF HEALTHCARE RESOURCES
THE REST OF
SOCIETY
The Health Care & Health Facet
OBJECTIVE A:
OBJECTIVE B:
Enhancing the
patients’ quality of life
Enhancing the
“providers” quality of life
HEALTH CARE AS AN EXCHANGE OF FAVORS
The flow of funds in U.S. health care, 2009
OTHER PRIVATE
PRIVATE HOUSEHOLDS
STATE GOV’T
Medicaid, etc.
12.6%
59%
Medicaid
Taxes
Vouchers, Subsidies
for Health Insurance
FEDERAL GOV’T
46%
Medicare,
Medicaid, etc,
33.6%
Cuts in
Paycheck
EMPLOYERS
PRIVATE INSCE.
Premiums for individually purchased
health insurance
Out of pocket at point of service (12%%)
34.5%
PROVIDERS OF HEALTH CARE
Taxes
In December 2010, the trade association
of private health insurers in the US – the
AHIP – published this report on the
average prices charged to larger insurers
by Oregon Hospitals
QUESTION: Why did private insurers
and employers behind them accept this
steep price increase?
COMPARATIVE PRICES FOR A NORMAL DELIVERY:
Total hospital and physician cost
US 95 pctl.
$13,799
US average
$8,435
US low
$6,379
Switzerland
$3,485
Germany
$2,147
France
$3,768
Canada
$2,266
Australia
$4,592
$0
$2,000
$4,000
$6,000
$8,000
$10,000 $12,000 $14,000 $16,000
SOURCE: International Federation of Health Plans, 2010
COMPARATIVE PRICES FOR AN APPENDECTOMY:
Total hospital and physician cost
US 95 pctl.
$25,344
US average
$13,123
US low
$7,758
Switzerland
$2,570
Germany
$3,285
France
$2,795
Canada
$3,810
Australia
$6,526
$0
$5,000
$10,000
$15,000
$20,000
$25,000
SOURCE: International Federation of Health Plans, 2010
$30,000
COMPARATIVE PRICES FOR LIPITOR:
US 95 pctl.
$134
US average
$129
Switzerland
$78
Germany
$78
Canada
$31
Australia
$33
$0
$20
$40
$60
$80
$100
$120
$140
SOURCE: International Federation of Health Plans, 2010
$160
Laugese and Glied in HEALTH AFFAIRS September 2011: 1647-56.
III. OPTIONS FOR COST CONTROL IN HEALTH CARE
During the past four decades, health-care spending in the U.S.
have grown on average more than 2 percentage points faster
than the rest of the GDP.
If that trend continues for the next four decades, we’ll be
spending 40% of our GDP on health care by 2050.
This is not going to happen. The economy can’t take it any
more.
PROJECTED HEALTH SPENDING 2009-19 BY SOURCE
$5,000
Medicaid
Other Public
Priv. Insce.
Out-of-Pocket
Other Private
Projected NHE in 2019 = $$4.5 trillion or 19.3% of GDP
$4,000
Private
$3,500
$3,000
$2,500
Government
Billions of Dollars
$4,500
Medicare
$2,000
$1,500
$1,000
$500
Medicare
$0
2009
2010
2011
2012
2013
2014
2015
2016
SOURCE: CMS Data and Statistics, Sept. 2010 Update.
2017
2018
2019
Given our increasingly skewed income distribution, who
will pay for the ever larger numbers of lower-middle class
and poor American families’ health care?
OPTIONS FOR CONTROLLING HEALTH SPENDING BETTER
Option A: Reform
the way we pay for
health care
HEALTH SPENDING = PRICES x UTILIZATION
Option B: Ration the
use of health care
Single-payer health system
(e.g., Canada or Vermont(?)
All-payer health system with
multiple payers (e.g.
Germany or Switzerland)
Multi-tiered, market-driven
health system that rations
health care by income class
√
I believe that in the next two decades the U.S. health system
may well evolve along the following lines (the third option):
1. Public hospitals and public clinics for publicly insured Americans,
especially the poor, but perhaps also for a restructured Medicare.
It allows politicians to ration health care without ever having to
admit it.
2. For the employed middle class, a mixed system, tiered by cost
through tiered reference pricing (now used mainly for prescription
drugs) that can be camouflaged as “value-based purchasing. That
approach also permits rationing of some health care by income
class without anyone having to say so openly.
3. For the upper-income groups, boutique medicine, which is already
growing in the U.S.
Stay tuned!