HEALTH CARE IN THE MACRO ECCONOMY Uwe Reinhardt, Woodrow Wilson School of Public and International Affairs and Department of Economics Princeton University

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

U.S. Health Care

External factors beyond out control

Self-Inflicted macro-economic wounds

A health system carefully calibrated

to be inefficient

Dysfunctional federal government

I. THE MACRO-ECONOMIC CONTEXT

II. THE HEALTH-CARE ECONOMY

OUTLINE

III. OPTIONS FOR COST CONTROL IN HEALTH CARE



A. Factors beyond our control

1. Aging of the population

SOURCE: Report of the Trustees of the Social Security System, http://www.socialsecurity.gov/oact/tr/2011/tr2011.pdf

Ratio of older people to working-age people



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

VALUE-CHAIN LINKS IN “OPERATIONS”or MANUFACTURE

Component A

Component B

Component N

Assembly∙∙∙

Korea Japan Switzerland China∙∙∙

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.

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

SECTOR PRODUCING

TRADED OUTPUT

Reference: Michael Spence and Sandile Hlatshwayo, The Evolving Structure of the American Economy, Council on Foreign relations, (March 2011)

• 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.

• 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.

SOURCE: Michael Spence and Sandile Hlatshwayo, The Evolving Structure of the American Economy and the Employment Challenge, Council on Foreign Relations, March 2011

7

8.5

12

10

18.5

9

12

14

16

22.5

0 5 10 15 20 25

Construction

Accommodation &Food services

Retail

Health Care

Government

Millions of Jobs

1990 2008

SOURCE: Approximated from Spence and Hlatswayo, Figure 6.

THE MAJOR JOB CREATORS IN THE UNITED STATES

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

1.2%

4.0%

3.0%

4.4%

10.3% 10.1%

0.6%

2.7%

1.3%

0%

2%

4%

6%

8%

10%

12%

14%

1976-2008 1993-2000 2002-2007

An

nu

al

perc

en

tag

e g

row

th

AVERAGE TOP 1% Bottom 99%

FIGURE 2 -- FRACTION OF TOTAL INCOME GROWTH CAPTURED

58%

45%

65%

0%

10%

20%

30%

40%

50%

60%

70%

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.



B. Self-inflicted wounds

A staunch anti-government attitude in the population and

among leading policy makers.

FIRST SELF-INFLICTED WOUND

"Government is not a solution to our problem; government is the problem." (January 20, 1981)

In his first inaugural address as President of the United States, Ronald Reagan proclaimed:

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.

CHINESE BULLET TRAIN – FASTEST IN THE WORLD

Americans cannot even dream of such an infrastructure.

http://www.huffingtonpost.com/2010/10/26/china-bullet-train-video_n_774273.html

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.

Keynesian mechanisms (payroll tax holiday, UE insce.etc.), $218 , 52%

Aid to states for jobs, $30 ,

7%

Incentives for employers to hire workers,

$118 , 28%

Infrastructure spending in

2012, $55 , 13%

ADDITIONAL FEDERAL SPENDING IN 2012 ON JOBS PROGRAM Total of $421 billion (Additional infrastructure spending of $35 b in 2013).

Fiscal mismanagement by the federal government.

SECOND SELF-INFLICTED WOUND

U.S. fiscal policy:U.S. fiscal policy:

``How cool!

Sunshine all

around!

© Tsung-Mei Cheng

Reagan/Bush I Clinton Bush II ObamaCarterNixon/Ford ????

SOURCE: Congressional Budget Office, http://www.cbo.gov/ftpdocs/110xx/doc11047/05-13-CBO_Presentation_to_AAAS.pdf

In the words of Douglas Elmendorf, the Director of the Congressional Budget Office (CBO):

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?

24

28.1

30.3

30.7

31.1

34.3

37

39.1

41.9

42.8

43.5

44.8

46.4

48.2

0 5 10 15 20 25 30 35 40 45 50 55

United States

Japan

Switzerland

Spain

Canada

United Kingdom

Germany

Netherlands

France

Austria

Italy

OECD AVGE.

Sweden

Denmark

Source: OECD Tax Data Base, http://www.oecd.org/document/60/0,3746,en_2649_34533_1942460_1_1_1_1,00.html#A_RevenueStatistics

TOTAL TAXES AS PERCENT OF GDP, 2009

26.1% IN 2008

Americans

are not an

overtaxed

people

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

0%

2%

4%

6%

8%

10%

12%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 1 2 3 4 5 6 7 8 9

PERSONAL SAVINGS BUSINESS SAVINGS TOTAL NET PRIVATE SAVINGS

SOURCE: Economic Report of the President 2011, Table B-1 AND B-32.

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

$(100)

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 1 2 3 4 5 6 7 8 9

SOURCE: Economic Report of the President 2011, Table B-103.

These are annual net borrowings from abroad.

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 Resources (i.e., health care)

Claims on GDP (i.e., Money)Individuals

who receive

health care

goods or

services as

patients

Individuals

who

surrender

real

resources to

health care

The utilization of health care is measured and controlled here

Health spending – now over 17% of U.S. GDP is measured here. It is what the providers of care get.

REAL vs FINANCIAL RESOURCES ABSORBED BY HEALTH CARE

Prices

5

7

9

11

13

15

17

19

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Per

cen

t o

f G

DP

U.S. France Switzerland Germany Canada Sweden U.K.

PERCENT OF GDP CLAIMED BY HEALTH CARE, 1980-2009

Source: OECD Data Base, 2011.

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 non-

existent.

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.

Patients

and the

Insured

Producers of Products

Whole-salers

Producers

of Health

Care

Services

THE VALUE CHAIN IN U.S. HEALTH CARE

The health-care workforce

Public and Private Health Insurers

Insurance brokers and others servicing the insurance industry

Information-infrastructure

Services

Medical

Research

Operations Research and Management Consulting

Financial Accounting

and Auditing

Marketing Services

Media and Publ. Rel.

Consulting

Risk Management Consultants

Legal Services

Others, in case I forgot

some

Lobbying Firms

Compliance Consulting

Firms

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.

HEALTH-

CARE

SECTOR

The Income--Employment Facet The Health Care & Health Facet

OBJECTIVE A:

Enhancing the patients’ quality of life

OBJECTIVE B:

Enhancing the “providers” quality of life

TH

E R

ES

T O

F

SO

CIE

TY

Health-Care Spending

Health-Care

Prices of Health-Care Goods and Services

OW

NE

RS

OF

HE

AL

TH

-C

AR

E R

ES

OU

RC

ES

Real resources

Health-Care Incomes

Wage Rates Rates of Return to Capital, etc.

HEALTH CARE AS AN EXCHANGE OF FAVORS

PR

IVA

TE

HO

US

EH

OL

DS

PR

OV

IDE

RS

OF

HE

AL

TH

CA

RE

Out of pocket at point of service (12%%)

STATE GOV’TTaxes Medicaid, etc.

12.6%

FEDERAL GOV’T

Taxes

Medicare,

33.6%

Medicaid

OTHER PRIVATE 7.2%

PRIVATE INSCE.EMPLOYERSCuts in

Paycheck 34.5%

Vouchers, Subsidies

for Health Insurance

Subsidies, Tax

Preference

46%

59%

Premiums for individually purchased health insurance

Medicaid, etc,

The flow of funds in U.S. health care, 2009

In December 2010, the trade association In December 2010, the trade association of private health insurers in the US – the of private health insurers in the US – the AHIP – published this report on the AHIP – published this report on the average prices charged to larger insurers average prices charged to larger insurers by Oregon Hospitalsby Oregon Hospitals

QUESTION: Why did private insurers and employers behind them accept this steep price increase?

$4,592

$2,266

$3,768

$2,147

$3,485

$6,379

$8,435

$13,799

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000

Australia

Canada

France

Germany

Switzerland

US low

US average

US 95 pctl.

COMPARATIVE PRICES FOR A NORMAL DELIVERY:COMPARATIVE PRICES FOR A NORMAL DELIVERY:Total hospital and physician costTotal hospital and physician cost

SOURCE: International Federation of Health Plans, SOURCE: International Federation of Health Plans, 2010 2010 Comparative Price ReportComparative Price Report..

$6,526

$3,810

$2,795

$3,285

$2,570

$7,758

$13,123

$25,344

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000

Australia

Canada

France

Germany

Switzerland

US low

US average

US 95 pctl.

COMPARATIVE PRICES FOR AN APPENDECTOMY:COMPARATIVE PRICES FOR AN APPENDECTOMY:Total hospital and physician costTotal hospital and physician cost


$33

$31

$78

$78

$129

$134

$0 $20 $40 $60 $80 $100 $120 $140 $160

Australia

Canada

Germany

Switzerland

US average

US 95 pctl.

COMPARATIVE PRICES FOR LIPITOR:COMPARATIVE PRICES FOR LIPITOR:


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.

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Bil

lio

ns

of

Do

llar

s

Medicare Medicaid Other Public

Priv. Insce. Out-of-Pocket Other Private

SOURCE: CMS Data and Statistics, Sept. 2010 Update.

PROJECTED HEALTH SPENDING 2009-19 BY SOURCE

Medicare

Medicaid

Other Public

Private Insurance

OOPOther Private

Projected NHE in 2019 = $$4.5 trillion or 19.3% of GDP

Go

vernm

ent

Private

Given our increasingly skewed income distribution, who

will pay for the ever larger numbers of lower-middle class

and poor American families’ health care?

HEALTH SPENDING = PRICES x UTILIZATION

Option A: Reform the way we pay for

health care

Option B: Ration the use of health care

OPTIONS FOR CONTROLLING HEALTH SPENDING BETTER

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

√

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.

I believe that in the next two decades the U.S. health system may well evolve along the following lines (the third option):

Stay tuned!

Documents

HEALTH CARE IN THE MACRO ECCONOMY Uwe Reinhardt, Woodrow Wilson School of Public and International Affairs and Department of Economics Princeton University