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National Institute for Health Insurance Reform

One little guy - one big goal - fix a broken system. mailto:rereason@hotmail.com

Thursday, July 21, 2005

Why Healthcare Costs So Much

Medicare turns 40 this month, and reflections on the accomplishments of the program seem appropriate.

When Medicare began, old people often could not afford to go into the hospital. Now, people live longer than ever, thanks in part to improved health care and improved access to that care.

Of course, the end of life is when the biggest effort is made to save and extend life; healthcare costs for the elderly population are vastly higher than the costs for younger people. So Medicare costs so much partly because the elderly and disabled population have vastly greater need for hospital and medical services.

In economic terms, the consumer market for healthcare is segmented; government covers most of the costs of the most expensive patients while healthier, working patients are segregated into markets that work without government directly paying the costs.

Third party insurance insulates the consumer from the direct costs. That is, since the insurance pays for the service, or pays the lion's share, cost is not considered by the consumer. Of course, the costs are eventually passed on to the pool of insureds in the form of premiums. In purely economic terms, the arrangement creates a virtually unlimited demand for health services from this segment of the market. Of course, when limitless demand meets limited supply, costs skyrocket.

People with no insurance occupy a peculiar position in the market. Their costs are often borne by providers of services, who pass the costs on to the insureds. Of course, providers are legally obligated to treat only life-threatening conditions. Thus, routine care, including preventive care, is usually simply not provided to the uninsured. So, the single most expensive form of care, emergency room visits, are often the only care the uninsured can afford. Since these costs are passed along to the insured, premiums soar while the average quality of results for all patients suffers.

Piecemeal solutions, such as HMOs or Medicare costs caps are ineffective because the system as a whole operates to inexorably drive up costs.

Of course, healthcare is not a consumer good like soda pop or TV sets or digital cameras. The fact that people do not seek services unless they need them is the only real restraint on consumption of healthcare.

Obviously, a system that enrolled the entire population, including the 45 million uninsured, would result in lower average costs for everybody. Studies show that many people choose to go without insurance, which they feel they don't need so long as they stay healthy. Surely adding them into the mix makes sense.

The architects of Medicare, men like Robert Ball, wanted Universal Healthcare for all Americans. They settled for what was politically possible, coverage for their parents. The economic distortions of segmenting the market were easily foreseen. In considering whether or not Medicare is or was successful, ponder the following question: Would you want to pay for your mother or father's last six weeks of life lived in intensive care out of your own pocket? Would you even be able to?

Drug Company Reins in Ads

Drug giant Bristol-Meyers Squibb announced they would voluntarily impose a one-year moratorium on advertising new prescription drugs to consumers.

American Academy of Family Physicians president Mary Frank praised the company for taking a step in the right direction.

According to the AAFP article, numerous studies in recent years have shown a link between advertising directed at consumers and doctor's writing prescriptions.

The issue of advertising by drug companies is controversial for several reasons. Estimates of the added costs to the healthcare system vary widely; some say $4 billion per year, and others claim the costs exceed spending on research and development.

Recent experience with Vioxx (not a Bristol-Meyers Squibb product) has raised the issue's public awareness. Vioxx was agressively marketed before Merck pulled it off the market because of a possible link to increased risk of heart problems.

Senator Bill Frist recently said "It's time for drug companies to clean up their act. If they don't, Congress will."

Among developed nations, only New Zealand and the United States allow drug companies to advertise prescriptions directly to consumers.

At best, these ads create a burden on doctors who are forced to explain why a particular drug that has been heavily promoted is not right for their patients. At worst, these adds increase demand, drive up prices, and add untold billions to healthcare costs.