What’s the Future for Health Care Cost?


Well, the day has finally arrived where Obamacare is being challenged in the US Supreme Court…  Reason magazine highlights the illogical position taken by the Obama administration:

The Obama administration argued to the U.S. Supreme Court this week that people must be compelled to buy medical insurance (designed by the government) or the national medical-insurance market will fail. Thus, Obamacare advocates say, the insurance mandate is consistent with the powers delegated under the Commerce Clause of the U.S. Constitution.

The argument, however, contains a fatal flaw. If the medical-insurance market would indeed fail without a mandate, it’s only because of other mandates the government has already imposed. Thus the government has created the rationale for an extension of its own power.

Milton Friedman used to warn people that the government could always find reasons for adding more government to fix the problems they created…


October 21, 2009

The saga of health care continues…  My position hasn’t changed.   As previously noted, my viewpoint is diametrically opposed to that of the Democrats.  The single payer approach is the worst thing that can happen to us.  This further removes the patient/customer from the cost-benefit decision-making.   A recent editorial from Ronald Bailey shares some logical views about reducing the cost of health care:

An essential player is absent from the competitive field: the actual consumer of health care services. So long as insurers can extract their premiums from employers and providers can extract payments from insurers, the health care industrial complex has very little incentive to rein in costs….

So what kind of real reforms could increase health care competition? Congress should aim to break up the system of local monopolies into which our health care sector has devolved….

There is one thing that everybody should know when it comes to health care: Competition in markets tends to lower prices and improve quality over time. It can do so in health care markets as well.


August 19, 2009

As an entrepreneur running a technology business, I have frequently asked our insurance agent why our health insurance premiums (Anthem Blue Cross or United Healthcare) increase every year by 10% or more. After 15 years of questioning, I have yet to receive a satisfying explanation. In addition, I’ve grown weary of the political rhetoric emanating from Washington on this very topic.  As a result, I elected to perform my own ad hoc analysis based on studies and facts available from relatively trustworthy organizations… I hope this doesn’t come off as an academic treatise, but take a look.

A study of national health expenditures by the US Department of Health & Human Services indicates that companies are typically paying $5,000 per year, per person for health insurance premiums (for employees only). According to a Price Waterhouse study on the rising costs of health care, health insurance premiums have increased by an average of 10 percent per year over the last 20 years.

Based on my analysis of the facts presented by the various studies, I attribute the growing costs to the following three areas:
• Aging Population – The change in demographics means that a greater percentage of American citizens require even more health care intervention.
• Technological Innovations – The results of research provides new pharmaceuticals, diagnostic methods, and surgeries that did not previously exist.
• Third-Party Payer – Since fees have been covered by a third-party, most users are not concerned about the efficiency or effectiveness of health care services.

Aging Population

As President Obama recently said, “the chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out there.” A detailed study on the lifetime distribution of health care costs by the National Institutes of Health indicate that the per capita expenditure for health care is more than $300,000, with more than 50% of health care costs incurred in an individual’s last few years of life. Additionally, the National Institutes of Health projects that the population of the United States aged-65-and-over is expected to double in size within the next 25 years. Thus, even if all the other variables affecting the cost of health care were to remain the same, the change in the demographics is going to increase the overall cost by at least threefold.

Technological Innovations

A study of health care costs by the Kaiser Foundation indicates that administration costs are less than 5% of the total. Meanwhile, prescription drugs account for 10% of total aggregate health expenditures, and it is the fastest growing segment. This is substantiated by a study from Health Affairs International that shows that there were over 900 new drugs introduced during a 20-year period between 1982 and 2003.

It has become very common for middle-aged Americans to be declared to have high blood pressure or high cholesterol. According to the Physician at the Seminal, more than 80% of the population enters this phase at some point in late adulthood. The standard path is for the patients to start taking costly examinations and pharmaceuticals for the next 20 or 30 years of their lives.

Since drugs have become such a central part of American life, the corner pharmacy has replaced the corner gas station. According to the statistics compiled by the National Community Pharmacy Association, there are more than 24,000 independent pharmacies in the United States (this does not include the chains such as CVS, Rite Aide, etc.). In addition to the increased emphasis on drugs, according to a health care study from the Rand Institute, more Americans are using expensive procedures such as magnetic resonance imaging (MRI) for simple problems such as knee sprains.

Third-Party Payer

The National Center for Policy Analysis states that every time we consume $1 worth of hospital care, we pay only about three cents out of pocket; 97 cents is paid by a third party (employer, insurance company or government).

The old cliché is that nobody takes the time to wash a rental car; or as Milton Friedman used to say: “nobody spends somebody else’s money as wisely as he spends his own.” With a third-party payer system, as long as someone else is footing the bill, you’ll want everything possible and you don’t care about the cost.


The examination of potential solutions is highly dependent upon some critical assumptions as well as your “worldview”. Specifically:
• Is health care an inherent right guaranteed for every US citizen?
• Is everyone eligible for exactly the same level of health care?
• Are all citizens entitled to every available health care remedy?

Most citizens will answer “yes” to at least one of these questions. As a result, it is clear that the cost of providing health care in America will far exceed the funds available. The expectations we US citizens have for health care are simply not in alignment with reality. Unfortunately, both Republicans and Democrats are not being forthright with the citizenry.

Rationing is a normal part of economic transactions. It is one thing for the Government to ration the consumption of rubber during a time of war, but the notion of a bureaucratic agency managing the rationing of health care is especially intolerable. The rationing of health care in a democratic society is established by the pricing negotiated between providers and user.

A sweeping socialization of medicine would be catastrophic for our country. The United States has to move to a model where each citizen is directly involved in their own health care cost/benefit (is this procedure, medicine, test, etc., worthwhile for me?) and rationing decisions. This will have the greatest impact on getting the cost of health care under control.

[Note: I have tried to move our small company towards a Health Savings Account and insurance for catastrophic health events, but discovered that the laws and insurance premiums do not yet support this approach.]

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