McKinsey I: the big picture

I want to go back to the McKinsey report on health care costs. It seems to me like a thorough analysis of our costs, and its conclusions about the source of the growth seem sensible. Still, it's 122 pages, so I'm going try to break it down into small, concise chunks here in the blog.

In the report. MGI (McKinsey Global Institute) looks at US health care costs between 2003 and 2006. They compare them to similar costs in 13 countries that they argue form a valid peer group for comparison. They find the following:

• The US spends a lot more on health care than these peers, both in absolute terms and as a percentage of GDP.
• This effect persists even after you adjust for differences in wealth between the US and its peers.
• In 2006 the US spent about $650 billion more than its peers on health care, adjusted for population and wealth.

The report goes on to look at this cost difference category by category, but before doing so the authors look at some commonly-cited reasons for disparities in health care costs, and conclude that the following do not explain our "extra" spending:

• The wealth effect. Countries with more money will spend more on health care. McKinsey found that our severe disparities persisted even after adjusting for this factor.
• Better outcomes. More money makes us healthier. But no, US life expectancy is mediocre compared with certain peers.
• Higher incidence of disease: we're sicker, so we need more health care. But we're not in fact noticeably sicker than our peers.

So, we spend a lot more, but not because we need it more, or because it helps us more. That's the first thing the MGI report tells us.

You can find the MGI report in the Links section to the right.

From the Magazines

Friends and family shared with a me a couple of good articles, which I'll link here and summarize.

The first is "The Cost Conundrum:what a Texas town can teach us about health care," by Atul Gawande in the New Yorker. Gawande looks at Medicare costs by region across the US, picks one of the most expensive (McAllen, Texas) and compares it to a nearby and much less expensive region (El Paso). After talking with residents, doctors and heads of hospital, Gawande concludes (having been tipped off to this by the doctors themselves) that the core problem is one of overuse. Doctors in McAllen simply prescribe more meds, tests and procedures than their counterparts elsewhere. He traces the reason for this to an "entrepreneurial" mentality among certain physicians, who see medicine as, well, a business, a way to make money. And he suggests that the variations among regions are essentially determined by which type of medical practice sets the tone in a region, much as an anchor tenant sets the tone for a shopping district: is the region's culture dominated by those who view patients as a profit center, or by those who work together to increase the quality of care and drive down costs? I found this article very persuasive. Note that this problem is not one that the big Obama health plan (HR 3200) would seem to address.

The second article is "How American Health Care Killed My Father," by David Goldhill, in the Atlantic. The author's father, at 83, was admitted to a hospital for pneumonia, and died thereafter from hospital-borne infection, leading the author on a long investigation of how this could happen in what's supposedly one of the most advanced health systems on Earth. I found this also to be an excellent article. A number of Goldhill's points have been echoed in other overviews of health care costs (which I think makes his points more compelling, not less so). He sees many problems with our system(s) of health insurance: the moral hazard of buying care with OPM (other peoples' money); the belief that all health care should be paid for by insurance; and the opacity of prices to the consumer. Like Gawande, he compares a high-Medicare-cost area (Dallas) to a less expensive one (Salem, Oregon), and concludes that the higher supply of physicians in Dallas leads to more tests and procedures prescribed. This is a little less damning than Gawande's portrait of certain physician-entrepreneurs, but the conclusion ends up the same: physicians (and others in the system) behave rationally given the economic incentives before them. More tests equals more incomes, especially if, like some of the McAllen doctors, you have opened your own facilities that compete with those in hospitals.

Goldhill, in a fashion I obviously appreciate given my couple posts on cost control, dismisses cost control as focusing in the wrong place: cost rather than price. He suggests that costs have to be managed by incentives (i.e. bottom-up) not controls (i.e. top-down).

Given his personal story, the author focuses closely on hospitals, noting that hospital costs grew 3800% from 1970 to 2006 despite declines in the number of hospital beds, incidence of admission and length of stay. Hospitals are actually being used less, as hospitals, yet their share of overall health care costs (about a third) stays the same.

In general the author finds the health care market non-competitive. Costs for market-priced Lasik surgery, not covered by insurance, have declined about 80% since introduction, like a new plasma TV would. Costs for an MRI, very old technology but covered by insurance, where the prices are opaque, are still very high.

The author concludes that fundamental changes are needed in the way we pay for health care. He recommends the eventual dismantlement of giant private and public insurance pools, Medicare and Medicaid included. He suggests there should be a mandate for all citizens to have an HSA and pay into it increasingly over their lifetimes. He suggests a single national insurance pool, like Medicare/Medicaid, but limited to "truly catastrophic" costs (over about $50,000). He suggests some form of guaranteed benefit for lower-income brackets. But the key in all cases would be to give the money to consumers, and make them responsible for spending it.

One rule I can attest to from my experience in managing a business: in order to change outcomes, you must change incentives. Both of these articles, in their own way, conclude that the health care system we have now makes sense, given how its incentives are structured. The McKinsey report I cited early makes the same claim. I found these articles compelling, and frightening in their implications. I hope that before anyone demonizes doctors, hospitals, insurance companies, pharma companies, trial lawyers, or the government, they'll reflect on this essential contention: that the system we have now mirrors the incentives at its heart.

In upcoming posts I'm going to turn back to the McKinsey report, to see how its data illuminate what's been discussed so far.

Negotiated drug prices in Medicare: from the right and the left

In the last post I talked generally about government "negotiation" of health care prices. This time, I'd like to look at a specific area in which price controls are being debated: the Medicare drug benefit. The drug benefit results from a 2003 Bush-era law that, among other things, extended Medicare benefits to cover prescription drugs in certain complex ways. Conservatives indicated they would not support the bill if its 10-year cost exceeded $400 billion, so it was announced as a $400B bill, though evidence later emerged that the Bush administration had higher cost estimates in its possession and suppressed them. So the cost estimates for the bill jumped, to over $500B about a month after it passed, and to about $1.2 trillion two years later.

Clearly, a prescription drug benefit is expensive. Not really very surprising.

The bill contains many provisions designed to appease various constituencies, as any large bill sort of has to. One of the provisions is that the government is forbidden from "negotiating" drug prices. Rather, a network of private plans actually provide the benefit, and these plans negotiate prices with the pharma firms.

Now, some find the non-negotiation provision odious. And "some" seem to be mostly on the left.

(Important aside: I really hope, in this blog, to be able to find a middle ground. I don't have a hidden "conservative" or "liberal" agenda. Part of the point of this exercise, in fact, at least for me, is deciding what I really think. In some cases, such as this issue of "negotiation", I may seem to take a right-leaning viewpoint. On others, I imagine I'll seem to lean left. If my views on "negotiation" have led you to either write me off or embrace me, depending on your bent, as somehow conservative, I urge you to instead set those labels aside, and just come along with me as we try to figure this stuff out.)

At this point, rather than offer you my own untutored views, I'm going to cite two position papers on the concrete issue of whether the non-negotiation provision is a good or bad thing. The goal is for you to look these papers over, if you care to, or read my attempts at summary, and see which arguments you think make the most sense.

The first paper is a piece titled "The Human Cost of Federal Price Negotiations: the Medicare prescription drug benefit and pharmaceutical innovation", put out by the Manhattan Institute for Policy Research. The MIPR appears to be your classic neo-con think tank, founded by William Casey who went on to direct the CIA under Reagan, and funded inter alia by Bristol-Meyers and the Scaife family (see articles on Wikipedia and SourceWatch). The second piece is titled "The Savings from an Efficient Medicare Prescription Drug Plan", put out by the Center for Economic and Policy Research, a left-leaning think tank focusing on economics issues (see the Wikipedia and Sourcewatch articles).

One thing you could do, of course, is just go browse the papers yourself and see what you think. But if you're pressed for time, I'll do my best to summarize them.

MIPR paper: this paper makes the claim that if the government uses its power to drive Medicare prescription drug prices down, pharma R&D budgets will suffer, fewer new drugs will be introduced, and people will live less long as a result. The paper argues that price controls will save $21B annually, but that the lost life-years have a value of $500B annually. The paper goes on to predict that government price controls on prescription drugs would lead to a reduction of pharma R&D expenditures of between $300 and $600 billion between 2005 and 2025. The paper also argues that, by analogy with the Veterans Administration, which imposes significant price controls in the form of steep mandatory discounts, a price-controlled Medicare drug program would have an incentive to reduce the formulary, i.e. the number of drugs available in the program, leading to a narrow range of drug choices for Medicare beneficiaries.

CEPR paper: this paper takes the position that the lower prices paid in other countries for drugs that cost substantially more in the US is proof that those lower prices are economically sustainable for the drug firms, and would remain so even if extended to the US. "The pharmaceutical industry must at least cover its production costs and make a normal profit on even the lowest price drug sales to other
countries or agencies, otherwise it would not make them," the paper states. The paper goes further than this, in fact, as it goes on to use the market price of generic drugs as a floor to which Medicare drug costs could be driven, since, again, generic drug manufacturers sell at these prices and still somehow prosper.

By all means read these papers yourself, compare, decide what you think make sense. I was surprised to find, by the way, that I turned up many more position papers on this topic from the right than from the left. The left-leaning paper I found, I have to say, does not impress me. I wish I'd found a better one.

If you read my last post on "negotiation," you can probably guess which of these papers I think makes more sense. I don't set much store by the $500B MIPR estimate of the value of "lost life-years." There are far too many assumptions in the chain there. Likewise, R&D reductions projected out 20 years don't impress me too much. But the notion that Medicare price controls will drive down pharma R&D to some extent, all other things being equal (and that's a big if, to which I'll return), seems obvious. One other, I think potentially quite potent point, is the claim that price controls would lead to narrower formularies, as it's alleged they have in the case of the Veterans Administration. The VA's national formulary, for example, does not include Lipitor, though it includes a number of other drugs in that class. But this is a complex issue that apparently even senior program administrators for the VA and Medicare can't quite agree on.

The CEPR paper, on the other hand, is downright puzzling in its naiveté about market pricing. Its author, Dean Baker, is said to be an economist, has written numerous books, and apparently correctly called the housing bubble and its aftereffects. How is it possible that he doesn't seem to understand differential pricing, or grasp the argument I advanced in my last post, that sufficiently low pricing in some market sectors guarantees that price in others will rise (all else again being equal)? If you assume that a company can successfully offer, across its entire market, the lowest price it offers to any segment, you are assuming that it has a great deal of unnecessary or unfair profit built into its overall pricing scheme. The CEPR paper takes this view almost explicitly. The paper does acknowledge, in a footnote, that "There is an important issue about whether the industry  would still have enough money to finance research into the development of new drugs if its profit margins were substantially reduced in the United States." But the note goes on to conclude that the question is not germane to the paper, which is simply try to calculate how far costs could be reduced. Can pharma companies still prosper under such circumstances? Not my problem!

So I'm afraid I find the CEPR paper, in favor of Medicare price controls, very weak due to the author's apparent ignorance of or disregard for the true nature of differential pricing. But in the end I think both papers fail. In their focus on negotiating price (which is after all their topic), the papers take differing but equally shallow views of cost, specifically, how much pharma companies are paying to develop new drugs. The MIPR paper effectively takes the view that the pharma cost structure is essentially sane, reasonable and efficient. It takes the view that there's not a ton of "fat" in the pharma cost structure, so that lowered prices must inevitably hit R&D to some degree. The MIPR paper takes a dramatically different view, namely that even the lowest drug prices in the market contain provision for a "normal" profit, so that US prices could come down 30%-50% without any adverse effects.

As we can see, the difference between these two papers comes down to the difference in unexamined assumptions about the cost and profit structure of the pharmaceuticals industry. The interesting question is in fact a root cause question: is research into new drugs structured in a sane and efficient way? That's why I think this focus on price control is so misguided. We need cost control, not price control, and in that sense, both of these papers, though I find their merits somewhat unequal, ultimately miss the point.

"Negotiating" health care prices — a good thing?

In upcoming posts I hope to crack open some basic sources of information: the McKinsey report that I've already referenced, and the massive HR 3200 bill itself. Before then, though, I want to expand (OK, vent) a little on an issue that I hear discussed a fair amount: negotiated pricing.

I often hear arguments like the following: "Consumers in the US pay 50% more for Superfluox than they do in Canada. This shows that US consumers are being overcharged. So what we need in order to remedy this unfair situation is for the US government to use its clout to negotiate lower drug prices."

There are many, many assumptions in such statements that I think are worth close examination. Let's start with "price negotiation." As a business owner I've been a part of many price negotiations. Though in theory a good negotiation produces what the business folks like to call a "win-win", accomplished by "expanding the pie," the reality is that most price negotiations in business are zero-sum negotiations. The party with greater bargaining power uses that power to force the weaker party to accept a lower or higher price than they would like. As a seller of goods or services, I may, in extreme cases, accept a price that will generate little or no absolute profit, or even, in certain cases, an actual loss.

Why would I do this? Let's create a concrete example. Let's say my firm, Acme Flangeroll, produces some of the best flangerolls in the world (whatever a flangeroll might be). Each flangeroll costs me about $10 USD to make. Of that cost, $5 is labor (making flangerolls is a fairly highly skilled job), $3 is raw materials, and $2 is all the marketing, administration and distribution. I aim for a target profit margin of 20%, which funds R&D for the next generation of flangerolls, as well as allowing me to pay a dividend to shareholders. So I price my flangerolls in the marketplace so that I net about $12 each, for my 20% net profit margin.

All well and good. My product is good enough that I attract the custom of Ajax, a big player in the international parts market. They like our stuff, and soon Ajax accounts for 40% of my revenue. That's a lot of eggs in one basket, but it's good money, and they have a big appetite for our product.

The eggs come home to roost, so to speak, when Ajax' head of procurement takes me to lunch one day and informs me that they "just can't do" $12/widget. As such a large customer, in today's economy, he's sure hoping I can work with him on price.

Except when we dig into it, the message is clear: sell us your product at $10/widget, or we'll take ALL our business elsewhere. So much for negotiation.

I simply can't afford to lose 40% of my business tomorrow. I'll be unable to make payroll and will rapidly fall into a debt spiral that will probably kill my company. $10 per widget is way better than $0, so I have no choice but to accept this terrible deal. Long-term I may be able to whittle the Ajax business down to a more manageable percentage, but for now — forgive the language, but I'm screwed.

Accepting zero margin on 40% of my volume stinks. My overall margin drops to 12%, in other words, I lose 40% of my profit. R&D is threatened, dividends are down, I may have to slow hiring or pay increases (this is a skilled job, remember). What can I do? Well, two wrongs don't necessarily make a right, but I do have a choice: I can raise prices for some of my other customers. In fact, if I raise my prices to a nice round $13/widget for all my non-Ajax customers, my overall profit margin will be right back at 20%. But I know for a fact that that big a hike will drive off at least one customer. I settle on an increase to $12.75. There's some grumbling, and a few lost sales, but eventually profit stabilizes back at 15% — not the 20% I hoped for, but way better than 12%.

So this goes on and I wean down the Ajax business a little and things are going OK until someone leaks word of the Ajax pricing to my other customers. And then I have a lot of conversations that go like this:

"The fact that you're charging Ajax ten bucks a widget shows that we're being overcharged. We insist that you extend the same pricing to us to remedy this unfair situation."

I trust the fallacy is clear. The $10 Ajax pricing does not prove that my other customers are being overcharged, and that therefore there's room to negotiate the $12.75 market price down. In fact it proves exactly the opposite. The fact that I have been forced to extend a $10 (zero-profit) price to Ajax absolutely precludes me from offering it to the rest of the market! Unless of course the market is unconcerned with whether I stay in business.

The fact in this case is that, by using its raw power to compel me to accept a zero-margin price, Ajax is directly responsible for the price increases seen by the rest of my customers. Their beef is with Ajax, not with me. And the correct response is not to try to force me to lower prices for them as well, driving me toward the very edge of sustainability in my business — the correct response is to recognize that Ajax has secured itself a below-market price, by force. That, in this hypothetical case, is the problem that needs solving.

You might think, in reading this example, that I'm about to leap to a fairly standard, conservative-leaning position on the evils of price negotiation in health care. I think there are some interesting arguments on that side, and I'll explore some of them, time permitting, but I'm headed (I hope) to a more subtle, middle-ground place. Two points I want to make.

Firstly, let's stop talking about "negotiation." When the government uses its clout to "negotiate" prices, we might as well call these price controls, because that's what they are, it seems to me. Just as Ajax told me more or less unilaterally what it would pay, the same happens when the government negotiates. In effect it fixes/specifies prices for certain goods and services. These are simply price controls, and it's how pricing works now for Medicare, as I understand it. So let's call this what it is: government control of health care prices.

But here's the bigger point: it is meaningless to focus on price. When we see a company offering Superfluox in Canada for $1 per pill and for $1.75 in America, unless we know something about the underlying costs, we cannot possibly know what to conclude from this. If Superfluox costs .50 per pill to make,, you can plausibly argue there should be room for the US price to come down. If it costs $1.05 per pill to make, nothing of the sort is true, and in that case the Americans are subsidizing the Canadians. In that case our beef is not with the company, for charging such prices. The real question ought to be, why are your costs so high?

In the long run, trying to control spending in a marketplace by controlling prices seems to me misguided. It attacks the problem from the wrong end. A price has two components: cost and profit. It seems to me that many statements about the desirability of government price controls in health care stem from the presumption that the prices of certain goods, such as prescription drugs, include provisions for unreasonable profit. There 's a whole interesting discussion we could have there, and hopefully will, but I suspect it is a largely unexamined assumption. More to the point, though, unless you have cases of truly egregious profit-taking (and please understand, I don't rule this out, I just have yet to see compelling evidence), you can only squeeze spending so much by trying to squeeze profits. The place it seems to me you need to focus is on cost, cost, cost.

Well, you might say, cost at one point in the chain is really just price if you move down a step. If a big gorilla at the top of the food chain pressures your price, the thing to do is just pass the pressure along, and press down on the various prices that make up your cost. OK, sounds plausible. Let's see how it plays out in my widget example. There, 50% of my cost is labor, %30 materials, %20 sales and administration. In theory, all I need to do is put the screws to my suppliers for these services and persuade/compel them to likewise accept lower prices.

There are several problems with this. One big problem might be that Ajax has more clout over me (due to their 40% share of my overall customer mix) than I have over any of my suppliers. 50% of my cost is labor. In that respect, my "supplier" is the labor market for flangeroll machinists. Sure, I can "negotiate" by offering lower salaries. But I don't have the labor market over a barrel, and the end result is going to be that if lower what I pay I'm going to get lower quality employees, and I'm going to turn out lower quality widgets. In theory these lower-quality goods will command lower prices in the marketplace, and you can see the makings of a very bad spiral.

The very bottom line on all of this, in my view, is that price controls are a form of "yelling at the problem." Trying to make prices drop by force is the bluntest of blunt instruments. It is only arguably fair in cases where the vendor has a substantial profit margin to work with — where their pricing, in effect, was almost arguably unfair. But in cases where the pricing is reasonably reflective of underlying costs, and the vendor's profit contains sensible provisions for things like R&D, reserves, and the other things that make companies work, then pressing the price down by force in one place is almost guaranteed to make it pop up like a prairie dog someplace else.

In any event, using force and clout to compel low prices is a business maneuver hardly worthy of government. This is a simple strongarm tactic that's old hat for the rankest titan of industry pounding a meaty pinstriped fist on the conference table. I expect, and need, much more from my government than a crude aping of the roughhouse tactics of the private sector.

There may be some short-term Band-Aid-style good to be had from certain price controls in certain areas. But such controls are not a cure for anything. It's like trying to control boiling by holding down the pot-lid, when what's needed is someone to turn down the heat. The problem of health care costs needs to be tackled bottom up, with a focus on managing costs, not top-down with a focus on managing price.

How is health care like electricity?

Reader Thomas pointed out a hole in my list of hypotheses as to why health care prices are high. Health care, he pointed out in a comment, could be considered to be somewhat like power (electricity), in that, when you need it, you need it now. You can't wait to see if prices drop, as they might for a model of TV or tractor. He suggested that such goods might follow different rules, that might make them more amenable to manipulation such as Enron practiced in the power market.

I found one useful overview of electricity pricing dynamics. Let me quote some of the mentioned features of electricity economics, which certainly parallel some things about health care:

In addition to supply and demand, the price of electricity reflects some of its unique characteristics.

• Electricity cannot be easily or cost-effectively stored.
   
• There are few substitutes.
   
• Generally, users cannot simply terminate consumption without significant disruptions in production. These unique factors magnify the impact on price of supply and demand imbalances.

The effect of price changes on supply and demand is called "elasticity." Broadly stated, elasticity of demand is the measure of how steeply demand goes down when prices go up. Elasticity is different for each commodity and reflects the particular characteristics of the commodity's use and markets.
In the short run, system-wide elasticity for electricity is near zero. There is almost no reduction in demand as prices rise on an hourly basis. This is because users do not have a stockroom full of spare electricity; they cannot use a substitute input; and, if they ceased their use while the price was high, many would suffer unacceptable disruptions in operations.

So how does the analogy with electricity help understand health care costs? Well, at a minimum it reminds us of the fairly obvious but still essential point that health care is a highly inelastic good. What this means is that it's relatively difficult to get the health care market to behave like the idealized free-market utopia, where consumers can "vote down" goods that are too expensive or too poor-quality. It also opens the intriguing question (which I haven't thought about in any detail yet) whether the market for health services could benefit from some of the hedging and risk-management tools used (or not, see the case of California as described in the above article) in the power markets.

But again, at a minimum, it reminds us that the health care market show significant insensitivity to price. By the way, another factor that it's argued makes demand for health care less elastic is the price-insensitivity induced by insurance plans, especially the more generous ones. A third contributor is the systemwide opacity around prices. Your doctor suggests you get a CAT scan. If you're like most of us, your first question is not "what does a CAT scan cost," but "what will it cost ME?" If the answer is acceptable, you're probably less worried about what it costs your insurance plan (a cost that's ultimately passed on in some form to all members in the pool, or, if the pool should fail in some way, to whatever entity bails out the insurer -- most likely the US taxpayer in the end).

Here's another post that compares health care to electricity, albeit in a very broad analogy concerning a mix of public and private sources for a good: http://demockracy.com/on-electricity-or-can-a-public-option-work/.

Is high health care spending a bad thing?

More or less every day we hear that health care costs are too high, that health care spending must be reduced, that the high cost of health care is "draining" or "crippling" our economy. It's true that, as we saw in another post, the US spends far more per capita on health care than other countries. But we could tell a similar story for defense spending, or spending on cars —and we hear nothing about how excessive defense or automobile spending is "crippling" our economy and needs to be lowered.

(A note to ideologues who are already composing a blistering rebuttal: I'll resort to for-the-sake-of-argument, rhetorical constructs like this frequently. Before you get worked up about something, please read the whole post carefully to see what point I'm really making, and why I may have thought it worthwhile to pursue certain lines of thinking or prop up seemingly nonsensical arguments for a while.)

So when we see high per-capita health care spending, there are a lot of ideas we might have:

1. Health care is a "superior good." People are willing to pay more for better health care. We spend more on health care because our health care is better.
2. Health care is a superior good. People will spend more on it the more wealth they have. We spend more on health care because we are overall a wealthier nation.
3. Health care spending presumably responds to, well, health. If we're spending more on health care it must be because we're sicker, and we should find out why that's so.
   
4. Health care is like any other kind of spending. It's no more intrinsically harmful than defense or automobile spending. After all, if I spend a dollar on health care, it goes into the pocket of my neighbor the doctor and he spends it on a movie, buoying the economy. (This was the argument of a recent WSJ editorial. I'd like to have the reference if anyone has it.)
   

These might all sound plausible. But in fact the McKinsey study I cited in an earlier post disproves most of them:

1. If our health care is higher-quality, you'd expect to see healthier people. The easiest metric, though a crude one, that I can think of is life expectancy. Unfortunately our high per-capita spending on health care doesn't lead to correspondingly higher life expectancy overall. The US fares poorly on life expectancy compared to McKinsey-selected peer countries. It does worse still when you focus on particular subgroups. Though aspects of our health care system are the best in the world, the extra dollars are not, overall, leading to better outcomes.
2. This is true. But the McKinsey calculations took this factor into effect and adjusted for it (somehow — I'll admit I haven't read the fine print to find out how yet). Our significantly higher per-capita spending in the report includes this adjustment factor.
3. The US is not in fact sicker than its McKinsey-selected peers — slightly less so for certain classes of disease, and generally about on par, certainly not 50% worse off.
4. This one is more nebulous, but health care spending is not like other kinds of spending. By and large, health care dollars don't come directly out of a consumer's pocket. They are typically drawn out of some sort of spending pool, one managed by a private or government insurer. This has a multitude of consequences, but here are just two. Firstly, in many insurance plans, especially more generous ones with low deductibles and copays, consumers will have relatively little price sensitivity since their own out-of-pocket cost is low and the actual cost of procedures is deeply buried. Secondly, the buying "habits" and characteristics of other consumers can profoundly affect my cost in a way I can't opt out of: systematic increases in real or perceived cost or risk WILL lead to higher insurance premiums, which will absolutely be passed along to me and my employer. There are good reasons to think that insurance pools of some sort are the right way to pay many health care costs, but it means that the health care marketplace behaves quite differently from, say, the handbag marketplace.
5. Finally, some amount of health care is a government-funded entitlement, so cost increases eventually will hit the US budget and thus eventually the US taxpayer, providing one more way in which health care costs are not like lumber costs.
   

So is our high level of health care spending bad, and if so, why? The answer seems to be the following:

The US spends significantly more wealth-adjusted per-capita dollars on health care than any other country in its peer group, yet achieves life expectancy results that lag that group, in some cases markedly.

If we wanted to convert this to a metric on which we performed poorly relative to others, we'd probably want a metric like "years of average life expectancy per wealth-adjusted per capita health care dollar." Wonkishness aside, the bottom line appears to be that we spend more, and get less, at least if "life expectancy" is the good we think our health care dollars are purchasing.

Who should read this blog

Let me clear that this blog is being written by a member of the health care laity (I'm CTO of a custom software firm and have had only tangential professional exposure to the health care system). If you know the issues intimately and are already a health care policy wonk, a site like the Health Care Blog may suit you better.

This blog is more likely to be interesting to you if you've suffered from one or more "what the ... ?" moments in reading coverage of or otherwise hearing about the current health care debate.

A starting point for some data

Believe it or not, fairly dispassionate studies of the health care system in America, as well as elsewhere, have been done. Whether they're influencing the debate or not is an interesting question. But for those of us who want to be students of the issue, they seem like a good place to start.

For my own starting point, I've chosen the reports prepared by the consulting firm McKinsey & Company. You find several of them linked from the McKinsey Global Institute's health care landing page. (Free registration required — please don't let this put you off). Pay special attention to the report titled Accounting for the cost of U.S. health care: A new look at why Americans spend more.

I'll be going over that report in some detail as I make my way through it, but I'll share the key finding here for starters:

The United States spends significantly more than many comparable countries on health care. Whereas countries in the peer group McKinsey examined seem to spend 6-10% of their per-capita Gross Domestic Product (GDP) on health care, the US spends almost 16%. As one of the highest per-capita GDP countries, the health care expenditure is larger in absolute terms as well, making the US by far biggest per-capita health spender in the group.

Conclusion: we spend much more per capita on health care than our (McKinsey-selected) peer group.

Is that a bad thing? We'll turn to that topic shortly.

What's this about?

"The Health Care Analyst" is a fairly sweeping title, especially when you consider that its author has no background or specialization in health care. My reasons for creating this forum began in the midst of our current debate over health care (2009). In trying to become a more informed voter, I noticed at first that virtually none of the news stories I read described the various legislative attempts at health care "reform" with any amount of precision. What I sought, and did not find, were answers to two basic questions:

1. What problem or problems are we trying to solve here?
2. What's being proposed, and how does it solve the problem or problems mentioned above?

You would have thought that a free press and an open democractic society would have made it very easy to find the answers to these questions. Not so, or at least not entirely. What I found fell into the following categories:

1. Coverage about the political maneuvers surrounding this or that bill — what factions might vote for it, who might switch votes, which lobbies were involved.
2. Coverage and opinion that presumed significant familiarity with the intricacies of the debate, which is by its nature highly complex.
3. Coverage and opinion strongly colored by unexplored presuppositions (aka "ideology")

I conclude that if I am experiencing this information gap, others may be as well.

Please understand I make no pretense of expertise in this area, at all. But what I intend to do, as time permits, is go out and find the best, clearest sources of information available, boil them down and extract their key points, and provide you with pointers to the resources if you want to wallow in their glorious, gory detail. Along the way, I'll doubtless take some pot shots at what I see as some of the more severely unexamined presumptions that color the debate. My first stop, when I get there, will be "negotiated costs."