OCTOBER 14, 2011 11:00AM

Ballooning health care cost: is Medicare the culprit?

Rate: 8 Flag


In a recent post by Rutherford Lawson, a fellow OS member, and hardcore "libertarian" who goes by the pen name UncleChri, has argued in several comments that Medicare is the main contributing factor that drove the U.S. health care expenditure to unprecedented levels. To put it more bluntly, the ballooning health care cost is all the big bad government's fault, a theme this OS member is always happy to repeat any chance he gets.

To support his claim, he referred us to an OECD website, which contains historical data related to health care expenditures for numerous countries around the world. In his words:

"Download the Excel file, find the "Healthcost as % GDP" tab and look for yourself at what happened to health costs after 1967, so that you can make up your own mind."

Knowing that this dude often has troubles with getting his facts straight, I decided to check out the 'Excel file' and examine the data more closely. After extracting and manipulating the data, I produced a series of graphs for your pleasure and elucidation. For this nifty analysis, I also pulled out data for a few industrialized countries for comparison purposes.

You can see the first figure here, which focuses on the U.S. and Canada:


Figure 1. Health care expenditure as a function % GDP: Canada vs US. (source: OECD)

Does the figure show that Medicare significantly increased health care expenditure? The answer is obviously No.

You'll first notice that when Medicare was introduced in 1965, the data points followed the same trend as the ones observed for Canada (same with other industrialized countries, such as Norway and France, as shown below) until 1971. If the hypothesis is true, one would expect a huge increase in expenditure after 1966, which cannot be seen in this figure. Only a very slight change in rate can be observed in 1967, but given the fact that other countries had similar changes or rates, this cannot be solely attributed to the introduction of Medicare. The changes may essentially be attributed to a more global effect.

But I'm sure some will argue that the expenditure linked to Medicare could potentially have increased drastically, which would then explain the disparity noted after Reagan took office in 1980. We'll get to the latter later, but since the Medicare expenditure has only increased from 0% to about 2% of the GDP between 1965 and 2005, this argument actually falls flat:


Figure 2. Medicare expenditure as a function of % GDP.
(source: Wikipedia)

If you think that removing Medicare, as Paul Ryan as suggested a few months ago, and replace it with private health care accounts will save us, think again. It won't be pretty, as I discussed here.

The first figure above also shows a very interesting phenomenon. As the avid reader will notice, after the single-payer system was implemented in every Canadian province, the health care expenditure started to drop or level off for several years, before starting to increase again in the late 70s. However, the rate is much lower than the one witnessed with the U.S. data. In fact, the increase in health care expenditure in Canada is at par with other industrialized countries, as shown below:


Figure 3. Health care expenditure as a function of % GDP for a sample of industrialized countries. (source: OECD)

How is it possible that a system, which includes every citizen, reduces health care expenditures? As some of you already know, I previously discussed that the single-payer system is much more efficient to control or manage health care costs. I won't bore you with the details, but you can find my 'theoretical' posts here and here on this subject. I'm glad to see that my academic viewpoints have real practical applications.

Imagine if Nixon had put his flawed ideology aside and implemented a single-payer system (or a similar true public-private system that covered everyone), the curve may have looked like the bottom one in Figure 1.

Now that we have shown that Medicare (and Medicaid) isn't the driving factor, what can explain the explosion in health care expenditures? A potential answer can be found in the 1980-2009 time period. A closer look at Figure 1 shows that the cost has increased significantly after Reagan became President. A 'jump' can be seen in 1981-1982, which was followed by an exponential increase until about 1992, where the expenditure became leveled (the Clinton years). In 2001-2003, we saw another large leap in expenditure, which remained constant until President Obama took office. In 2009, we can yet again see another significant increase in costs. However, this could be attributed to more global effects, since all countries experienced the same pattern. The fact that the global economy almost entirely collapsed has probable something to do with this increase.

Given the people who were leading the country during that time period, one can easily speculate that budget and tax cuts, deregulation, 'smaller government', and the increasing number of people who live below the poverty line or are uninsured played a significant role in the ballooning health care costs.

Despite everything that was discussed above, we nonetheless still need to ask this important question:

Why are the trends between the U.S. and the rest of the world so different after 1980?

On a final note, looking at the last 40 years, the global trend is certainly not going down. Is the U.S. health care system on its way to bankruptcy? Experts interviewed on a PBS segment two years ago think so. 


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Kanuk, you are so awesome at these data-based pieces, and they are so important to getting the real facts of the matter. Yes, statistics like these can be finessed, and in the wrong hands (Lawson's) they can be taken in some weird directions. And I know you hip to the perennial issue of correlation versus causation that arises in discussions like these. As you conclude, "one can easily speculate that budget and tax cuts, deregulation, 'smaller government', and the increasing number of people who live below the poverty line or are uninsured played a significant role in the ballooning health care costs."

Yes, that and the make-up costs and the tertiary care costs of those who lack insurance and receive no care until it is too late.

Finally, even when cost-per-procedure rates have been ratcheted down by payers like Medicare, we are still left with a system that is far more expensive than one based on salaried physicians.

Great work.
Thank you Steve! Greatly appreciated. Yep, the system is completely broken.

I'll drop by your latest piece later today.
Nice work, Kanuk.
To clear it up, it's not Lawson's libertarian leanings, but those of our favorite Uncle. He speaks libertarian, but claims to not be one, which fits well within his contradictory conniptions.

Correlating with the Reagan healthcare cost as % of GDP leap is the sudden jump in federal deficits and debt. Debt rises even more sharply and dramatically than HC costs. How one might influence the other is a question that should be asked, but for which I don't have an answer.

Uncle also blames the debt on Soc Sec and Medicare and other "entitlements." This fantasy runs rampant among the Right, but is understandable given their 30 year reign of error is the most sorry example of massive governmental, economic and ideological incompetence in world history. Hell, if I were similarly afflicted I'd be looking for scapegoats also, so let us have empathy.

Perhaps our favorite Uncle will lend his 40 words to express what 7 could opinion on this. I hope so, as I get a thrill watching the logical leaps, clumsy verbiage and historical fabrication miscues as he lathers up to his Big Finish -- You're a Socialist! Churchill, Churchill, quote-quote-quote!

Thanks for doing the work on this.
PS--The federal debt also tracks the same as HC to GDP% in both of those charts.
Beginning a steady increase under Reagan and Bush, the Greater, leveling off under Clinton, and resuming its climb under Bush, the Lesser.

That lends itself to the idea of a correlation-causation effect, though doesn't explain how it could be. My speculation vote is the missing link is "conservatism."
I don't think we're going to be able to control health care costs very much by changing the system of health insurance, unless that change also lowers cost on the medical side. Changing the system of health insurance should have the effect of making health care more affordable for certain individuals, and of having more people covered. But it's not necessarily going to reduce health care cost. In my humble opinion, the real cost driver is what hospitals and clinics spend. Here's an example of what I mean.

Let's say that in Simple City there are 100,000 people, and a single medical system, Simple Medical Center. Everyone in Simple City goes to Simple Medical Center for care. Simple Medical Center's expenses are around $1 billion a year. There is also Simple Insurance Company, providing health insurance to the residents of Simple City, and their operating expenses are around $50 million a year, not counting payments to Simple Medical Center.

Whatever happens with insurance, however the insurance system is tweaked, the people of Simple City are going to spend at least $1 billion on health care, because that's what it costs Simple Medical Center to operate.

In any particular hospital, around 30 percent of expenses will be for supplies, depreciation, interest, etc. Let's call that "stuff." Around 70 percent of expenses will be for salaries, which we can conveniently call "salaries."

So -- there are basically two ways that Simple Medical Center can reduce the cost of health care: they can spend less on stuff, or they can pay less on salaries. That's it -- stuff and salaries.

As Simple Medical Center reduces expense -- as they pay less for stuff and salaries -- the health care cost for people in Simple City will go down. If Simple Medical Center increases expense, the health care cost for people in Simple City will go up.

The only way that tweaking insurance will reduce health care cost is if the new insurance system will reduce the overhead cost of claims processing, which again is a matter of stuff and salaries.

If medical systems don't have good supply contracts, if they purchase equipment that isn't needed, if they implement programs that aren't needed, if they build extravagant "health palaces," if patients are given unnecessary procedures and diagnostics, if they fail to have efficient processes, etc., etc., all of this will be passed on as increased health care cost, and I think this is where the big money is.

When people say that "Medicare has increased health care expenditures," I think they have it bass-ackwards. Health care expenditures have gone up largely because medical systems spend more on stuff and salaries, and there are a variety of reasons for that. Increased Medicare expenditures are a symptom of that, not a cause.
Always happy to see you fighting the good fight.

Which reminds me, I have at least one more catch-up post in me on the subject...
Mish, eliminating the insurance companies would eliminate a lot of the cost. That's one of the reasons our costs in Canada are less. Government collects taxes, pays doctors and hospitals. Note for Steve - our doctors are private workers who get paid by the government on the basis of the bills they submit rather than being on salary.
Thoughtful post, my ex-pat friend. I honest-to-God do not get the antipathy toward comprehensive medical care for all Americans. Did I say antipathy? I meant downright hostility. What is it with the philosophy that catastrophic illness is just your hard luck?

I know there was opposition when universal coverage was instituted here in the 1960s, but I don't believe there's one politician -- even in the rightwing provinces -- who wouldn't get bored and reamed (not to mention dis-elected) if he or she proposed outlawing it.
Paul: You’re right about Uncle. He says that he's not a libertarian, but acts like one. As you indicated, the ballooning of the US debt is most likely linked to what’s going on with the health care expenditures. Actually, in my last post (on August 12th – a long time ago!), I have figure showing how the debt increased over time. Under Reagan (and GWB), it ballooned big time.

Mishima: I actually see your point, but I don’t entirely agree with it. It’s true that if everything stays the same (the supply side), but add all the uninsured to the system, we may not see substantial savings. However, the fact that people who were uninsured are now covered, they may start using the system more wisely (preventative measure, etc.). We’ve seen this with Oregon study which I sent you a few months ago. It is hoped that these people would use the emergency less often and seek medical help more appropriately when needed, which should have an impact overall medical cost.

If we were to create a health care system similar to other industrialized countries, hospitals would not compete with each other in order to stay in business. I agree with you on this point. This significantly influences costs. You raised this issue before and I now can see it where I live. We have two major hospitals (with a third one on the way) and they all spend a lot of money on TV advertising to show how good they are, how quick you can be seen at the ER, or look at our latest medical equipment that can be used for very accurate cancer detection. This is ludicrous. Free market in health care doesn’t work.

For me, what’s more telling is the Canadian experience. When all provinces implemented a single-payer system in their respective province, the overall costs started to go down (as shown in the first figure), even though many more ‘patients’ suddenly had access to appropriate medical services. I believe I put a link to a study in my second post (2 or 3 years ago!) which showed that the number of visits per capita increased after the single-payer system was implemented in Quebec in 1970. Interestingly, despite the increase in medical visits, the health care expenditure still went down.

Thanks a lot for your comment.
Thanks Myriad! Although I don’t want to write about health care stuff, sometimes I cannot help it. When I write about it, I often think about some of my friends who great difficulties having access to proper medical services (they often cannot afford it). This motivates me to write more about it.

You’re right about one insurance entity versus several entities. Mishima knows this too, as we discussed this topic several times before. ;-)

Boanerges Redux: Thanks to you too! You should see how some people here can be very hostile about caring for other people. You have a perfect example here (one of my posts):

Insurance: "Life is not fair & it will drive up my rates"

This kind of comment makes me sick.

Indeed, Harper won’t touch it.
"Free market in health care doesn’t work."

Yes, health care is one of those "ironic" industries in which competition actually drives up cost.
This you might also find interesting... I saw a patient yesterday, he came in to see my colleague as a new patient. This man, in his 30s, has a job with full insurance benefits, is married, etc, has been diabetic for about 15 years. About six years ago, stopped taking his meds, never went back to the doctor, for no reason (that he could give) other than being uninterested in taking care of it. We had to send him packing to the ER, as he will probably lose his foot to the gigantic rotten ulcer we saw on it. I have seen this kind of thing in non English speaking immigrants with no insurance or money, he was not any of them. His negligence will likely ring up 10s of thousands, possibly an amputation, and he had full coverage the whole time. ???!!! So, the part of "health care cost" no one addresses very well is patient responsibility (as opposed to just with STDs and slutty teenage girls). The sad part is how often I see stuff like this happen, not just in diabetes, but especially with chronic pain and disability patients. Our system has trained people to both treat insurance like a credit card and/or to be completely disconnected from personal responsibility.
Just to reiterate Paul's point I am NOT the libertarian that Kanuk refers to in his first paragraph. The libertarian made a comment on my article which dealt with the numerical magic utilized to try to make us sorry for how much money the rich pay in taxes.

With that out of the way, this is a noble piece of work, Kanuk. I find it a lot to absorb so I'll have to study it further but I do find it interesting how the health care costs go up during recent Republican administrations.
Rutherford, I'll correct the mistake when I get home tonight. In the previous version, I named the person who commented on your post. At the last minute, I decided not to mention him by name, but forgot to change the sentence accordingly. Sorry!
Mishima: Indeed, it is quite ironic.

Oryoki Bowl: Very interesting story. Thanks for sharing. I'm actually not surprised, since there will still be some people who will not take care of their health even if they are given all the necessary tools. Overall, I think the majority of people do the right thing.

As I was discussing above, a recent study published by MIT has shown that when (poor) people were given access to Medicaid (in Oregon), a large proportion of the newly insured used this opportunity to improve their health (seeing their doctor for preventive tests, etc.). Unfortunately, it wasn’t everybody who took advantage of this prospect, but it was better than when everyone was uninsured. I need to track down that study again.

Rutherford: Thanks! I changed the first sentence. Indeed, you’re not the OS member who believes that the tax rate for “rich” people is too high. He should look at the tax rate for other countries (all of which have a much better health care system), as I discussed here. That's what we call high tax rates!
well. i think the answer
is like the little bomb you threw in for good measure:
'The fact that the global economy almost entirely collapsed has probable something to do with this increase.'

global collapse and new understandings of what the hell
kind of territory we have stumbed upon
bring to mind
ideas of "strange attractors".

coherency ultimately gets chaotic at such heights of folly.
chaos theory, maybe?
James: Good point! Thanks for dropping by.
Glad I stumbled on this today, and I clearly need to go back and read some of your earlier posts on this subject!
A very thoughtful analysis. Thanks for doing this.

The theoretical detail I always cite, but that I never hear accounted for by the Republicans in explaining how the free market system will fix things is price elasticity of demand. I would expect that health care has little or none. People need health care to live and won't reduce their demand because of a price hike, so if you deregulate of course a profit-driven company can and will (and must, if you believe my Fiduciary Duty vs. The Three Laws of Robotics) charge more just “because they can.” In my view, even a capitalist should not be pushing that any market that is not properly responsive to supply and demand effects should be trusted to resolve itself without regulation, certainly no critical market that is required for the survival of the common citizen.

I could go into more detail, and should in a blog post elsewhere. But I figured I'd throw out that issue just to motivate your claim that it shouldn't necessarily be surprising that the free market solution doesn't turn out to be the most efficient solution to achieve the societal goal of good health. (It may do fine at achieving some mogul's goal of making a killing—pardon the painful but apt pun—on the market.)
Jeannette: Thank you! I hope you find the rest of the material to your liking. Thanks for dropping by.

Kent: Thanks for providing additional information about the "demand" side of health care expenditures. I suggest that you write something about this when you have the chance.

I can add to that. I remember talking to a business graduate student a long time ago (when I was in grad school myself) about medical practices. He was telling me that medical doctors were the only category of workers who are never (or barely) affected by recessions for the reason you stated above. In addition, he told me that what many medical doctors would do is, as an example, to ask the patient to come see him or her again say the following week "to make" sure the patient healed well. Although this business practice could be classified as a gray area ethically speaking, they are able to "control" the demand despite the variations associated with the economy. Since we were both students at the time and just chatting informally, I think this hypothesis should still be validated to see if this is really true.
Oops: It should be Jeanette! Sorry...
Kanuk, I guess you're hinting at the possibility that the second trip could be unnecessary yet billed at a high rate even if it didn't take long or something like that? I think that must happen, though I don't have data either just now. But I can maybe suggest some other scenarios as well, maybe some that are far less obvious and even sometimes hard to avoid, just part of doing business in the system we have now. I'll save it for the blog.
Kent, I forgot to respond to your comment. Yes, it was more or less what I was suggesting. For a doctor to ask his or her patient to come back for a follow up may still be okay in the eyes of the insurance company (or government, such as in Canada). It may be difficult to dispute this kind of doctor's decision (or a waste of time to fight it).

Looking forward to your post, if you write one on this topic.
Thanks for taking the considerable trouble to do this, tho I'm afraid it will have absolutely no effect on Uncle Chri or our friend Johnny Feverish.
Tom: Yup... As we noticed on the other post, nothing will change. I'm sure that he hasn't read this post, although I put a link to it in one of my first comments. As I said there a while back, it’s because of people like him that nothing will ever change about how health care is delivered in the U.S. (sadly).