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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
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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
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I. THE MACRO-ECONOMIC CONTEXT
II. THE HEALTH-CARE ECONOMY
OUTLINE
III. OPTIONS FOR COST CONTROL IN HEALTH CARE
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I. THE MACRO-ECONOMIC CONTEXT
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I. THE MACRO-ECONOMIC CONTEXT
A. Factors beyond our control
1. Aging of the population
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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
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I. THE MACRO-ECONOMIC CONTEXT
A. Factors beyond our control
1. Aging of the population
2. Outsourcing of labor to computers
3. Outsourcing of labor to low-cost countries
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SOURCE: Rolfe Larson, Blog: Business Planning, August 18,2011
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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.
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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.
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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.
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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.
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COUNCIL ON FOREIGN RELATIONS
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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.)
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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.
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SOURCE: Michael Spence and Sandile Hlatshwayo, The Evolving Structure of the American Economy and the Employment Challenge, Council on Foreign Relations, March 2011
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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
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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.
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Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, “Top Incomes in the Long Run History,” Journal of Economic Perspectives 2011; 49:1, 3-71.
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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%
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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
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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.
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I. THE MACRO-ECONOMIC CONTEXT
A. Factors beyond our control
B. Self-inflicted wounds
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A staunch anti-government attitude in the population and
among leading policy makers.
FIRST SELF-INFLICTED WOUND
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"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.
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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.
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CHINESE BULLET TRAIN – FASTEST IN THE WORLD
Americans cannot even dream of such an infrastructure.
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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.
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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).
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Fiscal mismanagement by the federal government.
SECOND SELF-INFLICTED WOUND
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U.S. fiscal policy:U.S. fiscal policy:
``How cool!
Sunshine all
around!
© Tsung-Mei Cheng
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Reagan/Bush I Clinton Bush II ObamaCarterNixon/Ford ????
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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):
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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?
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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
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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.
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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.
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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.
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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.
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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.
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And why is this macro-economic backdrop relevant to
health-care policy ?
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II. THE HEALTH CARE ECONOMY
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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
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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.
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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.
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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.
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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
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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.
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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
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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
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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
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QUESTION: Why did private insurers and employers behind them accept this steep price increase?
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$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..
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$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
SOURCE: International Federation of Health Plans, SOURCE: International Federation of Health Plans, 2010 2010 Comparative Price ReportComparative Price Report..
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$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:
SOURCE: International Federation of Health Plans, SOURCE: International Federation of Health Plans, 2010 2010 Comparative Price ReportComparative Price Report..
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Laugese and Glied in HEALTH AFFAIRS September 2011: 1647-56.
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III. OPTIONS FOR COST CONTROL IN HEALTH CARE
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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.
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$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
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Given our increasingly skewed income distribution, who
will pay for the ever larger numbers of lower-middle class
and poor American families’ health care?
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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
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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
√
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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):
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Stay tuned!