Reason for a New Age

The Cost of Health Care – Part 1

Posted by publius2point0 on 2010/01/06


Health care in the US costs roughly double that of every other modern nation. At some point, given our current rate of spending increase on health care, it is expected to become unsustainable.

For the purpose of consistency, I will classify all values here as average spent per person per year. The US spends about $6100 while most European nations are between $2000 and $3000. I’ll consider $3000 to be the level of spending we would desire, however.

There are various theories as to why American health care costs so much. Without proper multinational studies, there would really be no way to decisively determine for certain several of these theories, but fortunately there is sufficient information for most.

A single payer system has less overhead
If there are 100 possible clients for a set of companies, it might take one company 6 employees to deal with them all, but it will take two companies 4 employees each to accomplish the same, splitting the clients equally between themselves, for a sum total of 8 people being employed. 8 employees cost more than 6. Larger organizations can handle more clients more efficiently than multiple smaller ones, as a general rule.

Comparing just the Canada, the only country I was able to find sufficient data on, it seems that they pay somewhere between $100 or $300 on administration of their health organizations. The US spends somewhere between $530-590 and $1050.

The variance in these numbers is a bit hard to resolve. Most specifically, I am worried that profit might be included as “overhead”. I have two sources which address Medicare specifically, which being a government organization does not have profit, and both agree that Medicare costs about $330-$357. With Medicare covering about 42 million people, and the population of Canada being about 33 million, it seems like the $300 figure for them is more believable.

A private insurer, seeking profit, will employ more people than a government agency. Specifically, they need a marketing department and underwriters. They will also be smaller, on average, than Medicare, and so be less efficient. But I highly doubt that the simple employment of people would more than double their administrative costs. I doubt that these extra groups are in any way a majority of their work force or that they demand higher salaries. Personally, I find it most likely that the mid-$500 number is the accurate value for private insurance.

Does this mean that we could change our majority $550 cost for private insurance for a $300 system? Well, firstly let me note that even though a larger organization is more efficient, it still must expand for a larger client base. Canada has 33 million people. The US has nearly ten times as many. I suspect that a single payer system would cost something more between say $450 and $500. When we have $3000 to hack off, a saving of $50-100 isn’t terribly significant.

And more importantly, destroying the private insurance industry would cause massive turmoil without the most obsessive of oversight, and even then still take at least a decade to accomplish I would imagine, all the while laying off a significant number of people.

Personally, it seems more worthwhile to destroy state-specific insurance regulations. This will make it easier for local insurance agencies to merge with others across state lines. The US doesn’t need hundreds of separate insurance agencies. As few as four or five separate agencies would still allow for competition and be large enough to slough off most inefficiencies of size.

A single payer system does not charge for profit
Since it seems like that our $1050 number, above, probably included profit, then it seems that average profit is about $500 per year for private insurers. Actually looking up the profit margin for the industry, it seems to be about 3.4% (actually quite low compared to most industries). Perhaps my calculation of profit margin is incorrect, but 3.4% of $6100 is only about $210 not $500.

Whichever value is correct, the point does remain that this money is, theoretically, entirely unnecessary. Switzerland, a country which has all of its health care financed by private insurance, spends the most on health care out of every country in Europe. Even so, Swiss health spending is about half of ours. It seems plausible that their position on the top is possibly due to charging for profit.

Personally, a worry I would have for a single payer system is that it has no need to improve. I like to think that an insurance agency would always be seeking, through actuarials and so on, to determine the exact optimum use of money for a purpose. Customers of an insurance company, then, should be choosing the one which gets them the greatest health for the least money. That competition, in the long run and if made to be a competition on those terms, would be more productive than a single organization that is perfectly fine to continue existence so long as it pays whatever a doctor asks, or one which simply gives a set value it will pay and leaves the doctor to do his best within that range.

I wouldn’t say that, in the US, we have achieved this ideal where health insurers charge for actual health/lifespan offered. But with some minor legislation and pressure, I think this could be achieved and would be sufficiently worth it as to make the profit necessary to accomplish such worthwhile.

Sources:
http://content.nejm.org/cgi/content/short/349/8/768
http://www.cahi.org/cahi_contents/resources/pdf/CAHIMedicareTechnicalPaper.pdf
http://www.voicefortheuninsured.org/pdf/admincosts.pdf
http://secure.cihi.ca/cihiweb/en/media_13nov2008_tab2_e.html
http://secure.cihi.ca/cihiweb/en/media_13nov2008_tab4_e.html
http://biz.yahoo.com/p/5qpmu.html

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