Chapter 1

Chapter 1.C.2--The Crisis in Coverage and Spending

Updates on coverage and spending statistics can be found on the web pages of CMS, Kaiser Family Foundation, and the Census Bureau. According to the latest, spending continues to increase about 6-7% a year, hitting $2.2 trillion in 2007, or $7421 per person, and accounting for over 16% of GDP. Spending is expected to reach $4.4 trillion by 2018, or 20% of GDP. In 2008, group health insurance averaged $12,680 for family coverage, and $4704 for single coverage.

The California HealthCare Foundation has prepared a visual analysis of costs and financing trends over the past decade and some predictions of future costs, taken from numerous public and private organizations.

Also, here is a good overview from Kaiser Family Foundation. And, McKinsey & Company has published a very illuminating report that documents how much more the U.S. spends on health care compared to the rest of the world, and why: "Accounting for the Cost of US Health Care: A New Look at Why Americans Spend More" (Dec. 2008).

For more on international comparisons, see Daniel Callahan & Angela Wasunna, Medicine and the Market (2006), and the continuing series of articles in Health Affairs by Gerard Anderson and colleagues.

Additional useful statistical information can be found at:
http://covertheuninsured.org/factsheets/
National Health Information Center
Kaiser Family Foundation
DHHS - CMS
MedPac (for Medicare data)

State-by-state information is at: http://www.statehealthfacts.org/

New York Times columnist Paul Krugman wrote a series of penetrating articles in 2005 analyzing various problems in the U.S. health care system, and proposed solutions. Tom Mayo has posted a summary and links to the articles on the Health Law Prof Blog. See also David Leonhardt, Challenge to Health Bill: Selling Reform, NY Times, July 22, 2009.

Information sources about the ongoing debate on health care reform are compiled in the update to the Chapter on health insurance.

Previous reports appear to be overstated that a majority of bankruptcies are caused by medical bills. Instead, the majority of medically-related bankruptices result from losing jobs for health-related reasons, such as disability, or needing to quit to take care of a family member. See David Dranove and Michael L. Millenson, Medical Bankruptcy: Myth Versus Fact, Health Affairs, March/April 2006; 25(2): w74-w83. See generally Health Law Symposium: From Risk to Ruin: Shifting the Cost of Health Care to Consumers, 51 St. Louis U. L.J. 293-487 (2007).

Here are additional quotes regarding the crisis in American medicine:

“Researchers at Dartmouth Medical School, who have been studying Medicare's performance for three decades, estimate that as much as $1 of every $3 is wasted on unnecessary or inappropriate care. Other analysts put the figure as high as 40 percent.” Gilbert M. Gaul, Bad Practices Net Hospitals More Money, Wash. Post, July 24, 2005, at A01.

“[S]everal studies estimate that only 15 to 20 percent of medical practices can be justified on the basis of rigorous scientific data establishing their effectiveness.” Paul G. Shekelle et al., The Reproducibility of a Method to Identify the Overuse and Underuse of Medical Procedures, 338 New Eng. J. Med. 1888, 1888-95 (1998).

See also Jonathan Cohn, Sick: The Untold Story of America's Health Care Crisis (2007); Shannon Brownlee, Overtreated: Why Too Much Medicine is Making us Sicker and Poorer (2007).

Demonstrating that the "crisis" in medical care costs is long-standing and unlikely to be easily resolved, see Odin W. Anderson, et al., Changes in Family Medical Care Expenditures and Voluntary Health Insurance: A Five-Year Resurvey 99-100 (Harvard Univ. Press, 1963)

The medical care field is in a continuous state of flux. The changes and trends over as short a period as five years can give cause for alarm or pride depending on which facets of the field are given emphasis. The greatest concern today is with rising expenditures. At the same time the use of services is greater and more widespread and all indications point to further increases in utilization as the population becomes older and those with chronic illnesses survive longer than formerly. Health insurance premiums are constantly going up as a consequence. Still, health insurance helps spread the burden of medical expenditures more evenly among families and provides a stable financial base for the medical establishment. The prevailing climate is one of crisis: “medical care is being priced out of the market;” ”insurance induces physicians to increase their fees;” “the fee system of paying physicians encourages unnecessary surgery;” “hospitals are operated inefficiently and need to be ‘rationalized;’” “drugs are over prescribed and more expensive than necessary;” “families and the aged are going bankrupt paying for long-term illness because of the inadequacies of current health insurance;” “there is insufficient attention paid to ‘preventive medicine’ and early care;” and so on. At the same time, … [modern medicine provides tremendous benefits]. Why then the air of crisis? It seems to stem from the great concern with costs and the inability of many people to meet them in an orderly fashion without going into debt liquidating assets, or reducing their accustomed standard of living. . . .

Agreeing with the view that we do not necessarily spend too much in the aggregate, see Robert E. Hall, Charles I. Jones, The Value of Life and the Rise in Health Spending, 122 Q. J. Econ. 39 (2007):

Is the growth of health spending a rational response to changing economic conditions—notably the growth of income per person? We develop a model based on standard economic assumptions and argue that this is indeed the case. Standard preferences—of the kind used widely in economics to study consumption, asset pricing, and labor supply—imply that health spending is a superior good with an income elasticity well above one. As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.

Further exploring and debating this question, see Kevin Murphy & Robert Topel, eds., Measuring the Gains from Medical Research (2003).

This graph illustrates the highly skewed distribution of health care costs across the population. It shows, for instance, that 70% of people account for only 10% of health care expenditures, and that the top 10% of people account for 69% of expenditures. (The graph is taken from John V. Jacobi, Consumer-Directed Health Care and the Chronically Ill, 38 U. Mich. J. L. Reform 531 (2005) and based on Marc L. Berk and Alan C. Monheit. See Marc L. Berk and Alan C. Monheit, "The Concentrations of Health Care Expenditures Revisited," Health Affairs, 20 (March/April 2001), 9, 12.) See also Mark Stanton, The High Concentration of U.S. Health Care Expenditures (AHRQ, June 2006); Mark Hall, “47 Million & Counting: Why the Health Care Marketplace is Broken,” Senate Finance Committee, June 2008.

This amusing fable captures in allegorical form most of the important features of the crisis in American medicine. For a more recent version of a similar extended metaphor, using "Breakfast Insurance: A Metaphor for Health Insurance," see Regina Herzlinger, Consumer-Driven Health Care (2004), at 61-73.

Gourmand and Food--A Fable
From, Medical Care and its Delivery: An Economic Appraisal
Judith R.Lave & Lester B. Lave
L. & Contemp. Prob. 252 (1970)
Reprinted with Permission

The people of Gourmand loved good food. They ate in good restaurants, donated money for cooking research, and instructed their government to safeguard all matters having to do with food. Long ago, the food industry had been in total chaos. There were many restaurants, some very small. Anyone could call himself a chef or open a restaurant. In choosing a restaurant, one could never be sure that the meal would be good. A commission of distinguished chefs studied the situation and recommended that no one be allowed to touch food except for qualified chefs. "Food is too important to be left to amateurs," they said. Qualified chefs were licensed by the state with severe penalties for anyone else who engaged in cooking. Certain exceptions were made for food preparation in the home, but a person could serve only his own family. Furthermore, to become a qualified chef, a man had to complete at least twenty- one years of training (including four years of college, four years of cooking school, and one year of apprenticeship). All cooking schools had to be first class.

These reforms did succeed in raising the quality of cooking. But a restaurant meal became substantially more expensive. A second commission observed that not everyone could afford to eat out. "No one," they said, "should be denied a good meal because of his income." Furthermore, they argued that chefs should work toward the goal of giving everyone "complete physical and psychological satisfaction." For those people who could not afford to eat out, the government declared that they should be allowed to do so as often as they liked and the government would pay. For others, it was recommended that they organize themselves in groups an pay part of their income into a pool that would undertake to pay the costs incurred by members in dining out. To insure the greatest satisfaction, the groups were set up so that a member could eat out anywhere and as often as he liked, could have as elaborate a meal as he desired, and would have to pay nothing or only a small percentage of the cost. The cost of joining such prepaid dining clubs rose sharply.

Long ago, most restaurants would have one chef to prepare the food. A few restaurants were more elaborate, with chefs specializing in roasting, fish, salads, sauces, and many other things. People rarely went to these elaborate restaurants since they were so expensive. With the establishment of prepaid dining clubs, everyone wanted to eat at these fancy restaurants. At the same time, young chefs in school disdained going to cook in a small restaurant where they would have to cook everything. The pay was higher and it was much more prestigious to specialize and cook at a really fancy restaurant. Soon there were not enough chefs to keep the small restaurants open.

With prepaid clubs and free meals for the poor, many people started eating their three-course meals at the elaborate restaurants. Then they began to increase the number of courses, directing the chef to "serve the best with no thought for the bill." (Recently a 317-course meal was served.)

The costs of eating out rose faster and faster. A new government commission reported as follows: (1) Noting that licensed chefs were being used to peel potatoes and wash lettuce, the commission recommended that these tasks be handed over to licensed dishwashers (whose three years of dishwashing training included cooking courses) or to some new category of personnel. (2) Concluding that many licensed chefs were overworked, the commission recommended that cooking schools be expanded, that the length of training be shortened, and that applicants with lesser qualifications be admitted. (3) The commission also observed that chefs were unhappy because people seemed to be more concerned about the decor and service than about the food. (In a recent taste test, not only could one patron not tell the difference between a 1930 and a 19[95] vintage but he also could not distinguish between white and red wines. He explained that he always ordered the 1930 vintage because he knew that only a really good restaurant would stock such an expensive wine.)

The commission agreed that weighty problems faced the nation. They recommended that a national prepayment group be established which everyone must join. They recommended that chefs continue to be paid on the basis of the number of dishes they prepared. They recommended that every Gourmandese be given the right to eat anywhere he chose and as elaborately as he chose and pay nothing.

These recommendations were adopted. Large numbers of people spent all of their time ordering incredibly elaborate meals. Kitchens became marvels of new, expensive equipment. All those who were not consuming restaurant food were in the kitchen preparing it. Since no one in Gourmand did anything except prepare or eat meals, the country collapsed.

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