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July 21, 2009

Why Health Care Costs Are Rising, and, Indeed, Must Rise

The following analysis is not mine at all. I would credit the author, except I forget who wrote it initially, or where, or even when. Still, it was persuasive enough that it stuck with me so that I can basically paraphrase his arguments from memory.

So, just to clear myself of plagiarism charges: What I'm writing here is in my words, but the idea isn't mine at all. I wish I could remember whose idea this was, but I can't.

Imagine the purchasing power of the average citizen as a basket. He has a basket of money he can trade for goods and services; after trading his money away, his basket is now filled with goods and services rather than money.

A key point to begin with is that the average American's purchasing power has never been higher. Although the growth of real purchasing power may have slowed in the past ten years or so, it hasn't gone backwards. Every year the average American's basket grows fuller and fuller of goods and services. Maybe it's not growing as quickly as it has in some periods -- the fifties, the sixties, the eighties, the nineties -- but grow it does.

Despite the fact the basket now holds more than it ever has, a greater and greater amount of the space in the basket is taken up by health care costs. (And, actually, costs for services of similarly privileged nature, but more on that later.)

That concerns people, and bothers them. For, although they now have more goods and services than they've ever had before, they are bothered that they pay more and more for health care.

The costs of many goods and services drops in real-dollar terms, more than offsetting the additional costs of heath care, which rise every year. In the net, they're coming out ahead, because their basket still contains more than it ever has. But they're bothered that health care costs are not declining like other costs are, and they wonder how much more they'd have int their basket if health care costs declined as well, or at least did not grow and simply remained stable.

But there is a good reason the costs of everything else are going down, and since those reasons do not affect health care at all, there's also a good reason that heath care costs more dollars every year.

Food and clothing and manufactured goods prices drop over time, generally. That is because there are two forces always working to make them cheaper:

1. Increasing efficiency of production. In most industries, technology reduces costs over time. Automation, new techniques, information-age driven efficiencies like just-in-time production, etc., tend to reduce the costs of commodities and manufactured goods.

2. Globalization. Formerly, actual industry (i.e., steel not corn) was almost exclusively done by westernized countries with high standards of living and, consequently, high labor costs. Over time third-world or developing countries with low standards of living (and low labor costs) have produced more and more of the world's goods. They always begin with light industry, which has a lower capital investment -- textiles, clothes, shoes, toys, knick-knack crap. Over time they tend to start doing medium industry, like consumer electronics, and then heavy industry as well -- cars, for example. 40 years Japanese cars were a joke; well, they're a joke no more. The same 20 years ago for Korean cars.

These two factors are always exerting downward pressures on the costs of these goods. Each decade, an ear of corn or a pair of shoes or a television becomes cheaper in cost-adjusted constant dollars. Thus, people become "wealthier," if you define wealth as the amount of goods or services they can command with their dollars, which is, I think, the real meaning of wealth.

There are numerous services where these downward pressures do not exist, however.

Health care is one of them.

Although there may be some additional efficiency in the health-care industry, there isn't much, because at the end of the day a doctor still reads his patient's records and looks stuff up in his medical books and then talks to the patient one-on-one for a not-insignificant period of time, and the doctor's time is not unlimited.

He still has the same 40-60 hour workweek he's always had. There is no "mass production of health care services." There is no industrial multiplier, as there is with manufacturing a tv set, whereby one worker's labor is made more efficient each year, so that in the beginning of a decade he's making ten tvs a month and by the end of the decade he's making 15 tvs a month (reducing prices by around 33%). TVs are cheaper because each man-hour of labor produces more of them now. But health care is not cheaper, because one doctor-hour still produces pretty much the same doctor-hour of service it produced in the 1700s.

Furthermore, there is not a big downward pressure from globalization, because obviously one cannot outsource a hospital to Mexico. (Well, one could, but few Americans would be willing to go.) There is some downward pressure here as we in-source doctors from around the world, but it's not as if they're making third-word salaries when they're here. They may be willing to work a bit more cheaply than their born-and-raised American counterparts, but there's not that huge disparity as there is with Chinese labor costs and American labor costs.

So the reasons that other goods and services always go down are simply inapplicable to health care. In fact, they must go up, at least in this sense: If ten years ago you found a doctor willing to treat you for an ailment and take televisions as his payment, he might have been willing to take three tvs in trade.

Now, the same television-bartering doctor would want four, five, or six tvs for the same services. Not just because he's greedy. But because the real value of tvs has dropped in the past ten years, whereas the value of each hour of his service hasn't dropped a bit.

So, as compared to the costs of most other goods and services, health care costs must rise, and always will rise, at least until there is some breakthrough in the manner of health-care delivery that allows the increased efficiency of industrialization and mass-production to reduce those costs.

This idea explains why other similarly-situated professions always cost more -- lawyers, for example. And tradesmen, too: You can't send your car overseas for repair. You have to get a local mechanic to fix your car, and he's not competing with third-world mechanics, and he's also not able to increase the units of value he produces with his labor through industrialization. A mechanic's hour is worth the same as it was 50 years ago, and, since most other goods and services seem to fall in price, the mechanic's prices seem to grow in price by comparison.

Manufactured goods and commodities drop in price. Trades, crafts, arts, and sciences (such as medicine) do not, and so always seem to rise in price compared to the others.

One last point that applies only to health care: If you're buying a tv, you only tend to look at mature technologies. Today, a 60 inch plasma is a mature (if pricey) technology; you may consider buying that kind of tv. It's pricey, but not so expensive you can't afford it. (Probably.)

The thing is, you could have had that tv ten years ago, too, when it was an immature technology, or even a non-existent technology. Except instead of costing $2500, it would have cost you maybe a half-million or more dollars, as it would have been a special prototype, a special project, and you would have been footing the costs of research and development for this type of tv yourself.

But you wouldn't even have considered that. Ten years ago the best tv was, what, high-def rear projection or something? And at a screen size of 50"? That would have been the priciest tv you would have even considered at all. Sure, you could have contacted Phillips' engineers and contract them to make you a one-of-a-kind experimental 60" plasma tv, but such a thought never even entered you mind.

You were willing to settle for the current state-of-the-routine-art TV.

That's not the case in health care at all. For obvious reasons, no one is willing to settle for state-of-the-routine-art medicine -- medicine that is ten or fifteen years old, now routine and fairly inexpensive -- when there is that experimental, hand-crafted, prototype medicine available. At least they won't settled for the cheaper, mature medical technology when they face something deadly.

Fifteen years ago, say, the correct medical decision regarding a limb wasting away due to advanced diabetes was to amputate. That is now "routine" and fairly cheap.

Except it's not routine, because now there is the possibility of using the still-expensive and still-somewhat-experimental technology of replacing key arteries in the limb with synthetic arteries followed by a course of experimental and expensive drugs.

So the cost of treating this has not gone down at all; quite the opposite. While in all other aspects of life we're willing to settle for 15 year old technology, because it's now cheap enough to be worth it to us, health care is so precious to us we're always willing -- or rather wanting -- to buy new and novel treatment when we're confronted with something truly awful.

For most industries, then, 15 year old technology is the norm for consumer purchases. With health care -- when confronted with something life-threatening or life-altering -- we insist on the latest technology, even things that have only been going on for three or five years or so, only capable of being performed by a fairly limited number of doctors. We're buying TVs today based on technologies that began in around 1995; but as far as life-threatening diseases, we're employing technologies from this decade, and maybe this half of the decade.

When Obama talks about "bending the health-care cost curve," what he's really talking about is moving us all from five-year-old expensive techniques to fifteen-year-old inexpensive techniques.

He won't come right out and say that, of course. But his plan is precisely that -- to discourage the use of those pricey new-wave technologies that gobble up so many dollars, to take them off the available market, and make people content with 15 year techniques, medicines, and technology.

The problem? Currently only those paying their way get the new technology. We can't afford to buy it for everyone -- those who haven't paid a dime towards the maintenance of their health. As we cannot provide it to all, it's not fair to provide it to some. Those who pay will have to stop "clinging" to the notion that simply because they can afford it, they ought to have cutting-edge medical care.

It is cheaper that way overall, of course. But there are very good reasons that we, as individuals, and not as a government bureaucrat concerned with reducing costs, routinely insist on the "good stuff."

By the Way: I began by discussing the "basket of goods" because that's the way the original author did. But even as I was writing it for the first time, I thought, "Why am I writing about the basket? I have no idea how this analogy is supposed to pay off at the end; it seems I'm just confusing things and adding an analogy that doesn't clarify things."

I thought maybe, in the process of writing, I'd figure out the point of talking about baskets at all. I didn't. I did what I feared I would: Introduced the idea of a basket and then just dropped it.

More: Some Guy points out another important factor:

Plus, because of all this health science, people are living longer, and thus being afflicted from more expensive ailments.

Prevention's nice and all, but it actually raises costs, since it it's just stalling death a little bit longer.

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posted by Ace at 02:25 PM

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