Wednesday, July 22, 2009

US Health Care Costs

Georgetown professor Ken Homa has a good analysis of the health care industry cost structure, and takes issue with Obama's recent targeting of HMO profits. Homa's analysis is correct but could be easier to understand with a simple graphic, which I've done here.

HMO Profits constitute 2% of total US health care costs

Conclusion: Killing HMOs isn't going to save our health care system.

Of course, I've written about health care costs before as well.


Cory said...

Cool chart. How did you make it? Seems too nice for Excel.

Chris said...

@Cory - it's an Excel plug-in called ThinkCell.

Me said...

Of the $660B "HMO Expenses", $659B went to executive salaries.

Hammerspace said...

OK, but this is not the whole truth. I don't mean to pick on CN, whom I like, but people tend to discuss healthcare as though it were a zero-sum situation like the value chain for widget production. It's not. For example, by virtue of their very existence, HMOs *may* contribute to types of waste such as delaying or foregoing preventative care, leading to larger, more expensive problems later on. A basic waterfall chart that displays costs in this way is not incorrect, but it doesn't give the complexity of the healthcare situation the proper depth of analysis that it deserves.

Joseph Greiner said...

Why is the health insurance any different than traditional forms of insurance i.e. automobile, life, homeowners, etc.? Also, at what point in time did insurance deviate from a financial risk mitigation tool?

Hammerspace said...

Joseph, health insurance is a little different, because it is not as pure a financial instrument as is something like auto insurance.

For example, an individual's health insurance might affect their access to (or decisions concerning) high blood pressure medicine. If the right people take medicine today for a low cost, catastrophic costs costs related to events like strokes or heart attacks can be greatly reduced in the future. The more common example is diabetes, which, across the total population, is poorly managed in the US and leads to tons of avoidable costs, both in dollars and quality of life.

I don't think there are good parallels in other "risk mitigation tools" that you referred to. Your decision on auto insurance coverage doesn't affect the future condition of your car in the same way that the appropriateness of your health care will affect your body. (Your mention of auto insurance does bring to mind another interesting point--why do we all seem to agree that auto insurance should be mandatory, but not health insurance? People w/o insurance generate huge unpaid bills at emergency rooms that you and I pay in the form of higher hc costs and premiums. It wouldn't be entirely different from the way that mandatory auto insurance prevents society from bearing the costs of a few jack***** who lack auto insurance.)

As for your questions re: history, I think there were at least two interesting related historical trends, but I'm not going to get into them much here, b/c it's probably not the right forum.

Anyways, one is the linkage of health insurance to employment. I think this became popular sometime after WWII as a way for companies to differentiate themselves to attract employees during a time when the ability to just simply raise salaries was limited by law. Despite understanding how this became common, I have not seen really compelling arguments as to why employers should want to be involved in health insurance at all today. It seems as though it would be hugely beneficial to small businesses (and by extension, economic growth) if this were changed. And really, I doubt ppl would demand flood or auto insurance from their employers, so for what reason (other than "that's the way it is") do we expect them to provide health insurance?

The second trend was the rise of managed care, which was sold as a way to use HMOs, PPOs, etc. to reduce adminstrative waste. High irony, indeed.

The whole thing is truly a Gordian knot. Whether the current administration is wrong, right, or in between, people who pick apart health care reform based on one or two isolated points are either too stupid to understand the complexities or too politically motivated to want a real discussion.

OK, totally hijacked this comment thread with too much ranting. My apologies to CN and anyone else offended or bored.

Consultant Ninja said...

That's ok man, Hammer Away!

Everyone agrees that a majority of health care costs go to treat chronic conditions (diabetes, emphysemia, COPD, etc). What's not clear to me is how universal health care will drive these costs down.

The reason that these diseases are so prevalent is not that Joe Fatboy didn't go to the doctor early - it's that he eats crappy food, drinks too much, watches too much tv, and doesn't exercise. How will universal health care help Joe Fatboy's COPD issues (and correspondingly cost) go away?

Hammerspace said...


That's true; poor individual behavior is the saddest kind of waste in the system.

I suspect that "universality" is being stressed for political reasons.

Joseph Greiner said...


I am 25, in perfectly good health, and I currently split my insurance premiums with my employer. On an annualized basis I do not yield any of the benefits of my insurance premium, except for my discounted annual doctor visit. Through an employer based system I am currently subsidizing those within my company who are in poorer health by improving the average health quality and age.

The current system will continue to perpetuate the issue of subsidized care and just span it across a larger population...which may be higher risk and raise the overall premiums. If, and this is a big if, I could save my money in a tax deductible account, to effectually save for future expenditures, I really would not need to have insurance at least not under the current system. Now if they took a more traditional insurance approach where my insurance premium is minimal and strictly covers major emergencies then maybe I could vest in a longer term policy (similar to life insurance) that would effectively protect my financial risk.

So to my question:

Do you think that if health insurance did not exist at all, that doctors and care providers would be able to deliver better service at a relatively lower cost?

A good book on the topic is "Redefining Health Care: Creating Value Base Competition on Results" by Michael Porter.

Wednesday, July 22, 2009