Posts Tagged healthcare

How Much Will Insurance Cost Under Obamacare?

May 28, 2013 Update: California’s just-released prices for ACA coverage are close to my 2012 estimates, with an unsubsidized bronze plan (for a 25 year-old) available for $142/month in Los Angeles.

Health insurance premiums for minimum coverage will likely be around $150/month for 27 year-olds under the ACA, since the ACA includes relatively high-deductible plans under the Bronze plan option.

Now that the dust has settled on the Supreme Court ruling, let’s attempt to answer a simpler question – how much will health insurance cost under the ACA (Obamacare)? Individuals purchasing health insurance via the new health insurance exchanges will be able to select from four plan levels: bronze, silver, gold, and platinum. The law dictates that plans falling into these categories must have 60%, 70%, 80%, and 90% “actuarial value”, respectively. The concept of “actuarial value” dictates that the plan must cover the specified percentage of health care costs for enrolled individuals. Individuals enrolled in a bronze plan can expect their insurance to cover 60% of their health costs, for instance [1].

The Kaiser Family Foundation commissioned a study to determine the structure of plans that might meet the 60% actuarial value standard for the Bronze plan.  The study found that the following individual health care plans might qualify (all plans have a cap of around $6350):

  • A plan with a $6350 deductible and 0% coinsurance
  • A $4350 deductible with 20% coinsurance
  • A $2750 deductible with 30% coinsurance

How much would plans like these cost in 2014? We will focus on adults aged 27 in this example, since young adults more frequently go without insurance, and since young adults can now stay on their parents’ plans until 26. We can shop online for similar plans and get some results for comparison [2]:

  • $67.26 for a $2750 deductible / 30% coinsurance plan in Atlanta for a 27 year-old male
  • $98.21 for a $2750 deductible / 30% coinsurance plan in Atlanta for a 27 year-old female [3]
  • $129 for a $2750 deductible / 30% coinsurance plan in Silicon Valley for 27 year-old men and women
  • $73.22 and $95.07 for a $2500 deductible / 20% coinsurance plan in Chicagoland for a 27 year-old man and woman, respectively
  • $95 for a $2750 deductible / 20% coinsurance plan in Houston, TX for a 27 year-old man
  • $132 for a $2500 deductible / 10% coinsurance plan in Houston, TX for a 27 year-old woman
  • $70.75 and $90.46 for $2500 deductible / 20% coinsurance plan in Hartford, CT for a 27 year-old man and woman, respectively

Here are two market quotes for 63-year old females in relatively expensive markets:

  • $302 for $1200 deductible / 10% coinsurance HMO plan in New York, NY for a 63-year old woman
  • $516 for $3500 deductible / 10% coinsurance PPO plan in Santa Clara, CA for a 63-year old woman

The ACA stipulates that the most expensive policies for older individuals can be no more than 3 times the price of policies for younger adults. The data above show that a 27-year old can get a plan similar to the exchange bronze plan for around $100 per month today, but this is less than 1/3 the cost for older Americans. Using 1/3 of the cost of the plans for older women as a price floor, we get an estimate of $150 per month as the lower limit for plan prices [4].

This estimate is lower than the commonly-cited CBO estimate of $4500 per individual for bronze plans via the ACA exchanges. The CBO estimate is for 2016, and so it builds in two additional years of premium inflation (roughly 15%). The CBO number is also an average across all age groups – since young adults’ plans can cost 1/3 as much as the oldest (non Medicare-age) Americans, 27 year-olds’ plans will be much cheaper than the average. While the ACA should have allowed for more high deductible plans, it’s good to know that the bronze plans do provide for some affordable coverage options within the new health insurance exchanges.

[1] The 60% bronze plan threshold and other thresholds are applied to each plan considering the average expenditures for plan members. Given the deductible and copay structure of a particular plan, it’s possible that the plan spends a higher (or lower) percentage on a particular individual’s care. For instance, if you don’t use your plan at all in a given year, then your plan spent 0% on your care. At the other extreme, if you are diagnosed with cancer, and incur $100k in costs in a year, even a bronze plan would cover  perhaps 90% of that amount.

[2] All plans were found on ehealthinsurance.com on 8/2/2012.

[3] The wide discrepancy between plan prices for men and women will be eliminated by the ACA. For these purposes, averaging men and women’s prices enables us to get closer to a representative price under the ACA.

[4] Since health insurance is more expensive for women, and more expensive for older Americans, we used a 63 year-old woman as the prototype for an expensive risk in the existing private health insurance market. At age 65 virtually all Americans gain entry into Medicare (or Medicaid for seniors), and so 63 is the oldest age for which insurance quotes can reliably be obtained (some insurers won’t write short-dated policies, and no insurer writes non-Medicare policies for 65+ Americans). The average price from the two expensive quotes thus obtained was $409. After adding in 10% in premium inflation between now and January 2014, we get a premium estimate right around $450 per month. By law, one-third of this is the minimum that the exchanges can charge for any adult – and this equals $150 per month.

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A One-Line Fix For Medicare Spending

My one-line Medicare / Medicaid spending fix:

Medicare should continue to pay 80% of health care costs for recipients’ care below $40,000 per calendar year, but should pay only 50% of health care costs above $40,000 per calendar year.

With the ongoing debt-ceiling debate and political discussions over how to cut spending dominating discourse, I thought I’d chime in with a simple plan to fix America’s long term budget crisis. The majority of America’s future budget deficits are a result of runaway growth in health care spending, despite reductions in Medicare spending put in place with the recently passed health care reform. Paul Ryan and other conservatives propose to fix this by ending the Medicare program, and replacing it with an insurance-voucher scheme. President Obama proposes to control cost growth through the IPAB, a board with the power to control Medicare reimbursement policies.

My plan is far simpler than either, and will preserve Medicare as it exists today for 90% of recipients. How does this plan work? Kaiser Foundation research shows that 90% of Medicare recipients receive less than 40k per year in health care. The remaining 10% of recipients actually spend 60% of the Medicare budget. The proposed change would require these recipients to either shoulder more of the cost of expensive treatments, or to utilize less expensive treatments. Note that Medicare would not leave any recipient high-and-dry, but it would require even cost sharing for expensive treatments.

When faced with higher cost-sharing, many Medicare recipients would opt not to receive the newest cancer drugs, or the latest titanium hip replacement. It’s also quite likely that when faced with this two tier reimbursement structure, many health care providers would change treatments and pricing to stay competitive within the new structure – there’s evidence that today, health care providers charge Medicare what they do simply because Medicare will pay.

How much money would the proposed change save? Assuming that most spending above the $40k mark is eliminated [1], then Medicare and Medicaid might save $200B in the first year alone. This kind of change would also reduce health care cost inflation, since high-cost care would be curtailed significantly. It’s quite likely that this change would completely eliminate Medicare’s unfunded liability, without changing the program significantly for the majority of beneficiaries. But clearly this is too simple and non-ideological a change to stand a chance [2]!

[1] According to CMS, in 2011 total Medicare and Medicaid spending will total $1 Trillion. If my proposal to cut government cost sharing to 50% above 40k eliminated most spending above the 40k line (since many Medicare patients would not be able to pay their increased share above 40k), then the federal government would save half of the money expended above the 40k line. In 2006 the average expenditure for the high spenders in Medicare was $48k – in 2011 this would likely be over $60k per year with inflation and cost growth totaling 5% per year. Assume that the entire 20k per year above the 40 line were saved from using a resume builder online – that would mean that the high spenders’ health care expenditures would be reduced by 33%, reducing total government health care expenditure by 20% (one-third of the 60% spend on these expensive patients).

[2] I should note that this plan would leave some patients with expensive conditions to make difficult choices. By ending the endless spigot of government health care money, 10% of current beneficiaries would have to decide whether they could afford to have certain expensive procedures. But patients, not regulators, would be able to decide – the patients would simply be required to pay an even share for expensive treatment.

[3] In actual implementation, such a plan would have to be phased in. For instance, Medicare could initiate a 1 percentage point reduction in cost-sharing for each of the next thirty years, gradually moving from 80% to 50% for expenditures over the threshold.

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The End of Government Subsidized Medical Innovation

Most Americans don’t realize it, but America’s status as the world’s primary source of medical innovation is heavily government-subsidized. During the healthcare reform debate, many pointed out that America spends over 17% of its GDP on health care, far higher than any other nation, and almost double the average for OECD nations. This high rate of spending on health care has fostered the growth of high technology health care, from pharmaceuticals to biotech, medical devices, imaging equipment and even surgical robots. What would happen if the government were no longer able to spend at such a rate?

Imagine for a moment that America had a purely free-market health care system, with no Medicare, Medicaid, and without tax breaks for health care. The government currently pays for 62% of all health care spending, and without this support, our healthcare system would be much smaller. If a free-market approach to healthcare brought spending down to the OECD average, the US would spend $1.2 Trillion (48%) less on healthcare than it does today [1]. Without Medicare to pay for costly end-of-life care, it’s doubtful that $200,000 per year chemotherapy drugs would find a market, or that anyone would pay full price for replacements on hips implants. In short, a free market health care system would deliver less health care technology to America – though it would still deliver technology that proved itself worthy and affordable to patients.

Of course in the real world government-subsidized innovation isn’t going away – or is it? America’s long term budget problems are driven chiefly by health care spending, as acknowledged by the trustees of Medicare. The Soviet Union eventually went bankrupt by spending 40% of its GDP on defense. The United States is on track to spend 40% of its GDP on healthcare by 2050 [2], with much of that on high tech gadgetry with low marginal benefit, and with virtually all of that money coming from taxpayers. This is obviously not sustainable.

The newly enacted healthcare reform law begins cutting Medicare in earnest, but deeper cuts will be needed to prevent Medicare’s insolvency. These cuts will inevitably mean less spending, and less revenue opportunities for big pharma, biotech, and medical equipment companies. While many other countries already have highly regulated healthcare markets with lower profit margins, pharmaceutical and medical equipment companies have been able to achieve consistent growth by tapping the US market and US taxpayers. Regardless of how healthcare reform plays out, America’s huge and growing debt mean that this situation will come to an end. The golden age of subsidized medical innovation is drawing to a close.

[1] CMS estimates that 2009 health care expenditures were $2.5 Trillion, or 17.3% of GDP. If this were reduced to 8.9%, the OECD average, health care expenditures would be $1.29 Trillion, almost half of what they are today. While we don’t know exactly what US health care spending would be without government subsidies and programs, we do know that government spending and subsidies would drop by roughly $1.3 Trillion ($1.1 Trillion in direct spending plus $200 Billion in subsidies), leaving a number very similar to the OECD average.

[2] See Figure 4 of this CBO Report for long term health care spending projections.

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The End Of Employer-Based Health Care?

The employer penalties in the health care law are low enough that many businesses will drop health coverage. This is a blessing in disguise, as it will lower costs in the long run.

The fiery rhetoric on both sides of the health care debate obscured the details of the actual reform bill. Now that it has become law, policy analysts and journalists have been combing through the bill and issuing predictions on whether it will raise or lower premiums, help or hurt businesses, and generally bring or not bring the Apocalypse. The bill will definitely change how health care is paid for in the United States, but perhaps not in the ways many expect. The following analysis shows that it’s possible that the new law will end the system of employer-based health care entirely!

The Kaiser Foundation has produced a nice summary of the law, including employer requirements:

  • Employers with less than 50 employees face no penalties.
  • Employers with more than 50 employees that provide no health care coverage must pay a tax of $2000 per employee (with the first 30 employees being exempt)
  • Employers with more than 50 employees that do provide care may have to pay a tax 0f up to $2000 per employee if  their employees use the new health care exchange subsidies.

Given these requirements, what are an employer’s options?

  1. Drop Employee Coverage: A company drops its health care plan, paying the $2k per head tax and leaving employees to buy their own plans. The company will save $10,000 per employee on average given the average cost of health insurance [1], and will also save by eliminating benefits administration expenses. The company could give each employee a $9000 raise and still increase profit by $500 or more per employee [2]. Employees will be mad about the loss of benefits, but not too mad as they can get coverage on the exchange using their new income and potentially subsidies.
  2. Keep Employee Coverage: The company will face the administrative burden of supplying vouchers to some employees who would like to opt out, of complying with minimum benefits requirements, and will potentially still have to pay $2000 in fines per employee if its health care plan is deemed insufficient. The company’s use of benefits as a recruiting tool will be diminished once benefits can be obtained on the health care exchange.

Looking at the alternatives, why wouldn’t a company drop its health care plan? Particularly for employers with middle-income employees (who may qualify for federal subsidies), it makes more sense to drop health care coverage and raise wages than it does to continue the status quo. While the employer-based health care tax deduction still exists, for many families its appeal will be neutralized by subsidies available in the new health care exchanges. And since all Americans will be guaranteed access to insurance starting in 2014, benefits will no longer be the employment draw that they are today.

The health care reform bill will thus reduce the share of employer-based healthcare in the US market. This is an excellent change for a couple of reasons: first, it breaks the link between employment and health care, providing more stability to all Americans; and second, it slowly weans Americans off the employer health care tax deduction, which contributes significantly to health care cost inflation. Ironically, the bill’s writers did not intend it to be the demise of employer-based health care. But if this trend does accelerate, the bill may be successful in controlling health care costs. [3]

[1] The average employer contribution for a family insurance plan was $9860 in 2009, according to Kaiser Foundation research. With health care inflation averaging above 4% in recent years, this will rise to roughly $12,000 by 2014. If an employer chooses to pay the $2000 penalty rather than buy insurance for an employee, it can thus save $10,000.

[2] An employer could cancel insurance, saving $10,000 per employee, and then give each employee a $9000 raise. Payroll taxes (7.65%) would add another $688 to this sum, leaving a net profit of $312 per employee if an employer took this approach. Benefits administration expenses would also be eliminated, however, and these savings could be significant. Eliminating a single $40,000 salary HR position at a 200 person company would save another $200 per employee, for instance. So a net profit of over $500 per employee is quite possible – the actual profitability of the move would depend on how much of the health care savings the company chose to pass on in the form of higher wages for its employees.

[3] Why will the shift from employer to direct purchased health care coverage lower costs? First, when you spend your own money, you are more likely to be judicious about it. Second, when tax deductions are replaced with tax credits, the cost inflation effect will drop, since a deduction rises with every additional dollar spent, while a credit does not.

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What Percentage of US Healthcare Is Publicly Financed?

Public, taxpayer-funded health care spending will pay for for 53% of US health care in 2009. If health care tax breaks are included, this figure rises to 62%.

Of the $2.5 Trillion dollars expected to be spent in the United States on health care this year, what percentage is paid by taxpayers? The Kaiser Family Foundation calculates that 46% of health care spending was publicly financed in 2006, but this number seems to exclude health care for government employees. The Center for Medicare & Medicaid Services collects data on health care spending in its National Health Expenditure survey, which can be used to perform a direct calculation on the government share of health care financing. The following table summarizes the 2007 NHE data, the latest year for which a detailed breakdown is available:

Category Amount (2007 $ Billions)
Medicare [1] 418
Medicaid (Including State Funding) 340
Other Public Health Programs [2] 189
Federal, State, and Local Employee Health Care 134
NIH and FDA Budgets [3] 32
Total Public Spending 1113
All Private Health Spending 1018
2007 Total US Health Spending 2131

The 2007 data show that 52% of all health care in the United States is publicly financed. The NHE data also show that from 1987 to 2007, the government’s share of health care financing has risen by ten percentage points, or about half a percentage point per year. This means that in 2009, the public share of health care spending is likely at 53%, or perhaps higher as a result of rising unemployment due to the recession. If health care subsidies (primarily tax exemptions) are included as government financing of health care, they add another $200 Billion to the total, raising the government’s share of health care spending to 62%.

With the government already paying for the majority of US health care, one thing is clear about the current health care reform debate: The debate is not about whether the government will take control of the health care system, as that has quietly taken place over the last 40 years. The real debate is about how the government should distribute its health care spending, and on whether it will be able to rein in endless health care cost growth.

[1] The detailed NHE data split up by source of payment can be found here:

In calculating the numbers in the above table, I used Table 1 in the pdf. I allocated all costs associated with Medicare to the public sector, unlike the table in the pdf, which counts Medicare premiums and contributions as private sector payments. From a standpoint of determining government involvement in the health care system, it makes more sense to count all Medicare dollars as public financing, particularly since paying Medicare taxes is precisely how most of the Medicare system is funded!

[2] According to the NHE pdf, other federal, state, and local health programs “Includes maternal and child health, vocational rehabilitation, Substance Abuse and Mental Health Services Administration, Indian Health Service, Office of Economic Opportunity (1965-74), Federal workers’ compensation, and other miscellaneous general hospital and medical programs, public health activities, Department of Defense, Department of Veterans Affairs, and State Children’s Health Program (SCHIP)” and “Includes other public and general assistance, maternal and child health, vocational rehabilitation, public health activities, hospital subsidies, and state phase-down payments.”

[3] The NIH budget is $30 Billion, and can be classified entirely as health care spending, though it’s often left uncounted. But isn’t research to cure disease health care spending? If it’s not, then what exactly is it? I have also included two-thirds of the FDA budget, as that is the portion related to drug and medical device supervision.

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The Mystery of Health Care Pricing

Many economists, think tanks, and politicians have been agitating for more consumer-driven health care in the US. They argue that if consumers have to spend their own money for care, they will tend not to waste health care resources, and they will shop around for cost-effective care. The first part of this argument appears valid, as individuals will always spend their own money most carefully. Studies have validated this hypothesis, showing that individuals with high-deductible insurance and health savings accounts (HSAs) tend to spend less than those on traditional insurance.

But are individuals able to shop for health care in a competitive marketplace? Personal experience and numerous reports indicate otherwise. In the US, most health care providers can’t tell you the price of any particular health care service until after it’s been performed! I recently shopped around for a health care service, and called four doctors’ offices in total. One office told me that they “aren’t allowed to provide that sort of information.” Two more offices were flabbergasted, and attempted to ease their way out of the conversation. Only one office was able to answer with an actual price quote.

Why is this so difficult for medical providers? Virtually all chargeable medical services have associated CPT Codes, which are defined by the American Medical Association [1]. Hospitals, labs, and most medical practices have a chargemaster, which is essentially a price list. Even small practices without explicit chargemasters know the rate their doctor charges for his time. When insurers and medical providers negotiate payment structures, they negotiate using the chargemaster rates (and usually Medicare rates) as starting points for negotiation.

The currently proposed health care reform plans have missed this essential element: require all health care providers to publish standardized price lists, and market competition can begin [2]. For doctors, a simple hourly rate should be enough to satisfy this requirement. Hospitals and labs should be required to initially publish online price lists for their most common charges, with the list expanding over time. While this information is irrelevant to patients in emergency situations, the great majority of health care spending is pre-planned [3].

Put another way, why not include a mandate on medical price lists as part reform? The cost of the mandate to providers is extremely low, as the information is available, and publishing the information online eliminates distribution costs. While price transparency is making slow progress, Congress has an opportunity to make this happen, and should do so as part of the health care reform package.

[1] The AMA would likely be a primary opponent of free publishing of CPT code-based price lists, since it derives signicant ($70M per year) income from its copyright on CPT codes. If the government is to open up the pricing market, it may have to break this monopoly by buying the copyright at fair value and putting it in the public domain.

[2] Consider a scenario in which all doctors are required to provide price lists. Since most small practices would find this difficult, they might just quote a maximum hourly charge. One surgeon might quote $1000 per hour, and another $2000 per hour. And there you have it, competition on price can begin, just as it occurs for plastic surgery, Lasik, and other out-of-pocket services today!

[3] According to the Kaiser Family Foundation, roughly 70% of health care expenditures are non-hospital expenses. Since many hospital expenses are planned, it appears that significantly less than 30% of health care expenses are emergencies in which consumers have no choice of provider. According to ACEP, only 3% of health care costs are emergency-related.

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List of Countries with Universal Healthcare

Update 1/21/2013: With the Supreme Court’s decision to uphold the ACA (aka Obamacare), and President Obama’s inauguration to a second term today, the US will have universal health care in 2014 using an insurance mandate system.

Thirty-two of the thirty-three developed nations have universal health care, with the United States being the lone exception [1]. The following list, compiled from WHO sources where possible, shows the start date and type of  system used to implement universal health care in each developed country [2]. Note that universal health care does not imply government-only health care, as many countries implementing a universal health care plan continue to have both public and private insurance and medical providers.

Country Start Date of Universal Health Care System Type
Click links for more source material on each country’s health care system.
Norway 1912 Single Payer
New Zealand 1938 Two Tier
Japan 1938 Single Payer
Germany 1941 Insurance Mandate
Belgium 1945 Insurance Mandate
United Kingdom 1948 Single Payer
Kuwait 1950 Single Payer
Sweden 1955 Single Payer
Bahrain 1957 Single Payer
Brunei 1958 Single Payer
Canada 1966 Single Payer
Netherlands 1966 Two-Tier
Austria 1967 Insurance Mandate
United Arab Emirates 1971 Single Payer
Finland 1972 Single Payer
Slovenia 1972 Single Payer
Denmark 1973 Two-Tier
Luxembourg 1973 Insurance Mandate
France 1974 Two-Tier
Australia 1975 Two Tier
Ireland 1977 Two-Tier
Italy 1978 Single Payer
Portugal 1979 Single Payer
Cyprus 1980 Single Payer
Greece 1983 Insurance Mandate
Spain 1986 Single Payer
South Korea 1988 Insurance Mandate
Iceland 1990 Single Payer
Hong Kong 1993 Two-Tier
Singapore 1993 Two-Tier
Switzerland 1994 Insurance Mandate
Israel 1995 Two-Tier
United States 2014? Insurance Mandate

Will the United States join this list in 2014?

[1] Roughly 15% of Americans lack car insurance coverage, so the US clearly has not yet achieved universal health care. There is no universal definition of developed or industrialized nations. For this list, those countries with UN Human Development Index scores above 0.9 on a 0 to 1 scale are considered developed.

[2] The dates given are estimates, since universal health care arrived gradually in many countries. In Germany for instance, government insurance programs began in 1883, but did not reach universality until 1941. Typically the date provided is the date of passage or enactment for a national health care Act mandating insurance or establishing universal health insurance.

System Types:

Single Payer: The government provides insurance for all residents (or citizens) and pays all health care expenses except for copays and coinsurance. Providers may be public, private, or a combination of both.

Two-Tier: The government provides or mandates catrastrophic or minimum insurance coverage for all residents (or citizens), while allowing the purchase of additional voluntary insurance or fee-for service care when desired. In Singapore all residents receive a catastrophic policy from the government coupled with a health savings account that they use to pay for routine care. In other countries like Ireland and Israel, the government provides a core policy which the majority of the population supplement with private insurance.

Insurance Mandate: The government mandates that all citizens purchase insurance, whether from private, public, or non-profit insurers. In some cases the insurer list is quite restrictive, while in others a healthy private market for insurance is simply regulated and standardized by the government. In this kind of system insurers are barred from rejecting sick individuals, and individuals are required to purchase insurance, in order to prevent typical health care market failures from arising.

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US Doctors Are Overeducated

US medical students study for 8 years prior to residency, compared to 5-6 years of study in the rest of the world. This discrepancy increases health care costs by $25 Billion annually without contributing to quality.

In the UK, medical students study for five years after high school before beginning residency. They can expect to become practicing doctors by their late 20′s. This is true in Australia as well, where it’s possible to become a practicing doctor after less than 10 years of post-secondary education.

In much of Europe, medical students study for 4-6 years before beginning vocational training, and this process is slowly being standardized throughout the EU. Finally, in Japan, Brazil, China, India, and many other countries, medical education involves a 5-6 year degree followed by optional specialty training.

Since medical students in the US have a career path two years longer than in most other countries, their initial salary requirements must inevitably be higher to compensate for two years of extra tuition and lost salary. Using a career ROI calculation, it’s possible to estimate that US doctors must be paid an additional $30,000 per year as a result of this additional schooling [1]. With roughly 800,000 physicians in the US, that amounts to $25 Billion per year in additional compensation!

Why does the US stand almost alone in requiring aspiring doctors to study for eight years before training for another 3-8 years prior to practicing medicine? Is it possible that American doctors are better at their profession as a result? In fact, a small number of accelerated six-year medical programs exist in the US, and these programs have extremely competitive admissions. In a 6 year program, typical Bachelors-level general college education is curtailed while still accommodating a full four years of medical school. This model should become the norm rather than the exception, enabling medical students to enter careers more quickly and with less, thereby saving the entire health care system money!

[1] Using the spreadsheet used to perform Career ROI calculations, we can first adjust the medical student’s career path to shorten it by two years. This will raise the NPV and rate of return. We can then lower the expected salary to the point that the NPV is equivalent to the original NPV – the difference in salary is the salary amount made necessary by the extra schooling.

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Lowering Healthcare Costs: Supply and Demand

Most discussions around healthcare these days focus on covering all Americans, and on lowering healthcare costs. President Obama has recently focused on the second issue, noting that ballooning healthcare costs could cripple the federal government’s finances and kill economic growth. But how can healthcare costs be reined in? In the partially private US healthcare system, prices are still somewhat subject to the law of supply and demand. Healthcare prices (and therefore costs) can thus be lowered by either reducing demand or increasing supply. Here’s a quick list of ideas:

Increasing Supply:

1. Increase the number of medical professionals. Unemployment among healthcare professionals remains near 1%, far lower than any other field. Increasing the number of medical, dental, and nursing school seats in the US will increase supply over time, creating more balance in the healthcare work force and driving down wage increases.

2. Shorten the length of medical school. Doctors in the UK and other countries finish their medical education in six years or less before going on to training programs (residency), while US doctors spend eight years between college and medical school. Accelerated six year medical programs exist in the US, and there is no evidence that their doctors’ education suffers as a result. Shortening medical, dental, and pharmaceutical programs to six years will increase the supply of practitioners, and decrease the starting salaries they demand since their schooling and debt burden are lower.

3. Doctors aren’t needed for routine healthcare. Nurse practicioners, midwives, pharmacists, and other medical providers can provide much of the routine care needed. National laws (or at least guidelines) making it easier for these practitioners to do their jobs will further increase the supply of qualified medical professionals, driving down prices.

4. Warranties on Medical Care. While pay for quality has been heavily discussed, it is quite difficult to measure and implement in practice. It’s far easier to require warranties on procedures, so that medical providers must provide care free of charge when issues as a result of mistakes during a procedure. Medicare could put this in place, incentivizing the industry to move towards higher quality.

Decreasing Demand:

1. Measure cost effectiveness of treatments within Medicare. As long as Medicare pays for healthcare by quantity, without any regard for cost-effectiveness, expensive and marginally effective treatments will continue to drive health care inflation. Patients should be given the option to pay for treatments that are not cost-effective, should they desire.

2. End employer health care tax deduction. As I’ve previously discussed, this $250B+ subsidy inflates demand, causing price increases for all, including those without insurance. Removing this subsidy would decrease health care spending by up to 10% [1], and could provide funding for other initiatives including universal health care or deficit reduction.

3. End tax breaks on medical goods and services. Sales taxes are generally not levied on healthcare products like the $285B pharmaceutical industry, providing them with a $20B subsidy relative to other goods [2]. Property taxes and income taxes are not collected on many not-for-profit hospitals, though some generate significant income and serve very few uninsured patients. Ending these subsidies would further reduce demand and prices.

4. Enact consistent end-of-life guidelines for Medicare. 27% of Medicare spending (almost $100B) is incurred for patients in their last year of life. While higher costs towards the end of life are expected, there are wide variations in spending in different regions of the US. Enacting a consistent set of guidelines which emphasizes palliative care would help decrease end-of-life healthcare demand.

Why doesn’t this list mention the approaches typically touted like electronic medical records, administrative efficiencies, and the like? Unfortunately, while efficiency improvements would result in one-time reductions in cost, they would not change the supply-demand fundamentals of the US healthcare delivery system. The solutions mentioned above would address these issues, creating permanent decreases in healthcare costs while potentially expanding availability.

[1] $250B is slightly more than 10% of healthcare spending in the US today, so eliminating this subsidy would reduce spending by that amount at most. In practice, the reduction would be somewhat less, since falling prices would cause some offsetting increase in healthcare consumption.

[2] Assuming a 7% sales tax (most states’ sales tax is higher), 7% of $285B is roughly $20B.

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US Healthcare Reform: Possible Choices

The United States’ health care system is a patchwork of private care, Medicare for seniors, Medicaid for some of the poor, and emergency-only care for the 47M uninsured. Both presidential candidates insist that change is needed, with increased coverage and decreased costs as primary goals. Neither candidate mentions how public dollars will be rationed, though government resources are limited.

Here’s a list of a range of health care systems in place around the world, with the most market-oriented systems listed first, and the most government controlled systems listed last. The future of American health care will mostly take the form of one of the middle options, as both extremes appear politically unpalatable.

US Health Care System Choices:

Health Care System Description Found Where
Traditional Free Market Little government intervention, patients pay health care providers directly. Those without financial means rely on charity hospitals or receive no care. India, many developing countries
Public Senior Care + Semi-Free Market The government provides health care for seniors, while others rely on a regulated private health insurance market (whether purchased individually or through an employer). United States
Public Care for Children and Seniors The government provides health care for seniors and children, while others rely primarily on the private health insurance market (whether purchased individually or through an employer). Barack Obama’s health care plan approximates this
Mandatory Health Insurance The government requires that all individuals purchase health insurance, and provides subsidies to assist the poor and unhealthy in purchasing coverage. Massachusetts, Hillary Clinton’s Plan
Dual Public-Private System The government provides health care for all residents not enrolled in private care, and provides incentives for employers to provide health care and for individuals to purchase care. Individuals may also pay extra to supplement their basic government plan. Australia
Single Payer, Private Premium Care The government provides health care for all residents, and individuals can choose to pay extra for premium health care services (like private rooms, experimental treatments, etc). France, other European countries
Single Payer Only The government pays for all health care, and does not allow private market health care transactions. Canada

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