Category: Economics

How Much Would Universal Healthcare Cost?

Universal health care would cost $70 Billion for 2009 if enacted using a market-based approach, but this cost will grow rapidly if overall health care inflation is not tamed.

How much would health coverage for all uninsured Americans really cost? Critics maintain that covering all Americans would break the US budget (which is already overstretched), while advocates maintain that covering all Americans can be done affordably. But how much would universal coverage really cost?

The Commonwealth Fund provides a great summary of the costs of proposals under consideration, including Medicare for all, a Building Blocks extension of the current system, and other proposals. Proponents of universal Medicare claim that it will save the US $58 Billion in 2010, since Medicare operates more efficiently than private insurers [1]. Providing universal coverage through incremental changes could cost anywhere between $48B and $120B, according to analyses by the Urban Institute and the Lewin Group, a private health care consultancy. And while Medicare for all would lower total health care spending, it would raise the Federal government’s share of spending by almost $200 Billion per year.

With numbers all over the map, is it possible to come up with a plausible estimate for comparison purposes? Sites like ehealthinsurance.com now make it much easier to get estimates for insurance coverage. Using this data, we can estimate how much basic health insurance coverage would cost for the 45 million uninsured Americans. The experience of Massachusetts, which has implemented universal health care, can also be used to project an estimate for the rest of the country. Since Massachusetts’ health care costs are above US average, this provides a high-side estimate.

Using market insurance quotes, the cost of providing a health insurance with a $1000 deductible and prescription coverage would amount to $2500 per person annually, or roughly $115B per year [2]. This calculation uses different insurance rates for different age groups among the uninsured, based on this demographic breakdown of the uninsured provided by the Kaiser Foundation. In Massachusetts’ experience, covering each uninsured individual costs roughly $3400 per year. Covering all 45 million uninsured Americans at this rate would cost $150 Billion per year.

The midpoint of these estimates is around $130 Billion per year. To get a final estimate, money currently spent on uncompensated care must be subtracted out, since there is no uncompensated care in a universal health care system. Approximately $58 Billion will be spent on uncompensated care in 2009 [3], and subtracting this figure out leaves roughly $70 Billion in annual expenditure required for universal health care.

While $70 Billion per year sounds like a lot of money, it’s actually less than many estimates. It looks increasingly likely that some kind of health care reform will be passed in 2009, and that money will be found to pay for it for the moment. The bigger question is, how will it be paid for tomorrow? Unless health care cost growth is pulled into line with inflation, no one has that answer.

[1] Medicare doesn’t have to perform medical underwriting, and it doesn’t have to spend money on advertising, sales, or shareholder dividends, so its overhead should be lower than private competitors, if it can maintain efficiency. Critics counter that Medicare suffers from high fraud rates precisely because it is a government bureaucracy without competition to force it to raise efficiency and tighten controls.

[2] Here is the rough cost estimate for each demographic group, taken from quotes on ehealthinsurance.com:

0-19: $100/month  (20% of all uninsured)

20-29: $150/month (29% of all uninsured)

30-44: $200/month (27% of all uninsured)

45-64: $400/month (24% of all uninsured)

Using these numbers, we calculate a weighted average cost per person of $213 per month, or $2556 per year. That’s $115 Billion for 45 million people.

[3] In 2004, uncompensated care expense was estimated at $40.7 Billion. Since health care spending (in nominal dollars) has grown at 7.5% per year during this decade, the adjusted number for 2009 is approximately $58 Billion. This assumes that uncompensated care is growing in line with health care costs as a whole.

Posted on by praveenghanta 16

The True Cost of Gun Ownership

The gun industry generates a total economic loss of $15B per year in the United States.

Guns are a part of American culture, and guns are also a part of the economy in the US. While not a large industry, the small arms and hunting industries contribute roughly $29B annually to the US economy [1]. While many industries have externalities (think pollution), the gun industry’s externalities are particularly damaging: 31,000 deaths and 70,000 injuries per year [2].  From an economic standpoint, the cost-benefit of US gun ownership and the gun industry can be measured by weighing the economic benefit of the gun industry against the economic loss caused by premature deaths and injuries.

What is the annual economic loss associated with 31,000 deaths and 70,000 injuries? By looking at loss of income alone, each gun death can be valued at roughly $1.4M, or $43 Billion in total lost income [3]. A 1994 study published in JAMA concluded that medical costs from gun injuries cost another $2.3B, or $4B today including inflation [4]. The total economic costs of $47 Billion per year from gun industry externalities thus greatly exceed the economic benefit of the industry!

Perhaps this is not surprising. Guns were invented as military weapons, and while hunting and recreation are part of today’s industry, guns’ primary use remains human combat. In the 20th century, the arms industry split into two industries: a hugely profitable defense industry which sells only to the government, and a tiny small arms industry accessible to ordinary American citizens. Despite causing a $15B loss every year to the American economy, the American small arms industry exists because it is protected from its liabilities by the Second Amendment and its political allies.

Can this situation can be improved? The gun industry has thus far successfully resisted efforts at further regulation, and the NRA and other organizations have created a potent political alliance to prevent a change in the status quo. Eventually, an industry with huge negative externalities has to improve its behavior as attitudes shift, or public sentiment and politicians will force the issue (the oil and tobacco industries come to mind). The gun industry would do well to cooperate with reasonable regulations that decrease its negative side effects, or it risks harsher regulations down the road.

[1] The gun industry’s estimated total value in 1999 was $24B, or $29B today when adjusted for inflation.

[2] According to the CDC, there were roughly 31,000 deaths involving firearms (including homicides, suicides, and accidents), and  70,000 non-fatal injuries related to guns annually.

[3] Gun death rates peek in the 18-24 age range, and fall sharply after 30, according to the CDC (select Age under Output Group). Assume that the average person killed by a gun loses 35 years of productive life (from 35-70) . 35 years * US per capita income of roughly $40,000 equals $1.4 Million per person. No NPV adjustment is needed, because gun deaths are cumulative over time – last year’s gun deaths contribute to this year’s losses as well.

[4] This study concludes that the medical costs associated with firearms injuries were roughly $2.3B per year in 1994. Assuming a health care rate of inflation of 4% over the last 15 years (lower than the real rate!), this $2.3B equals $4B in 2009 dollars.

Posted on by praveenghanta 32

US debt to exceed GDP by 2010!

In Febuary, I predicted that US federal debt would exceed US GDP by 2015. It appears that I was too optimistic at that time.

The Obama Administration’s latest budget projections now show that the debt may exceed GDP as soon as 2010! This year’s deficit is expected to rise to $1.75 Trillion, raising the total debt from the current 11.2 trillion (4/9/09) to almost 13 trillion by year end. Next year’s deficit is projected to be in the trillion dollar range, driving the debt up to 14 trillion [1], which is roughly equivalent to 2008 GDP. Since GDP growth will be negative in 2009 and modest in 2010, it’s not unlikely that GDP and gross federal debt will be equal at the end of 2010 [2].

It looks like the budget situation may force decisions on big government programs like Medicare, Social Security, and Defense sooner than most expected – and likely sooner than the Administration would prefer. Here’s to the return (or beginning?)  of fiscal discipline!

[1] See Table S-9 in the White House Budget for FY 2010, showing gross debt of 14.078 Trillion for 2010.

[2] Table S-8 shows the White House’s economic growth assumptions, which are more optimistic than many mainstream economists’ assumptions. In fact, the table itself shows that both the CBO and private economists have lower growth projections than the White House (kudos for the honesty). The CBO estimates GDP at 14.6 Trillion for 2010, meaning that any further slippage in the budget cause the debt to surpass GDP.

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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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Limits on the Health Care Deduction?

The Obama administration is open to the idea of limiting the deduction on employer-based health care coverage. This would be a tremendous step in the right direction in limiting health care cost growth, as I’ve previously discussed (here as well).

While President Obama campaigned against this proposal initially, his advisers now indicate that he will not oppose a reduction in this subsidy if Congress passes it. Let’s hope that this particular initiative survives the Congressional melee and emerges as part of health care reform!

Posted on by praveenghanta 0

How Big is the Mortgage Problem?

How big is the bad or “toxic” mortgage and loan problem in the US? Nouriel Roubini says the total losses on US mortgages and loans will be 3.6 Trillion, while the IMF has a lower estimate at 2.2 Trillion. Is there an easy way to gauge the size of this problem and check the veracity of these estimates?

Total US mortgage debt outstanding, including residential, commercial, and farm properties, stood at $14.7 Trillion dollars in December 2008. Of this, $4.9 Trillion in residential mortgage debt is guaranteed by the federal government through Fannie Mae, Freddie Mac, and Ginnie Mae, and does not expose holders of this debt to any risk of loss.

During the depths of the Great Depression, roughly half of all mortgages on homes in major cities were in default. Interestingly, home prices only fell by 20% during the same period, so that even during the Depression, banks could expect to eventually recover 80% of the value of their defaulted loans – and this is assuming 100% financing!

Housing prices are falling more sharply in the current downturn, with Economy.com predicting a peak-to-trough decline of 36%. Mortgage default rates so far have been much lower than the Great Depression, and total defaults across all mortgages are unlikely to exceed 20% during this recession. Assuming a hefty 20% default rate, and an extraordinary 50% drop in home values, banks would still lose only 10% of total loan principal. This would amount to a worst-case $1 Trillion loss in US mortgage lending. According the Federal Reserve, consumer and commercial loans together total another $4 Trillion in principal outstanding. If these loans default at a high rate of 25%, another $1 Trillion in losses would be incurred, for a total of $2 Trillion in US loan losses.

These simple calculations take into account the extraordinary default rates and real estate price drops occurring today, and yet the $2 Trillion in projected losses and is far lower than some economists’ estimates. Perhaps the problem is more tractable than suggested; while $2T is a large sum, it’s much more manageable than the $3-4T predicted by pessimists!

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How much energy do we need?

energyvshumandevelopment

Energy usage vs UN Human Development Index, 1997

How much energy do we need? In traditional economics, this question is meaningless, as humanity simply consumes the amount of energy demanded at the market-clearing price. But in a resource-constrained world, this question becomes pertinent. Can the world’s energy supplies power a future in which all of mankind uses the same amount of energy as the average American? What level of energy usage is possible, and as fossil fuel sources run short, what kind of renewable energy investment will be required? Let’s examine some scenarios:

Scenario 1: The World at American Standards

The United States consumes 100 quadrillion btu of energy annually. If the world’s population stabilizes around 9 billion, bringing the entire world up to US energy consumption would require 6000 quadrillion btu per year. This is more than twelve times current energy production, a figure that even optimistic forecasters doubt possible. If solar panels cost 50 cents per watt installed (90% cheaper than today and cheaper than coal), an investment of $500 Trillion would be required to provide this amount of energy.

Scenario 2: The World at European Standards

The graph above shows that the US could cut per capita energy consumption by 70% without a significant drop in quality of life. Achieving this standard worldwide would require total energy production of 1800 quadrillion btu per year, still more than triple today’s capabilities. An investment of $150 Trillion would provide enough solar energy to power the world at these standards, a number over double current world GDP.

Scenario 3: Current Energy Usage per Capita

The scenarios above assume that the developing world eventually reaches parity with the industrialized world. Assume instead that current energy usage is maintained on a per capita basis, with the world’s population stabilizing at 9 billion. The world would consume 700 quads of energy per year. This level of energy usage would require $60 Trillion in investment, which might be achievable over time.

Conclusion

Unless energy prices drop by 99 percent via nuclear fusion, the world’s economy is likely to be energy-constrained in the future. It’s highly unlikely that the entire world will ever reach an American or even European level of energy consumption, and even current energy consumption levels will require a massive investment to reach sustainability. The calculations above assume that renewable energy will become significantly cheaper than coal, and yet the cost of replacing the world’s energy infrastructure is enormous. But in the long run, it will be necessary!

Calculations

At 50 cents per Watt installed, what’s the price per kilowatt-hour that I’m assuming? Assume that a 1kW solar system produces 1800 kWh per year, as according to SolarBuzz. Over a 30 year lifetime the system would produce 54000 kWh. If this system costs $500 at 50 cents per watt, then $500 / 54000 kWh = 1 cent per kWh. This is much cheaper than retail delivered electricity generated from coal.

Scenario 1:

1800 kWh * 3413 btu / kWh = 6143400 btu per $500 system

6000 quadrillion btu / 6143400 btu/system = 976 billion 1kW systems needed

At $500 each, that’s $490 Trillion.

Scenario 2: 1800 is 30% of 6000, so 1800 quadrillion btu would require $147 Trillion in investment.

Scenario 3: 700 is 11.6% of 6000, so 700 quadrillion btu would require $57 Trillion in investment.

Posted on by praveenghanta 7

US Debt to exceed GDP by 2015

Here’s a more recent post – the US Debt is now likely to exceed GDP by 2010, next year!

The United States federal debt stands at 10.7 trillion today, or 75% of US GDP. The CBO projects that the US debt will reach 14.6 trillion by 2015, without accounting for the effects of the stimulus package and ongoing bank rescues. These efforts could easily add 1-2 trillion to the total debt, sending the debt over 16 trillion by 2015.

GDP growth may be negative for 2009, and will probably average 2% through 2015 according to CBO projections. Real GDP at the end of 2008 was 14.2 trillion, and is project to rise to 15.8 trillion by 2015, less than the federal debt at that time! Rising inflation may prevent this from happening, but will bring its own set of problems.

Where does a debt load of 100% of GDP put the United States relative to other nations? That would put the US among the top 10 most indebted nations in the world, with peers like Zimbabwe and Italy.

Source Links:

Current US GDP at Bureau of Economic Analysis

US Total Debt at treasurydirect.gov

CBO Budget and Deficit Projections – Click Budget Projections. This xls also includes economic growth estimates.

CIA World Factbook Ranking of Nations by Public Debt

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Healthcare Bubble

Dot com bubble. Real estate bubble. Commodities bubble. Healthcare bubble? How can the US healthcare system be a bubble when tens of millions are uninsured and more people fall through the cracks daily? The media, public, and politicians alike have been more concerned with the inadequacies of the system than with its rapid growth. US healthcare spending has grown enormously, exceeding the rate of inflation for decades to become the largest sector of the US economy. The United States now spends over 16% of its GDP on healthcare, almost double the average for developed nations.

Perhaps Americans just demand the best and priciest healthcare, with the most modern technology and treatments. Other insurance prices are on a steep rise, including home, accidental and auto insurance. If Americans paid for healthcare themselves, this would simply represent a rational spending choice. But the federal government now incurs 60% of all healthcare spending, meaning that taxpayers, and not individuals, pay for most of our healthcare. Medicare, Medicaid, and other direct government healthcare accounts for 46% of healthcare spending, while tax breaks on healthcare subsidize another 10-15% of healthcare spending [1].

At current growth rates, government healthcare spending will exceed the entire Federal budget by 2050 [2]. Total spending on healthcare will near one-third of GDP by 2030. It’s unlikely that the US can devote 1/3rd of all productive capacity to healthcare without crippling other sectors of the economy and reducing overall economic growth. The healthcare bubble thus dwarfs all previous bubbles in size, since the technology, real estate, and energy sectors are all so much smaller.

How will the bubble pop, and what will its effects be? Since most healthcare spending is federal, the bubble will pop when the government can no longer afford its healthcare outlays. The US has been able to borrow freely by issuing debt for many decades, but this will eventually end once our debt exceeds GDP. With the current downturn, government debt may actually exceed GDP by 2015 [3]. Thus the reckoning may come sooner than many expect.

Will healthcare reform contain costs and deflate the bubble gradually? Most reform plans focus more on increased coverage than on cost control, so they may exacerbate the problem. Eventually the hard choices will have to be made, and they will include some combination of reducing Medicare benefits, cutting provider reimbursements, openly rationing government health care, and limiting the tax break on health insurance. I just hope that some of the hard choices are made before we are collectively up against a fiscal wall.

[1] $200 Billion in taxes are foregone as a result of the employer-based healthcare tax deduction, equivalent to 10% of all healthcare spending. When this subsidy is included the government’s share of healthcare spending rises to 56%. This analysis does not include the exemptions on property taxes and sales taxes that healthcare providers receive; adding these subsidies in would likely drive the government’s share of health care spending over 60%.

[2] The CBO predicts that Medicare and Medicaid will account for 14% of GDP by 2050. This figure doesn’t include healthcare spending through the VA system, SCHIP program, and other federal healthcare programs, which total $100 Billion in spending today. If these programs also grow commensurately, total government spending may near 18% of GDP in 2050, roughly equivalent to total government revenue.

[3] This projection of public debt growth shows that US government debt will exceed gdp by 2050. This only takes into account debt held by the public, however. Gross government debt is already above 65% of GDP, and may grow to 75% by the end of 2010 as a result of the recession and stimulus spending. With deficits of $500B+ per year possible for several year, US total government debt could exceed gdp in less than 10 years.

Posted on by praveenghanta 13

Is Oil and Gasoline Demand Rising Again?

The media is filled with reports that Americans are driving less, and that gasoline demand and oil demand continue to drop. What’s the reality of the situation? Is demand continuing to drop, has it leveled off, or is it rising again? The graphs below tell the story:

Figure 1: US gasoline demand dropped off in 2008. US Gasoline demand is highly cyclical, and figure 2 corrects for this.

2007 vs 2008 Gasoline Consumption

Figure 2: To eliminate seasonality, 2007 demand is subtracted from 2008 demand to measure the difference week by week. This shows that demand crashed in September and October, but has subsequently begun to recover. Low gas prices may be responsible for the demand rebound.

2008 Second Half US Oil Consumption

Figure 3: US oil demand also dropped sharply during September and October, but has since recovered to mid-2008 levels. In addition to rising gasoline consumption, residual fuel oil demand is rising since oil is now price-competitive with natural gas.

Figure 4: The long term EIA graph shows that demand growth has leveled off, and that after a sharp drop in late 2008, demand is recovering.

Gasoline and crude oil demand seem to have recovered from the levels experienced during the heart of the financial market meltdown. Intuitively, gasoline demand should rebound a bit, since gasoline price deflation over the past year makes driving a very inexpensive activity for consumers. With the recession curtailing further oil exploration, we may be in for a price shock when economic growth returns!

Note: All data used in the graphs can be found by clicking on the EIA graphs, which link to the appropriate EIA data pages.

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