It’s Unsustainable
by Jaan Sidorov
Health care reform is gaining even greater urgency thanks to a highly informative release of a Health Affairs web exclusive written by actuaries from the Centers for Medicare and Medicaid services. They’ve have two numbers that are driving reform: 2.4 trillion and 6.2%. The former is attracting a lot of attention. The latter isn’t. The former is big and makes the stimulus package pale by comparison. The latter sounds small. Don’t let that fool you, however because, of the two numbers, it’s the 6.2% that is really really scary.
The first number is the amount of money that will be spent on health care in 2008. That comes to over $8000 per person in the United States. As testimony to the huge size and strength of our economy, we can currently afford to spend that on ourselves every year. John Goodman in the prior posts notes one reason for our willingness to put up with the cost is because much is hidden.
Unfortunately, whether it is hidden or not, we can’t afford the second number. That’s the rate of spending growth that is projected over the coming years. It contrasts with the 4.1% growth projected for the gross domestic product (GDP – or the sum of all goods and services produced in the course of a year). The mismatch means that year over year, more and more of both our collective individual income will be spent on our own and others’ health needs. Right now, that is about 16% of GDP. It could grow to a total of 20% in less than 10 years.
6.2% is known as ‘trend.’ While us mortals think about absolute numbers, actuaries lay awake at night worrying about the rate of growth. Successful insurers recognize that increases in the rate of health care costs are part of the business. Their job is to predict those increases and advise what the health insurance premium should be. The DMCB is no actuary, but it bets the Fed’s actuaries are telling their bosses that this kind of trend is this.
According to the Health Affairs article, the number 1 and 2 drivers of the cost inflation is ‘medical prices’ and ‘growth in the use of services,’ which accounts for about 2/3 of the growth rate – not the aging of the population. Interestingly, the ‘administrative costs’ of private insurance are projected to continue to decline from over 13% to 12%, making it less likely that insurance company’s ‘profiteering’ can be blamed for our cost woes.
Now comes the hard part - where we see the difference between oratory and reality, bombast and bipartisanship, gimmicky delay versus the day of reckoning.
It’s called hard choices.
