The US can't cut healthcare spending

Thomson Reuters

The numbers, when it comes to healthcare costs in the US, are always stunning, and the report by the Department of Health and Human Services, published by Health Affairs, doesn’t disappoint. In 2015, healthcare spending surged 5.8% to $3.2 trillion: nearly $10,000 for every person in a population of 324 million. Healthcare spending rose from 17.4% of GDP in 2014 to 17.8% in 2015.

The report pointed out a number of reasons behind that surge in spending. But what it didn’t point out is the simple fact that without the surge in healthcare spending, GDP in 2015 would have essentially stalled. And without the secondary industries feeding off the healthcare boom, such as the construction boom of healthcare facilities, GDP would have looked even worse.

Among the components in the report contributing to this overall increase in spending:

• Spending for hospital care up 5.6%
• Spending for physician and clinical services up 6.3%
• Spending for private health insurance up 7.2%
• Spending for Medicaid up 9.7%
• Retail prescription drug spending up 9.0%

The Federal Government was the largest spender, footing 29% of the total bill, largely due to the rising age of the population and thus the growing costs of Medicare, and due to rising subsidies for private insurance coverage.

The report had a special word about the pharmaceutical industry. Spending on specialty medications – to treat hepatitis C, cancer, autoimmune diseases, etc. – boomed, as did spending on other brand-name drugs. And 45 new drugs were approved in 2015, after 41 had been approved in 2014. New drugs create new money flows. That’s what Big Pharma wants. And then this:

Price growth for existing brand-name drugs remained strong in 2015…, reaching a double-digit rate for the fourth consecutive year.

Indeed, it’s not that Americans consume more healthcare; it’s that they’re paying higher prices for what they consume, in an industry protected by lobbying, patent laws, consolidation, and inscrutable pricing strategies, as PE firms are muscling into the endless money-maker to wring out those that pay for it, even as allegations of collusion and price-fixing are now rampant.

Healthcare spending is bleeding taxpayers, households, and companies alike, and thereby the rest of the US economy. In return for this enormous transfer of money, by far the most per-capita in the world, the US gets worse than mediocre results, with a life expectancy of 78.8 years, which puts the US in about 31st place, depending on who’s doing the counting.

It would be possible to do something about the price of healthcare in the US and bring this monster under control. The suggestions range from forcing competition on the sector to strict price negotiations by public entities, or even an iron-fisted single-payer system. But no real efforts will ever be made to bring these costs down. And here’s why….

No one in government, after looking at the numbers, and particularly not economists that are married to the concept of GDP growth, will ever dare go up against this ravenous monster – because every dime wrung out of taxpayers, households, and companies, and every dime borrowed from the future to pay for healthcare adds to GDP and GDP growth. Without it, there might not have been any visible GDP growth in 2015.

According to the report, healthcare spending rose by 5.8% or $175 billion in 2015. But GDP, adjusted for inflation, only rose by $304 billion in 2015, for a measly growth rate 1.88%. So:

• If healthcare spending had remained flat in 2015, GDP would have grown a measly 0.79% on average for the year. On a quarterly basis, GDP would have declined at least in Q1 and Q4, and possibly also in Q3.
• If efforts to crack down on these costs had pushed healthcare spending down 5% in 2015, to a still enormous $2.9 trillion, or $8,855 per person, the US economy would have been mired in a recession the ENTIRE YEAR!

No industry is more important to US GDP than healthcare – even though it cannibalizes the rest of the economy.

These figures don’t even include the secondary sectors that feed off the healthcare boom, such as construction of health care facilities which totaled $41 billion in 2015, according to the Census Bureau. Even in Houston, where commercial real estate is in a depression due to the implosion of the oil & gas boom, the healthcare segment was still doing well in 2015.

If consumers, companies, and governments didn’t have to spend so much money on healthcare, they could spend it on other things. Over the longer term, that would be more beneficial to the economy than feeding it to the healthcare monster. But given its lobbying power and its mega-footprint in the US economy, the industry has Washington wrapped around its little finger. And the occasional efforts to rein it in are effortlessly brushed off.

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