The Covert Rationing Blog

Why Healthcare Inflation Cannot Be Explained By Waste and Inefficiency

October 18th, 2007 by DrRich

Sundry proposals for healthcare reform are being advanced today by, among others, that class of Americans who would like to become Our Next President. DrRich has avoided discussing the specifics of the various proposals made by these individuals because, well, so have they.

But whatever their proposals, whether of the Wonkonian or Gekkonian variety, there is one thing on which they all seem to agree, namely, that a major part of the problem is that our healthcare system is rife with waste and inefficiency.

The healthcare system, of course, is infused at every level with unnecessary complexity, bizarre incentives, Byzantine regulations, incompetent practitioners, diversion of healthcare funds to non-healthcare ends (such as corporate profits or expanding layers of governmental bureaucracies), and other forms of waste and inefficiency. And indeed, such waste is a large part of the problem. Nobody can deny this.

But when our political leaders say that waste is the very root of the problem, and assert that their particular healthcare proposals will be certain to eliminate that waste, here’s what they’re really trying to tell us: There is so much waste in the system that we can avoid rationing by getting rid of it.

This assertion is false. No matter how much waste and inefficiency you think might be plaguing our healthcare system today, there’s not enough to explain the healthcare inflation we have been seeing for decades, and therefore, not enough to allow us to avoid rationing altogether.

DrRich will shortly demonstrate why this is the case. He will do it using simple Math, applied by means of a simple Spreadsheet.

But first, there is an underlying concept we must agree upon. The real fiscal problem with our healthcare system is not simply that we’re spending a lot of money on healthcare, or even that we’re spending a large proportion of our GDP on healthcare. Surely, if the proportion of the GDP we’re spending on healthcare were to remain at 15% we could figure out a way to pay for it. But that’s not what’s happening. The real problem is that healthcare expenditures are growing at a double digit rate of inflation, several multiples faster than the overall inflation rate, such that, over time, an ever larger proportion of our annual GDP is being consumed by healthcare expenditures. Unless this disproportionate rate of growth is stopped, eventually healthcare spending will consume our entire economy. (Rather, what will actually happen is that it will grow to the point of producing societal upheaval, well before it consumes the whole pie.)

There are only two things that can explain this rapid inflation in healthcare expenditures. Either it is due to unrelenting growth in wasteful spending (as we are assured by our political leaders), or it is due to unrelenting growth in useful healthcare spending. If it is the latter, then we must ration. So therefore (we all fervently pray), the rate of growth must be caused by wasted spending.

That desired conclusion, however, leads to mathematical absurdities.

The following table illustrates what would have to happen in order for wasteful spending to account for our current healthcare inflation. The spreadsheet from which this table derives makes the following assumptions;

• The proportion of healthcare spending today that is wasteful is 25%. (The actual number, of course, is impossible to come by. It depends, for one thing, on who gets to define “wasteful.” If I’m a 92-year-old man who gets a $12,000 stent procedure to eliminate my angina, I and my doctor might consider it money well-spent, while you might consider it wasteful. But however this question ends up getting resolved, we need an estimate that we can use in our spreadsheet right now. Our admittedly arbitrary estimate of 25% is designed to seem pretty high - a necessary feature, given that we’d like to invoke wasteful spending as the root of the problem - but still can be defended as reasonable-sounding. As we will see, the proportion we’re wasting today turns out not to be a major determinative factor in the long-term.)
• The annual overall rate of growth of healthcare spending is 12%.
• The annual growth rate of useful healthcare spending is economically well-behaved. That is, it matches the rate of overall inflation. The spreadsheet therefore assumes a 3% annual inflation rate for useful healthcare spending. (We must make this assumption because if useful healthcare spending were not economically well-behaved, that is, if the growth rate for useful healthcare expenditures were substantially higher than the overall rate of inflation, then no matter what the rate of growth for wasted healthcare spending, we would still have disproportionate healthcare inflation - and rationing would be unavoidable.)
• The annual growth rate of wasteful healthcare spending is whatever it needs to be (given that the growth rate of useful spending is 3%), to bring the overall rate of growth to 12%.

(Note: If you want to play with the actual Excel spreadsheet itself, e-mail DrRich at DrRich@GUTHealthcare.com and when he gets a chance he’ll send you a copy. This offer may become void if his blog suddenly becomes popular.)

We see from this table several things. First, as expected, healthcare expenditures are doubling roughly every 7 years. Second, in order to account for this increase by invoking waste and inefficiency, the proportion of healthcare spending that is devoted to waste must increase to ridiculous proportions very rapidly, such that by the 5th year, 46% of all healthcare expenditures must be wasteful; and by the 20th year, 85% must be wasteful. Similarly, the percentage of the annual increases in healthcare spending that would have to be due to waste and inefficiency rapidly climbs to equally ridiculous proportions. By year 5, wasteful spending will have to account for 85% of the annual increase in healthcare expenditures, and that proportion continues to climb, eventually approaching 100%.

Now let’s look at the same picture another way. This time, let’s assume that as recently as 2003, our healthcare system was 100% efficient. That is, only four years ago there was no waste whatsoever. Then let’s allow that the remaining three assumptions given above are still operative. The following chart results:

We can see from these results that, even if only four years ago we had a completely efficient healthcare system, as much as 81% of today’s annual increase in spending has to be due to waste and inefficiency. Indeed, unless at some point within the second G.W. Bush administration we actually had a completely efficient healthcare system, this spreadsheet tells us either that our fervently held belief (that waste and inefficiency accounts for healthcare inflation) is completely wrong, or that today virtually ALL of our annual increase in healthcare spending MUST be due to waste and inefficiency, and none due to useful healthcare.

As long as we insist that wasteful spending accounts for the unsustainable growth we’re seeing in healthcare expenditures, then whatever our assumptions may be regarding the current proportion of wasteful healthcare spending, we very quickly encounter the same mathematical absurdities.

One can only surmise from this analysis (done with actual Math) that our desired conclusion is wrong. A substantial proportion of our growing healthcare expenditures must necessarily be coming from real, honest-to-goodness, useful healthcare. And if we’re going to substantially curtail that growth, we’re going to have to curtail useful spending. Which means we have to ration.

But, once again, we’re Americans and Americans don’t ration. Which is why we’ve commissioned the big insurers and the government to do the rationing covertly, a task they have accepted with great gusto.

In the meantime, DrRich does not kid himself that exposing the mathematical absurdity of the chief assumption espoused by our political leaders, in their brave efforts to reform healthcare, will change hearts and minds. American political partisans, not to mention the American media, eat mathematical absurdities for lunch.

Posted in Healthcare economics

2 Responses to “Why Healthcare Inflation Cannot Be Explained By Waste and Inefficiency”

1. Dawn wrote on 10/22/07 at 6:44 am :

   DrRich…interesting post. Wasteful healthcare…placing a pacemaker in a 95 year old man who has had 3 strokes but who (at least according to the cardiologist and cardiac surgeons) can’t be placed in a nursing home because of his bradycardia UNLESS HE HAS PACEMAKER PLACED. Otherwise, we’ll just send him home to his 85 year old wife, who has severe arthritis and can’t lift him. Too bad he died 4 days after the pacemaker was placed, but don’t worry, Medicare paid for it.

   Family story that STILL pisses us off. No one wanted the pacemaker placed, we just wanted him to die in peace. But it wasn’t allowed. At least the DNR was respected, when he finally coded.

2. The Covert Rationing Blog » Blog Archive » A Modest Proposal for Controlling Drug Prices wrote on 10/23/07 at 1:42 pm :

   […] week DrRich proved that waste and inefficiency cannot possibly account for healthcare inflation, and that instead, the unsustainable increase in our healthcare expenditures must necessarily […]

TrackBack URI

Leave a Reply