Eliminating Waste and Inefficiency Is Not Enough

DrRich | August 29th, 2011 - 7:22 am

Podcast:

A recurring theme of the CRB is that the rising cost of healthcare is the main internal threat to the continued viability of the US. Indeed, the very title of this blog reflects the chief mechanism which is being employed, fruitlessly and disastrously, in the attempt to reduce those costs.

Recently, DrRich pointed out that there are four ways – and only four ways – to reduce the cost of healthcare. He did this as a service to his readers, so that when politicians describe in their weaselly language how they will get the cost of healthcare under control, you will be able to figure out which of the four methods they are actually talking about.

While DrRich’s synthesis has been generally well-received, a few readers did offer one particular objection. DrRich, they assert, left out a fifth way to reduce the cost of healthcare, and the very best way at that. Namely, just get rid of the waste and inefficiency.

DrRich has talked about this before, but obviously it is time to revisit the issue.

It is, in fact, a central assumption of any healthcare reform plan ever proposed that we can get our spending under control simply by eliminating – or at least substantially reducing – the vast amount of waste and inefficiency in the healthcare system. Conservatives propose to do this by incorporating the efficiencies of the marketplace, thus eliminating the waste and inefficiency imposed by bureaucrats. Progressives propose to do it by adopting and enforcing strict, top-down regulations (ideally, through a single-payer system, employing the officially-perfect wisdom of various expert panels) that will control the wasteful and inefficient behaviors of healthcare providers. But one way or another, each scheme for reforming healthcare proposes to bring spending under control by eliminating waste and inefficiency.

Another way of describing what all the reformers across the political spectrum are telling us is: There is so much waste in the system that we can avoid healthcare rationing by getting rid of it. Most Americans believe this. Most policy experts believe this. DrRich suspects that even most of his loyal readers believe this, despite what he’s been telling you for many years.

But this is unfortunately false. No matter how much waste and inefficiency you think might be gumming up our healthcare system today, there’s not enough to explain the uncontrolled rise in healthcare spending we have been seeing for decades, and therefore, not enough to allow us to avoid rationing altogether in any publicly-funded healthcare system.

To understand why this is the case, we must first recognize the fundamental problem with our healthcare spending. The real problem is not simply that we’re spending a lot of money on healthcare, or even that we’re spending a larger proportion of our GDP on healthcare than any other country. The real problem is that our healthcare expenditures for years and years have been growing at double digit rates, 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, sending us back to a more typical era for mankind, where healthcare is a little-thought-of luxury, and not a necessity or a right. This will happen well before healthcare consumes 100% of the economy.)

To reiterate, it’s not the amount of spending on healthcare that is creating a fiscal crisis, it’s the rate of growth of that spending.

Once we understand the problem – that it’s the rate of growth of healthcare spending that threatens our society – then demonstrating that waste and inefficiency cannot possibly account for that rate of growth is a matter of simple mathematics.

What our politicians and policy experts are telling us, when they say they can fix the problem by eliminating waste, is that without all the waste, our healthcare spending would be economically well-behaved. That is, save for the waste and inefficiency, the annual rate of increase in our healthcare spending would be roughly the same as the general rate of inflation. To say it another way, our leaders are asserting that the “excess” in growth of our healthcare spending is entirely wasteful.

It is trivial to construct a simple spreadsheet to test this assertion, that is, a spreadsheet in which calculations assume that any increase in annual healthcare spending over and above the general rate of inflation must be due to wasteful spending.  In such a spreadsheet, for instance, we may take the annual rate of growth of healthcare spending to be 10% (a reasonably representative number for the past 30 years or so), and the annual rate of overall inflation to be 3%.

We now must “pick” the proportion of healthcare spending that we designate as being wasteful in Year 1 of our spreadsheet. Nobody really knows this value, especially since we all will define wasteful healthcare spending in different ways. Let’s just say, arbitrarily, that 25% of healthcare expenditures are wasteful in Year 1.

When we plug these values into our spreadsheet, the result is clear. In order to account for our unsupportable growth in healthcare spending by invoking waste and inefficiency, the proportion of healthcare spending that is caused by waste must increase to ridiculous proportions very rapidly, such that (for instance) by the Year 10 we will have more than doubled (59%) the proportion of all healthcare expenditures that are wasteful; and by the Year 20, nearly 80% must be wasteful. Similarly, the proportion of the annual increases in healthcare spending that would have to be due solely to waste and inefficiency rapidly climbs to equally ridiculous proportions. By Year 5, wasteful spending will have to account for 82% of the annual increase in healthcare expenditures, and that proportion continues to climb, eventually approaching 100%.

In real life, of course, we have enjoyed healthcare inflation of roughly 10% for over 30 years now. So if the assumptions behind our spreadsheet are accurate – and again, these are the assumptions our political and policy leaders expect us to swallow – we find ourselves in the position, at Year 30, where well over 90% of all of our healthcare expenditures must be wasteful, and virtually all of the annual increase in healthcare spending is entirely accounted for by waste and inefficiency. (This result is largely independent, after 30 years, of whatever value we may have chosen as the proportion of wasteful spending in Year 1.)

Such a result is completely absurd. If you think it is not absurd, but actually reflects reality, then (all of healthcare being entirely useless) there’s no point in worrying about healthcare at all – we should simply stop spending any money on it.

And this result indicates that the initial assumptions must be wrong. That is, the unsupportable rate of growth in our healthcare spending cannot be due to waste and inefficiency. Therefore, that growth must be due, fundamentally, to the growth of “useful” healthcare expenditures.*

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*This analysis does not trivialize the waste and inefficiency we actually see in our healthcare system, which is large and inexcusable. What it likely means is that the level of inefficiency – which is certainly at least 25% of the total if not higher – likely attaches itself proportionately, sort of like a tax, to the underlying growth in healthcare expenditures.
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Therefore, DrRich has demonstrated, using actual Math, that 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 that as long as we have publicly-funded healthcare (which we do), we have to ration.

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

DrRich is compelled to point out, once again, that waste and inefficiency is multiplied with great exuberance any time you have covert rationing. Disguising all the rationing activity as something other than rationing fundamentally requires opaque procedures, unnecessary complexity, bizarre incentives, Byzantine regulations arbitrarily and variably enforced or ignored, and the diversion of healthcare dollars to non-healthcare ends (such as corporate profits, expanding layers of government bureaucracies, and other massive bureaucracies within the healthcare system created to defend oneself against those government bureaucracies). Covert rationing greatly increases waste and inefficiency, and does so inherently and systematically.

To reduce the unavoidable rationing to the smallest amount possible, we will have to figure out a way to do it openly, and not covertly. Having viewed commercials featuring Congressman Ryan pushing elderly ladies off a cliff after he proposed a Medicare reform far less drastic than open rationing (a reform that would restore some individual responsibility for healthcare expenditures to at least some of the more well-off beneficiaries, and thus reduce to some extent the need to ration care), DrRich doubts whether the public is yet ready to engage in such an endeavor.

6 Responses to “Eliminating Waste and Inefficiency Is Not Enough”

  1. Matthew says:

    Of course, the real reason “waste, fraud and abuse” will never be eliminated is that it’s a feature, not a bug. It is directly proportional to the size of government. Government programs must waste money however they can. They must continuously justify their own budget increases to survive. Also, there is the small matter that if people were “allowed” to keep their own money, they would quickly learn that they are able to accomplish the vast majority of what they now depend on government for on their own. Such a revelation can not happen if bureaucracies are to retain power. They must continue to waste money. They have no other choice.

  2. Jupe says:

    Dr Rich,

    Continuing our discussion from here:

    http://covertrationingblog.com/economics-and-that/the-four-ways-to-reduce-healthcare-spending

    Will you play around with the calculator a little more?

    (here’s the link again.)

    http://www.cepr.net/calculators/hc/hc-calculator.html

    Nevermind the initial blue line. Click on different countries and compare.

    What do you make of that?

    Also, if I can beg of you to just take a deep breath and give my idea a chance in your head, will you consider this?

    I’m tens of thousands of dollars in debt over medical bills over a few trips to the ER when I developed epilepsy post partum (I paid for the delivery out of pocket.) Most of my bills are to various radiology companies, lab-work companies, etc, operating out of the few hospitals I went to. Constellations of private companies, each with their own millionaire/billionaire CEOs/owners, millionaire top admins, stock and shareholders, etc. I don’t think there’s as much of THAT in the other developed nations. Could that (and stuff like that, like the companies that just fight with insurance companies to get doctors reimbursed) be where a lot of the money’s going in the US compared to the rest of the developed world?

    • DrRich says:

      Jupe,

      The reason per-patient costs are so much lower in other countries is multifactorial. There is more overt rationing in most places (simply not paying for expensive therapies); Medicare pricing keeps the price of everything artificially high; “new” products developed in the US don’t go to other countries until/unless the prices come down; Americans pay all the subsides for new products, the rest of the world gets those products eventually.

      Because of the artificially high prices resulting from Medicare pricing (companies must charge 100% higher than Medicare reimbursement, since Medicare usually pays only 50% of charges or less), and the inability (under the law) for healthcare providers to bill lower prices to cash-paying patients, cash-paying patients are screwed. Often, however, once the bills go out, payers will negotiate a settlement if they are convinced they are unlikely to get paid otherwise.

      Rich

      • Jupe says:

        Thank you for the comprehensive and thoughtful reply, Dr Rich. I’ve been familiar with pharmaceutical, international “price tiering” for a few years. I also agree that overt rationing decreases costs elsewhere and that Medicare is acting to keep prices artificially high (in a way you have demonstrated as being illegal, as well. I want someone’s head on a platter over that, personally.) So, yes, that’s all part of it.

        Isn’t there also a valid case to be made that what I described is part of the difference in costs, too, though?

      • DrRich says:

        Jupe,

        Sure, your point is entirely valid. The more complex any set of regulations, the more opportunity there is to set up businesses and even entire career paths to “help” both sides navigate through them. This is why the income tax system can never really be reformed. There are too many people making their living off it – politicians, lawyers, law enforcement, accountants, financial advisors, etc. Same thing with the healthcare system.

        Rich

  3. Jupe says:

    Also, about this:

    “Regarding the link you provided, I am saying that in order to get onto the “blue” line, we will need to do more than merely eliminate wasteful healthcare spending. We will either need to openly ration healthcare, or move a substantial proportion of healthcare spending to the level of the individual, or both.”

    I know, and I agree. I think we should have some sort of NHS that openly and democratically rations, and also allow people to buy “extra, non-socialized” health care (like Lasik, expensive cancer drugs that just prolong life for a few weeks or months, etc.) at will.

    Another idea is a really, really, really free free-market free for all, where everything from chemo drugs to antibiotics to sodium pentothal is available to everyone.

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