Eating the seed-corn of healthcare

In the prior post in this series, I concluded that controlling healthcare cost growth was about reducing the differential growth rate of NHEPC (compared to GDP per capita) by a couple of percent per year. This made me want to dig deeper into the question of what exactly is NHEPC (National Healthcare Expenditures Per Capita)? I learned some intriguing things.

The topic of this post is the inexorable decline over time in the fraction of our healthcare costs allocated to the bucket called “Investment”.

For background to this project, which is all about identifying fertile opportunity spaces resulting from runaway healthcare costs, see the introduction and the first installment of the series.

Personal Healthcare Expenditures matter most

The key takeaway from the chart above is that by far the lion’s share (80-85%) of US Healthcare Expenditure falls into the bucket called Personal Healthcare Expenditures (strawberry color) (1), and this has been the case for the last 50 years.

Because Personal Healthcare Expenditures make up the majority of total costs, and have been maintaining a roughly constant share of the overall pie, it needs to be within that bucket that we look for big reductions in long term growth rates. More on that in my next post.

Are we eating our healthcare seedcorn?

But, take a look at the purple bars in the chart, which show the portion of healthcare expenditure allocated to “Investment”. It has been declining steadily since the early ’70’s, being replaced in part by some increases in the bucket called “Public Health” (green) but primarily as a result of the growth of the bucket called “Admin and net cost of PHI” (orange). Note that this is not just a growth in absolute terms. This is a systematic growth in the fraction of healthcare expenditures allocated to this “Admin” bucket.

You can see it more clearly in this second graph (same data).

What is this “Investment” we have been reducing since the 70’s? According to the National Health Statistics Group (2), it includes:

• Non-commercial research (eg research funded by the NIH, but excluding research funded by for-profit entities such as the pharmaceutical industry). As far as I can see, research performed by for-profit entities does not get captured at all in the National Health Expenditures.
• Structures: defined as “new construction put in place by the medical sector”. I think this includes things like the cost of building a new hospital or renovating an old one.
• Equipment: defined as “medical capital equipment purchased / put in place by the medical sector”. I think this includes, for example, a new CT scanner purchased by the local hospital, but also the new kitchen equipment purchased by that same hospital.

I suppose there may be arguments about why reduced investment in healthcare research or capital equipment is a good thing. That sounds like a whole new topic for exploration. To me, it does not sound like a good thing overall though. What do you think?

Growth in administration costs. Is this the culprit?

Here is what is included in the “Administration and Net Cost of PHI” bucket:

• Administrative costs of healthcare programs such as Medicare and Medicaid, and the
• Net cost of Private Health Insurance.

It is particularly depressing to see the jump in these admin costs, around 2000, to a new seemingly stable plateau of about 7% of total healthcare costs (orange curve above). After all, as the overall size of the government-run insurance programs and the private insurance programs grow, it seems reasonable to expect there would be economies of scale, and that things should get more efficient. If that were happening then the percentage allocated to these administrative overhead tasks would shrink. Quite to the contrary, the costs of “administration” are not just growing. They are growing considerably faster than the overall growth of the healthcare system.

It would be informative to explore whether it is the government portion primarily responsible for this, or the private sector. Maybe I will return to this in a future installment.

I do want to emphasize one thing, at this point. While administrative costs seem to be growing faster than overall healthcare costs, and this seems like a bad thing that ought to be rectifiable, I dont believe this is the most important problem, simply because at present administrative costs still represent a modest proportion of overall costs and thus don’t influence total growth rates all that much. For example, even if we could cut back the “admin” bucket to the 4% share of total costs it had back in the ’60’s, we would succeed only in reducing costs by 2-3%, or a single years overall growth.

Administrative costs vs overall costs

To tie this discussion back to the prior posts on this topic, the graph below shows Total National Health Expenditures and both the Personal Health Care Component and the Administrative Component (all per capita and in $2010). It clearly shows the similar growth rates of both total NHE and of Personal Healthcare Expenditures (3.5% per annum from 1980 -2010) and the somewhat faster growth rate of the Administrative cost component (5% over the same 1980-2010 period).

Conclusions

• We have been steadily reducing our “Investment” in healthcare since the 1970’s. This sounds like a bad idea.
• We seem to have a problem with out of control growth in the costs described as “Administrative and Net Costs of Insurance”. However, as a small portion of the overall pie, they are not the primary issue.
• To have the greatest impact on the problem of runaway healthcare costs, it seems like reducing the growth rates of the dominant bucket (Personal Healthcare Expenditures) is the place to focus.

Next installment of this work

In my next post I am going to look more closely into the big gorilla of healthcare costs: Personal Healthcare Expenditures.

Meanwhile, if you want to get involved or get more details about this project, or get access to later portions of this work that might not make it into this blog:
Sign up to be part of the discussion/information loop (no charges).

.

.

.

References

1. SOURCE:  Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group;  U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Bureau of the Census.Overview and description available at Centers for Medicaid & Medicare Services. Data downloads available here
2. National Health Expenditure Accounts Methodology Paper, 2010