Is Rationing the Future of Healthcare?

We’ve been hearing a lot about the so called “healthcare debate” in the past couple of decades, but little seems to change. The primary discussions always center on funding—how will we pay for the kind of healthcare we want, need and have a “right” to?

Here’s my thinking on the healthcare issue: until our leaders—from what ever quarter they originate—come clean and begin discussing what healthcare services we’ll have to give up in order to have affordable healthcare, the entire issue is dead in the water. Funding healthcare isn’t the problem—controlling costs is. Is rationing the future of healthcare?

I’m not betting against it.

To paraphrase Ross Perot, that’s “the crazy aunt in the attic no one wants to talk about.” It’s the 21st Century’s version of the “third rail of politics—touch it and you die”. It’s excluded from the debate and treated as if it isn’t necessary.

But I think rationing is the only way out of the healthcare crisis, and the only reasonable course we have to provide more affordably priced health insurance policies.

The current system is excluding too many people

Is Rationing the Future of Healthcare?
Is Rationing the Future of Healthcare?

According to the 2010 Census, nearly 50 million people have no health insurance in the US. That works out to be one out of every six people in the country. They’re doing without coverage either because they can’t afford the cost of private coverage, or because they have medical conditions that make getting insurance either prohibitively expensive, or totally impossible.

Now if you have health insurance you may not be terribly concerned that so many are going without it, but rest assured, your health insurance premiums are being affected by the millions who aren’t covered. The cost of paying for care given to the uninsured is passed on to those who do have coverage in the form of higher charges for medical services performed. If healthcare providers can’t collect fees for service from the uninsured, they raise the price of services across the board to cover the loss. That means higher medical costs and higher insurance premiums for everyone.

The sheer number of uninsured in the US is a gaping hole in the system that’s getting bigger each year. Obamacare, to be fully implemented on January 1, 2014, will supposedly address this issue. But how much more will it cost to provide unlimited care for an additional 50 million people?

(Please see the updated 20 Part-time Jobs With Health Insurance post for the most current list of employers who offer health coverage for their part-time staff.)

The impact of healthcare on the US economy

We have serious, structural problems in the US economy, and one of them is the cost of healthcare. According to the chart below, issued by the Organization of Economic Cooperation and Development (OECD), US healthcare expenditures are eating up more than 16% of the nations total economic output (gross domestic product, or GDP). The numbers in the chart—applicable to 2008 but released by the OECD in 2010—have reportedly gotten worse since and now show healthcare costs to be consuming more than 17% of GDP.

Exhibit 6 Total Health Expenditure as a Share of GDP, U.S. and Selected Countries, 2008

Source: Organisation for Economic Co-operation and Development (2010), “OECD Health Data”, OECD Health Statistics (database). doi: 10.1787/data-00350-en (Accessed on 14 February 2011).

Notice from the chart that healthcare costs consume proportionately more of our GDP than they do the GDP of any of the other industrialized countries, and by a wide margin. In fact healthcare costs in the US, in general, are about twice the average for the industrialized world. That gives US based businesses a competitive disadvantage compared to our major trading partners. But it gets worse.

The chart reflects healthcare costs-to-GDP ratios for rich countries—the difference between the US and developing countries is far worse. Much of the manufacturing production that was once here has been shipped off to developing countries, who not only have much lower wage costs, but also far lower healthcare costs. This means we can fully expect even more jobs to move to lower cost countries.

We can continue the present course of expanding healthcare—always demanding more and better care—but it will continue to degrade the economy, and that will translate into a continuing loss of jobs.

The current healthcare system is completely unsustainable

I don’t want to throw too many numbers out, but numbers are the only way to properly illustrate the cost trends in healthcare. So here come some more numbers…

In 1980, the US GDP was approximately $3 trillion. By 2010 it had reached nearly $15 trillion—which is to say that the US economy grew by a factor of five over a period of 30 years.

In 1980, US healthcare expenditures were $256 billion, representing about 8% of the total economy.

By 2010, total healthcare expenditures hit $2.6 trillion, which is to say that healthcare spending increased by a factor of ten over a 30 year period. Healthcare as a percentage of the economy increased to more than 17%.

Numbers don’t lie, so here’s what we know: while the overall economy grew by a factor of five in the last 30 years, healthcare expenses have grown by a factor of ten. That’s double the rate of growth in the economy. In that same time frame, healthcare as a percentage of the total economy grew from 8% to 17%–which is also a doubling.

In the next 30 years, will we be able to absorb another doubling of healthcare costs from 17% of the economy to 34%? That kind of growth in healthcare—and the economic fallout it will produce—is completely unsustainable.

The case for healthcare rationing

The problems of the healthcare system aren’t going to be fixed by making a few tweaks here and there, or by half-hearted attempts at superficial “reform”.

There are two constructive ways to approach this: continue to increase funding, or make serious efforts at cost containment—which ultimately will lead to rationing.

Increasing funding is the route we’ve taken thus far, and it’s the course that’s gotten us into the current conundrum. Increased funding drives higher medical costs, which leads to demands for still more funding. How this will continue in a nation whose national debt is larger than its economy remains to be seen, especially given that the population is getting steadily older.

That brings us to cost containment.

There’s no way to cut healthcare costs without forcing us all to give up benefits—a.k.a., rationing. This can be done either by capping how much health insurance will pay for any given therapy or, at the extreme, by restricting therapies except under very specific conditions.

As “unfair” as that seems on the surface, something has to be done to end the cycle of healthcare/health insurance inflation. That inflation has gotten so entrenched in our economy that no one even questions it. Like housing prices prior to 2007, we expect that healthcare prices will always go higher as though it were a natural phenomenon. But as we found out in the housing meltdown, a tree truly can’t grow to the sky. Sooner or later, prices reach nosebleed levels and set off a crisis. I believe we’re on the cusp of that right now with healthcare. Healthcare is eating up a disproportionate, unsustainable (17%) level of the economy and still 50 million people are without coverage.

Whether it’s legislated or it comes upon us by disaster, rationing is in the future of healthcare.

My thinking is that until the dialogue on healthcare begins to incorporate workable cost cutting, the debate is mostly an attempt to defend business as usual. And we know where that’s going.

What do you think about healthcare rationing? As much as the public doesn’t want to hear it, do you think it’s inevitable?

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8 Responses to Is Rationing the Future of Healthcare?

  1. When our politicians have to have the same coverage as the rest of the country we might see some changes. But as long as the rules that we live by don’t apply to them, we’re not going to get anywhere.

  2. That’s an excellent point. They have the benefit of having the very best coverage in the country and have little incentive to fix anything. My own sense is that we’re going to end up with a very different healthcare system, but one that will evolve more than it will be legistated. And it will happen in just a few years. The current system is already showing too many stresses, and the market will do what the politicians won’t. The 10s of millions without coverage, in addition to the price spiral are symtoms of those stresses.

  3. I haven’t seen numbers like this making the problem so apparent. Obviously the increases on US Healthcare Expenditures are the problem with a 9% increase. That graph is literally embarrassing showing how out of line we are with the rest of the world in Health Expenditures as a share of GDP. Thanks for shedding some light on some incredibly glaring problems.

  4. Hi Joel–We spend most of the debate focused on our own system and declaring that we need more spending. We don’t compare ourselves to the standards of the rest of the world, and that’s probably how our system has gotten so far out of control. If other countries can manage their healthcare systems on 8-9% of GDP we should. 17% is way out of whack and doesn’t leave much room to grow any further.

  5. Hey Kevin, thanks for the response. I completely agree with you statement. Do you have a link to the 17% figure anywhere? I haven’t really been able to find a hard figure on that and would like to reference it at some point if I could. Thanks again for all the insights, you have my wheels turning. 😛

  6. Hi Joel, Do you see the link in the middle of the post–$256 billion? Click that link–it indicates that the percentage has actually risen to 17.9% in 2010. I think it’s safe to assume it’s higher still in 2012.

  7. No, rationing is not needed. Common sense is needed. The US has a unique system where the state pulls back and gives the insurance companies free reign to make huge bucks “covering risk”. This might be a smaller issue, but the US happens to be a lawsuit-happy country where the courts feel they have to entertain every suit brought forward instead of fining people who keep wasting their time (I guess it keeps court workers employed, but it costs everyone more). And people are actually charged out of pocket for routine visits to the doctor, so they often don’t go until a condition is more advanced and costs more to deal with. I am a libertarian, but even I can see how some things just make sense to do “socially”. Health care is one of the most obvious ones.

  8. Hi David–The problem in the US is that healthcare is so big that it’s become an economic and social grab bag, not just for the industry itself, but also for lawyers, politicians and snake oil peddlars. There are so many problems with it that it’s hard to know where to start. But I think that a strong effort toward serious cost containment will start to close the grab bag and get us going in a better direction.

    From what I’ve read and heard, you have a much better system in Canada, and contrary to public pronouncements, we could learn a lot from it in the US. BTW, I’m a Libertarian as well.

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