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Sunday
Jul222012

“Why Your Health Care Is so Darn Expensive”…

Contributed by Alex Daley and Doug Hornig, Senior Editors, Casey Extraordinary Technology

The cellphone in your pocket is NASA-smart. Yet it costs just a couple hundred dollars. So why is it that rising technical capabilities are leading to drastically falling prices happening everywhere, except in your medical bill? The answer may surprise you…

Microchip technology breakthroughs mean you can now do more on a phone bought for $200 than you ever could have thought of doing on a $2,000 computer just a decade ago. It has more computer power than all of NASA had back in 1969 – the year it sent two astronauts to the moon. The $300 Sony Playstation in the kids' room has the power of a military supercomputer of 1997, which cost millions of dollars.

So just think what computers can do to help doctors cure you when you're sick. Indeed, computers do keep us healthier and living longer. Illnesses are diagnosed faster. Computer scans catch killer diseases earlier, giving the patient a better survival rate than ever in history. New treatments are being created at an astonishing rate. All kinds of conditions that would have killed you a decade ago now are controlled and even cured, thanks to new technology.

But shouldn't medical care – just like the mobile phone and video games – be getting cheaper? 

"The bottom line is that you are paying for extending your life and curing diseases that until recently would likely have killed you."

A longer life has a bigger price ticket.

But are We Really Living That Much Longer?

It is easy to dismiss the days of people's lives spanning a mere three decades as prehistoric... but it wasn't really that long ago. According to data compiled by the World Health Organization, the average global lifespan as recently as the year 1900 was just 30 years. And if you were lucky enough to be born in the richest few countries on Earth at the time, the number still rarely crossed 50.

Curing the Six Killer Diseases of Childhood

It was just about that time that public health came into its own, with major efforts from both the private and public sectors. In 1913, the Rockefeller Foundation was looking for diseases that might be controlled or perhaps even eradicated in the space of a few years or a couple of decades. The result of this concerted public-health push included nearly eradicating smallpox, leprosy, and other debilitating or deadly diseases. It also included vaccines against the six killer diseases of childhood: tetanus, polio, measles, diphtheria, tuberculosis, and whooping cough. A simple graph illustrates the dramatic change.

In the US, the average lifespan is now 78.2 years, according to the World Bank. In many countries in the world, it is well over 80. But like all averages, it's affected mainly by the extremes. For instance, in the early part of the 1900s, the data point that weighed most heavily on average lifespans was child mortality. Back then families were much larger, and parents routinely expected some of their children to die.

But the flip side, as can be seen in the graph, is that for anyone lucky enough to survive childhood at the turn of the last century, life expectancy was not that much lower than it is today.

For all of our advances in medicine, we only live about 20 to 30% longer.

Not only is the increase quite small – relative, say, to the explosion in computing power over the same period of time – the amount of money we spend adding another year or two to the average lifespan is on the rise.

If we exclude high child mortality, we are not living that much longer today than we once were.  So where does all the money we spend actually go?

Intuitively, one would think that there should be a relationship between the economic well-being of a country and the life expectancy of its citizens. And, as you would imagine, there is a strong correlation between wealth and health.

The important takeaway from this graph is the flattening of the curve along the top. What it means is that in many countries with lower GDPs, those with less to spend on health care can attain life expectancies in the 65-75 range. Pushing the boundaries beyond that (as the richer countries do) clearly requires much greater resources. By implication, that means spending more to do it.

Here's something else we've discovered: The cost of battling the diseases of adulthood rises dramatically with age. Per capita lifetime healthcare expenditure in the US is $316,600, a third higher for females ($361,200) than males ($268,700). But two-fifths of this difference owes entirely to women's  longer life expectancy.

Nearly one-third of lifetime expenditures is incurred during middle age, and nearly half during the senior years. And for survivors to age 85, more than one-third of their lifetime expenditures will accrue in just the years they have left.

Technologies and the cutting-edge companies that create them help to drive these costs down, while creating a profitable business for themselves and their investors.

To take a simple example, the MRI machine invented by Raymond V. Damadian may seem expensive on the surface, but it accomplishes things that previously required a much heavier investment in time and diverse professional expertise.

Or consider how a company like NxStage Medical a company the team at Casey Extraordinary Technology have been following closely and profiting handsomely from for quite some time. A business like this has revolutionized the delivery of renal care. Their home-based units save a ton of money compared with the traditional, thrice-weekly visits to a special dialysis clinic.

Innovations like these from NxStage are changing the way patients receive care and the way a company produces income for its shareholders.

But the problem remains that overall, medical costs continue to rise faster than improved technology can serve as a countervailing force.

There are three easily identifiable reasons for this:

  • Diminishing marginal returns
  • Rising costs of non-technology inputs
  • Increased quality of life

The Law of Decelerating Returns

Technology in most arenas is a field of rapidly increasing marginal return on investment, i.e., accelerating change. In other words, things don't just get continually better or cheaper; they tend to get better or cheaper at a faster rate over time. This concept of "economies of scale" applies in finance, hard sciences, and any sufficiently quantitative field – where numbers dictate behavior.  It mainly refers to the idea of changing returns over time. We refer to these as "marginal returns."

Imagine for a moment that you are a manufacturer:

  • Once you've paid off the cost of your factory or equipment – your "fixed" costs – you maybe make a widget to sell for $10, with a cost per unit of $5.
  • If you make and sell a thousand units, you make $5,000 profit. That is the marginal return.
  • But now imagine that if you make 100,000 units, your cost per unit drops to $4 – you have more negotiating power over your raw materials suppliers, you can run your staff with less slack, etc.
  • And if you can make 200,000 you save/make another dollar.

    That means you have "accelerating marginal returns" – we're used to that in technology.

Every year Intel is able to lower the cost of the processing power it sells on the market. A chip is a commodity product: it's the same for nearly all consumers, and the market is global. Of course medicine is not quite the same – at least not in the most important instances.

No doctor treats a wide range of diseases. They're forced to specialize and must undergo never-ending education and certification. And they require complex equipment used only by a handful of fellow specialists. Ultimately, there are few places to find economies of scale.

Treatment Difficulties

The simple fact is that, in our zeal to live to the age of 80+, we have made a trade-off. We've left behind the diseases of youth – diseases that mostly strike once, resulting either in death or fading chances of a long life – but they've been replaced by a host of new, chronic diseases. Diseases of age. Diseases of environment. And diseases of design.

These are the challenges companies like NxStage are dealing with every day. It's a time-intensive endeavor, but successful medicines are big winners for investors... sometimes very big.

The illnesses we fall prey to these days as a result of living longer – conditions such ischemic heart disease or cancer – are all much more complicated than their predecessors. None is caused by a single, easily identifiable agent. There's no virus to isolate and eradicate. There's no pathogen sample to convert to a vaccine.

These conditions cost considerably more to treat than the traditional infectious disease does. More labor is involved. More time. And available drug treatments rarely cure in a few doses, if ever.

So, chronic conditions breed chronic costs.

Keeping someone with lung cancer alive for twice as long as would have been the case 30 years ago is a great feat, but it comes at considerable additional cost in terms of the time devoted by the many healthcare professionals involved. And that means troubling questions like this must be asked: If every patient can live twice as long, but it takes twice as many net people-hours to care for them, has there been a net gain for society?

The Driving Force

Our medical progress has been won through a major increase in net costs per person. In 1987, US per capita spending on health care was $2,051. That's $3,873 in 2009 dollars. But in 2009, actual spending amounted to $7,960 per capita. Some of that is attributable to rising costs that have outpaced inflation.

In 1986, the average pharmacist made $31,600, or $66,260 in 2012 dollars. Today, the real average salary is $115,181 – nearly double.

But it's not universal. Radiologists, for example, have seen their salaries drop from an inflation-adjusted $425,000+ to $386,000 in the same period.

Also, costs for surgeries and diagnostics are not a clear-cut contributor. Data are hard to compile as costs vary greatly:

  • California recently saw charges for appendectomies in the range of $1,500 to $180,000.
  • In Dallas, getting an MRI at one center can be more than 50% more expensive than another across town.

Most indications seem to point to lower, not higher, real costs over time for most common conditions. Average hospital stays post appendectomies have fallen from 4.8 to just 2.3 days in the past 25 years, for instance. That's thanks largely to insurance requirements, as well as better sutures, pain medicines, and surgical equipment.

As hard as procedural costs are to compare, the outcomes are much more clear-cut. In cancer, the improvement has been significant in some cases and less dramatic in others.

For those diagnosed with cancer in 1975-'77, the five-year survival rate was 49.1% (and only 41.9% for males).

For those diagnosed between 2001 and 2007, five-year survival increased to 67.4% for both sexes and jumped to 68.1% for men.

Even if you're diagnosed when over age 65, you have a 58.4% probability of living another five years.

Prognoses, however, vary widely with disease specifics. If you contract pancreatic cancer, for instance, your prospects are the grimmest. It's likely to be terminal very quickly. Among the most recently diagnosed cohort, a meager 5.6% survived for five years. That's more than double the rate from 30 years ago, but small comfort.

Liver cancer sufferers' five-year survival rate has more than quadrupled, but only from 3.4 to 15%.

Lung cancer is also still a near-certain killer. In the 2001-'07 group, a meager 16.3% survived for five years, only a slight tick up from the 12.3% rate of 30 years ago.

Brain cancer is quite lethal as well, with only 34.8% surviving for five years today – more than 50% better than the 22.4% rate of 30 years ago, but not great.

On the other side of the ledger, breast-cancer victims are doing very well. 90% survive for at least five years if diagnosed after 2001, vs. 75% in 1975-'77.

And prostate-cancer treatments have been the most spectacularly successful. Five-year survival is fully 99.9% of those diagnosed in the past ten years, vs. only 68.3% in 1975-'77.

Longer survival rates are, of course, impossible to document in recently diagnosed patients, since we're not there yet. But to give you some idea, here are the 20-year survival rates for the above cancers, taken from the NCI's 1973-'98 database: Pancreas, 2.7%; liver, 7.6%; lung, 6.5%; brain, 26.1%; breast, 65%; and prostate, 81.1.%.

These are big steps forward. They enhance not only the length but the quality of life, as well. However, with each rising year of average age, we increase our medical expenses.

By eradicating the big childhood killers, we solved most of the easy problems. And so we live to face the much more complicated and much more expensive to treat diseases of age. At some point, it isn't lifestyle changes that are keeping us alive – it's machines and doctors and medicines doing a lot of the heavy lifting in order to grant us those precious extra days. All of that costs money.

So we are not dying of the most dreaded ailments as quickly as we once were. But that's not due to advances in curing the major chronic illnesses of our time – heart disease, diabetes, cancer, and AIDS. Instead, we've primarily extended the amount of time we can live with them.

Mexico's health minister, Dr. Julio Frenk, noted the irony here when he said, "In health, we are always victims of our own successes." We are living longer... and we're costing a lot more in the process.

Doug Hornig

Senior Editor

Doug Hornig is the editor of Casey Daily Resource Plus, a frequent contributor to both Casey Research's BIG GOLD, the go-to information source for Gold investors and Casey Daily Dispatch, a simple and fast way to keep up with the ever-changing investing landscape.

Doug is not just an investment writer, however. Doug is an Edgar Award nominee, a finalist for the Virginia Prize in both fiction and poetry, and the winner of several open literary competitions, including the 2000 Virginia Governor's Screenwriting contest.

Doug has authored ten books, done investigative journalism for Virginia's leading newspaper, and written articles for Business Week, The Writer, Playboy, Whole Earth Review, and other national publications.

Doug lives on 30 mountainous acres in a county that has 14,000 residents and a single stop light.

Alex Daley

Chief Technology Investment Strategist

Alex Daley is the senior editor of the technology investor's friend, Casey Extraordinary Technology.

In his varied career, he's worked as a senior research executive, a software developer, project manager, senior IT executive, and technology marketer.

He's an industry insider of the highest order, having been involved in numerous startups as an advisor to venture capital companies. He's a trusted advisor to the CEOs and strategic planners of some of the world's largest tech companies, and he's a successful angel investor in his own right, with a long history of spectacular investment successes.

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Reader Comments (9)

A big point was missed in regards to the pharmacist salary situation, which is illustrative: In '86 (and for a while after), you only needed a BPharm to become an RPh and work retail. Now you need a PharmD, which has caused a lot of the salary inflation— and PharmDs are (unsurprisingly) over–educated for retail work, where a BPharm was sufficient (and especially is after modern pharmaceutical software). This sort of inflation in licensing requirements is not uncommon.

I'm also shocked to see the word ‘insurance’ only once in this piece. By hiding and (unequally) distributing costs, health insurance in the US has allowed for huge price inflation. When I was in college, I was working as a pharmacy technician, and when Medicare Part–D finally rolled out, we actually saw the prices of drugs overwhelmingly prescribed for seniors shoot up in price. Why? We weren't getting that many more patients taking those drugs; insurance allowed the market to bear more costs. My chronic medical issues are subsidized by other persons paying into my insurance company, etc.

While diminishing returns, chronic treatment (though faux–chronic treatments are more worrisome), etc. are a significant part of health care costs, certification–ism and insurance are more proximate causes.
July 23, 2012 | Unregistered CommenterAriston
Your cancer survival conclusions are way overstated. There are huge differences in lead time bias between cancers diagnosed in the eras you describe. We diagnose almost all cancers, especially prostate and breast at much earlier stages now, than even 10 years ago. This that fact alone extends "survival" - we know about the cancers for a longer time before death, but it doesn't mean we've achieved gains in life expectancy. This is particularly problematic for prostate cancer, and then breast, since if you live long enough and screen often enough, you're likely to make a ton of early diagnoses...
August 2, 2012 | Unregistered CommenterDan
Time is ripe for certain suppressed therapies from the 30´s and revivals from the 90´s.
Electrical / sonic healing machines.
Google ( Royal Raymond Rife, Hulda Clark, zapper, plasma generator RPZ, …)
August 2, 2012 | Unregistered CommenterAntonio
How about Ogre Engery Wilhelm Reich ?
He was on a special track.
August 3, 2012 | Unregistered Commenterjiff plani
none of this explains why i got charged 3500 for seven staples to my scalp last year. five hundred bucks per staple.
and that was the charge to me after my health plan paid their share. took the doctor about two minutes .bill included over 400 bucks for use of the waiting room. when i severed the tip of my finger off in the mid ninetys, i paid 135 bucks cash at the emergency room to have it sewn back on. no health plan for me in those days. theres no one to even argue the overpriced bills of today with. if i'd known it would be 3500 bucks for seven staples i would have superglued the wound shut myself. and the surgical staplers are available on the web, new in the sterile package for 5 dollars if you buy ten or more. i understand rising costs for high tech stuff, but not for the mundane small stuff of everyday life.
August 3, 2012 | Unregistered Commenterjohn
You make no mention of obesity and its effect on healthcare. Obesity is setting off a huge increase in Type 2 Diabetes among other illnesses that will have a profound impact on our healthcare system with of 60% of our adult population being overweight or obese.
August 3, 2012 | Unregistered CommenterBrad
"In 1986, the average pharmacist made $31,600, or $66,260 in 2012 dollars. Today, the real average salary is $115,181 – nearly double."

A big piece of this is the cost of credentialing.

A huge transfer of wealth has happened between those who need a piece of paper, those who hope to become some of the recipients (adjunct professors etc) and the tiny elite who are tenured.
This is a cancer that needs to be rooted out .
September 18, 2012 | Unregistered Commenterbill jones
Yes these are all real issues, but lets get to the heart of this matter. Insurnce companies take 35 cents of every health care dollar (10-12% as GUARENTEED profit) and average 23% overhead (outrageous executive salaries, etc) and DON'T DELIVER A SINGLE DAMN BANDAID!!!!!!!!. NOTHING!!!!!!!!! This is why NO european country allows "for profit health insurers" as the primary medical coverage. Why can't we do this like a non-profit credit union or mutual insurance company where these middle men are cut out? Because these corporatons use your money (premiums) to BUY YOUR CONGRESS!!! There is a perverse incentive for the insurers to INCREASE costs when their profit is based on a percentage of their expenses (Cost Plus accounting/contracting "regulated" by the insurance commissioner in every state = guarenteed profits as a percentage of costs, which is supposed to be illegal in government contracting, and makes no sense at all when we are trying to prevent and reduce costs). Yes your claims manager will try to nickel and dime you on office visits, but the executives at the top know that their salaries and bonuses are based on growing the dollar size of the business/profits.

The next issue is BIG PHARMA where they take 28 cents of every health care dollar for patented products that are no better than we had 40 years ago (ie. not one non-steroidal anti inflamatory drug has every been shown to be any more effective than aspirin) and there are many natural products that are just as effective and safer (Bromelain - pineapple enzyme). Americans pay three times as much for their medications as anyone else in the world does. And this is inshrined in law. Americans can't order their drugs from Canada, France, Germany, Britian, etc. We are constantly told that we have to compete in the global market place, but then we are not allowed the price benefit of that trade. Only the multi-national pharmaceutical corporation is.

That totals 63 cents of the health care dollar. I could drop these costs overnight, with the stroke of a pen, by simply telling insurance companies "You are not public utilities, and you don't get guarenteed profits. Get out there and COMPETE!! BIG PHARMA- "If NAFTA and GATT are good for you to ship good paying jobs to CHINA and Indonesia, then why aren't prices of medications coming down. You don't get to charge Americans any more than you do in Europe ar Asia."

These two simple changes would cut health care costs by a minimum 40 percent. There are enough dollars to pay for all the best health care in the world. They are just being stolen. No different than Wall Street stole the American Dream.
September 19, 2012 | Unregistered CommenterBrian -- DO
One of the foundational principles for investing, as espoused by the Casey organization, is to understand what government is going to do and then to front run the consequences of its actions. Did you guys miss the memo? Hmm.... Lets see. Take the 20 pct of the US economy (Health Care) that has more government involvement than any other sector, outside of finance, and write an article about why health care costs are so high. High on my list would have been things like government cartelization of the industry via the AMA, tax deduction of employee health care costs to employers, and third party payment of costs via medicare and medicaid. For all the otherwise excellent information in your article, I was unable to discern why my hospital charged me 200 dollars for an aspirin during my last stay. I thought the economics of fixed and marginal costs of aspirin delivery would have applied here.

Or perhaps I am being a little unfair. After all, the point of your article was to show how we as a society are largely victims of our own success when it comes to high health care costs. Living longer due to medical advances gives more time for other things to go wrong and for chronic conditions to appear. However, I find it a little more than coincidental that the largest expenditure of lifetime health care costs comes when government is the one picking up the tab.

Imagine for a moment, an alternative universe. In that universe you are responsible for your own health and its associated costs (Milton Friedman type I spending) and those of others that you choose to contribute to (MF Type II). Now imagine that Granpa is getting on in years and begins to experience kidney failure. You and your fellow type II spenders have a decision to make. You can make large expenditures to keep Grandpa alive another 6 months in a state of bed ridden malaise or you can make him comfortable during his final days and use the savings to fund Johnny's college education. Hmm..... What to do. What is our more urgent want and need... If he was lucid what would Grandpa want to do?

Now contrast that to our present universe where Government picks up the tab. (MF type IV. The government takes your money by coercion and spends it on others.) We get win/wins all around. Now every second of Grandpa's life is sacred and we should spend whatever it takes to get as many of them as possible (as long as we are not the ones picking up the tab). Government gets to fulfill its most urgent wants and needs by spending your money to get reelected. Notice that neither of the wins is efficient and cost effective health care. (There is also the slight matter of government having to set up a sprawling and costly apparatus to extract all the resources from us to make provision for subsidized health care thereby leading to societal demise, but that is for somebody else to worry about down the road. And I also digress).

I also noticed in your article a certain amount of assertion and embedded assumption masquerading as fact. The conclusions of your article, direct and implied, only apply in the context of the unspoken given; namely heavy government involvement in the economy. It would be incorrect to generalize that higher costs of healthcare relative to everything else society produces is unavoidable regardless of government involvement (think days of ATT monopoly vs cell phones today. If ATT was still a government enforced monopoly would we even have cell phones widely available today. ) Unless of course you are a Keynesian at heart. Or perhaps you had to ignore the above elephants in the room due to constraints of time and space. In that case I would conclude that the real point of your article was to satisfy an urgent want and need of yours which is to pimp your respective newsletters. But don't get me wrong. I am a big fan of all things Casey. Pimping, broadly and properly understood, is a large part of what enables a free society to engage in mutually beneficial exchange. Other than lacking even a mention of the number one driver of high health care costs, both direct and indirect, I found your article to be both informative and worthwhile.
September 24, 2012 | Unregistered CommenterAFO

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