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Paradigm Shift For The Healthcare Expense Monster

A sadly familiar theme in the US—the growing ranks of the working poor—was fleshed out today. But the report, “Low-Income Working Families: The Growing Economic Gap,” did something else: it added graphic details to the conundrum of US healthcare spending. While it ballooned to $2.7 trillion, 17.9% of GDP, or $8,680 per capita, households have lowered their share. And so have businesses. What gives?

Despite improvements in the unemployment rate, 32.1% of all working households “may not have enough money to meet basic needs,” the report found. That was for 2011. In 2007, 28% of all families fell into that category. There are now 47.5 million low-income working families (earning less than 200% of the official poverty rate of $22,811 for a family of four). The report fingers in part the new job market. As people are finding jobs, they’re earning lower wages and have fewer benefits “compared with the middle-class jobs they held before.”

After housing expenses—81% of those below the official poverty level and 62% of low-income working families spent over 33% of their income on housing—and after day-to-day essentials, such as food and energy, little if any money remains for medical expenses.

But there is a parallel phenomenon: high-deductible health insurance plans linked to tax-advantaged IRA-like Health Savings Accounts. While deductibles range from $1,000 to $4,000 or more, the much lower premiums and tax savings can turn this into a bonanza for healthy people—if they keep their medical expenses down. The plans have taken off, much to the lament of healthcare providers. In 2006, only 10% of those with health insurance opted for a high-deductible plan; by 2012, their ranks had swollen to 34%!

These two large (and overlapping) groups—those who cannot spend more money on healthcare, and those who have a profit incentive not to—amount to a paradigm shift. They have lowered the household share of US healthcare spending. And it’s causing “unprecedented concerns” in the industry [The American Consumer Revolts Against Prescription Drugs].

But consumers aren’t the only players. This is the $2.7 trillion healthcare pie, a depiction of who pays what:

In 2011, households paid for 27.7% of all health care expenses—insurance premiums, out-of-pocket expenses, and supplementary premiums paid to Medicare. Year after year, they spent more than they’d spent the year before. But overall healthcare spending ballooned even faster, and as households were no longer able or willing to play along, they cut their share of overall healthcare spending.

In 1988, households paid for 36.8% of the total healthcare pie. Then their share declined, except for a slight rise during the late 1990s. The down trend was flattening out when the financial crisis hit. Layoffs washed over the land. Households axed healthcare expenses, cutting their share from 29.2% in 2008 to 28.3% in 2009. Despite a “recovery” in the job market, their share continued to drop, reaching a low of 27.7% in 2011.

Businesses, too, spent more year after year in absolute terms, but unlike consumers, their share edged up, particularly during the dot-com bubble. But when the bubble burst, the tightening began in earnest, reducing the business share from 25.1% in 2000 to 20.6% in 2011.

What gives? Consumers and businesses, responsible for over 60% of healthcare spending in 1988, have cut their combined share to 48%. Somebody had to pick up the difference. Well, yes. Governments. Particularly through Medicare and Medicaid.

The share of state and local governments edged up from 15% in 1988 to 16.4% in 2010 but then jumped to 17.4% in 2011. The share of the federal government rose from 15.9% in 1988 to a whopping 27.6% in 2011. Though that’s down from 28.3% in 2010!

The two groups, namely households and businesses, that had incentives—ranging from sheer survival to more profit—to push back against the healthcare industry, and that had at least some ability to do so, did. But government entities, subject to special-interest lobbying, went hog-wild. Greatest beneficiary: the healthcare industry. Over the years, it became the largest industry and one of the most powerful lobbies in the country.

But 17.9% of GDP may be more than the economy can bear—a glass ceiling of sorts. And healthcare spending has remained stuck there since 2009.

Now Congress might weigh in. Further limits on how much Medicare and Medicaid can pay for certain services or medications, or serious efforts to root out waste and fraud, might actually, perhaps for the first time ever, reduce the healthcare industry’s share of the economy—a dreadful thought for the industry. And it will do everything in its might to keep that from happening.

Now some fodder for the gun-control debate that the horrid events in Connecticut stirred into a frenzy, though it snoozed through the daily drumbeat of murders in Oakland, CA, a few miles across the Bay from me, or in Richmond to the north, or really in any other city. The fodder is inconvenient, however. For both sides of the debate.... How Americans Stack Up In Dying From Violence, War, Suicide, And Accidents.

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Reader Comments (7)

The Meds will soon have a major change requiring a 'means' test for benefits. Ditto Social Security. Personal spending will continue to fall as poverty spreads in the US.
January 15, 2013 | Unregistered CommenterMakati1
8% of GDP in the UK. Less than half the US cost. And we all get the full benefit. 17% must surely be another triumph for Free Markets ! What is the flow of hard cash into the Health Care Corporations but a Tax, guys? Low tax economy? Come on! Pull the other one.....
January 16, 2013 | Unregistered CommenterRoger Yates
Mr. Yates, the problem is that it isn't a free market. It's a rigged market and a triumph of insurance company political lobbyists. In a truly free market the cost would be far lower.
January 16, 2013 | Unregistered CommenterJB McMunn
At the end of the day 17.9% of GDP (and rising and rising rapidly) simply means this system is conpletely unsustainable. One way or the other it will have to be made to work or somewhere in the not to far future it will fall apart.
1. Move to a European style system. Donot see that hapening the people that are entitled to basically full healthcare now are still considerably more than the Obanacares. So no political platform. Anyway also in the richer parts of Europe it simply is a problem (and they have higher taxes, have more 'solidarity' what ever that might be, and much cheaper systems providing it. Next to aging which works in the other direction). They need adjustments (aka cuts) as well only much smaller ones.
This would mean as well basically nationalising the full healthcare system very difficult at best.

2. A harder Chinese style system. Difficult to see that working. It didnot work before at the end of the day care was supplied and paid for by the government, at least most of it.

3. Basic healthcare system (sort of skeleton NHS) for all (but mainly the poorer parts unless otherwise insured or covered. But also very likely for a lot of middle incomes. As we see in Europe the healthcare itself is not worse in a NHS system only the service around it is horrible. But for middle incomes it would also mean a drop in costs of say 4000 USD annually per person (in average at least). And as somebody would have to come up with it, likley more wages if you move from a present style package to this one).
Set the system up will be easier than a full NHS. Simply (well simply) tender it at European prices and if really nobody wants to have it get doctors from abroad (India has plenty of them). And I doubt that because if the system will start to work the present capacity will for a large part not be used (so it is use it for this or close the thing down and for the personnel get in line for an Obamaphone). This is not a full nationalisation not even close, most could even remain private.

Imho option 3 will be the only way to keep things affordable. At least for the lower and middle income groups. The rest will have a choice, but Europe showed at the end of the day not many will take that it is simply for 95% too expensive the way it is going now. Middlegroups can take extra packages to get complete cover, if they want.
January 16, 2013 | Unregistered CommenterRik
@J B McMunn A truly free market would collapse completely in short order. That is why it has never been allowed. I should have put "free market" in quotes. You are right we don't have one. It is a Utopian dream like "true communism". Have you ever noticed how interchangeable the elements are in Marxist and Market Theory? In Marxism you have three components of a Utopian prediction. 1. The masses/ proletariat react to the effect of 2. A pseudo scientific "force", the forces of History and create 3. A Utopian end: Socialism. In Market Liberalism you have 1. The consumer ( the masses) who react to the effect of 2. A pseudo scientific "force" , market forces (the forces of history) and creates 3. A Utopian end, Freedom Democracy and "the end of history". One bunch of idiots are replacing the elements in another bunch of idiots slack brained Utopian bull. Anyone out there got another theory that doesn't rely on nineteenth century pseudo science? Market Forces, the Forces of History what the hell does that mean? It's about as scientific as the power of prayer. OK so Free Markets are a religion. Now we are getting somewhere.......Lloyd Blankfein did say he was doing God's work, Ayn Rand's Objectivism has all the features of a cult.
January 16, 2013 | Unregistered CommenterRoger Yates
When healthcare eats up so much money, it does actually two things.

One, as I mentioned, it bumps into a glass ceiling. There just isn't enough money to pay for it all, so we'll use borrowed money, and after we've borrowed too much (that includes gov), we have to cut back.

Two, it's a huge part of the economy and economic growth. When I walk around in San Francisco (yes, walk), I see in certain parts of town quite a bit of new construction, and much of it belongs to hospitals or medical centers. It's a vibrant growth industry in the US. The biggest one. So, if we curtail medical spending, as we have to in the future - Rik's option #3 comes to mind - we will cut into GDP....
January 16, 2013 | Registered CommenterWolf Richter
Expensive healthcare as well as a lot of government services are partly fake GDP (for the excess costs). You could as well double the price for all services and think you are 100% better off as a society.
January 18, 2013 | Unregistered CommenterRik

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