QC Newsletter

April 8, 2010

Health Care: Is an Apple a Day Enough ?

At QCircuits, a small business, we struggle with health insurance costs every year at this time. Recently, when we saw our premiums go up “only” 6.2 percent, our insurance consultant jumped for joy. Her typical client experienced about three times that increase. Somehow, I couldn’t match her enthusiasm. How many other things go up at a multiple of the inflation rate year after year (unfortunately, as the father of a college student, that’s another one for me)? And we’re supposed to be happy about it!

Here are some facts and opinions about the impact of health care insurance on industrial economics:

1. History. In 1929, Dallas teachers created a hospitalization plan, a precursor to our present employer-centric health care insurance system in the U.S. Prior to this, plans focused on coverage for accidents and disability—not the doctor visits, procedures and medications we commonly expect to be covered today.

Interestingly, the federal government had a major impact on popularizing employer plans as a result of wage and price controls established during World War II. Because salaries were capped, employers elected to use fringe benefits, which were excluded from the caps, as a means of attracting and compensating employees.

Health insurance was central to this. It appears that costs were reasonable, averaging about $150 per capita in the U.S. as recently as 1960 (about $900 in today’s dollars). Doctors made house calls. Technology was inexpensive: stethoscope, hammer. Proprietary drugs fewer. If anything really bad happened, you died.

Given this history, it should be no surprise that our current “system” is pretty chaotic. It is essentially an unplanned patchwork that’s evolved over time.

2. Costs. U.S. costs are high as percentages of GDP: 16 percent vs. about 9 percent in Europe. On a per capita basis, we spend about $6,000 per year. Most of Europe is about half that amount, although wealthy Luxembourg is at least in our league at around $5,000.

Some would argue that we have better access to care, very advanced drugs and technology, which drives our costs higher. Whatever the reasons—and they are surely more complex than what we can cover here—the U.S. spends more, and our outcomes are not necessarily commensurate with our spending.

3. Scale. Like many mandates, this one alters economic competition. Big companies are given differential advantage versus small ones because fixed components of the costs are spread over larger numbers of people, units, revenue, etc.

A famous example of this is early auto emission controls. Catalytic converters gave GM a substantial per car advantage over Chrysler because the massive fixed investment to develop the systems was spread over several times as many units.

I believe the same holds true to health care costs. Smaller firms cannot afford the HR specialization of larger ones and have to “pay by the drink.” Some of those drinks are quite costly. Even on the variable elements of health costs, the advantage clearly rests with the large employer groups that can average out some unlucky bad experience over many more participants. In QCircuits’ case, we had one year where two employees had bad luck and the result was a 26 percent cost increase the following year. Maybe that’s why we’ve seen the modest 6.2 percent this round.

4. Age. We’ve all read about how retiree costs have hampered the competitiveness of various U.S. industries, most notably autos. Health care can be a similar issue.

If you think about it, health care costs would go up year over year even if you have the same exact employees and claims experience from one year to the next. Everybody got a year older and age is a rough proxy for utilization of medical services.

So, if you are a new company (auto transplant factories and startups, for example) and hire generally younger people, your health insurance premiums should be less than a similar firm with the same number but older staff. This can be very damaging to entrenched competitors because there is really little they can do to defend against it, particularly with age discrimination laws in place.

5. Competition. How does health care coverage vary globally? China spent 5.8 percent of GDP on health care in 2003. Much of the spending is private and many people—estimated at 500 million—cannot afford to get care of any sort. Europe, despite its reputation for welfare states, spends far less than the U.S., averaging around 9 percent of GDP, although it differs by country. France, often cited for having outstanding medical care, spends around 11 percent of GDP. Participation there is mandatory and the government role is large, negotiating annually with non-profit insurers for levels of payroll deduction and doctors’ fees. Ireland, at about 7 percent, is at the low end of spending in Europe.

Since many countries provide their coverage via taxation, either directly attributed to medical care or from general receipts spread over the entire population, those costs are not as volatile as U.S. plans. They are probably akin to our FICA in that it stays pretty stable as a percent of payroll and companies don’t observe the wide annual swings we see here. Japan, for example, spends about 8 percent of GDP of which 83 percent is government expenditure.

What this means from a competitive perspective is that China has an advantage, simply because they put the burden almost entirely on the individual, and the individual does not spend much due to lack of funds and possibly due to scarce availability as well. Europe and Japan are in the middle, due to mid-level total expenditures, but borne largely through general taxation.

The U.S. approach directly impacts industrial competitiveness because the amount spent is high here. Employers ultimately pick up much of the tab and must pass cost increases rapidly to customers. Regardless of these differences, medical costs are high in the developed world and low in the developing world. By themselves, low medical costs are not enough to sway the balance of competition materially. But they are consistent with other low costs in developing countries that drive competitiveness—wage rates, material availability and pricing.

So it’s a complex situation and we’ll have to see how the details flow out. I am optimistic that some good will come from all the turmoil, but it may take years to prove that. In the meantime, I’m sitting here swilling down green tea, dark chocolate and fruit salad. I’m still in a lot of pain from last night’s visit to the gym. The pain is minor, though, compared with the pain of paying nearly $20,000 a year for health care. An apple a day is clearly not enough.

Jeff Cosman

 

Sources:

1. Kaiser Family Foundation, “Health Care Spending in the United States and OECD Countries”, January, 2007.

2. Wikipedia, “Health Insurance in the United States”; “Health Care System in Japan”; “Health in France”; and “Public Healthcare in China”.

3. IBM Business Consulting Services, “Healthcare in China”, March, 2006.

4. GPO Access, “Budget of the United States Government, Historical Tables”, February, 2008.

--Jeff Cosman