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| Authors: | Lee Hudson Teslik Toni Johnson, Staff Writer |
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Updated: March 4, 2009
Factoring in costs borne by the government, the private sector, and individuals, the United States spends over $1.9 trillion annually on healthcare expenses, more than any other industrialized country. Researchers at Johns Hopkins Medical School estimate the United States spends 44 percent more per capita than Switzerland, the country with the second highest expenditures, and 134 percent more than the median for member states of the Organization for Economic Cooperation and Development (OECD). These costs prompt fears that an increasing number of U.S. businesses will outsource jobs overseas or offshore business operations completely. U.S. economic woes have heightened the burden of healthcare costs both on individuals and businesses. The Obama administration's first budget includes billions to overhaul health care, and despite the economic downturn, experts see a consensus emerging that healthcare reform should move forward.
The United States spent 16 percent of its GDP in 2007 on health care, higher than any other developed nation. The nonpartisan Congressional Budget Office (CBO) estimates that number will rise to 25 percent by 2025 without changes to federal law (PDF). Employer-funded coverage is the structural mainstay of the U.S. health insurance system. According the U.S. Bureau of Labor Statistics, about 71 percent of private employees in the United States had access to employer-sponsored health plans in 2006. A November 2008 Kaiser Foundation report notes that access to employer-sponsored health insurance has been on the decline (PDF) among low-income workers, and health premiums for workers have risen 114 percent in the last decade. Small businesses are less likely than large employers to be able to provide health insurance as a benefit. At 12 percent, health care is the most expensive benefit paid by U.S. employers, according to the U.S. Chamber of Commerce.
These ballooning dollar figures place a heavy burden on companies doing business in the United States and can put them at a substantial competitive disadvantage in the international marketplace. For large multinational corporations, footing healthcare costs presents an enormous expense. General Motors, for instance, covers more than 1.1 million employees and former employees, and the company says it spent roughly $5.6 billion on healthcare expenses in 2006. GM says healthcare costs add between $1,500 and $2,000 to the sticker price of every automobile it makes. Health benefits for unionized auto workers became a central issue derailing the 2008 congressional push to provide a financial bailout to GM and its ailing Detroit rival, Chrysler.
It is difficult to quantify the precise effect high healthcare costs have had so far on the overall U.S. job market. Health care is one of several factors--entrenched union contracts are another--that make doing business in the United States expensive, and it's difficult to parse the effects of each factor. Moreover, economists disagree on the number of U.S. jobs that have been lost to offshoring--the transfer of business operations across national boundaries to friendlier operating environments. The Princeton economist Alan S. Blinder, in a 2006 Foreign Affairs article, says that judging by data compiled from "fragmentary studies," it is apparent that "under a million service-sector jobs in the United States have been lost to offshoring to date." Blinder goes on to predict that somewhere between 28 million and 42 million U.S. jobs are "susceptible" to offshoring in a future where technology allows the more efficient transfer of jobs. Many other economists, however, have shied away from making such estimates, and some have criticized Blinder's approach.
It is clear, however, that healthcare expenses affect every level of U.S. industry. For large corporations they mean the massive "legacy costs" associated with insuring retired employees. For small business owners they can be even more devastating. "In many places, you have small businesses that simply cannot afford to offer coverage," Sarbanes says. Often, he says, healthcare expenses make it impossible for small business owners to hire candidates they would otherwise desire.
Elsewhere in the world, healthcare systems are much less reliant on private sector support--and much less expensive. For example, the U.S. system costs 83 percent more per capita than the Canadian system, where public funds collected through taxes pay for up to 70 percent of healthcare coverage. A number of East Asian systems also enjoy high quality of care for a much lower cost. An article in Cambridge University's Journal of Social Policy looks at what it calls the "remarkable" performance of healthcare systems in Hong Kong, Malaysia, and Singapore, where the authors argue the legacy of British colonialism has encouraged a strong state role in the healthcare system.
Taiwan's system is commonly singled out as a model for cost-effectiveness. An article in Health Affairs examines Taiwan's National Health Insurance (or NHI) system, implemented in 1995, which provides comprehensive universal health coverage to Taiwan's roughly 23 million citizens. The authors conclude that savings from the NHI system largely offset the incremental cost of covering the previously uninsured. Taiwanese are assessed around $20 a month for full health coverage. In contrast, Americans pay roughly $500 per month, according to data in a report by McKinsey.
Not surprisingly, U.S. job drift comes primarily from industries where jobs are most "tradeable," as Blinder puts it. Services that can be delivered electronically--information technology, for instance, but also a wide and expanding array of other service-sector jobs--will be easier to shift across national boundaries in the future. This doesn't mean American jobs will necessarily be lost--jobs can also be brought onshore--but it does mean industry will have to adapt.
By and large, companies do not argue against the employer-based insurance model. Rather, they contend that a wasteful public-private system is pushing costs much higher than they should be. Jeffrey Rideout, a medical doctor and the head of the Internet Business Solutions Group at Cisco Systems' Healthcare Practice, says the amount businesses pay for employee insurance is just one element of their total healthcare costs. Rideout says businesses incur a "triple tax." First, they pay for insurance programs through health benefits. Second, he says, businesses indirectly subsidize Medicare and Medicaid, the federally supported programs for primarily poor and elderly Americans. Businesses pay higher insurance premiums to make up for the fact that Medicare and Medicaid reimbursements often do not match the total costs hospitals incur treating these patients, a "hidden tax" confronted in a health care proposal (PDF) laid out by California's Governor Arnold Schwarzenegger. Third, Rideout says, businesses also subsidize the strain on the system wrought by the cost of treating America's uninsured, again through higher insurance premiums.
"In many places, you have small businesses that simply cannot afford to offer coverage." -- Rep. John Sarbanes
Obama does not propose to alter the employer-based system and move to a single-payer, government-run system. Instead, he wants to allow people and small businesses, who currently have trouble affording health insurance, to buy into a government-sponsored insurance pool similar to the one for insuring U.S. federal employees. The proposal also includes a small business tax credit for those that provide coverage to their employees to help with the costs. Obama's proposal would mandate coverage for children but not adults. Obama's plan may be opposed, however, by lawmakers who are against expanding government's role in health care or placing more requirements on the industry.
Healthcare experts agree the people with the most control over what drugs get prescribed and what procedures get done have little incentive to lower these costs (indeed, to the extent that they get paid by the procedure, their incentives are often quite the opposite). Likewise, patients often feel little need to control the costs of their own medical care if it is covered by insurance. The system bears the brunt of the excess, and employers make up the difference in the rates they pay.
While there is competition in the U.S. healthcare system, it operates at the wrong level, argue Harvard Business School Professor Michael E. Porter and Elizabeth Olmstead Teisberg, a professor at the University of Virginia's Darden School of Business, the authors of the book Redefining Health Care: Creating Value-Based Competition on Results. "Competition is both too broad and too narrow," Porter and Teisberg write. "Competition is too broad because much of the competition now takes place at the level of health plans, networks, hospital groups, physician groups, and clinics. It should occur in addressing particular medical conditions. Competition is too narrow because it now takes place at the level of discrete interventions or services. It should take place for addressing medical conditions over the full cycle of care, including monitoring and prevention, diagnosis, treatment, and the ongoing management of the condition."
Teisberg, in an interview, said part of the reason for this disconnect is that companies have traditionally focused their attentions strictly on direct costs rather than the root cause of the costs: poor health. Teisberg cites internal corporate reports that estimate the combined costs of these additional expenses to be two-and-a-half to three times higher than the direct costs of coverage. An issue brief (PDF) from the University of Wisconsin's Public Health and Health Policy Institute examines the empirical research of employee health-promotion plans, suggesting they can bring a healthy return on investment for employers, given the "spin-off" benefits of productivity, intellectual capacity, and reduced absenteeism.
This doesn't mean American jobs will necessarily be lost--jobs can also be brought onshore--but it does mean industry will have to adapt.
Teisberg points to the example of imaging that can be used to detect warning signs for possible stroke victims. Imaging is expensive and thus rarely implemented as a preventative measure. But strokes are the leading cause of long-term disability in the United States--and account for an extraordinary cost burden on the system that could potentially be reduced through the smaller, if still significant, upfront cost of imaging.
Technology, too, can play an important role in minimizing overall health costs to make things more efficient and minimize mistakes. Cisco's Rideout points out that the U.S. healthcare industry lags in information technology (IT) spending behind not only its competitors internationally, but also other industries domestically. Rideout says the average company outside the health industry spends seven times as much as U.S. healthcare companies on information technology, and companies in some wealthier industries like banking spend up to twenty times as much. U.S. competitors abroad have also consistently outspent the U.S. government on healthcare IT investment--Rideout says the U.S. government invests $0.43 annually per capita on IT. The Canadian government, by contrast, spends $31 per capita.
One of the most commonly cited goals that could be spurred by increased investment is the shift to electronic medical records. Though critics worry about privacy, digitizing patient records achieves a number of ends at once: it cuts paper costs, obviously, but also reduces the likelihood of errors in prescriptions and in the transfer of data between hospitals--flaws that can cause medical errors and prompt the need for expensive ongoing care.
Some analysts believe healthcare reform and a weakening economy are on a collision course. The ongoing economic crisis has cost Americans thousands of jobs, and when people lose their jobs, most cannot afford to maintain their health plans even though the law affords them the opportunity to pay the premiums separately for a limited time. Most lawmakers have come to recognize health care must be addressed. However, with Democrats in charge of both Congress and the White House, some experts worry that reform may be derailed over differences in how to accomplish it--and how much to spend. The president's fiscal 2010 budget sets aside $630 billion over ten years for a healthcare reserve fund to finance reforms to the healthcare system (PDF). One of the biggest sticking points will be whether to mandate health care for all employers to provide and all Americans to obtain. A healthcare reform proposal by Senator Max Baucus (D-Mont.), who heads the Senate Finance Committee, notes that while a majority of people polled support some sort of mandate, "opposition to each of these options is also somewhat substantial" (PDF).
Another issue is how much to universalize health care. Experts argue that providing some sort of universal health care would ease the economic burdens on families and possibly add to economic stimulus. But a January 2008 report published in the New England Journal of Medicine shows that Republicans generally favor overriding state mandates on the industry and limiting malpractice suits, rather than government-sponsored health plans. Yet another obstacle may be a proposal by Democrats to force large employers that do not currently provide health insurance to pay a fee to the government to offset the cost of government-sponsored coverage. A December 2008 report (PDF) from the Congressional Budget Office notes, "an argument against this option is that it would impose a new cost on employers."
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