From the November 2009 issue of Research Magazine • Subscribe!

The Health Care Fallacy

Efficiency is not the only, or best, measure of the quality of our health care system.

Debate on U.S. health care reform is dangerously skewed. Sure, the current system is expensive and inefficient. But inefficiencies of one kind or another plague all medical systems, whereas there are plenty of things the United States gets right in its health care sector.

It is a global leader in innovation, research and biotech. It develops new drugs, creates new procedures and designs equipment better than any other country. The sector is a major foreign currency earner, exporting $12.2 billion worth of medical devices last year, for instance, and running a surplus in the industry at a time when most other goods producing industries in the United States are running deep deficits.

American doctors, surgeons and other medical professionals are among the best trained, and while many Americans travel abroad in search of cheaper care, foreigners often prefer to be treated here, the high costs notwithstanding. Any change in the system, while perhaps correcting some problems, will inevitably create new ones and, worse, tinker with success.

Elephant in the Room

Nevertheless, health care does present a challenge that could undermine the competitiveness of the U.S. economy and even, under a worst-case scenario, end up bankrupting the country. The real ticking bomb is Medicare, the government-run program covering 43 million Americans over the age of 65.

Although financed by a special payroll tax and billed as single-payer health insurance for the elderly, Medicare is really an entitlement program. Unlike any private insurance, it is run mainly on a pay-as-you-go basis.

According to current calculations, the Medicare Trust Fund will run out of money between 2014 and 2028. Its unfunded liability measures over $38 trillion over a 75-year horizon, and the current recession is putting Medicare into an even deeper hole. But if the system goes bust, Washington will be implicitly expected to pick up the tab.

Most Americans -- 88 out of every 100 born today -- will reach the age of 65 and thus become Medicare claimants. This makes Medicare fundamentally different from auto or fire insurance, where only a set portion of the insured ever file claims. It is also different from conventional private health insurance policies, where a majority of insured are expected to stay healthy. Finally, all insured, regardless of their lifetime contribution or medical history, get needs-based coverage.

Thus, Medicare is Karl Marx's ultimate dream. It fulfills the communist principle "from each according to his ability, to each according to his needs." The eventual tab for Medicare is open-ended and is hostage to such factors as longevity and medical research. In fiscal 2009, Medicare spending will surpass $500 billion, measuring around 15 percent of federal outlays.

Over the next two decades, Medicare rolls will almost double, to 77 million, as baby boomers reach retirement. There have been some scary projections for the runaway cost growth of the program, with expectations that its share of GDP will almost double, from over 3 percent currently to 6 percent, but even worst-case scenarios may raise that percentage.

Every year, the death rate in the United States has been setting new record lows. But while the overall death rate declined 1.9 percent in 2006, the rate for the over-85 cohort dropped by 4 percent. Other age groups above 65 also saw declines well above average. Life expectancy continues to inch up. It stood at 77.7 years in 2006, rising to 77.9 in 2007, according to the latest report by the Centers for Disease Control.

The Research Trap

Life expectancy has increased by around seven years since 1970, nearly half of the increase occurring during the 1970s. However, we may now be on the brink of a major jump in longevity. The leading cause of death in the United States remains heart disease, while strokes are in third place.

Medical advances have improved the understanding of such diseases, and prevention, medication and surgical intervention are steadily reducing mortality from those two causes. They accounted for 30.9 percent of all deaths in 2007, down from 37.3 percent in 1997.

Cancer, diabetes and, increasingly, Alzheimer's are emerging as the leading causes of death instead. Deaths from Alzheimer's rose from 1.0 percent of all deaths in the United States to 3.1 percent over the past decade.

However, medical research is starting to treat or manage such diseases more successfully, and death rates from cancer, at least, are declining. Science may soon fulfill the old dream of expanding the human life span. The implications for Medicare -- and the U.S. economy -- may prove to be disastrous.

In most fields, if practitioners do their job well, they leave less work for themselves and their colleagues. A good car mechanic reduces the need for future repairs, while police officers obviate the need for a larger police force if they fight crime successfully. In other professions, however, a good practitioner can create more work both for himself and others.

The law is a case in point. Medicine, as long as it deals with healing and prevention, is clearly in the former category. However, in geriatric medicine, success in treating one disease merely leads to other diseases or, worse, gradual decline. Moreover, most old-age medical conditions tend to be chronic, and managing them creates steady work for doctors over a long time.

Similarly, medical research often simplifies medical treatment and cuts costs. Ulcer has gone from a chronic condition to a treatable illness. Procedures that previously required costly hospitalization can now be performed on an outpatient basis. In the case of geriatric medicine, however, research often has the opposite effect, raising the cost of care substantially and ensuring that even the most prudent retirees outlive their retirement savings.

The reality, however, is that many retirees are not especially prudent. Even before the current recession, the baby boom generation approached its retirement years with one-third of its total number holding less than $10,000 in savings.

That's roughly 25 million people who will eventually outlive their savings. The Social Security system, which has $70 trillion in unfunded liabilities over the next 75 years, may actually see an even larger shortfall.

Efficiency vs. Morality

The subject matter of economics is the efficient distribution of scarce resources. Taking care of the elderly is a moral obligation of any human society, but there is also a solid economic rationale for providing a reasonable safety net for all retirees.

If working age citizens don't have confidence that their old age will be taken care of even under a worst-case scenario, and that, in particular, their medical expenses will be paid, they are likely to over-save during their productive years, reduce the number of children they decide to have and spend less on their education. This will lead to slower economic growth here and now.

However, since the health care system is able to extend life spans substantially at a considerable cost, and continue to further maintain life at an ever greater cost, such distribution of resources will inevitably become counterproductive. It will undermine economic efficiency and endanger sustainability of economic growth, since financial resources will be distributed away from productive uses and sunk into dead-end activities -- literally so.

The question facing U.S. policy-makers is not whether we should pull the plug on Granny. It is whether we'll allow our nation's economic strength to be sapped not by some economic rival like China, but by Granny with her newly replaced hip dancing away on the deck of a cruise ship.

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