Cut Soaring Salaries To Reduce Healthcare Costs

Want to cut healthcare costs?  Cut salaries. 

One need not look far to find data pertaining to healthcare costs.  However, discerning the signal from all the noise has been next to impossible as evidenced by myriad of recommendations and government regulations all the while  healthcare costs continue to grow at a rate greater than GDP, 25o bps greater over the last 50 plus years!

The noise is compelling, just look at a few examples:

1. McKinsey accounts for the cost of healthcare,
2. History of US healthcare spending,
3. Truth about medical malpractice,
4. Harvard Business Review shows how to reduce waste in healthcare spending, and 
5. Kaiser Family Foundation compiles recent data.

All the above information makes for fascinating reading, but it can make your head spin, especially so if you seek to truly find ways to contain healthcare costs. 

Healthcare costs cannot continue to outpace GDP or eventually it becomes GDP.  At the current pace, healthcare cost would be ~50% of GDP in 45 years and in 75 years, it will comprise all of GDP. So the question becomes when does healthcare cost slow and eventually grow at a rate less than GDP so that healthcare costs are in-line with other industrialized nations? Restricting access to those with money (as Republicans want) is one way.  Taking from those that have money to give to others (as the Democrats did) is another, but neither is the best.

To properly answer that question, we need to find the signal.  The signal is in front of our very eyes and we miss it. I too, started focusing on the noise, but I could not stop thinking about a recent chance meeting with a young neurosurgeon who has 27 classic cars. 

My focus fixation on all those cars allowed me to observe the signal, which is, hold on ---- “salaries”.  It is that simple, yet we miss it, accept it, whatever, but this cannot continue.

The biggest component of any product or service is salaries, especially so in a service industry such as healthcare.  In case you are wondering about information technology (IT) and medical technology spend, together they account for a a whopping $125 billion or less than five percent (5%) of the overall healthcare spend, essentially, this spend is negligible.

Salaries comprise more than those of doctors.  It comprises administrators, salespersons (medical equipment, drugs, insurance, etc…), etc…  In the case of physicians, their salaries have grown at the same rate as healthcare over the last five decades.  Is it correlation or causation?  I believe it is a little of both.

The reason why salaries have been able to increase is because the healthcare industry has become essentially an oligopoly due to electing more lawyers than economists that have passed laws, which have created all the regulations that have led to this mess.  John McCracken, PhD, of UT Dallas, also believes that the healthcare industry is becoming oligopoly, but for different reasons, which he states in his well written blog post here.

If by some miracle our elected officials see the errors of theirs and their predecessors’ ways and fix this mess, sadly, it will take approximately 40 years to contain costs to where the costs are in line with other industrialized nations (assumes GDP growth stays constant and healthcare growth decelerates at a reasonable rate of 95% of the prior year’s growth and essentially goes flat in 20 years).

In short, expect healthcare to remain a topic of discussion for a long time.

Still Dealing With Whom Is Going To Pay For Healthcare

Healthcare once again rears its ugly head now that the CBO has scored the GOP's ACA replacement and predicts that the rolls of the uninsured would increase which would lower the Federal government's costs.

Sadly, the Republicans that sponsored the bill seek to shift costs, not lower them just like the Democrats and President Obama did years before.  With the ACA, it just happened that individuals and families like mine carried the burden in costs (please see prior posts).  This time it will be the poor and the states.  Yet, we all carry the costs in one form or another.  I guess we all have to share in this misery before real reform takes place.

Interestingly, my first letter to the editors of the Wall Street Journal (WSJ) written approximately six years ago referenced healthcare costs, which is as follows:

I agree with Dr. Donald Berwick in his op-ed article entitled, The Right Way to Reform Medicare, that we need to reduce our healthcare costs. He realizes that improving quality while reducing costs benefits consumers, but he woefully fails to see, understand and acknowledge, which is typical of most bureaucrats, that unfettered competition in a capitalistic economic system is the genesis of these consumer benefits, not more government regulation.

Upon reflection, I think what I wrote hits the nail on the head.

Border Adjustment Tax

Last week I wrote a letter to the editors of The Wall Street Journal (WSJ).  Unlike a previous letter, which I shared in the prior post last week, this letter was not published in a print edition.

The letter referred to two opinion pieces in the February 27, 2017 print edition of the WSJ.  The first article was entitled, The Illusory Flaws of 'Border Adjustment', and the second article was entitled, The 'Longshoreman Philosopher' Saw Trump Coming in 1970.

The author of the first article, Martin Feldstein, believed the tax would net the U.S. $1 trillion over ten years whereas the author of the second article, Reuvan Brenner, shared the wisdom of Eric Hoffer, a U.S. philosopher that lived last century.

Upon reading my letter you may noticed that I favored the latter article over the former and in doing so I hit on two common themes of mine, cause and effect and the national debt.

My letter entitled, The ‘Illusory Flaws’ in “The Illusory Flaws of ‘Border Adjustment’” is as follows:

Mr. Feldstein doth ignore the law of cause and effect and or he must think foreign exporters to the US are imbeciles.  Based on what he wrote in his opinion piece entitled, The Illusory Flaws of ‘Border Adjustment’, I believe he may be one of the “alienated intellectual[s]” attributed to Eric Hoffer per Mr. Brenner in his opinion piece below Mr. Feldstein’s entitled, The ‘Longshoreman Philosopher’.

More specifically, if a US exporter to another country experienced a prompt and ongoing loss of gross margin of an additional 2000 bps or 20% ---and most likely a business loss (assuming operating margin in line with S&P 500 at ~ 700 bps or 7%), would he expect the exporter to do nothing?  The exporter will eventually stop exporting (either going out of business or from a smart business decision) and or increase prices.

Big picture, a tax is restrictive and will eventually lead to a reduction in consumption (and a drag on GDP, which I would think he would know). Maybe this convoluted and faulty thinking led him and other advisers to persuade President Reagan to believe in what his immediate successor had previously termed ‘voodoo economics’ (aka supply-side economics) because, arguably, voodoo economics led to an expanding debt obligation that began on Reagan’s watch and still continues today, 30 years later (please see chart at metrocosm.com).

We have serious problems that need serious solutions, not tax and spend gimmicks that fail to ignore relevant impacts.