Healthcare Bubble Needs Popping

Friday, 09 Aug 2013 07:36 AM

By Barry Elias

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Approximately 30 percent of U.S. healthcare expenditures are unwarranted, according to a report issued by the Institute of Medicine (IOM). The history of medical insurance is critical if we are to understand the genesis of this debacle.

During World War II, the War Production Board created the Office of Price Administration for Price Control and the National Labor Board for Wage Control. These bureaucratic entities controlled prices and wages to assist the war effort, but fringe benefits were excluded from their jurisdiction. As a result, healthcare benefits were used to enhance compensation packages. These benefits were tax deductible to both the employer and employee, which resulted in stronger demand for healthcare services.

This demand was increased further by the War Labor Board (1945), National Labor Relations Board (1949) and the Supreme Court (1949), when they permitted unions to bargain collectively for health benefits. In 1946, 600,000 union dependents received these benefits. By 1954, this figure increased to 17 million, according to Robert Helms of the American Enterprise Institute.

In 1965, Medicare and Medicaid introduced a fee-for-service model. This construct encouraged healthcare providers to increase the supply (and demand) of services, which would be billed indirectly through third-party insurance companies. This reduced the incentives by providers and consumers to consider the cost effectiveness of healthcare, which enabled a cost-increasing tendency for all payers, including the government, employers and individuals.

The aforementioned have resulted in skyrocketing demand, expenditures and cost of healthcare products and services.

In 1960, we spent $27 billion on healthcare, or 5 percent of gross domestic product (GDP). By 2011, this figure increased 100-fold to $2.7 trillion, nearly 18 percent of GDP, according to the Centers for Medicare & Medicaid Services (CMS).

In the recent study, the IOM suggests approximately $765 billion of the $2.7 trillion spent on healthcare, or roughly 30 percent, is 1) unnecessary ($210 billion), 2) excessive administration cost ($190 billion), 3) overpriced ($105 billion), 4) inefficient ($130 billion), 5) fraudulent ($75 billion) and 6) ineffective in prevention ($55 billion).

Increasing information symmetry and transparency for consumers and providers will help reverse this trend, according to Dr. Kavita Patel, a fellow in the economic studies program and managing director for clinical transformation and delivery at the Engelberg Center for Health Care Reform at the Brookings Institute.

Patel points to recent analyses and commentary that reveal "most patients and their physicians have little or no understanding of the true cost of care or pricing, often resulting in poorly informed decision making." To increase the quality of healthcare products and services that are cost-effective, she recommends 1) anti-trust legislation that limits the ability of insurance companies and providers to obscure price increases from consumers, 2) regulatory reform that enhances transparency and 3) public information on provider quality and prices.

These recommendations are critical, especially as the baby boom generation begins to retire in the coming decades.

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