Healthcare Costs and U.S. Competitiveness

http://www.cfr.org/publication/13325/

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Author: Lee Hudson Teslik, Assistant Editor
• May 14, 2007

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Introduction
Factoring in costs borne by 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. Representative John P. Sarbanes (D-MD), a member of the House Education and Labor Committee, told CFR.org that in light of these concerns a “consensus is emerging” on Capitol Hill to do something to ease pressures on U.S. employers. Many experts recommend some form of increased public-private partnership, though the specifics of competing plans vary wildly.
Competitive Disadvantage
Employer-funded coverage is the structural mainstay of the U.S. health insurance system. According to 2005 data from the U.S. Census Bureau, the most recent official data available, employer-provided health benefits cover 175 million Americans, or about 60 percent of the population. Those numbers have fallen since 2001, when 65 percent of the country had some form of employer coverage, based on data from the Kaiser Family Foundation, a nonprofit focused on healthcare issues. Premiums have skyrocketed, rising 87 percent since 2000. In 2004, health coverage became the most expensive benefit paid by U.S. employers, according to a report by the Employment Policy Foundation.
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 like General Motors, which covers more than 1.1 million employees and former employees, footing healthcare costs presents an enormous expense—the company says it spent roughly $5.6 billion on healthcare expenses in 2006. GM says healthcare costs alone add $1,500 to the sticker price of every automobile it makes, and estimates that by 2008 that number could reach $2,000.
“In many places, you have small businesses that simply cannot afford to offer coverage.” -- Rep. John Sarbanes
It is difficult to quantify the precise effect high healthcare costs have had so far on the U.S. job market. Healthcare 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.
Rival Healthcare Models
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.
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.
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 twenty dollars a month for full health coverage. In contrast, Americans pay roughly five hundred dollars 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.
The ‘Triple Tax’
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) recently 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.
Improving Value
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.
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, up-front cost of imaging.
Tapping Technology
Technology, too, can play an important role in minimizing overall health costs. 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. For every dollar per worker a healthcare company spends on IT, Rideout says, the average U.S. company spends seven dollars, and companies in some wealthier industries like banking spend up to twenty dollars. U.S. competitors abroad have also consistently outspent the U.S. government on healthcare IT investment—Rideout says the U.S. government invests forty-three cents annually per-capita on IT. The Canadian government, by contrast, spends thirty-one dollars 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.
The U.S. government invests forty-three cents annually per-capita on IT. The Canadian government, by contrast, spends thirty-one dollars.
Political Viability
It remains to be seen what sort of political tidal wave it would take to force an overhaul of the system, but increased pressure from the business community has made the prospect of change increasingly likely. “Now you’re hearing it from the marquee CEO crowd in private industry that we have to come up with some comprehensive solution or they simply won’t be able to compete,” says John Sarbanes, the U.S. representative from Maryland. GM’s G. Richard Wagoner, Jr., for instance, recently chastised legislators on the need to find some “serious medicine” for the healthcare system. Testifying before the House Foreign Affairs Committee in January, CFR’s Gene B. Sperling argued the United States needs a universal healthcare plan to help its businesses keep up with competitors globally.
What many executives and politicians alike now recommend is an expanded public-private partnership. Some countries, Rideout notes, feature top-down implementation and reimbursement programs. Britain, for instance, has implemented a pay-per-performance program through which physicians can increase their income by up to fifty thousand dollars a year by meeting government-regulated performance standards. Sarbanes says both sides of the public-private partnership could save money if the government provided more funding on the front end by “improving delivery models, broadening coverage, and setting up clinics and preventative care.” Similarly, Rideout says the government can implement programs to insure workers who do not receive coverage through their employers, footing an up-front cost but reducing long-term strain on emergency care, the most expensive form of medical care.
President Bush, in his 2005 healthcare plan, set out a goal for most Americans to have electronic medical records by 2014. Meanwhile, 2008 U.S. presidential candidates are dipping their toes into the healthcare debate. Speaking in May 2007 at the Detroit Economic Club, Senator Barack Obama (D-IL) expressed willingness to meet automakers halfway: “We’ll help to partially defray those healthcare costs, but only if the manufacturers are willing to invest the savings right back into the production of more fuel-efficient cars and trucks.”