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Solving America's Healthcare Crisis

Solving America's Health Care Crisis

Healthcare expenditures have increased at a 7% annual rate over the past decade to $2.6 trillion, which represents 18% of GDP (versus 9% for much of the rest of the world, and 5% in the US in 1960). The Congressional Budget Office forecasts that if present trends continue, health care spending will account for 37% of GDP by 2050. In this piece, I shall attempt to briefly defend three points: In the short term (next ten years), there is nothing we can do to contain the growth in healthcare spending. Over the intermediate term, there are three areas to focus on to restrain costs. Over the long term, we must reform the healthcare delivery system if we are to bend the cost curve sufficiently.

Near term, the strong forces behind healthcare expenditure growth, namely demographics, chronic disease and benefit plan design, are already in place and cannot be significantly altered. Simply summed up, a disproportionate percentage of spending occurs later in life, and half of all healthcare dollars are spent on 5% of the population. Although spending growth has slowed to 4% in each of the past two years, this can very likely be attributed to the more subdued economic environment, as people have avoided or delayed expensive medical treatments. As the economic outlook improves, this backlog of procedures should result in a short-term heightened level of expenditures. This will be augmented in mid-decade by the introduction of an all-oral drug regimen to treat Hepatitis C, which when coupled with new recommended screening guidelines, could add an incremental $30-50 billion in drug spending. Additionally, the Affordable Health Act, which I believe is philosophically a step in the right direction, and may ultimately restrain growth, will in its first few years cause a dramatic increase in spending. While benefit plan designs are becoming more restrictive, eg tighter networks, increased co-pays, they are still directed at a mid-single digit rise in per employee costs.

In order to impact healthcare spending, we can either reduce the cost per "disease unit" or the number of such units. I have chosen to focus on the latter, and I believe there are three areas that can be examined for cost savings. These are obesity, cigarette smoking and end of life care. Seven of the top fifteen medical conditions, including heart disease, hypertension, osteoarthritis and diabetes, are correlated with obesity, and it is estimated that obese people spend almost $1500 more each year on health care than an average weight person. We need to encourage healthier behavior (diet and exercise) from a young age, educate families on the benefits of reducing fats and "empty calories", urge restaurants to disclose caloric content and composition of meals, and support efforts focused on children exercising. Tackling cigarette smoking will be difficult, given political and personal sensitivities. However, by delaying a ban for at least a decade, the economic impact could be mitigated, workers could be retrained and land use could be reallocated. At the very least, I believe we should attempt to eliminate smoking in the presence of children, infants and pregnant women (while recognizing privacy rights). Third, we as a society need to examine end of life care. Expenses associated with the last year of life (and even the last thirty days) are dramatic, and demographic trends are only going to exacerbate this issue. My recommendation would be to form a task force consisting of doctors, nurses, ethicists, clergy and caregivers, to consider this immensely difficult issue.

Ultimately, we shall have to modify the healthcare delivery model, especially given opposition to a national health plan. A basic issue that needs to be addressed is the incentive structure of our system. In the private sector, those at risk (the insurers) can raise premiums to reflect greater payments. Other participants, including providers and manufacturers, typically benefit from increased utilization. Implementation of best practice guidelines and greater use of preventative services should help, but the fragmentation of our healthcare delivery system limits their efficacy. Furthermore, advances in medical technology will continue to prolong life, creating even greater cost pressures. We, as a society do not have the option of doing nothing, and the solution will only be more painful the longer we wait.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.