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Health Care's Perfect Storms: Which One is Worse?

|Includes: AET, CI, CVS, UNH, Walgreens Boots Alliance, Inc. (WBA)

In response to a reader's comment (Economix Blog, The New York Times), noted health economist Uwe Reinhardt considers the question, How much do we spend on health care? He answers this as follows – but, in doing so, neglects the other "perfect storm" in the making:

"Consider a family whose breadwinner(s) earn a gross wage of $60,000. By “gross wage” I mean wages that the employer books as labor expense — in accounting parlance, the total debits the employer makes to the payroll-expense account for the employee. It includes the employee’s pay before deducting any contributions that employees make toward their fringe benefits — e.g. health insurance — and any taxes they owe. It also includes the full cost of employer-paid fringe benefits and contributions to Social Security and Medicare.

"In the absence of any government subsidies, this “gross wage base” of a family is the donkey that must carry the full burden of the family’s employment-based health insurance, whether formally paid for by the employer or employee.

"At an annual growth rate of 3 percent, a wage base of $60,000 now will grow to $80,600 in 10 years. On the other hand, at an annual growth rate of 8 percent, a family’s total spending on health care would grow from $16,700 now to $36,000 in 10 years.

"It follows that 10 years hence health care would swallow up 44 percent of this family’s gross wage base in 2019, before any allowance for employer- or employee-paid fringe benefits and taxes..."

His next post will examine the cost of universal coverage, and how to finance it.

Clearly, any way you cut it, the consumer's ability to pay is stressing the system. However, a potentially bigger issue looms on the provider side: specifically, its willingness and ability to accept public funds. More and more providers are dropping Medicare and Medicaid simply because reimbursements don't cover costs – not just physicians, but other service vendors too such as drug stores. At the same time, funding sources are in jeopardy. Medicare's hospital trust fund, for example, is only a few years away from insolvency.

These reinforcing tensions could paralyze the system well before consumer finances reach the precipice.

Creating another entitlement program in universal coverage might exacerbate this provider problem even more. The result: mandated coverage for all, but at the cost of rapidly shrinking access and quality – and, let's not forget, an added tax burden.

On the flip side, at what point do enough providers stepping away from the current system form a viable shadow system? Would this new system offer better value than currently exists?

Time will tell, but the opt-out rate continues to accelerate.

Disclosure: No Positions