The Cost Conundrum in Healthcare

Paul Schumann

Atul Gawande, New Yorker, writes in What a Texas town can teach us about health care:

"It is spring in McAllen, Texas. The morning sun is warm. The streets are lined with palm trees
and pickup trucks. McAllen is in Hidalgo County, which has the lowest household income in the
country, but it’s a border town, and a thriving foreign-trade zone has kept the unemployment rate
below ten per cent. McAllen calls itself the Square Dance Capital of the World. “Lonesome
Dove” was set around here.

McAllen has another distinction, too: it is one of the most expensive health-care markets in the
country. Only Miami—which has much higher labor and living costs—spends more per person
on health care. In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice
the national average. The income per capita is twelve thousand dollars. In other words, Medicare
spends three thousand dollars more per person here than the average person earns.

The explosive trend in American medical costs seems to have occurred here in an especially
intense form. Our country’s health care is by far the most expensive in the world. In Washington,
the aim of health-care reform is not just to extend medical coverage to everybody but also to
bring costs under control. Spending on doctors, hospitals, drugs, and the like now consumes
more than one of every six dollars we earn. The financial burden has damaged the global
competitiveness of American businesses and bankrupted millions of families, even those with
insurance. It’s also devouring our government. “The greatest threat to America’s fiscal health is
not Social Security,” President Barack Obama said in a March speech at the White House. “It’s
not the investments that we’ve made to rescue our economy during this crisis. By a wide margin,
the biggest threat to our nation’s balance sheet is the skyrocketing cost of health care. It’s not
even close".” (Read more at
http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande)

This is an excellent article and worth reading in it's entirety. I think that the key point of the
article is that the cost of health care, in aggregate, is not related to income, but in the business
model used to deliver that health care. In McAllen, Texas, the author reports, “In 2006, Medicare
spent fifteen thousand dollars per enrollee here, almost twice the national average. The income
per capita is twelve thousand dollars. In other words, Medicare spends three thousand dollars
more per person here than the average person earns.” On the other hand, “ Rochester, Minnesota,
where the Mayo Clinic dominates the scene, has fantastically high levels of technological
capability and quality, but its Medicare spending is in the lowest fifteen per cent of the country—
$6,688 per enrollee in 2006, which is eight thousand dollars less than the figure for McAllen.”

The difference between these two examples is that in McAllen, the doctors, labs, hospitals, etc.
are all run as businesses, and the Mayo Clinic is run as a service and the doctors collaborate and
are paid salaries.

I've been a small voice against the rationalization of the business paradigm to shareholder
economic value added and its adoption in other industries (such as health care and education,
since 2003 ( See The Evils of EVA and the Myth of Shareholder Value and Its Relation... at
http://insights-foresight.blogspot.com/2003/11/evils-of-eva-myth-of-shareholder-value.html).
 2

Now we have discovered that can be disastrous even when applied in the financial industry.
Healthcare should not be run as a business. Nor should government run it.

Outside of mainstream business, society is learning that openness, decentralization and

collaboration are required to tackle large problems and some of these concepts are being applied
successfully in business (See Coase's Penguin, or Linux and the Nature of the Firm at
http://insights-foresight.blogspot.com/2009/09/coases-penguin-or-linux-and-nature-of.html and
Wikinomics at http://insights-foresight.blogspot.com/2008/12/wikinomics-how-mass-
collaboration.html). We haven't learned that yet in healthcare.

Furthermore, as reported in the Cost Conundrum, the amount of Medicare spending is inversely
related to the quality of health care. “Two economists working at Dartmouth, Katherine Baicker
and Amitabh Chandra, found that the more money Medicare spent per person in a given state the
lower that state’s quality ranking tended to be. In fact, the four states with the highest levels of
spending—Louisiana, Texas, California, and Florida—were near the bottom of the national
rankings on the quality of patient care.”

In order to get a sense of the problem, let's look at a few statistics about healthcare in the US.

The United States Department of Labor, Bureau of Labor Statistics reports

(http://www.bls.gov/oco/cg/cgs035.htm):

* As the largest industry in 2006, health care provided 14 million jobs—13.6 million jobs for
wage and salary workers and about 438,000 jobs for the self-employed.
* 7 of the 20 fastest growing occupations are health care related.
* Health care will generate 3 million new wage and salary jobs between 2006 and 2016, more
than any other industry.
* Most workers have jobs that require less than 4 years of college education, but health
diagnosing and treating practitioners are among the most educated workers.

According to PreventDisease.com
(http://preventdisease.com/worksite_wellness/health_stats.html):

“Escalating health care costs continue to remain an issue of great concern for many employers
and providers of health care services. Here are some of the latest statistics concerning health
care:

* Preventable illness makes up approximately 80% of the burden of illness and 90% of all
healthcare costs.
* Preventable illnesses account for eight of the nine leading categories of death.
* The United States spends more on health care than any other industrialized nation in the world
and yet, in many respects, it's citizens are not the healthiest. (2)
* More than one-quarter of children without health insurance coverage had no usual source of
health care in 1997, compared with 4 percent of children with health insurance. (4)
* Uninsured children were nearly three times as likely as those with health insurance to be
without a recent doctor's visit in 1997. (4)
* The US healthcare system is the most expensive of systems, outstripping by over half again the
health care expenditures of any other country. (2)
Paul Schumann, PO Box 161475, Austin, TX 78716, 512.632.6586,
paschumann2009@gmail.com
 3

* In 1997, health care costs in the US totaled in excess of $1 trillion. (2)

* Health care costs in the United States exceed 14% of the gross domestic product. (2)
* The average cost of health care per person in the United States approximated $3,925 in 1997.
(3)
* Lifetime medical costs average approximately $225,000 per person. (1)
* Some 18 percent of lifetime costs for medical care--over $40,000--is estimated to be incurred
in the last year of life. (1)
* Despite expenditures in excess of $1 trillion, the number of people without health insurance
continues to increase reaching 43.4 million--16.1% of our population--in 1997. (2)
* The Health Care Financing Administration's analysts recently projected that, beginning in
1998, national health spending would again begin to grow faster than the rest of the economy. (2)
* By 2002, the HCFA projected that national health expenditures would total $2.1 trillion--an
estimated 16.6 percent of the gross domestic product. (2)”

In a study done 2008, the US lagged behind 18 other nations in halting preventable deaths,
according to MedicineNet.com (http://www.medicinenet.com/script/main/art.asp?
articlekey=86292).

“The U.S. today finds itself last on a new list of countries seeking to curb preventable deaths in
people younger than 75.

Not only does the U.S. have the worst spot on that list, its rate of improvement is also slower
than the other 18 industrialized nations included in the study.”

“...the slow decline in U.S. preventable deaths 'has coincided with an increase in the uninsured
population,'”

Some of the preventable diseases can be prevented by vaccines. WebMD

(http://www.webmd.com/healthy-aging/news/20090724/us-adults-dying-of-preventable-
diseases) reports, “Diseases easily preventable by adult vaccines kill more Americans each year
than car wrecks, breast cancer, or AIDS.
Yet relatively few in the U.S. know much about these diseases -- and far too few adults get
vaccinated, find surveys by the CDC and the National Foundation for Infectious Diseases
(NFID).

'It may surprise you to learn that over 50,000 adults die each year of diseases that are potentially
vaccine preventable,' NFID president-elect William Schaffner, MD, said at a news conference
held to announce the survey results.”

Other preventable diseases include most cardiovascular problems and diabetes. Obesity is an
epidemic.

Watch the short video.

The CDC (http://www.cdc.gov/HealthyYouth/healthtopics/index.htm) reports:

“CDC addresses six critical types of adolescent health behavior that research shows contribute to
Paul Schumann, PO Box 161475, Austin, TX 78716, 512.632.6586,
paschumann2009@gmail.com
 4

the leading causes of death and disability among adults and youth. Other important issues that
affect children and adolescents are also addressed:

1.Alcohol & Drug Use

Alcohol is used by more young people in the United States than tobacco or illicit drugs, and is a
factor in approximately 41% of all deaths from motor vehicle crashes.

2.Injury & Violence (including suicide)

Injury and violence is the leading cause of death among youth aged 10-24 years: motor vehicle
crashes (30% of all deaths), all other unintentional injuries (15%), homicide (15%), and suicide
(12%).

3.Tobacco Use
Each day in the United States, approximately 4,000 adolescents aged 12-17 try their first
cigarette. Each year cigarette smoking accounts for approximately 1 of every 5 deaths, or about
438,000 people. Cigarette smoking results in 5.5 million years of potential life lost in the United
States annually.

4.Nutrition
Healthy eating is associated with reduced risk for many diseases, including the three leading
causes of death: heart disease, cancer, and stroke. In 2007, only 21.4% of high school students
reported eating fruits and vegetables five or more times daily (when fried potatoes and potato
chips are excluded) during the past 7 days.

5.Physical Activity
Participation in physical activity declines as children get older. Overall, in 2007, 35% of 9-12
graders had participated in at least 60 minutes per day of physical activity.

6.Sexual Risk Behaviors

Each year, there are approximately 19 million new STD infections in the United States, and
almost half of them are among youth aged 15 to 24. In 2007, 39% of currently sexually active
high school students did not use a condom during last sexual intercourse.

These behaviors usually are established during childhood, persist into adulthood, are inter-
related, and are preventable. In addition to causing serious health problems, these behaviors also
contribute to the educational and social problems that confront the nation, including failure to
complete high school, unemployment, and crime.”

The CDC also reports that chronic diseases are largely preventable:

“Chronic diseases are noncommunicable illnesses that are prolonged in duration, do not resolve
spontaneously, and are rarely cured completely. Examples of chronic diseases include heart
disease, cancer, stroke, diabetes, and arthritis.

* Chronic diseases cause 7 in 10 deaths each year in the United States.

* About 133 million Americans—nearly 1 in 2 adults—live with at least one chronic illness.
* More than 75% of health care costs are due to chronic conditions.
* Approximately one-fourth of persons living with a chronic illness experience significant
Paul Schumann, PO Box 161475, Austin, TX 78716, 512.632.6586,
paschumann2009@gmail.com
 5

limitations in daily activities.

* The percentage of U.S. children and adolescents with a chronic health condition has increased
from 1.8% in the 1960s to more than 7% in 2004.

Although chronic diseases are more common among older adults, they affect people of all ages
and are now recognized as a leading health concern of the nation. Growing evidence indicates
that a comprehensive approach to prevention can save tremendous costs and needless suffering:

* Heart disease and stroke are the first and third leading causes of death, accounting for more
than 30% of all U.S. deaths each year.
* Cancer, the second leading cause of death, claims more than half a million lives each year.
* Diabetes is the leading cause of kidney failure, nontraumatic lower extremity amputations, and
new cases of blindness each year among U.S. adults aged 20–74 years.
* Arthritis, the most common cause of disability, limits activity for 19 million U.S. adults.
* Obesity has become a major health concern for people of all ages. 1 in every 3 adults and
nearly 1 in every 5 young people aged 6–19 are obese.

Chronic diseases are the most common and costly of all health problems, but they are also the
most preventable. Four common, health-damaging, but modifiable behaviors—tobacco use,
insufficient physical activity, poor eating habits, and excessive alcohol use—are responsible for
much of the illness, disability, and premature death related to chronic diseases.”

Paul Schumann, PO Box 161475, Austin, TX 78716, 512.632.6586,

paschumann2009@gmail.com
 6

In effect, like Walt Kelly's Pogo (http://www.pogopossum.com/) comic strip drawn for Earth
Day in 1971, to a large extend in heathcare, we are causing a lot of our healthcare problems by

Paul Schumann, PO Box 161475, Austin, TX 78716, 512.632.6586,

paschumann2009@gmail.com
 7

our lifestyle and choices.

These selected statistics are not to all inclusive. They were selected to indicate the scope of the
problem of healthcare. The healthcare system is one of the large systems in the US that we have
to interact with and depend upon. It is a complex system and interaction with it is complicated.

I don't know a solution to the problem, but what I do no that any attempt to “fix” healthcare in
this country will fail without addressing the complete system. Most of the solutions talked about
in the media and by the politicians focus only on the financial part of the system.

As you can see from the statistics, the major elements of healthcare costs are preventable
diseases, the business paradigm applied through out the system, and our lifestyle.

Some major elements of preventable disease are vaccinations, tobacco, and obesity. The
combination of these three elements alone touch upon all elements of the existing healthcare
system as well as many business interests outside the healthcare industry. And, don't forget all
the jobs that would be lost in the healthcare industry if we were to reduce costs by 90%.

Contrary to what John Mackey, CEO of Whole Foods has written , the Declaration of
Independence does indeed speak to the people's right to health:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by
their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit
of Happiness. — That to secure these rights, Governments are instituted among Men, deriving
their just powers from the consent of the governed ...” I contend that you cannot have life, liberty
or happiness without your health.

The Preamble to our Constitution : We the People of the United States, in Order to form a more
perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence,
promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,
do ordain and establish this Constitution for the United States of America.” The definition of
welfare is health, happiness, prosperity, well-being.

We do have a right to health and should hold our governments accountable to assure that all
people have equal access to that right.

References
1. Fries, J.; Koop, C.E.; Beadle, C.E.; et al. "Reducing health care costs by reducing the need and
demand for medical services." The New England Journal of Medicine, 329: 321-325 (July 29),
1993.
2. Iglehart, J.K. "The American health care system--expenditures." The New England Journal of
Medicine, 340(1): (January 7), 1999.
Paul Schumann, PO Box 161475, Austin, TX 78716, 512.632.6586,
paschumann2009@gmail.com
 8

3. Kuttner, R. "The American health care system--employer sponsored health coverage. The
New England Journal of Medicine, 340(3): (January 21), 1999.
4. Center for Disease Control (CDC) - CDC RELEASES NEW REPORT ON U.S. HEALTH
STATISTICS (July 26), 2000.

Paul Schumann, PO Box 161475, Austin, TX 78716, 512.632.6586,

paschumann2009@gmail.com