Friday, January 22, 2010

$3.5 trillion over the next decade

For a fuller discussion of the problem of high health care costs, read my analysis on Scribed (link below):


With the election of Republican Senator Scott Brown in Massachusetts and the continuous public focus on the economy, the present health care reform effort in Congress appears stalled. Whatever happens to it, it is worth considering how much it would have cost to provide coverage under the current cost structure to the 15% of the US population, which is currently uninsured.

Much of the media latched onto the talking points of “budget neutral” and “deficit reducing over 10 years.” But these are nebulous concepts, at best. Whether something is budget neutral simply depends on how much redistribution happens through the government. The better question is how much will it cost. So here are a few simple, back-of-the-napkins calculations based on data provided by the Kaiser Family Foundation, The Congressional Budget Office, and The Congressional Research Service. Most of the data is from 2007 since the period of 2006-2008 is the time frame for which there is the most complete research and information. Ten or twenty percent adjustments of these figures don’t substantially alter the final result.

So covering the uninsured under the present cost structure would look something like this:

Private insurance covered a total of 172 million non-elderly Americans for approximately $900 billion. If we assume the 45 million currently uninsured are added to the rosters of private insurers, that’s an increase of 26% in customers for the insurance companies. (It doesn’t matter whether people are forced to pay directly the cost of health premiums, or do so through taxes, or subsidies.) Assuming costs are proportionate, annual health care spending will increase by 26% of $900 billion or by $234 billion.

The Congressional Budget Office forecasts that by 2019, health care costs would double. Proportionately, this means that the $234 billion per year will grow to $468 billion per year over the next decade. Assuming a linear increase, the average annual cost over the next decade would be $351 billion per year. Thus it will cost $3.5 trillion over the next 10 years to cover the people who are presently uninsured.

This calculation is clearly an oversimplification, but the assumptions made or ignored affect the cost estimates both positively and negatively. For example, some of the money that is currently spent by the uninsured out of pocket will no longer be spent out of pocket but through the insurance program. So the net increase in costs may be less than the $234 billion estimate. On the other hand, as people gain health insurance coverage, they tend to consume more health services, which will result in an overall increase in the consumption of health services, thus growing the dollar amount beyond the $234 estimate. Furthermore, the simplified estimate above ignores any adverse selection effects – the notion that the people who currently don’t have health coverage, on balance, require more health services than the ones who are covered.

Even if my simple estimate overstates the costs by a factor of two, and it doesn’t cost $3.5 trillion over the next decade but only half as much, the implication is clear – without dealing with the high and rising costs of health services, it will be very difficult to have broader coverage and to avoid the economic disaster caused by unsustainable health care expense levels.

1 comment:

  1. Do you feel like people are so busy freaking out THAT there is a problem that they can't think about a solution? this type of logic...hmmm, logic...who knew?