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Health care costs in the US - why so high?

If the US health care industry were its own economy, it would be large enough to have a seat at the G8 table. It provides the most expensive health care in the world, though not necessarily the best, and it’s not accessible to millions. It is becoming a large and unsustainable burden on Americans and on the US economy. Both conservatives and liberals have enough reasons to demand a significant reform in the way the system operates but current reform efforts are largely misdirected.

The real cause of high and rising health care costs is either misidentified or ignored by lawmakers. Artificial villains are designated (malpractice lawyers, health insurers), which further detracts the public discourse, policy analysis, and political decisions from focusing on and removing the true drivers of costs. I recently researched and wrote an analysis of US health care costs, which concludes that the key underlying problem in our health care system is the inefficiency of doctors and hospitals.

Click on the "View my documents on Scribd" link below to read or download my analysis. The link takes you to Scribd, which hosts the paper.

Government logic

The US House of Representatives has passed two bills that affect auto dealers, reports Automotive News today.

The Dealer Arbitration Bill is described as giving the 2,150 auto dealers whose franchises were canceled by GM and Chrysler more favorable terms in the arbitration of their disputes with the automakers. So the government decides to interfere in this business dispute not by establishing a mechanism for impartial resolution, not in support of its own to companies involved in it (GM and Chrysler), but by tilting the field against them and in favor of the dealers.

The second bill is the 1,279-page financial regulation legislation, which would create the Consumer Financial Protection Agency. Its intent is to protect consumers from making bad financial decision by regulating the sources of financing, such as mortgages, credit cards, etc. Given that the second largest financial transaction for most Americans is the purchase of an automobile, and that dealers are the biggest targets of consumer complaints about financing, one could expect the new law to regulate dealer financing as well. Not so--the bill excludes dealers-assisted financing from this regulation.


If your politics lean to the left, you're likely to accept the first bill but be appalled at the omission in the second. If your politics lean right, you would likely disprove of both. If you're an auto dealer...

Also today Automotive News reports that all of Toyota's North American factories are running over time to keep up with demand. Hm... if you're an auto dealer you might just want to get a Toyota franchise.

Lights out - now we need the light bulbs on

It was sad to see the beautiful Chrysler headquarters building outside Detroit seemingly deserted when I passed by it last Saturday evening. While office buildings normally leave many of their lights on 24/7, the only lights visible that night in the glass and steel Chrysler tower were the faint emergency exit lights. I figured it must be some cost saving measure (it is), but the momentary thought that the building might actually be vacant was jolting.

Chrysler is an American institution. Founded in 1925 by Walter P. Chrysler, the company introduced numerous innovations, many of which became industry standards. Walter Chrysler was a manufacturing and engineering genius who cut his teeth in the locomotive building business before switching to automobile manufacturing. The company is one of the "Big 3" American automobile manufacturers that survived competition and consolidation in the industry that saw literally hundreds of companies go out of business since the 1920s. None of this, of course, mandates that Chrysler must survive the current economic turmoil. On the other hand, the possible demise of this venerable American corporation is neither necessary, nor necessarily helpful.

It would be really sad, I think, if Chrysler ceases to exist. Not just for sentimental reasons, either. But the current artificial life support, the government loans with their strings attached, may not be the solution to bringing Chrysler from the brink of extinction. It seems to me that now is the time to open the floodgate for all kinds of creative ideas, as many as possible, from anywhere across America and around the world. I teach my students that modern corporations must be learning organizations in order to survive the global competitive environment. Now is the time for Chrysler to become a learning organization- to plug into as many people and other organizations as possible, to plug into any source of ideas that might flame the creative sparks, which might lead to new, innovative, creative solutions for its current predicament.

There are thousands of business and engineering school students who crave for an opportunity to put their minds to work on really challenging real-life cases, there are tens of thousands of workers (and former workers), with their ears (and noses, and eyes) close to the ground who have perspectives and experiences that the corporate executives lack, there are civic organizations and others, thousands, if not hundreds of thousands, who may be interested in solving a challenging problem like bringing Chrysler back from life support. Thomas Friedman would call this "open source innovation." It's possible, it's doable, it's a bit crazy, but it's the way the knowledge economy (fyi: that's today's economy) works. The real question is, can Chrysler plug into, and manage, such an open source innovation model, or will it just wait to hear for whom the bell tolls? Alas, the answer is out there: Its own blog rules state:

1-In the spirit of honest, free-flowing conversation...
...
11-The blog is not intended as a forum for outside suggestions, including but not limited to those which pertain to vehicle design, product attributes, marketing or advertising, and no such material will be posted.

Yes, I know, the Chrysler blog is just one out of many possible ways to plug into the open source innovation 'thing' in this flat world of ours, still... The company saves a few thousand dollars by turning the lights off at night, but what it really needs is to find a way to turn lots of light bulbs on if it should have any hope of survival. In the spirit of honest conversation, I'd like to help you out, Chrysler, really, but my entire lifetime tax dollars just went to the guy sitting over there, in the dark corner of the AIG executive cafeteria. Sorry, all I've left is advice.

Wanna See a Bigger Crisis – Solve the Healthcare One

Why are we complaining that healthcare prices keep going up? Didn’t we just see what happened when housing prices came down? It seems the bottom fell out of our economy. I say, to keep America’s economy going strong (or at least, to keep it from completely collapsing), don’t let healthcare costs come down! Learn from the housing crisis: be proactive and keep healthcare prices up!

I looked at the US Bureau of Labor Statistics (BLS) data for the healthcare and construction industries and found some insightful information. With the collapse of the housing segment of the economy the home construction industry is taking a serious hit. Many construction workers, naturally, are losing their jobs. Consequently, these formerly employed workers lose their income (which, according to the BLS, was higher than the national average income in all private industries) and the butcher and baker, etc. who used to sell to these workers and their families lose customers and revenue, and in turn their suppliers lose revenue, etc, etc, along the chain. Clearly, the negative effect ripples (or rips?) throughout our feeble economy.

The construction industry employed (yes, past tense, since all data are for 2006, the latest available) 7.7 million workers, 2 million of them in no way associated with residential construction, which leaves 5.7 million affected by the housing crisis. These are a lot of workers in an industry that is collapsing. We are witnessing the consequences and feeling the pinch as unemployment increases and incomes slide.

Now let’s look at the healthcare industry. Like construction, it also paid above the national average. Unlike construction, it employed nearly two-and-a-half times as many workers—a whopping 13.6 million! It is the single largest industry in these United States. Imagine what would happen if healthcare prices collapsed—hospitals and doctors’ offices across the country, unable to generate the cash flow to pay their employees, would have no choice and be forced to lay off many of these workers. A lot more butchers and bakers, etc. etc. would be hurt by the ripple (or is it now tsunami?) effect of such layoffs.

Well, one might say, tough luck for those Porsche-driving, trophy-wife sporting doctors who ignored us and overcharged us on our last office visit! Alas… Of the 13.6 million workers in healthcare only 3.4% (less than half a million) are physicians and surgeons. They number fewer than even the top management and business types employed by the industry (4.2%). So if docs and execs account for less than 8% of healthcare workers… who are the 92%? According to the BLS, they are middle-class Americans whose jobs require [certain skills and training but] less than 4 years of college education. Are these the good American jobs we want to sacrifice on the altar of low healthcare costs? Haven’t we seen and suffered enough from the consequences of low housing prices and growing unemployment in the much smaller construction industry? Why do we never learn from history?

So why are we complaining that we have a healthcare crisis? Solving it would cause a much bigger one, you see.

Yet Smaller Minority View

Why do proponents of freedom and free markets often sound wacky, closed-minded, ideological, and unreasonable? Why did free market ideas get their turn as public policy only after absolutely everything else had been tried and failed, and are on their way out at the first sign of economic disturbance? I suspect the answer to the first question might help with the second one.

I recently encountered a short essay by George Mason University professor Dr. Walter E Williams on the auto industry bailout. Professor Williams is a free market economist whom I greatly respect but his essay illustrates my concern. I was sad to see how most people, not sold on the free market ideas, could easily see him as ideological, disconnected from reality and, worse yet, irrelevant to the real economic issues of the day. He is neither. The problem with the small minority of true believers in individual freedom and free markets is that their approach to communicating their ideas leaves most people scratching their heads and wondering what planet those free market weirdos come from.

I take several paragraphs of Dr. Williams’ essay to illustrate why I think free market proponents sound like the members of a wacky cult to a vast majority of the people. (You can read Prof. Williams' complete essay here )

Let's not allow Congress and members of the bailout parade panic us into allowing them to do things, as was done in the 1930s, that would convert a mild economic downturn into a true calamity. Right now the Big Three auto companies, and their unions, are asking Congress for a $25 billion bailout to avoid bankruptcy. Let's think about that a bit.

I agree with the call of Prof. Williams. It just doesn’t seem that this call is really effective at having many people consider his viewpoint. Majority of people don’t understand nor, consequently, buy the idea that the federal government helped usher in the Great Depression of the 1930s. But by being controversial instead of informational in the opening paragraph the author would tend to turn away readers who he might wish to persuade.

What happens when a company goes bankrupt? One thing that does not happen is their productive assets go poof and disappear into thin air. In other words, if GM goes bankrupt, the assembly lines, robots, buildings and other tools don't evaporate. What bankruptcy means is the title to those assets change. People who think they can manage those assets better purchase them.

In theory this is always true. In practice many things influence the outcome, so it is sometimes true. In Detroit, history (empirical evidence) shows, it is frequently not true. When GM closed factories and laid off 30,000 workers in Flint, Michigan in the 1980s (subject of Michael Moore’s first film Roger and Me ) other industrial companies did not come and take over the closed GM plants or employ the laid off workers. The same is largely true of Detroit where many more American car companies have abandoned facilities. Fifteen years ago when I first moved to Detroit I was shocked by the sight of long abandoned factories and yards. The same ones still lie vacant today. Drive south on Interstate 75 and merge onto I-94 West near downtown Detroit to see the skeleton of the old Fisher Body Plant (photos/history) on Piquette Street dominating your view. Or see the photo essay The Industrial Ruins of Detroit. There is plenty of evidence that the buildings, assembly lines, and tools have lost their value, fallen into disuse in the last four decades and have never found productive purchasers and uses.

Here is how Walter P. Chrysler biographer Vincent Curcio put it in his 2000 book Chrysler: The Life and Times of An Automotive Genius:

It took Detroit a long, long time to recover from the disaster of 1933…

Investment in the city dried up for a long, long time. The skeletons of huge uncompleted buildings haunted the cityscape for decades, and large tracts of land intended for housing lie empty and weed-covered even now, sixty-five years later. Detroit became a gigantic and failed place…

With so much and so vivid evidence in plain sight, the theory that assets of bankrupt enterprises go to more productive uses sounds like a fairy tale to the lay observer.

Two vital marketplace signals are the profits that come with success and the losses that come with failure. When these two signals are not allowed to freely function, markets operate less efficiently. To be successful a business must take in enough revenue not only to cover wages, rents and interest but profits as well. In order to accomplish that feat executives must not only satisfy customers but they must do it in a manner that efficiently utilizes all of their resources. If they fail to cover costs, it means that resources are not being used efficiently and/or consumers don't value the good being produced relative to some other alternative. When a firm routinely fails to turn a profit, there are bankruptcy pressures. The firm's resources, workers, building and capital become available to someone else who might put them to better use. When government steps in with a bailout, it enables executives to continue mismanaging resources.

This is again true but we have to pay close attention to the details: First, we’ll have to see how long the dramatic decline in car sales lasts, but it may be possible that the market size during the past several years had been artificially sustained with too easy credit and profligate (and unsustainable) consumer spending. This means that it is possible for the foreseeable future to have a car market measurably smaller than it has been thus far. This in turn implies a significant overcapacity exists in the car manufacturing business, which would indicate that the auto manufacturing assets may not be turned over from an unprofitable to a profitable company (managers), but could simply be left to sit idle, the cost of converting them to other uses too high.

Second, the fact that a firm’s resources in a bankruptcy become available to someone else in no way means that there is someone else who can productively employ these resources. They may sit idle. Again, plenty of examples exist in the rust belt of America.

Herein lies the crux of the matter: Idled assets and unemployed workers may not have alternative uses and employment, unless the costs of these assets and workers becomes very attractively low. It is possible that if Detroiters were willing to accept $4/hour to work in a factory that manufacturing firms might flock to Michigan. It’s possible, even somewhat likely. This, however, would mean a reduction in the standard of living of these workers that is unseen and unimaginable in our lifetime, and unacceptable to the workers. The unspoken risk is that it may cause a disruption of the social fabric and of civil behavior. The real question is then: how do we sustain the standard of living while realizing that Toyota isn’t simply going to take over the bankrupt GM plants in Michigan?

Professor Williams’ paragraph sounds like there is no problem, that everything can work out without anyone giving it a second thought. This is perhaps why free market proponents often seem disconnected from reality: a failure to acknowledge the fact that many individuals are suffering and that, as I briefly discussed above, their suffering may not end in the foreseeable future. On the other hand, advocates of government intervention say, “We see and acknowledge the problem, we feel your pain, we’ll have the government do something.” The government, clearly, can do something—it’s an easy sell for people who face immediate economic difficulties. Instead of educating people that government intervention doesn’t help and makes things worse, and offering better alternatives, the free marketers come in and say, “Don’t worry about it, it will all work itself out.”

The failure of the free market economists is to engage in a public conversation about alternative solutions to the very real economic challenges we are facing. Just because the government shouldn’t force a solution on everyone doesn’t mean that every single individual should face and handle one’s problem completely alone without any support from or interaction with the rest of the community. Public discourse through the media, or in town halls, or in college or community seminars can be educational, it can stimulate creative ideas and solutions. All economic progress comes from inventing valuable things to do and to make. Such progress comes neither from government programs nor from doing nothing and only hoping each individual would figure something out alone.

Free marketers today seem to instinctively oppose any "public" or "community-based" solutions because they equate them with coercive government mandates. They seem to forget that Ford, Toyota, Google, and The Red Cross are all voluntary, community-based solutions to the problems of transportation, information gathering, and emergency response. By constructively engaging in public debate supporters of economic freedom are likely to contribute to both solving the current economic challenges and to legitimizing free market ideas as reasonable alternatives to socialism and coercive collective action.