Free money: Rationalize two astonishingly inefficient sectors of U.S. economy

Two sectors of the U.S. economy — health care and education — are absurdly expensive for the value they provide.

The National Coalition on Health Care says:

Total [health care] spending was $2.4 TRILLION in 2007, or $7900 per person. Total health care spending represented 17 percent of the gross domestic product (GDP).

U.S. health care spending is expected to increase at similar levels for the next decade reaching $4.3 TRILLION in 2017, or 20 percent of GDP.

Much of that is wasted on unnecessary procedures, paperwork to screen out high-risk insurance applicants, unnecessary squabbling between insurance companies and hospitals, etc. And roughly 50 million Americans lack health insurance, so they don’t see a doctor until their health problems become severe and very expensive to treat.

Unsurprisingly, the World Health Organization’s World Health Report 2000 ranked the U.S. #1 in health spending, #37 in “overall health system performance” and #72 “On level of health.”

A personal example: My father-in-law visited an emergency room in 2007 — as the sharp pain he had experienced several hours earlier was fading away — just to be safe. The hospital insisted on admitting him over his objections. It never diagnosed or treated the problem. Just one day’s fruitless observation led to bills over $18,000. I used two different methods to estimate what the visit should have cost, and both methods suggested $2,500 was a more reasonable price.

But a patient’s “waste” is a hospital’s “profit.” And when hospitals hold the kind of monopoly power they wield over uninsured emergency room visitors (like my father-in-law who’s too old to get insurance but has not been in America on his green card long enough to qualify for government insurance), they exploit it. In America, the uninsured paradoxically pay far more for medical treatment than insurance companies pay for equivalent treatment:

In 2004, the rates charged to many uninsured and other “self-pay” patients for hospital services were often 2.5 times what most health insurers actually paid and more than three times the hospital’s Medicare-allowable costs. The gaps between rates charged to self-pay patients and those charged to other payers are much wider than they were in the mid-1980s, and they make it increasingly more difficult for some patients, especially the uninsured, to pay their hospital bills.

This is “price gouging” of desperate, sick, uninsured people who show up at your hospital and don’t have the luxury of shopping around for lower prices. (Price shopping is also impossible for non-emergency treatment because most hospitals refuse to publish their prices.) Hospitals can — and do — make up whatever prices they want for their services. Government does not regulate prices (at least here in Connecticut). I know because I complained all the way to the state Attorney General’s office and was told hospitals are free to charge whatever they want, even if hospital A is charging ten times what hospital B charges.

Education is another nightmare. Just last week, I blogged about how poorly American students perform on international tests. The facts below suggest throwing money at education won’t work. In 2003, USA Today reported that the U.S. tops the world in school spending but not test scores:

The United States spends more public and private money on education than other major countries, but its performance doesn’t measure up in areas ranging from high-school graduation rates to test scores in math, reading and science…

The United States spent $10,240 per student from elementary school through college in 2000, according to the report. The average was $6,361 among more than 25 nations…

[T]he United States… finished in the middle of the pack in its 15-year-olds' performance on math, reading and science in 2000, and its high-school graduation rate was below the international average in 2001… Declining performance as [American] students grow older served as a warning to the nation, [Education Secretary] Paige said.

In 2007, we were still not getting much for our money:

Experts say the correlation between spending and testing performance is not strong…

“It’s not necessarily so that states with higher spending have higher test scores,” said Tom Loveless, an education policy expert at the Brookings Institution think tank.

He said Washington, D.C., has among the highest spending in the country but its students have among the lowest scores on standardized tests, while some states like Montana with relatively low spending have fairly high performance on tests.

An interesting Op-Ed in The New York Times suggests waste is rampant in U.S. higher education — supposedly the envy of the world — too:

Most graduate programs in American universities produce a product for which there is no market (candidates for teaching positions that do not exist) and develop skills for which there is diminishing demand (research in subfields within subfields and publication in journals read by no one other than a few like-minded colleagues), all at a rapidly rising cost (sometimes well over $100,000 in student loans)…

[Our] mass-production university model has led to separation where there ought to be collaboration and to ever-increasing specialization. In my own religion department, for example, we have 10 faculty members, working in eight subfields, with little overlap. And as departments fragment, research and publication become more and more about less and less. Each academic becomes the trustee not of a branch of the sciences, but of limited knowledge that all too often is irrelevant for genuinely important problems. A colleague recently boasted to me that his best student was doing his dissertation on how the medieval theologian Duns Scotus used citations.

America’s broken health care and education sectors offer incredible opportunities for cutting costs while simultaneously improving outcomes. But incrementalism won’t get us there. Change requires vision plus political will. The potential savings are so immense that we should be able to buy off vested interests (i.e., compensate insurance companies, poor teachers, etc.) and still produce a better outcome for all.

Posted by James on Monday, April 27, 2009