The High Cost of Private Profit in Health Care

The High Cost of Private Profit in Health Care

By Peter Dolack in Systemic Disorder.

The United States spends huge amounts of money on health care. But it is only in comparison to other countries that the magnitude of health care spending becomes clear. Because the U.S. health care system is designed for private profit rather than public health, the U.S. spends an extra $1.15 trillion per year beyond what it would otherwise.

If that total astounds you, you are not alone. When I first began making calculations to determine excess spending in health care, the figures were so large that I had difficultly believing them and performed the calculations over again. The result was the same.

The excess spending on health care is not only growing, it is growing much faster than the rate of inflation, in concert with overall health care spending. For instance, the annual average of excess spending for the period of 1990 to 2000 was $685 billion. For the period of 2001 to 2010, the annual average ballooned to $1.15 trillion.

And despite all that extra spending, U.S. residents have poor health results in many key indicators, in comparison to the world’s other advanced capitalist countries. Still more amazing, 51 million people in the U.S. are without health insurance, while all other peer countries have universal care. This is the system that millions of U.S. citizens believe is the best in the world thanks to the world’s most developed public relations and misinformation industries.

The rest of the world is quite in disagreement, to the point that even the harsh austerity-minded Conservative prime minister of the United Kingdom, David Cameron, has repeatedly had to deny (whether or not sincerely I will leave to others) any intention to emulate the U.S. system as he attempts to impose changes on the country’s National Health Service.

U.S. health care is by far the world’s highest

Let’s do a bit of digging under the surface of numbers. First off, an explanation of where the $1.15 trillion in annual excess spending comes from. I calculated the number by first obtaining total health care spending per capita* of the three largest economies within the European Union (France, Germany and the United Kingdom) and of Canada, the neighbor of the United States. I then averaged the numbers for the years 2001 to 2010 (the latest for which full statistics are available) as compiled by the Organisation for Economic Co-operation and Development (OECD), the club of the world’s advanced capitalist countries and the largest developing countries.

The composite average of Canada, France, Germany and the U.K. for 2001 to 2010 is US$3,479 per capita per year. That number is less than half of the U.S., which had by far the world’s highest health care spending at $7,325 per capita per year. The differential was then multiplied by 300 million, the approximate U.S. population during the past decade. If you prefer a different measure, the U.S. spent 17.4 percent of its 2009 gross domestic product on health care expenditures, again the world’s largest by a wide margin. The average of the 34 countries of the OECD is 9.6 percent.

And if that is not enough, here is one more astounding comparison: Not only are out-of-pocket expenses by U.S. health care consumers higher than in any of the four comparison countries (no surprise there) but per capita government spending in the U.S. is higher than in any of the four comparison countries. Those four have varying versions of what U.S. right-wing ideologues venomously denounce as “socialized medicine” — health care systems either run or closely regulated and supervised by a federal government paid for through taxation — and yet each government nonetheless spends less than does the U.S. government on a per capita basis.

Despite the massive transfer of money to private insurance companies by employers and employees, on a per-capita basis government health care spending by itself in the U.S. is higher than total health care spending in Canada.**

The authors of the paper “Why is health spending in the United States so high?” (a supplement to an OECD statistical report) attempted to draw conclusions from a mass of data on health care expenditures:

“It does not have many physicians relative to its population; it does not have a lot of doctor consultations; it does not have a lot of hospital beds, or hospitals stays, when compared with other countries, and when people go to hospital, they do not stay for long. All these data on health care activities suggest that U.S. health spending should be low compared with other countries.”

The reason that spending is anything but low is because of the high prices extracted throughout the system. The costs of a range of medical procedures or surgeries are much higher in the U.S. than elsewhere, as are pharmaceutical prices. The authors write:

“Overall, the evidence suggests that prices for health services and goods are substantially higher in the United States than elsewhere. This is an important cause of higher health spending in the United States.”

The OECD is an organization that is representative of the world’s most powerful capitalist countries, so the report does not inquire into underlying causes or in any way challenge the economic system that leads to such results; it merely reports facts and figures. Those facts and figures, however, give us a useful starting point. The wasteful spending on health care are subsidies for pharmaceutical manufacturers, hospital-chain operators, insurance companies, managed-care companies and medical-products manufacturers. Money flows to those corporate entities directly from your pocket and indirectly from you via government spending.

Each U.S. citizen’s annual share of wasteful, excess spending on health care — excess spending that goes into the coffers of some of the country’s largest corporations among the many industry profiteers — amounts to $3,846. Business leaders, their lavishly funded think tanks and pressure groups, and the public-office officials who represent them continually assert that private enterprise is always more efficient. It would seem that the efficiency lies in extracting money and wealth.

Government more efficient because goal isn’t private profit

Noting that “high administrative costs and lower quality have also characterized for-profit HMOs” (health maintenance organizations funded by insurance premiums that supervise health care), a Journal of the Canadian Medical Association article provides the following figures for the percentage of revenue that is diverted to overhead:**

  • For-profit HMOs: 19 percent
  • Non-profit plans: 13 percent
  • U.S. Medicare program: 3 percent
  • Canadian Medicare: 1 percent

In contrast to the rhetoric so often employed, government is far more efficient at delivering health care than the private sector. (This is also true in retirement plans, where the U.S. Social Security program’s overhead is much lower than mutual-fund managers or other financial-industry enterprises.) An important reason is that the government does not skim off massive amounts of money for bloated executive pay nor does it need to generate large profits to enrich financiers.

Such large expenditures also flow from a lack of competition. Few people in the U.S. have a choice of insurance provider, which is dictated by their employer, and insurance companies and HMOs frequently limit choice of doctors, and often deny coverage so as to maximize profits. A company that has stock traded on exchanges is legally required to maximize profits above any other consideration; it is no different because health care happens to be the product.

A few summers ago, I found myself in a debate with a Canadian woman who was critical of her country’s health care system. I acknowledged that Canadian health care is not perfect, but then gave the example of a friend who had recently died in his 50s of a heart attack because his insurer decreed that he did not require medication for his weak heart and he could not afford it on his own. Does that happen in Canada?, I asked. She replied with silence.

As in any other mature industry, most market share has consolidated into a few hands, a condition that is known as an “oligarchy.” Although competition in younger or more fractured industries does result in price reductions, when an industry is reduced to a small number of dominant corporations, price competition is usually a casualty.

Health care constitutes several industries — insurance, pharmaceuticals, hospitals and medical equipment, among others — and each adds to the cost. Giant pots of government money are involved, always a lucrative source of private enrichment. And insurers have people over a barrel because health insurance comes through their employer, who make deals with a single insurer, take it or leave it.

Health care provision also has unique attributes that further inflate costs. In “The high costs of for-profit care,” by Steffie Woolhandler and David U. Himmelstein (the Journal of the Canadian Medical Association article quoted above), the authors write:

“Why do for-profit firms that offer inferior products at inflated prices survive in the market? Several prerequisites for the competitive free market described in textbooks are absent in health care. First, it is absurd to think that frail elderly and seriously ill patients, who consume most health care, can act as informed consumers (i.e., comparison-shop, reduce demand when suppliers raise prices or accurately appraise quality). …

“Second, the “product” of health care is notoriously difficult to evaluate, even for sophisticated buyers like government. … By labeling minor chest discomfort “angina” rather than “chest pain,” a U.S. hospital can garner both higher Medicare payments and a factitiously improved track record for angina treatment. It is easier and more profitable to exploit such loopholes than to improve efficiency or quality.

“Even for honest firms, the careful selection of lucrative patients and services is the key to success, whereas meeting community needs often threatens profitability. … [For-profit] hospitals duplicate services available at nearby not-for-profit general hospitals, but the newcomers avoid money-losing programs such as geriatric care and emergency departments (a common entry point for uninsured patients). The profits accrue to the investors, the losses to the not-for-profit hospitals, and the total costs to society rise through the unnecessary duplication of expensive facilities.”

U.S. fares very poorly in a comparison of national systems

In the spirit of comparison-shopping, here is a brief examination of the five countries under discussion, the United States and the four comparison countries.

  • German health care system: Everybody is covered. Workers pay eight percent of their gross income into a “sickness fund,” a nonprofit insurance company; employers pay the same amount. These contributions account for almost all money in the system. Workers choose among 240 sickness funds. There are no deductibles. Everything, including drugs, is free for children younger than eighteen. The government regulates all insurance companies closely.
  • French health care system: Everybody is covered. Workers pay 21 percent of their income into a combined retirement and national health care system; employers pay about half that amount. Payroll and income taxes largely fund health care. There are no waiting lists for elective surgery or to see a specialist. Doctors’ fees are negotiated with medical unions, while hospital fees are regulated. Patients with one of 30 long-term and expensive illnesses pay nothing for care.
  • British health care system: Everybody is covered. The National Health Service is funded by income taxes, employs physicians and nurses, and owns most of the hospitals and clinics. The service also pays directly for all health care expenses, with prescriptions and dentistry being the two exceptions. There are sometimes long waiting lists, which are commonly attributed to there being no restrictions on services, particularly hospitalization.
  • Canadian health care system: Everybody is covered. The federal government sets standards; provincial and territorial governments administer the system. Medically necessary hospital, physician and diagnostic services are free, although most dental care and prescription drugs are not covered. Services are primarily through private providers. Long waiting times for specialists are a problem, with reduced government payments cited as an underlying cause.
  • U.S. health care system: 51 million are not covered. Coverage is through an employer (of which the employee pays a portion), or through own purchase of private insurance, but most can’t afford to do so. Insurance companies frequently dictate what, or if, services will be provided. Coverage generally requires out-of-pocket expenses and includes a “deductible” before payments begin. Patient bankruptcies due to inability to pay bills are common.

Another weakness of the U.S. health care system is that is based on the concept of a “family wage” instead of a “social wage.” That is both cause and effect — unlike other countries where health care is a right, in the U.S. health care is a privilege, and the large disparities in the ability to obtain it reflects the canyon-like inequality there and also aggravates social inequities. Not only because health care is tied to an employer, giving a boss more power over employees, but because a family’s health care coverage is tied to the person who has the job that provides it — usually the man in a traditional family. But it could be any one person in a non-traditional family or within a gay or lesbian household.

Universal health care systems are gains of movements

Feminist pioneer and theorist Kathie Sarachild of the influential group Redstockings, in a July 4 interview on the Joy of Resistance: Multi-cultural Feminist Radio program, summarized this concept. She said:

“The family wage is another way of saying this old idea that men should support the family. [U.S.] society is built on the idea that men should get higher pay than women because men would support the family and women would stay home and take care of the children. … Even though there were always women who worked, they received less pay than men did because of this family-wage concept. …

“A lot of [the European social wage] came out of socialist and communist theory. … The labor movement and the feminist movement in [Europe] have been able to win a social-wage system, which pays to raise the next generation [through universal health care and paid leave when a child is born instead of being dependent on an employer to pay a ‘family wage’ to the man].”

Nationalized health care becomes part of a basket of social benefits, including more vacation time, life-long education and elder care that liberates working people from dependence on an employer. A shorter work week would also bring benefits, Ms. Sarachild said:

“If the work week were shorter … there would be more jobs. There’d be less unemployment because the work week is shorter so there are more paid jobs. There would be more time at home for the father and mother to be with the child. …. [With the introduction of a] social wage, the unfair family wage would not be necessary. … [Women] are not as dependent on the man, and both of you are not so dependent on the employer.”

The lower wages of women in the “family wage” system boost corporate profits on the backs of women, Joy of Resistance host Fran Luck points out, and many women are forced to stay in bad relationships because they would lose their health care.

For men and women, the price of private profit is enormously high: 22,000 people die and 700,000 go bankrupt per year as a result of inadequate, or no, health insurance in the United States.*** The U.S. ranks among the bottom five of the 34 OECD countries in per capita doctor consultations, hospital beds and average length of stay in hospitals,**** and is well below average in life expectancy and infant mortality.

The country’s people pay more than $1.15 trillion per year on top of what they should pay to swell corporate profits and executive and Wall Street wallets — in return, we receive worse coverage. That is the price of capitalism.

* OCED figures. Spending per capita in U.S. dollars adjusted to create purchasing power parity.
** Steffie Woolhandler and David U. Himmelstein, “The high costs of for-profit care,” Journal of the Canadian Medical Association, June 8, 2004, pages 1814, 1815.
*** T.R. Reid, “No Country For Sick Men,” Newsweek, Sept. 21, 2009, pages 43-44.
**** “Why is health spending in the United States so high?,” OECD report, page 5.

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