Why U.S. healthcare costs so much

Both Paul Krugman and Steven Pearlstein wrote this week about a January report from the McKinsey Global Institute on accounting for the cost of U.S. healthcare.

Pearlstein, in the Washington Post, writes,

Even after adjusting for wealth, population mix and higher levels of some diseases, McKinsey calculated that we spend $477 billion a year more on health care than would be expected if the United States fit the spending pattern of 13 other advanced countries. That staggering waste of money works out to 3.6 percent of the nation's entire economic output, or $1,645 per person, every year.

In laying out with remarkable clarity how and where we overpay, the McKinsey report punctures myths, exposes common misconceptions and highlights realities long ignored in the health-care debate.

Let's start with one the American Medical Association hopes no one will notice, which is that American doctors make a lot more money than doctors elsewhere -- roughly twice as much. The average incomes of $274,000 for specialists and $173,000 for general practitioners are, respectively, 6.6 and 4.2 times those of the average patient. The rate in the other countries is 4 and 3.2.

Pearlstein outlines why the doctors' arguments fall flat against the evidence in regard to why they deserve so much.

He also reports on other sectors of waste, like the pharmaceuticals' outrageous profits in the United States. He ends up with insurance companies' overhead:

Proponents of a government-run "single-payer" system will certainly home in on the $84 billion a year that McKinsey found that Americans spend to administer the private sector portion of its health system -- a cost that national health plans largely avoid. But as long as Americans continue to reject a government-run health system, a private system will require something close to the $30 billion a year in after-tax profits earned by health insurance companies. What may not be necessary, McKinsey suggests, is the $32 billion that the industry spends each year on marketing and figuring out the premium for each individual or group customer in each state. Insurance-market reform could eliminate much of that expense.

Of course, any effort to reduce these excess costs faces determined opposition from well-financed lobbies, which is why many reformers prefer to focus on the goal of extending coverage to the 47 million Americans who don't have health insurance. But doing the one without the other, the McKinsey researchers warn, would be economic folly. Offering universal coverage without reining in costs would add another $77 billion each year in unnecessary and unproductive health spending.

The problem with this analysis is that Pearlstein is saying Americans reject something that a majority of us have said we would prefer.

Will the McKinsey Report sway Colorado's 208 commission, or any of the other state entities considering reform? Will it help progressives at healthcare institutes and foundations move forward? The good people at the Colorado Consumers Health Initiative have reportedly decided to submit a proposal that is based on expanding assistance without reform to the Colorado commission. This is evidently the default liberal position, and it's part of why people have lost faith in the Democratic Party.

You can read Krugman at Welcome to Pottersville, and also the great comments from readers.

Krugman not only cites the McKinsey Report, he ledes with this:

Is the health insurance business a racket? Yes, literally — or so say two New York hospitals, which have filed a racketeering lawsuit against UnitedHealth Group and several of its affiliates.

I don’t know how the case will turn out. But whatever happens in court, the lawsuit illustrates perfectly the dysfunctional nature of our health insurance system, a system in which resources that could have been used to pay for medical care are instead wasted in a zero-sum struggle over who ends up with the bill.

The two hospitals accuse UnitedHealth of operating a “rogue business plan” designed to avoid paying clients’ medical bills.

Can you believe it? That a company led by a CEO who went into forced retirement last year with $1.6 billion in illegal back-dated stock options, is afloat in a culture of corruption?

Could this be the true meaning of "trickle down"?

How can AARP continue to justify using UnitedHealth as their insurer?

For those of feeling jilted by Krugman's embrace of John Edwards' incremental reform plan, his finale to this piece may be more of the same.

McKinsey estimates the cost of providing full medical care to all of America’s uninsured at $77 billion a year. Either eliminating the excess administrative costs of private health insurers, or paying what the rest of the world pays for drugs and medical devices, would by itself more or less pay the cost of covering all the uninsured. And that doesn’t count the many other costs imposed by the fragmentation of our health care system.

How can we possibly get rid of "excess" administrative costs without getting rid of the insurance companies themselves?