Archive for March, 2019

It Really Is The Prices, Stupid!

Thursday, March 21st, 2019

Trying to understand American health care these days is a little like trying to do the breast stroke through molasses. A lot of effort for not much progress.

The scope of the issue is vast. In 2017, US health care spending grew 4.6%, exactly double the growth rate of inflation, to $3.5 trillion. In 2018, it grew another 4.4% to $3.65 trillion. That’s 18% of US Gross Domestic Product (GDP). To put this in perspective, consider this: $3.65 trillion is more than the entire GDP economies of Italy and Spain – combined! It is $1 trillion more than the entire GDP of France and  equals that of Germany’s $3.6 trillion GDP.

Each of the health care players say they want to do something about this, just as long as you don’t touch their particular slice of the pie. And, because the health care lobby dwarfs every other one, we’re reduced to nibbling around the edges.

In 2003, Uwe Reinhardt, Gerard Anderson, Peter Hussie and Varduhi Petrosyan published their seminal work, It’s The Prices Stupid: Why The United States Is So Different From Other CountriesThey examined health care data from 30 OECD countries for the year 2000. Here is the basic conclusion from their Abstract:

U.S. public spending as a percentage of GDP (5.8 percent) is virtually identical to public spending in the United Kingdom, Italy, and Japan (5.9 percent each) and not much smaller than in Canada (6.5 percent). The paper also compares pharmaceutical spending, health system capacity, and use of medical services. The data show that the United States spends more on health care than any other country. However, on most measures of health services use, the United States is below the OECD median. These facts suggest that the difference in spending is caused mostly by higher prices for health care goods and services (my emphasis) in the United States.

In 2017, Reinhardt died, after which his co-authors decided to re-examine their original conclusions and publish their findings as a tribute to him. Their new paper, It’s Still The Prices, Stupid, which they published in January, 2019, concluded that their original conclusions were “still valid.”

The conclusion that prices are the primary reason why the US spends more on health care than any other country remains valid, despite health policy reforms and health systems restructuring that have occurred in the US and other industrialized countries since the 2003 article’s publication. On key measures of health care resources per capita (hospital beds, physicians, and nurses), the US still provides significantly fewer resources compared to the OECD median country. Since the US is not consuming greater resources than other countries, the most logical factor is the higher prices paid in the US. Because the differential between what the public and private sectors pay for medical services has grown significantly in the past fifteen years, US policy makers should focus on prices in the private sector.

Another way to look at this is to compare the growth of health care utilization with the growth of prices. This produces some highly informative, surprising and, sometimes confounding, data. For example, from 2012 through 2016, US hospital in-patient prices rose 24.3%, yet in-patient utilization decreased 12.9%. I guess all that hospital consolidation has really lowered hospital prices, hasn’t it? During that period, and due primarily to the opioid epidemic, prescription drug utilization was the only medical service whose utilization rose, and it was up only 1.9%, despite the prices of prescription drugs rising 24.9%.

Question: Who has the most skin in this game?

Answer: Employers and the 156,199,800 people who work for them.

That answer is why I believe Warren Buffet, Jamie Diamond and Jeff Bezos, three major employers, have formed their joint health plan, Haven, and hired Atul Gawande to run it.  They have given Dr. Gawande time and a lot of money not just to slow the spending growth in their respective companies, but to reverse it. Buffet has spoken loudly about how health care costs place America at a competitive disadvantage. He has been vocal in his criticism of Republicans’ devotion to reducing corporate taxes, which, at 1.9% of GDP, are now the lowest among advanced nations and pale to near insignificance when compared to the health care costs borne by employers. He has said, “Medical costs are the tapeworm of American economic competitiveness.” Further, they are a major cause for little or no real wage growth.

More proof for his point: According to the US Census Bureau, employer sponsored insurance plans (ESIs) cover 56% of the US population. In 2018, the year we hit $3.65 trillion, the average annual premium for a family in an ESI was $19,616, of which employees paid an average of 29%, or $5,688. Employees in family plans also had an average deductible of $2,788, plus co-pays. So, even without the co-pays, employees are paying more than $8,000 for an ESI family plan. In 2019, we will blow through $20,000 for the cost of an ESI family plan. This is patently unsustainable and leads to two inescapable conclusions: First, Washington has not fixed this, and, given past experience, it is doubtful it ever will, regardless of efforts by progressives. Second, employers are the only people with the leverage and urgent incentive to do anything constructive. They need to stop worrying about corporate taxes, get on the Buffet, Bezos and Diamond bus, and throw all the muscle they have at the American health care fiasco.

 

Robots In The Manufacturing Sector – We’re Lagging Behind

Thursday, March 14th, 2019

In 2013, Oxford professors Carl Frey and Michael Osborne published what became a highly read, highly cited and highly criticized study suggesting that machines could replace 47% of America’s jobs over the following 25 years. This landed like a stink bomb on the robotic revolution.

The study, which examined more than 700 US occupations, found that jobs in transportation, logistics, and administrative and office work were at “high risk” for automation. “We identified several key bottlenecks currently preventing occupations being automated,” said Dr. Osborne when the study was released. “As big data helps to overcome these obstacles, a great number of jobs will be put at risk.”

Following the study, academics and pundits jumped into the middle of the debate to argue its conclusions. In 2015, Forrester Research’s J. P. Gownder authored The Future Of Jobs, 2025: Working Side By Side With Robots and updated it two years later in 2017. Gownder concludes that, yes, AI will replace many jobs, but it will also create many jobs. He suggests a net job loss of perhaps 9.1 million, or about 7% of the workforce. Seven percent isn’t 47%, but 9.1 million jobs are a lot of jobs. And a lot of people who could be swept away by the rise of the robots.

So, clearly, the robots are coming. And, just as clearly, there is now, and will continue to be, human collateral damage. We should do everything in our power to help the millions of people the robots will displace. It would be outrageously stupid, and immoral as well, not to do that.

But if you believe development and adoption of robots is essential to keep the country competitive and prosperous, then you should be concerned, because other countries are outpacing us. By long shot.

A new report from the Information Technology & Innovation Foundation (ITIF) finds the US ranks 7th in the world in the rate of robot adoption in the manufacturing sector.

When controlling for worker pay, the situation is even more bleak. In that case, we’re 17th in the world.

The report relies on International Federation of Robots data for industrial robot adoption rates but adjusted the rankings to control for differences in manufacturing worker pay. The decision to use robots usually weighs the cost savings that can be achieved when a robot can perform a task instead of a human worker, and those cost savings are positively related to the worker compensation levels. Higher wages lead to faster payback, making more robots a more economical investment.

On a compensation-adjusted basis, the report found that southeast Asian nations significantly outperform the rest of the world in robot adoption, with South Korea, Singapore, Thailand, China, and Taiwan the top five nations, in that order. Moreover, China’s rate of robot adoption is so high, fueled by massive government subsidies, that if China and South Korea’s respective growth rates continue, by 2026 China will lead the world with the highest number of industrial robots as a share of industrial workers, when controlling for compensation levels.

Robert Atkinson, ITIF’s President, has some sensible suggestions for how we can catch up. Policy makers should listen to him.