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November 06, 2007


Friedrich von Blowhard writes:

Dear Blowhards,

In a recent posting, Auctionocracy, I provided a very brief overview of money in politics and argued the thesis that we've adopted a system of public policy that's openly for sale to the highest bidder. I wanted to follow that post up with several showing examples of how an industry's cash spent on campaign contributions and lobbying has paid off handsomely for that industry, but perhaps hasn't worked out quite so well for American society at large.

In the first of these follow-up postings, I want to consider the healthcare industry. To recapitulate, I would remind you of a piece of information from my first posting, to wit that healthcare providers were the second-most prodigal political spenders, having forked out $420 million in contributions during the 1998-2006 campaign cycles, and $2,043 million in lobbying during the years 1998-2006. (These figures were compiled from data at, which I wholeheartedly advise you to visit here.) In their generosity, the healthcare providers were only exceeded by the plutocrats of the financial services industry and they come in well ahead of the "political" donors, who scraped along in third place.

I also wanted to re-emphasize that in my numbers above I left out the $255 million in campaign contributions and lobbying expenses of the HMO industry because their economic agenda at least occasionally calls for restricting healthcare spending. This of course differentiates them from the hardcore healthcare providers (doctors, dentists, nurses, chiropractors, hospitals and nursing homes, pharmaceutical companies, medical supplies and equipment providers, dietary and nutritional supplement manufacturers) who are all united by a heartfelt and unambiguous desire for more healthcare spending, and whose campaign contributions and lobbying dollars are spent to bring that glorious consummation about.

Simply talking about dollar aggregates may not suggest how much effort that the health care industry puts into its political arm twisting; this piece by Maureen Glabman from 2002 may provide a clearer impression. After noting that in that year there were 17,800 registered Washington lobbyists, she points out that:

An estimated 40 percent of those 17,800 lobbyists promote health care agendas, according to James Albertine, president of the Alexandria, Va.-based American League of Lobbyists. To put it another way, there are 13 health care lobbyists for each of the 535 members of Congress.

Well, what has the healthcare industry gotten in return for its campaign contributions and its fleet of lobbyists? I am delighted to announce on behalf of those never-say-die influence peddlers that their hard work and determination has paid off better than hitting the Trifecta. The healthcare industry receives a gusher, a veritable Niagara of public subsidies, luxurious enough even to make the farm lobby or the military-industrial complex speechless with envy.

As Maggie Mahar reports here, (based on figures from 2004):

[T]taxpayers bankroll [i.e., subsidize] 51 percent of the nation's $2 trillion health care bill: this includes paying for private insurance for public employees (accounting for 6 percent of total health care spending), Medicare (17 percent of the total), Medicaid and SCHIP (16 percent), and other public health services including veterans' programs, public hospitals, and school programs (12 percent). (These figures come from the Centers for Medicare and Medicaid Services.) And as the number of people on Medicare, Medicaid, and SCHIP climbs, the taxpayers' share of the bill is rising.

As Ms. Maher goes on to emphasize, however, these percentages underestimate the contribution that the public sector makes to healthcare industry’s bottom line. After all, the costs of employer-provided healthcare (in 2004 30% of the healthcare revenue pie) are tax-deductible to the employer, and the income that these expenditures provide to current and retired beneficiaries is likewise not taxable. The consequence?

[A] recent study published in Health Affairs calculates that in 2004 the government lost $108.5 billion in tax revenues and another $66.4 billion in payroll taxes for Social Security and Medicare [as a result of the tax deductibility of employer-provided healthcare benefits].

These lost government revenues are of course made up for in higher taxes on non-exempt income, thus transferring an additional $175 billion to the sector and pushing the amount of healthcare spending underwritten by public subsidy by another 4-5 percentage points.

What is particularly scary is that the subsidy from the public purse will continue to grow rather spectacularly in the years ahead. As the Associated Press reported in a February 2007 story, public expenditures are projected to more than double in the decade to come:

Health care is expected to account for $1 of every $5 spent in the United States in another decade...Over the coming decade, spending on health care will continue to outpace the overall economy. By the year 2016, it will total nearly $4 trillion, economists at the Centers for Medicare and Medicaid Services said in a report being released Wednesday...The economists also predict that government programs will gradually replace employers when it comes to providing health insurance for millions of Americans.

I also thought we shouldn’t pass over in silence the Federal government's investment in basic research that will ultimately be profitably commercialized by the pharmaceutical, biotechnology and medical device communities. I grant you, in comparison to the trillion or so in subsidies for direct healthcare expenses it’s pretty much peanuts; still, according to an American Academy for the Advancement of Science report which you can see in full here, Federal funding of life science R&D in FY 2006 totaled at least $29 billion. In case you’re wondering, not even defense gets as much taxpayer-supported research.

So, how are the various branches of the healthcare industry bearing up under this avalanche of public subsidies? Well, according to an article in American Venture magazine which you can read here, venture capitalists (who are pretty good at seeing what direction the wind blows) made a record number of investments in biotech and medical device companies during the second quarter of 2007. The total dollar volume of such investments easily outpaced any other category of venture investing. Or as this 2006 article points out:

"There's just huge investor appetite for companies they perceive are going to grow because of demand in the marketplace,'" said Tracy Lefteroff, global managing partner of the VC practice at PricewaterhouseCoopers. "The Baby Boom generation will make huge demands on the health- care system and health-care products in general.'"

In yet another corner of the healthcare universe, the action is also quite frothy, as Tony Chen pointed out in April 2007 in a posting entitled "Private equity and M&A booming in healthcare":

Hospitals also continue to buy each other out - there has been a lot of activity of late. 2006 was a banner year with 57 hospital transactions. …Maybe the hottest area (but under the radar) is senior care - more are opening and many are being bought out at record prices. There's less red tape, a lot of market fragmentation, and baby boomers flooding the gates.

This positive opinion is echoed by the industry's bankers, as reported in John Andrews' story for Healthcare Finance, "Capital Climate Healthy in Healthcare Sector":

The consensus in the [lending] community is that a positive economic trend is running through the healthcare industry despite hiccups that have arisen just about everywhere else. And while healthcare may not be insulated from the challenges facing the general economy, it is currently viewed by lenders as a relatively safe, stable and potentially lucrative place for investment dollars..."There is a huge construction boom going on – the biggest in 40 years," [GE Commercial Finance’s Randy ] Waring said. "A lot of hospitals are undergoing new construction or renovation and are spending loads of money on upgrading their IT systems and medical technology. The financial picture has dramatically improved, and they need capital for much-needed investments."

And hey, things are hot for medical professionals, too. As Christopher Gearon’s U.S. News’ story "Doctors in Demand" points out:

To size up the job market in medicine, one only has to check in with physician headhunters. "Every physician staffing firm is having record years," says Kurt Mosley, vice president of business development for Merritt, Hawkins & Associates. With demand outstripping supply, physician salaries are robust, signing bonuses are the norm, and the opportunities for young doctors are ever expanding. "Doctors coming out of school are no different than a Heisman Trophy winner," Mosley says. "They are wooed and wooed."

In fact, the healthcare employment picture is unquestionably the brightest for any sector or industry in the U.S., and has been for some years, as this Business Week story "What’s Really Propping Up the Economy?" from September 2006 points out:

Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago...Almost invisibly, health care has become the main American job program for the 21st century, replacing, at least for the moment, all the other industries that are vanishing from the landscape. With more than $2 trillion in care is propping up local job markets in the Northeast, Midwest, and South, the regions hit hardest by globalization and the collapse of manufacturing...If medical spending rises to 25% of gross domestic product by 2030, as many economists expect, health care's share of jobs could grow to 15% or 16% of the labor market from today's 12%, based on historical patterns.

Jeez, to use a medical metaphor, healthcare is growing like a tumor, and like a tumor it has developed its own dedicated blood supply -- that is, money sucked from society at large by the Federal and state governments.

So, how is all this spending paying off for the American public? After all, I see no end of statements by apologists for the healthcare industry claiming that as any society becomes wealthier its perfectly appropriate to spend more money on healthcare, and that better health is well worth the price, yadda, yadda, yadda.

The problem is, those statements are either self-serving spin (to wit, while it might be natural to spend more on healthcare as we get wealthier, it’s not natural to spend so much more that it puts us into the poorhouse) or simply wrong (the idea that spending more money as a nation on healthcare -- i.e., medicine and drugs -- actually makes us healthier.)

But, heck, don’t take my word for it, hear it directly from the U.S. governmentin February, 2007:

Dr. Mark McClellan, an analyst who used to oversee the Medicare and Medicaid programs, [commented] "We know that much of the spending is going to treatments that are unnecessary or lead to medical errors, so we’re not getting nearly as much value as we should," McClellan said.

In a L.A. Times op-ed piece "Health Care Code Blue" from November 2006 (sadly no longer accessible for free), clinical instructor at Harvard Medical School John Abramson is a bit more blunt about our spectacular failure to get much in the way of "bang for our buck":

The spiraling cost of healthcare is well known: $7,100 per person this year, projected to increase to $12,000 in 2015 and compounding at more than double the rate of inflation. Already, medical care gobbles up one-sixth of the GDP. Even so, we ask ourselves, how better to spend our money than on the best healthcare in the world. Not so fast. The facts show that these enormous expenditures may be buying us the best amenities in medical care -- but not the best health. For example, Canada spends only 60% as much per person on healthcare as the United States. Yet, since 1980, the longevity of all Canadians has improved more rapidly than that of only white Americans...Britain spends only 40% as much as we do on healthcare. But according to the Journal of the American Medical Association, middle-class insured Americans "are much less healthy than their English counterparts"...In fact, although Americans spend twice as much person on healthcare as the other 21 wealthiest countries, data from the World Health Organization show that we live the shortest amount of time in good health – 2 ½ years less than the average in other countries...

And it gets worse; in fact, it appears that the more we spend, in many cases, the worse our outcomes get, as Leif Wellington Haase of The Century Foundation points out in his article, "The Elephant in the Operating Room" from October 2006:

As John Wennberg and his Dartmouth colleagues have pointed out, with ever-increasing precision, regions of the U.S. that spend more on health per capita, adjusting for the sickness of their underlying populations, don’t get better outcomes. Higher spending regions may even do worse. Higher per capita spending, however, tends to be correlated with higher concentrations of specialists and hospitals. Where there are more specialists and hospital beds (in, say, South Florida), per capita annual Medicare payments soar. [emphasis added]

This is truly a shock. Our vast expenses for healthcare, while clearly buying us lots and lots of well-paid specialists and expensive hospital beds, aren’t actually buying us health?

Surprising as it may seem, this revolutionary concept is actually quite well acknowledged among healthcare scholars and economists. Robin Hanson, an economics professor at George Mason University, explains in a September 2007 essay with the provocative title of "Cut Health Care in Half":

In the aggregate, variations in medical spending usually show no statistically significant medical effect on health. (At least they do not in studies with enough good controls.) It has long been nearly a consensus among those who have reviewed the relevant studies that differences in aggregate medical spending show little relation to differences in health, compared to other factors like exercise or diet. [emphasis original]

Philip Longman, a senior fellow at the New American Foundation, provides some context for this rather shocking conclusion in his 2003 essay, "The Health of Nations":

During the 20th century, the health and life expectancy of the average American improved dramatically. A child born today can expect to live a full 30 years longer than one born in 1900. Improvements in medicine, however, played a surprisingly small role in this achievement. Public health experts agree that it contributed no more than five of those 30 years. This may seem counterintuitive given the attention society pays to medical breakthroughs. But the changes in living and working conditions over the last century are the real reason...

During the first half of the 20th century, living and working conditions improved vastly for most Americans. Workplace fatalities dropped 90 percent. This, combined with public health measures such as mosquito control, quarantines, and food inspections, led to dramatic declines in premature death...

As the century progressed, medical care grew enormously more sophisticated and effective, particularly in managing pain and preventing sudden death from traumatic injury, infection, and heart attack. But the overall gains to public health remained modest...

Modern medicine's ability to actually cure people is quite depressing. The consensus estimate, accepted by the Centers for Disease Control (CDC), is that medicine has contributed just two of the seven years in added life expectancy achieved since 1950...

Sure, many best-sellers and newsweeklies tout the "longevity revolution" prompted by advances in cutting-edge medicine. But overall longevity is due more to dramatic reductions in infant mortality, which allow more people to grow old, than to modestly extended lives among the elderly. Since 1950, life expectancy at 65 has increased by just 3.45 years; among women over 65, it has actually declined slightly since 1992... [emphasis original]

"But, Friedrich," many of you will say, "You’re distracting us with mere nothings. We all know that the cure for everything that ails health care is universal coverage and government-single payer insurance. Once we have that, all will be well."

Sorry to harsh your mellow, but I think this is another case where even 'advanced' political thought turns out to be trapped within the conceptual hall of mirrors of our current mindset. As Mr. Longman remarks, even universal health insurance, that magic wand that will permit even the poorest of us access to all the healthcare we can load on our plates at the buffet table, may not actually help much:

[E]ven a Cadillac health-insurance plan plays little, if any, measurable role in improving health and life expectancy. A RAND Corporation study compared two groups of families over 15 years, one with full medical coverage, the other with a large deductible. The families with full coverage consumed 40 percent more health-care dollars than the other groups, but researchers couldn't detect any measurable differences in health. [emphasis added]

What implications does all have for a sensible American health care policy? Well, first off, I would argue that it’s high time to throttle back on our medico-industrial complex. Mr. Hanson remarks:

[O]ur main problem in health policy is a huge overemphasis on medicine. The U.S. spends one sixth of national income on medicine, more than on all manufacturing. But health policy experts know that we see at best only weak aggregate relations between health and medicine, in contrast to apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution, climate, and social status.

In other words, it’s time we invested in those strong aggregate relations, not in the weak one (medicine). If we have to spend more money, we should spend it encouraging exercise, better diets, more sleep, less smoking, control and remediation of pollution, and perhaps look for ways to counter the deleterious, if somewhat mysterious, effects of low social status on health. You know, putting our dough into areas where it will actually pay off for us.

Mr. Longman puts it this way:

Both parties should pause and reflect. For all the additional money we're throwing into medicine, Americans aren't getting much healthier. Maybe it's time to try a different approach. The biggest opportunities for improving the health of Americans -- and restraining health-care costs -- lie in keeping people healthy, rather than treating them once they become sick. So instead of simply adding more benefits to a health-care system that is already financially unsustainable, or using new benefits to herd people into HMOs, why not offer a more sensible deal: Bribe people into taking better care of themselves. For instance, why not offer seniors who exercise bigger drug discounts than those who don't? This may sound radical, and it is. But the more Americans learn about the costs and failings of contemporary medicine and the extraordinary benefits they can reap from simple behavioral changes like exercising, the more such plans will begin to make sense.

But, as we all know, the odds of anything sensible like this happening are pretty darn slim, because "good sense" and "the general public" don’t make campaign contributions or lobby. while special interests, like the healthcare industry, do. Henry Aaron, a senior fellow at the Brookings Institution points this out forcefully in a November 2007 L.A. Times opinion column, "Why Has Health Reform Failed?":

Healthcare reform involves huge financial stakes. When Clinton proposed his reform, the U.S. healthcare system spent as much as the gross domestic product of France. Now it spends as much as the combined GDPs of France and Spain. The potential losers from any reform -- insurers, hospitals, doctors -- can and will marshal enormous resources to block action.

Well, I'd like to offer you a more optimistic view, but I think it's something to at least get a clear view of what we're up against.



posted by Friedrich at November 6, 2007


I'd say that healthcare spending is only a problem if people really want less healthcare but are being prevented by gov't spending. The reality seems to be the opposite. The populace wants the gov't to spend *more* on healthcare.

As for single-payer, that saves money by the obvious - rationing. To be honest, as a Canadian, I support our current system which makes it hard to spend money outside the system, but it does so by preventing people from getting healthcare that they would prefer to have. It's quite anti-freedom in that it doesn't make it easy for people to spend their money as they like. However, on a statistical basis, it does save a pile of money for not much in the way of medical down-sides (statistically-speaking... there are always lots of anecdotes...)

Posted by: Tom West on November 6, 2007 8:20 PM

Lordy, what a mess. Thanks for detailing all that. I wonder too about the quality of the few years that medicine has added to our lives. I've seen all too many oldies kept alive past their natural death-date by medicine. Presumably this is a medical triumph, or at least stunt. But it means months or years of misery for the poor unconscious oldie, as well as his/her loved ones. One hears that docs, nurses, nursing homes, etc are getting better about not prolonging lives in unreasonable and undesired ways, and I hope that's true.

FWIW, years ago I read a Roy Porter history of medicine. He was pretty beady-eyed about the contributions of medicine. If I remember right, he said that 1) medicine almost certainly did more damage than help until the 20th century. And 2) the biggest advances in human health came not from medical advances but from such mundane seeming reforms as decent sewage systems and getting people to wash their hands regularly.

Posted by: MIchael Blowhard on November 7, 2007 2:52 AM

"Auctionocracy" is a good description. Which is why there are annoying people like me who insist that we can't use the State to solve various problems: because it will always get bought.

Posted by: Tim Worstall on November 7, 2007 5:32 AM

Since so many members of my extended family, and the Karoake Queen's family work in some medical field, I'll relate a part of this that is seldom mentioned, except surprisingly, in a recent column by Ann Coulter.

The price of medical care is driven to a great degree by the culture of lawsuit. Trial lawyers, as Coulter points out, draw, on average, salaries that are exponentially larger than doctors and other health care professionals.

My mother is an LPN who works primarily with seniors. Every facility she works with responds with full resuscitation for every patient in crisis, no matter how old or sick, and no matter the wishes of the patients or their families. They do this out of fear of lawsuit. Written statements that the patients' families won't sue are regarded, according to my mother, as worth about as much as used toilet paper.

The same is true in every aspect of the medical field. The costs of an out of control litigation system play a large role in the costs of an out of control medical system.

In short, it is the actual desires of people that are driving the costs. Everybody wants maximum care. Nobody wants to die. And, we no longer believe that death or injury or aging is just a fact of life. It's somebody's fault. And, the lawyers are right there to tell you that it's somebody's fault and that you have the right to collect.

We are getting just about what we deserve.

Posted by: Shouting Thomas on November 7, 2007 9:34 AM

As usual it boils down to a matter of individual responsibility. That we eat healthy, that we exercize, that we pace ourselves to insure decent sleep: these things are up to us, individually. And they're hard. They take self-managment, self-control, discipline. Plus, the percentage of the population that will govern itself healthwise is not likely to change, ever. Doctors can't do any of these things for us. But turning to doctors to save us is easy. So we turn to doctors. And pay the price.

P.S. I don't necessarily count myself among the self-controlled. Just sayin'...

Posted by: ricpic on November 7, 2007 12:04 PM

Let's see, countries like Canada and England have that dreaded monster "socialized medicine" under which they spend significantly less on healthcare than America and have better health; surely a great argument against such folly. Certainly government bureaucrats (those parasites) if charged with administering such a system will have every incentive to make sure that your claim for the tests ordered by your doctor are denied, unlike those insurance company employees working tirelessly to make sure your health and not the company's profit margin is their number one priority.

And then there is that rationing issue. We don't have anything like that here. If you have insurance and a fat bank account you can book a room in a nice private hospital and get cutting edge medical treatment whenever you want, on demand. Under socialized medicine your tummy tuck might not get scheduled for months because the only plastic surgeon available is too busy repairing the cleft palates of poor kids or skin grafts for firefighters and who wants that? Nope, we don't ration, just ask those who have no insurance how easy it is for them to get timely and preventative care.

The vast sums spent on campaigns and lobbying by the health care and pharmaceutical industries merely help them to give us the greatest, most up to date, medical system in the world. Why would we ever question this?

Posted by: Chris White on November 7, 2007 1:52 PM

Kudos Friedrich von Blowhard. Awesome post. You'd better be careful, someone in the "real" media might have to start whining about how terrible bloggers are when you deliver a kick-ass report like this.

Shouting Thomas - Ann Coulter? C'mon. Sadly, even if she is reporting facts, she's such a wingnut attack shrew that no one takes her seriously. And even if you wanted to, a typical fact-check of her info usually reveals loads of fresh BS. I know living in the middle of a way leftie community can work on your soul (I've been there), but don't go so far as to quote Coulter! Dude!

Posted by: yahmdallah on November 7, 2007 6:01 PM

"The price of medical care is driven to a great degree by the culture of lawsuit."

No it's not. HMOs require members to sign arbitration agreements, and many private practitioners are requiring them - I had to sign one recently before getting a consultation with a surgeon. California and other states instituted caps on personal injury damages years go. Hospitals and nursing homes will honor a DNR (do not resusitate order). If they don't, that alone would be a cause for litigation. I'm not surprised lawyers are constantly blamed and Ann Coulter proclaims it. It's part of the corporatist agenda that the right has sold its soul to.

Posted by: Peter L. Winkler on November 8, 2007 2:12 PM

I'll be attending a wake tonight for the father of a friend. He was an 86-year old veteran of WW II, wounded bailing out of his bomber, POW survivor of a forced march that saw 80% dying on the way, and he was killed by our healthcare system.

He had a genetic blood protein problem taht eventually became a cancer. He was a pretty sharp old guy, and his doctors saw guranteed payment for treatment, so they talked him into chemotherapy. Tonight marks the third week since his first and only treatment.

Are society's interests served by aggressively treating this?

Posted by: Brutus on November 9, 2007 1:39 PM

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