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U.S. Health Care in a Global Context

How are domestic health care costs encouraging job outsourcing?

February 2, 2006

How are domestic health care costs encouraging job outsourcing?

There is a tendency in the United States to blame anything that ails the economy on some external force beyond our control.

For example, it's now almost treated as gospel that the structural decline in U.S. manufacturing employment over the past decade was caused by a low-cost labor glut in China (the real culprit: technology, productivity and service-industry growth).

Detroit's perennial woes, of course, were for many years attributed to unfair trade and corporate policies practiced by Japan (versus internal impediments facing the U.S. auto sector).

Most recently, India's rise has been to blame for declining jobs in the U.S. service sector (hardly true, as U.S. job growth is now entirely driven by the service-sector).

Rising energy costs? Fault greedy global oil producers, not the U.S. consumer base, even though we account for roughly one-quarter of global energy consumption.

Air pollution in Los Angeles? Blame it on coal-belching China or the Santa Ana winds, not the thousands of drivers clogging the freeways of southern California.

You get the picture: if there's a problem, there's a good chance it's the fault of some exogenous force.

That said, there is one handicap that cannot be blamed on either China or India or any other nation — America's soaring health care costs.

The latter is a homegrown problem that threatens to sap U.S. consumer spending, erode the global competitiveness of U.S. corporations and undermine public sector finances at both the federal and state level. Mounting health care costs, in short, represent a clear and present danger to the United States.

The "good" news is that the pace of health care spending has slowed, with national health care expenditures rising by 7.9% in 2004, the slowest annual increase since 2000. Drug spending grew by "only" 8.2% in 2004, less than half the rate of growth of just five years ago.

In addition, private spending on health care slowed in 2004, as did out-of-pocket expenses. Mind you, inflation, as measured by the consumer price index, rose by 3.3% in 2004, just a fraction of similar health care expense increases.

Now for the bad news: While the pace of U.S. health care spending has decelerated, total health care spending in the United States has morphed into a $1.9 trillion animal, accounting for 16% of gross domestic product (GDP) in 2004.

That is up from 13.8% of GDP in 2000 and well above watermarks reached in 1980 (9.1%) and 1970 (7.2%). Households, businesses and government — all three bear the burden of rising health care expenses.

U.S. households, for instance, doled out a record $236 billion in out-of-pocket expenses (co-payments, deductibles and other non-covered items) in 2004, roughly $100 billion more than a decade ago.

If that wasn't enough, they shelled out another $206.4 billion (another record) in contributions to private health insurance premiums and individual premiums, a staggering 66% increase from levels at the start of the decade.

Throw in payroll taxes and contributions associated with Medicare and Medicaid, and aggregate household spending on health care totaled $557 billion in 2004. That's a tidy sum even when gauged against the massive U.S. consumer base. Businesses were in no better position than U.S. households.

Total private business spending rose to $448 billion in 2004, a 6.5% increase from the prior year. Since 2000, what businesses pay out in the way of private health premiums has increased by nearly $100 billion, a rising cost that many companies, most notably in the swath of small and medium-sized firms, cannot bear.

This may in part explain why over 40 million Americans don't have health insurance today.
Entities at the federal and state level have been in no way immune to higher health care expenses. Thanks to rising costs associated with Medicare, public health care spending rose by 8.5% in 2004.

Again, this was well above the prevailing rate of inflation. Medicare spending rose by 8.9% to $309 billion in 2004, on top of a 6.6% jump the year before. Growth in Medicaid spending slowed in 2004, although expenditures jumped by 7.9% in 2004, just a shade off an 8.8% rise in 2003.

Since 2001, Medicaid spending by the federal government alone has grown by 9% annually. At the state and local level, Medicaid spending surged 10% last year and, for several states, Medicaid has become the second largest line item in the budget (behind education).

By most accounts, ballooning medical costs are placing more and more state finances under stress. Indeed, between 1994 and 2004, combined state and local expenditures on health care costs doubled, rising from $147 billion in 1994 to $294 billion in 2004.

The upshot — more states may follow in the footsteps of Maryland, which recently introduced legislation that would force companies to maintain, or increase, contributions to employee health insurance. The bill has yet to become law, but bears close watching.

Throughout the world — most notably in the United States, Europe and Japan — health care costs have surged on account of ageing populations, demanding consumers and costs associated with technological innovation.

Caring for the sick, elderly and unfortunate is a budgetary curse confronting the industrialized world and some developing nations, including China, which will be the first nation ever to grow old before it grows rich.

In other words, the United States is hardly alone in spending an increasing amount of its resources on health care. Yet what separates America from the rest of the world is the following: No other nation devotes as much of its resources and capital to health care, yet receives so little in return.

Health care costs in Japan were roughly 8% of GDP in 2003, compared to 10% in France and Canada — and 7.7% in the United Kingdom. These nations expend less on health care, yet receive the same — if not better — service than the average American.

The United States spends twice as much as Canada on health care per person, yet the average Canadian has a higher life expectancy. Ditto for Japan, Germany, France and the United Kingdom — four nations that allocate less to medical expenses than the United States, yet still manage to have a generally healthier population by various measures.

Since 1970, U.S. health care expenditure as a percentage of GDP has more than doubled. The 8.8 percentage point increase in U.S. GDP allocated to health care spending between 1970 and 2004 was greater than more modest increases in Germany, France, Japan, the United Kingdom and elsewhere.

There's something wrong with this picture, and, if you listen closely, you will notice that more and more American executives are hinting that rising non-wage costs in the United States are driving firms to shift more production facilities and service activities overseas.

Sure, U.S. firms may fancy cheap labor in India and China, but, more importantly, they fear the burden of soaring domestic health care costs here at home. Meanwhile, for U.S. households and the public sector already deep in debt, shouldering the burden of rising health care costs is becoming more difficult.

With this in mind, something has to give — possibly higher taxes at the federal and state level, or greater out-of-pocket expenses for households. How all of this plays out, nobody knows.

We are, however, certain of this: The "good" news about the slowing pace of U.S. health care spending should be taken with a grain of salt by investors. America's health care sector is ailing and poised to become an increasing drag on the U.S. economy.