Health care cost is the real problem

Published 9:00 pm Saturday, January 21, 2006

In the psychology business they have a name for it: displacement activity. When we can’t or won’t deal with something, we deal with something else instead.

In business conversations the classic example of displacement activity is often expressed by an analogy to “rearranging the deck chairs on the Titanic.”

While some of us control it better than others, the urge toward displacement activity seems to be an inherent part of human behavior. It is not surprising, then, that displacement activity is part of our organizational behavior, too. It has become routine behavior, in fact, for our governments at every level to avoid confronting issues. It is much easier to rearrange deck chairs.

That is what is happening in health care. State governments, including ours in Olympia, have now become fixated on employers who do not provide health care insurance for their workers. And while that is not necessarily a bad thing to do – maybe the deck chairs really do need rearranging – it does not address the basic problem: the cost of medical care is a menace to our economic health.

From an economics standpoint, there are two fundamentally different questions raised by health care costs: how much, and who pays. Government’s focus on employers is an attempt to address only the question of who signs the checks to pay for health care.

The answer certainly makes a difference to some individuals and some companies, and it does involve issues of equity and fairness. But it is important for us to remember that in another sense – the larger, macroeconomics of our economy – the question of who pays isn’t quite as important as how much.

In our state’s economy, for example, how much does it matter if the health care insurance bill for “Worker A” is paid by an employer, who will pass the costs on to the company’s customers, or paid by the public through taxes? To the extent that the company’s customers are the same public, they pay the same amount, and the method, or even the route, of payment doesn’t make much difference. It’s how big the bill is that counts.

The bill for medical care is big and getting bigger. Health care now consumes nearly one dollar out of every six in the US economy and it continues to grow faster than the Gross National Product itself.

Not surprisingly, many employers cannot afford this. Those with existing health insurance benefit plans make efforts to share the burden of increased costs with their workers, but, increasingly, many companies are cutting back sharply on health insurance coverage, or are simply dropping out of the benefits business entirely, leaving their workers to fend for themselves.

While it is relatively easy to take a cheap shot at these companies – “greed vs. fair treatment of workers” and that kind of Wal-Mart bashing stuff – a broader perspective gives us, well, a broader perspective. When you see so many companies that previously had good health benefit plans and so, presumably, didn’t hate or exploit their workers now shrinking or abandoning those plans, you have to wonder if it is really greed or a matter of survival for them. If it is the latter, as seems likely, we are in trouble.

As an economic sector, health care has some similarities to 19th century agriculture in the US. The production of food absorbed so much labor, investment, time, and energy that it put the squeeze on every other source of economic growth. The largest portion of the American people was pinned down by the back-breaking labor of farming. It wasn’t until technological improvement and capital-intensive farming changed the math of agriculture that its improved productivity freed us up to educate ourselves and go on to other things.

Medical care is not agriculture. For one thing, the people who work in the medical fields are some of the best educated and most productive individuals that the US has to offer. But productivity in medical care has mostly been directed at expanding capabilities and improving outcomes. People live longer and better lives. This is a monumental achievement and needs to be treated with respect.

The economic result of this, though, is that in medical care productivity improvements haven’t changed the math. Cost efficiencies have slowed down the growth in costs, but not much. Each year, medical care consumes more and more money, and absorbs more and more people into its labor force.

Without a change in the underlying math, the bill gets bigger every year and becomes less affordable. State legislatures can rearrange all the deck chairs they like, but they cannot change this, at least not without confronting the “how much” issue. We are still on a collision course with reality.

James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101” monthly for the Snohomish County Business Journal.