Home > #OWS, data science > Are healthcare costs really skyrocketing?

Are healthcare costs really skyrocketing?

October 22, 2012

Yesterday we had a one-year anniversary meeting of the Alternative Banking group of Occupy Wall Street. Along with it we had excellent discussions of social security, Medicare, and ISDA, including details descriptions of how ISDA changes the rules to suit themselves and the CDS market, acting as a kind of independent system of law, which in particular means it’s not accountable to other rules of law.

Going back to our discussion on Medicare, I have a few comments and a questions for my dear readers:

I’ve been told by someone who should know that the projected “skyrocketing medical costs” which we hear so much about from politicians are based on a “cost per day in the hospital” number, i.e. as that index goes up, we assume medical costs will go up in tandem.

There’s a very good reason to consider this a biased proxy for medical costs, however. Namely, lots of things that used to be in-patient procedures (think gallbladder operations, which used to require a huge operation and many days of ICU care) are now out-patient procedures, so they don’t require a full day in the hospital.

This is increasingly true for various procedures – what used to take many days in the hospital recovering now takes fewer (or they kick you out sooner anyway). The result is that, on average, you only get to stay a whole day in the hospital if something’s majorly wrong with you, so yes the costs there are much higher. Thus the biased proxy.

A better index of cost would be: the cost of the average person’s medical expenses per year.

First question: Is this indeed how people calculate projected medical costs? It’s surprisingly hard to find a reference. That’s a bad sign. I’d really love a reference.

Next, I have a separate pet theory on why we are so willing to believe whatever we’re told about medical costs.

I’ve been planning for months to write a venty post about medical bills and HMO insurance paper mix-ups (update: wait, I did in fact write this post already). Specifically, it’s my opinion that the system is intentionally complicated so that people will end up paying stuff they shouldn’t just because they can’t figure out who to appeal to.

Note that even the idea of appealing to authority for a medical bill presumes that you’ve had a good education and experience dealing with formality. As a former customer service representative at a financial risk software company, I’m definitely qualified, but I can’t believe that the average person in this country isn’t overwhelmed by the prospect. It’s outrageous.

Part of this fear and anxiety stems from the fact that the numbers on the insurance claims are so inflated – $1200 to be seen for a dislocated finger being put into a splint, things like that. Why does that happen? I’m not sure, but I believe those are fake numbers that nobody actually pays, or at least nobody with insurance.

Second question: Why are the numbers on insurance claims so inflated? Who pays those actual numbers?

On to my theory: by extension of the above byzantine system of insurance claims and inflated prices for everything, we’re essentially primed for the line coming from politicians, who themselves (of course) lean on experts who “have studied this,” that health care costs are skyrocketing and that we can’t possibly allow “entitlements” to continue to grow the way they have been. A couple of comments:

  • As was pointed out here (hat tip Deb), the fact that the numbers are already inflated so much, especially in comparison to other countries, should mean that they will tend to go down in the future, not up, as people travel away from our country to pay less. This is of course already happening.
  • Even so, psychologically, we are ready for those numbers to say anything at all. $120,000 for a splint? Ok, sounds good, I hope I’m covered.
  • Next, it’s certainly true that with technological advances come expensive techniques, especially for end-of-life and neonatal procedures. But on the other hand technology is also making normal, mid-life procedures (gallbladders removal) much cheaper.
  • I would love to see a few histograms on this data, based on age of patient or prevalence of problem.
  • I’d guess such histograms would show us the following: the overall costs structure is becoming much more fat-tailed, as the uncommon but expensive procedures are being used, but the mean costs could easily be going down, or could be projected to go down once more doctors and hospitals have invested in these technologies. Of course I have no idea if this is true.

Third question: Anyone know where such data can be found so I can draw me some histograms?

Final notes:

  • The baby boomers are a large group, and they’re retiring and getting sick. But they’re not 10 times bigger than other generations, and the “exponential growth” we’ve been hearing about doesn’t get explained by this alone.
  • Assume for a moment that medical costs are rising but not skyrocketing, which is my guess. Why would people (read: politicians) be so eager to exaggerate this?
Categories: #OWS, data science
  1. Jonathan
    October 22, 2012 at 8:51 am | #1

    Very refreshing: Let’s make sure we know the facts before forecasting or prescribing.

    People certainly use data beyond hospital costs.

    I don’t know this well but I asked a friend of mine about this a while ago. The Medicare system collects and analyzes (and forecasts) extensively. They make fairly granular data available here:

    With tables on medical costs such as these:

    They also forecast and are probably the official source of the projections of Medicare’s financial problems.

    They have links to other sources.

    My friend put together some information on components of growth, I’ll try to pull that together and post it.

  2. Bindicap
    October 22, 2012 at 9:30 am | #2

    Are you looking for a starting point in understanding medical costs? Or you have that and don’t believe it and want some alternative? This is not an area where I feel I know a lot, but the basics aren’t too hard to find. There are many competing interests and points of view, but I’m still not very receptive to conspiracy theories surrounding the stats.

    Price indices are here on FRED.


    Look at CPIMEDSL / CUSR0000SA0L5 to see medical costs have a long trend now of rising faster than non-medical costs.

    The Medicare series is W824RC1. Medicaid W729RC1. Search for more interesting things like health care employment and construction costs.

    I see things on health.data.gov too, but I don’t know this site well and some things seem broken. You can navigate eventually to NHE60-10_Final.csv, which seems to have some of what you ask.

    VHA should have good data and supposedly has done a good job controlling costs within its system. There should be lots of data, but I don’t know my way around it. You can Google a CBO report.

  3. Jonathan
    October 22, 2012 at 9:56 am | #3

    Here is a table of growth in medical costs:

    Overall CPI Medical Cost Quantity& Total
    CPI Medical Spending Growth Quality Growth
    1961-1970 2.9% 4.5% 10.7% 1.5% 6.0% 7.6%
    1971-1980 8.1% 8.3% 13.1% 0.2% 4.4% 4.6%
    1981-1990 4.5% 8.1% 11.0% 3.5% 2.6% 6.2%
    1991-2000 2.7% 4.6% 6.6% 1.9% 2.0% 3.9%
    2001-2010 2.4% 4.0% 6.5% 1.6% 2.4% 4.1%

    The numbers in the table are annual rates.

    Overall CPI is the growth rate in the Consumer Price Index
    CPI Medical is the “Consumers Medical Care” component of the CPI
    Medical spending it “Total Medical Expenditures from the Centers of Medicare and Medicaid Services (cms.gov)

    Cost growth is the incremental growth of CPI medical / Overall CPI
    (i.e. (1+ CPI_Medical) / (1 + Overall CPI) – 1. so a little less than subtraction would suggest.

    Other is the growth in spending not explained by costs (assuming costs are measured accurately, a big if).

    Total Growth is the estimated growth in the amount people paid for medical care.

    So, for instance, in the 60s, medical spending increased 10.7% annually. Of that, 2.9% reflected the overall inflation rate, 1.5% was due to faster increases in medical costs over other stuff and 6% was either because people had more doctor visits, procedures, drugs, etc. or because of new procedures, drugs etc. were being developed.

    As Cathy noted, there is a demographic component to this. Population growth would cause total spending to rise. Also, a rise in elderly would particularly increase medical costs. That has two components, increase in longevity and baby-boom transition. All of these effects would show up in “Other”.

    One last caveat. I don’t know much about these statistics but the raw data were sent to me by someone who does (and is fairly unbiased in these things). But, I know from other areas that CPI cost estimates understate the true costs a person would encounter. For instance, for automobiles, if one year a car does not have anti-lock brakes and the next year the same make of car does, the BLS attributes some of the price rise to a quality improvement. Same for air conditioning, air bags, etc. Inflation is trying to measure the cost rise if you bought exactly the same thing from one year to the next. But you can’t buy exactly the same car. So, the actual cost of a basic car today versus a basic car in 1960 grew by much more than the CPI measures because the basic car today has air conditioning, Anti-lock brakes, catalytic converters, etc. which they didn’t have then.

  4. Jonathan
    October 22, 2012 at 10:04 am | #4

    Attempt to make the table readable.

    . . . . . . . . . . Overall. . CPI . . . . . Medical . . . . . . Cost . . . . Other . . Total
    . . . . . . . . . . CPI . . . . Medical . . Spending . . . Growth . . . . . . . . . . . Growth
    1961-1970 . . . 2.9% . . . 4.5% . . . 10.7% . . . . . . 1.5% . . . 6.0% . . . . 7.6%
    1971-1980 . . . 8.1% . . . 8.3% . . . 13.1% . . . . . . 0.2% . . . 4.4% . . . . 4.6%
    1981-1990 . . . 4.5% . . . 8.1% . . . 11.0% . . . . . . 3.5% . . . 2.6% . . . . 6.2%
    1991-2000 . . . 2.7% . . . 4.6% . . . . 6.6% . . . . . . 1.9% . . . 2.0% . . . . 3.9%
    2001-2010 . . . 2.4% . . . 4.0% . . . . 6.5% . . . . . . 1.6% . . . 2.4% . . . . 4.1%

  5. K
    October 22, 2012 at 10:52 am | #5

    My favorite way to measure this is percentage of gdp going to health care. It’s crude but feels understandable and is straightforward to compare between different years and different countries.

    According to Wikipedia (I think OECD numbers) it looks like the percentages in the US have gone like this
    1970: 7%
    1980: 9%
    1990: 12%
    2000: 13.5%
    2007: 16%

    In the UK it’s like this
    1970: 4.5%
    1980: 5.5%
    1990: 6%
    2000: 7%

    You can also see other countries. ‘Skyrocketing’ sounds like the right word to me (I agree it would also be interesting to look at a more detailed breakdown as you say).


  6. Blimp Rider
    October 22, 2012 at 7:53 pm | #6

    Your statement regarding ISDA is erroneous.

    ISDA standards and guidelines are not independent laws that supercede local laws and regulation. That is a gross misrepresentation

    If what you are referring to are ISDA proposed comments to regulators (i.e. CFTC) on derivative rulemaking for say CEA 1.73, you are then misreprenting the rulemaking/comment process.

    Please qualify your charges about ISDA.

  7. Kaleberg
    October 22, 2012 at 11:36 pm | #7

    Another good place to look is the Kaiser Family Foundation web site. The KFF has been pushing for health care since the 1930s, and they still do some good analysis. Their health care cost primer at http://www.kff.org/insurance/7670.cfm notes that spending averages $9,744 for people 65 and up, while only $5,511 is spent on those 45-64. In other words, most health care money goes toward helping older people which is why they live longer and healthier lives. The top 1% of all patients account for 21.8% of all medical spending for an average of $51,951. The top 5% account for nearly half of all spending.

    These numbers aren’t surprising. Most people are moderately healthy and don’t rack up a lot of expenses. You expect most of the spending to go towards those most at risk of dying, so a lot of the money goes to old people and people with nasty problems. (A friend of mine’s daughter is one of the expensive cases. She would have been dead and buried years ago without some rather expensive treatments.)

    One interesting chart is Figure 3 which shows the changing rate of growth of health care costs which peaked in the 1980s, then fell before rising in the 1990s, peaking in 2002. The rate of change has been falling dramatically since then. I have no idea of what that’s all about, though I suspect some restructuring that will be obvious in retrospect. (For example, more and more doctors work for salaries in group practices rather than each running his or her own office on a piecework basis. There has also been a real change in surgery and recovery times.)

  8. Gary
    October 23, 2012 at 9:07 am | #8

    There are different things that we might call “healthcare costs” … there is overall spending (measured in gross or per capita). Overall per capita spending will be driven by costs of procedures, the mix of procedures performed (which in turn will be driven by demographics as well as changing practices), and finally the level of access that people have to the healthcare system altogether.

    Then there are costs of providing healthcare for a particular person. This will be driven by the costs of procedures, as well, and for the changing mix of procedures that reflects changing medical practice. But it will largely strip out the demographic and access effects. The cost of group health insurance plans is one proxy for this.

    I think the original question was largely about the latter characterization of healthcare costs? I think the Kaiser data is likely to get closest to that.

  9. SamChevre
    October 23, 2012 at 11:12 am | #9

    A really excellent, careful description of “what does it mean that health care costs are high, and what can we say about why?” is the series by Aaron Carroll on The Incidental Economist, “What makes the US health care system so expensive?”

  10. Larry Headlund
    October 23, 2012 at 1:30 pm | #10

    “Why are the numbers on insurance claims so inflated? Who pays those actual numbers?”

    Second question first: No one pays those actual numbers except those with high detuctibles or those with cash flow problems. Health care providers offer big discounts if you pay up front, say by credit card. Why? Because insurance companies negotiate even bigger discounts. The exact size and nature of those discounts are in private contracts between health care providers and insurance companies, not open. As to the why, high numbers make insurance attractive ($1200 for a finger splint? I must have insurance!) and when you have a co-pay the discount may mean that a 20% co-pay may mean that the insured is sometimes paying over 100% of the actual cost of the procedure. (The insurer gets a credit.)

    “Assume for a moment that medical costs are rising but not skyrocketing, which is my guess. Why would people (read: politicians) be so eager to exaggerate this?”

    Look at the prefered solutions. The one the WSJ types love is individual Medical Savings Accounts, like an IRA earmarked for medical expenses. So who will manage these accounts, for a fee? And who will pay lobbyists to ‘inform’ politicians?

    • SamChevre
      October 24, 2012 at 2:21 pm | #11

      Second question first: No one pays those actual numbers except those with high detuctibles or those with cash flow problems.

      This isn’t quite right; if you have a high-deductible policy, all care–even care you pay for yourself–is paid at the insurer’s negotiated rates. (I had a child in the hospital for 5 weeks when I had a $7500 deductible.)

  11. cgutierrez777
    October 23, 2012 at 1:52 pm | #12

    I’d like to encourage anyone with links or access to open source health care (or other) data to check out Bamblo @ http://bamblo.com/index.php/Main_Page

  12. October 23, 2012 at 2:19 pm | #13

    how many links can i provide, before i get blocked as a spammer?

    here’s where i usually start:

    but cms has scads more data:

    they’ve changed the website all around, so i don’t know what i used for contact information, but a few years ago i emailed someone somehow at cms, told them i was a blogger, linked to a post i had written, and asked them some questions. they were extremely helpful and kind and responsive back then, so i can’t imagine they wouldn’t also be helpful now too.

  13. October 23, 2012 at 2:24 pm | #14

    not sure where all the healthcare spending projections come from, but a lot of the people who are always shouting about medicare and social security running out of money are drawing from the trustees’ reports [which the helpful person at cms told me are not as accurate as the nhe data, btw].

    i’ve snarked about the social security trustees’ reports here:

    and here:

    and medicare here:

  14. October 23, 2012 at 2:29 pm | #15

    there’s all kinds of international data [including the u.s.] available from the oecd, but generally only if you pay for it. you might, if you poke around their site enough, find something useful: http://www.oecd.org/

    i usually start here: http://www.oecd.org/els/healthpoliciesanddata/healthataglance2011.htm#B3

  15. October 23, 2012 at 2:34 pm | #16

    finally, private insurance spending is considered “proprietary information” so this kind of information is hard to come by. generally i just search the web until i find a published article that’s ungated.

    i have, in the past, had some insider contacts in the health insurance industry, and was able to get some information back in the day, so if you can cultivate some contacts like that, or know someone who can, you might get some of the answers you’re looking for that way.

  16. jeremiah757
    October 26, 2012 at 3:34 pm | #17

    Health care costs might be less arbitrary if they were exposed to competition.

  17. November 16, 2012 at 10:58 am | #18
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