Health Care Costs & Cars

I was thinking recently about what are some of the unique drivers of cost in America's health care system. Sure, there's insurance profit margins eating up maybe 10%, there's litigation and insurance against this litigation which eats up less than 5%, and other items that we frequently hear about. But here's an item that's a pretty big driver of health care costs that I've never once heard mentioned: cars.

It occurred to me that car accidents must be a tremendous source of ER visits and expensive procedures. I decided to try and find out just how much cost our car-dependent culture adds to our health care system. OK, this was much harder than I expected. I wound up not being able to find anything that gave an estimate for costs to treat injuries caused by car accidents. The closest I could come was a page by the National Safety Council that gave numbers of traffic fatalities, traffic injuries, and cost of treating all unintentional injuries (whether or not they were caused by cars) in 2005. So I used this information to make some estimates.

First, the basics. About 45,000 people were killed in car accidents and about 2.4 million people were injured by cars. Total visits (cars or not) to the ER amounted to about 28 million at a cost of about $625 billion. So...cars were responsible for about 10% of visits to the ER and about 40% of accidental injuries leading to death (about 110,000 people killed from unintentional injuries overall). So car accidents must account for at least 10% of the cost of treating accidental injuries. And experience, combined with the fact about 40% of fatalities from injury are the result of cars, indicates that injuries sustained in car accidents are far more likely to be serious injuries requiring expensive treatment. So let's just assume that the total cost of treating car accident victims comes to roughly midway between 10% and 40% of the cost of treating all injury victims. That would be 25% of $625 Billion. That's over $150 Billion. With rising health care costs and rising population leading to more people on the road, we're probably looking at close to $200 Billion in medical costs for treating car accident victims. (Just FYI, that's considerably more than what we pay to build and maintain roads.)

Of course, all developed countries have cars. But no country uses cars nearly as much as America. I looked up traffic fatality rates by nation and found that Canada is the only major industrialized nation with a traffic fatality rate much more than half of America's (their rate is about 2/3 ours). So if we used cars at the same frequency as other developed nations, our spending on medical care for car accident victims would be roughly cut in half at least. That's $100 Billion. That's 5% of what we spend on health care in this country. That's not enough to solve the health care problems we're facing...but it's not chump change either. And, frankly, I'm not hearing many other proposals offering savings of 5%.

I've made the point over and over again that by simply diverting the funds we're already spending on maintaining highways to building and maintaining a high-speed rail network and efficient transit within cities, we could build an efficient transportation network capable of meeting most people's transportation needs and reducing our dependence on cars (and oil). Turns out yet another of the many, many benefits of this change would be a dramatic reduction in our national health care costs. And, of course, it would save about 20,000 lives every year, too. For a comparison, that's about how many people die from all criminal activity in the entire country on an annual basis.

Why aren't we investing in better transportation??

It's Not Class Warfare, It's Just Math

I came across this neat little thought experiment on a blog recently, so unfortunately I have no idea who to attribute it to. But here it is:

Suppose you have a population where the top 1% of income earners make 10% of the income at Year Zero (this is approximately where the US stood in 1980). Suppose the overall economy grows at a real rate of 2.5%, while the incomes of the top 1% grow at 6%. (This is basically what has happened in the US since 1980--ignoring the last 12-18 months, more on that later.) This seems perfectly reasonable since, after all, the top 1% are probably far more productive (at least by 2x) than the rest of society, so why shouldn't their wages grow slightly over twice as fast? As long as everybody is making more money, everybody should be happy even if a very slightly larger share goes to the top 1%. So after 25 years at these growth rates, what has happened to incomes? In our hypothetical world, Year 25 would have the top 1% earning a little over 20% of the income. (This is basically the situation in the US in 2005, 25 years after 1980.) The top 1% earning 20% of the income might not sound so bad. After all the top 1% may be far more productive, produce far more jobs, provide far more investment, etc. After another 25 years in our hypothetical world, the top 1% are now earning over 50% of the income. From a purely economics point of view, this may be entirely reasonable. Of course, in the real world, one must consider the political reality of whether a population will stand for 1% receiving the majority of all income. History suggests dramatic revolutions occur at far lower levels of wealth for the highest ranks. The US launched into a vast campaign of wealth redistribution in the '30's at a time when the top 1% received about 20% of income. But enough reality, let's continue for another 25 years in our hypothetical world. By year 75, the top 1% is earning (drum roll, please) 120% of income! Clearly, this situation is not sustainable from any perspective.

So here's my thoughts on the thought experiment:

Of course, for a fraction of the population to earn 120% of the income is a statistical impossibility. (Although recent events have demonstrated in reality this may be possible if the bottom 99% simply borrow money in excess of their incomes to give to the top 1%.) So what does this thought experiment mean? The most obvious conclusion is that our historic rates of overall growth and growth for the top 1% are mathematically unsustainable and will have to change, certainly within the lifetime of most young people today. Let me restate that: Mathematically speaking, the income distribution in America has to change from what it has been in the last 3 decades. This is not class warfare. It is a simple application of math. It took me about 5 minutes to set up a spreadsheet to run the numbers--I'd be happy to send a copy to anybody who wants it and isn't sure how to create it themselves.

The real question is, how will this change occur? History suggests two possibilities, and ideologues suggest a third. Let's start with the ideologues. There is a libertarian fantasy that a middle-class is a naturally occurring phenomenon. In this line of thinking, at some magic number, the share of income earned by the top 1% will level off, reflecting some sort of "natural" balance, and the overall economy would grow at the same rate as the income growth of the top 1%. (Basically, any time the top 1% grows at a rate faster than the overall growth, no matter how small the difference, the result will be unsustainable over a long enough period of time.) There is no need for government to get involved, rational people making rational decisions about their money will lead to a perfectly efficient and stable economy. It sounds good in theory, but never in history has anything like this ever come close to happening. History does not reveal any examples of a society experiencing economic growth that is evenly distributed across the population without a government intervening to make it happen. And, historically speaking, there are only two ways to achieve evenly distributed income growth. The first is revolution. This method involves overthrowing the government, forcibly seizing assets of the wealthy, and effectively ending economic growth so that income inequality can not rise...because nobody's income is rising. I would call that a very bad method. The second way history shows that income growth can achieve even distribution is through incremental change--more evolution than revolution. This is what happened in the US in the '30's & '40's, and most of western Europe at about the same time, particularly at the end of WWII. The result was decades of growth shared across populations with incredible improvements in living standards for nearly all. The alternative method, revolution, was tried by Russia and the nations that came under its influence with considerably less positive results.

So there we have it: basic math demands that something must change in the way income is distributed in America. History indicates there are 3 options for how this change can happen. We can:
a) do nothing at a governmental level and hope for a miracle to occur--or simply ignore the problem presented by basic math.
b) start a revolution to overthrow the current government and economic order and try another Soviet-style experiment.
c) repeat the methods used successfully in the US (and most western European nations) in the '30's and '40's in which the government makes incremental changes through tax policy, social programs, and the like, to achieve a more sustainable distribution of incomes without destroying the entire economic system that has worked in the aggregate quite successfully for centuries.

I enthusiastically support c). Of course, once we all agree on c) there's still the question of what policies and programs need to change and how. But the conversation would sure be a lot easier to have if the room weren't full of people shouting for option a).

One last point: I mentioned earlier that I was ignoring the last 12-18 months. Some might pounce on the last 12-18 months as an example of how natural economic cycles will return income distributions to more sustainable levels. After all, this downturn has not been kind to the rich, with many losing vast amounts of wealth and seeing huge cuts in their income. But this ignores two things. First, all economic levels have taken huge hits in terms of wealth and income. Second, and far more important to my point, recessions have come and gone over the last 3 decades and not interrupted the long term trend of increasingly skewed wealth distribution. In fact, nearly every analysis I've seen about boom-bust cycles indicates that the net effect of boom-bust cycles is nearly always to increase the skewing of wealth toward the top 1%. The wealthy nearly always bounce back from recessions at a much faster rate than the general population (witness the fact stock market securities, held disproportionately by top income earners, rise quickly at the end of recessions while unemployment, far more important to low income earners, is widely considered a "lagging indicator" because of its generally slow rate of recovery). Assuming the US emerges from this recession, it seems safe to assume, barring government intervention, that the wealthy will more than make up for their losses and the long-term trend of increasingly skewed wealth distribution will continue to hold.

Is printing money really a bad thing?

On a discussion board for an accounting class I'm taking, somebody made a comment to the effect of our government is currently printing money and so the economy is just a house of cards that will come collapsing down at any moment. Here's my response:

"Whether it's really bad for the government to just print money is an interesting topic. In effect, that's what the quantitative easing strategy deployed recently by the Fed amounts to. Instinctively, it would seem like a bad thing. The dollar's value will slide to nothing if the Fed just prints endless quantities of it. Countless examples of this exist around the world in the last few centuries. However, what if the government just prints a relatively small quantity of money relative to the overall supply? Obviously, the dollar still falls in value, but not to zero if done on a limited scale. And what are the consequences of the dollar falling in value? First, our buying power of foreign goods will drop. We won't be able to be quite such a nation of excess. We'll produce domestically more of the items we consume because it will become economically efficient to do so. This will create more jobs. We'll also produce more goods for export because other nations will have more buying power with respect to the goods we produce. Again, more jobs in the US. Certain aspects of our material standard of living might be reduced...primarily cheap electronics from Asia and the cheap plastic junk that you find at Walmart won't be as cheap. But the trade-off is there will be far more opportunities for America to actually produce goods and services again. Personally, I'm willing to accept a smaller TV and less plastic junk in this trade.

Of course, there's always the risk of devaluing the dollar to practically nothing. But there's actually very little risk of that for one simple reason. Numerous countries have devalued their currency to being worthless, but they virtually all share one crucial difference with the current situation in the US. In countries like post-WWI Germany & Hungary, or Argentina, or Zimbabwe, the people in control of monetary policy (i.e. printing money) were/are not the same people who actually held the bonds that underlie the value of the currency and they did/do not hold significant assets with values denominated in that currency. By contrast, in the US, the members of the Fed, as well as the political and economic leaders with the clout to influence the Fed, hold significant assets that are dollar-denominated, including large amounts of the bonds that underlie our currency. In Post-WWI Germany, the people who set monetary policy had little incentive to maintain a sound monetary policy because it was foreign investors who stood to lose the most while they themselves stood to lose little from a default on their currency. Our situation is very different. The people who set our monetary policy stand to lose tremendously if they allow the dollar to default.

And what's more, global investors seem to agree. Even with the announcement of quantitative easing (printing money), there has been no flight from dollar-denominated assets by foreign investors. Clearly, they also realize that the US does not have adequate incentive to destroy its currency. A moderate devaluing of the dollar will actually offer us a number of competitive advantages that will correct our trade imbalances and probably bring more jobs back to the US. People who understand these issues far better than myself are for the most part betting that a devaluation without default is by far the most probable outcome."

A lot of that information comes from Niall Ferguson's "The Ascent of Money".

The Origins of Anti-Immigration Sentiment

I'm amazed at the amount of outrage being expressed at the notion that somebody, somewhere might be receiving medical care while illegally in the US. I wonder if these same people, if they were involved in a car accident while they were speeding, would say, "No, don't treat me. I was breaking the law and don't deserve medical care." Somehow I doubt it.

I'll preface this by saying I'm about as pro-immigrant as you can get. Maybe that's colored by the fact that the only person I know who is definitely an illegal immigrant is an entrepreneur employing several people in his successful software company (and paying taxes on it, too). Doesn't seem like we should be trying to kick this guy out of the country. But beyond personal experience, I also know history. I know that the US has always had a lot of immigration, and that's been a source of strength, not weakness. People have always worried about whether the new immigrants will assimilate, and point to the previous immigrants as "good" immigrants while the current immigrants are "bad" immigrants. Heck, near my hometown of Kansas City was an entire region around Hermann, MO, that was almost exclusively German for decades. Schools taught in German, public signs were largely in German, etc. And what did it hurt? Nothing. The second generation, born in the US, eventually integrated into US culture, influencing it but not overwhelming it, and our country did not turn into Germany. In fact, Hermann and the region are a popular tourism destination in Missouri because of all the authentic German character in the region.

To me, immigration is simply a natural expression of free markets at work. I like free markets. I've devoted a lot of space on this blog to pointing out cases where markets break down. But this is an area where I don't see the failures being more costly than the benefits of markets. Let workers go where the jobs are, and let things sort themselves out. Yes, this will mean people will enter our country who are willing to work harder for less money. But that's not necessarily a bad thing...after all, I thought we were a country that supported hard work. There will be challenges, but they will mainly be related to income distribution, which is something we're dealing with anyway. And I refuse to accept that the solution to maintaining a decent middle-class standard of living is to exclude certain groups of people and relegate them to poverty. Oddly, many people who claim to support free markets also want closed borders.

More tellingly, I know the legal history of anti-immigration laws. (Read a summary here) For nearly the first hundred years of our nation, there was no such thing as "illegal" immigration. Our nation was open to anybody, although ideally they would be white people, but that wasn't written into law, yet. I always find it ironic when anti-immigration folks invoke the Constitution or the founding fathers. Our country was founded on the notion that anybody who came to our country (as long as they were white) could become a citizen. As citizenship was expanded to more non-white people, people decided they'd better do something to keep more non-whites from moving here. The first law making any form of immigration illegal wasn't passed until 1875. While on the surface it was aimed at "prostitutes", the reality was it was simply a cover to exclude Chinese women from entering the country, and hopefully that would keep the men out as well (reference). Soon after, we would add more laws that were more explicit in who we wanted to keep out: Chinese Exclusion Act (1882), Alien Contract Labor laws (1885 & 1887) which singled out specific nationalities, Immigration Acts of 1903 & 1907 to clamp down on Mexicans entering the country, etc. Basically after 100 years of open immigration, our nation entered a hundred year period of race-based exclusion. It wasn't until 1976 that laws were changed to stop giving preference to Western European immigrants--officially anyway. You don't have to talk to many people to realize there's still racial under-tones that determine who the "good" immigrants are and who the "bad" ones are. The fact is banning immigration is not in the spirit of our nation. When we have banned immigration, it has overwhelmingly been for racist reasons.

Do we really want to maintain the legacy of race-based exclusion, or embrace the original ideal of a nation open to all?

Hey Missouri & Kansas! You're welcome.

It's well known that California is having some serious budget problems right now. Many conservatives are almost gleeful about the situation and point to California as an example of how liberal policies inevitably lead to out of control government spending, poor economic growth, and practically the downfall of civilization as we know it. However, being the geek that I am, and wanting to apply some of what I'm learning in a governmental/non-profit accounting class I'm taking, I started digging into the California budget and looking at where our tax dollars are going. The truth is California's budget crisis is a result of California's robust economy and the massive extent to which our tax dollars go to subsidize other, poorer (mostly politically red) states.

I didn't strictly limit myself to looking at state revenues/spending. I also looked at taxes Californians pay at the federal level and where that money goes. There's a helpful data sheet published by the Tax Foundation at this link (http://taxfoundation.org/files/ftsbs-timeseries-20071016-.pdf) that breaks down by state how much each state pays in federal taxes and how much of that money each state gets back. Turns out, in 2005, the latest year for which data was available, California contributed ~$50 billion more in federal taxes than it received in federal spending. This number fluctuated considerably in the time period covered, but for the last two decades California has paid considerably more than it has received almost every year. In the last decade in particular, $50 billion is a pretty good estimate for the annual average that California contributes in excess of what it receives.

Now some people might think that most states are like that. After all, DC is a money pit, right? Well, DC may waste a lot of money. But the fact is DC wastes money primarily by spending it somewhere, and usually that somewhere is in one of the states. Turns out a lot of states receive substantially more in government spending than they contribute. And as can plainly be seen here, the majority of the states being subsidized by California and other net contributors are demographically conservative, Republican-leaning states--including my native state of Missouri and its neighbor containing much of the Kansas City metro area, Kansas. In 2005, Missouri was a net drain on the system to the tune of ~$13 billion and Kansas to the tune of ~$3 billion. And yet, even with billions of dollars in federal welfare, these conservative states still can't match the per capita economic productivity of states like NY, Massachusetts, California, etc.

If California didn't have to support the welfare states, and instead had that $50 billion to spend on our own state government, we would actually have a state surplus of over $30 billion. We could eliminate the sales tax altogether, or almost do away with the income tax. Or we could do what has made us so rich to begin with, continue to invest in better schools and infrastructure.

However, I'm not advocating California stop supporting the welfare states. The fact is, thanks to massive public investment in education and infrastructure, Californians are far more economically productive (i.e. rich) than citizens of more conservative states. And the culture that keeps states like Louisiana and Mississippi so poor is unlikely to change anytime soon. So, like it or not, we probably need to keep supporting the poorer state, or else their situation will get unimaginably worse.

What should be more widely publicized, however, is the fact that conservatives states are overwhelmingly welfare states. Their economic policies are not working. They depend on more liberal states like California to maintain their standard of living. And it is the states with more liberal policies that are far more economically productive.

Department of Defense & Health Care?

I've made several posts listing examples of ways the government has made enormous contributions to the well-being of our society. Just since WWII, the federal government has provided an interstate highway system, satellite technology, and laid the foundation for the Internet. One can only imagine what our lives (not to mention our economy) would be like without these interventions. And I've also made the case that renewable energy spending & health care would also benefit from government intervention (and in fact already have to a large degree). But it occurred to me recently the connection between most of the interventions that are widely recognized as successful by most of society--they were nearly all connected to national defense.

The interstate highway system was justified in the name of national defense because it would allow us to quickly move weapons around in time of war. Perhaps if the case had been made that the increased mobility and ease of moving goods would provide economic growth that would far exceed the costs, free-markets fundamentalists could have shot it down by arguing if the highway system could really be so valuable, private investors would fund it. Satellite technology was developed as part of the space race to militarily control outer space. The Internet was developed on the rationale of having a robust communications network that would be nearly impossible to wipe out. In all cases the economic benefits proved to be far more valuable than the military benefits, but the programs could not be sold on economic grounds.

While talking with a right-wing ideologue, I mentioned the Internet as an example of wise government investment. She thought that was nonsense and I must believe that Al Gore invented the Internet. When I explained the actual history of the Internet (DARPAnet, etc.) and how it grew out of a military project, suddenly she said that OF COURSE military projects were good government spending. In her mind the military is the only branch of government that deserves funding and can be trusted to spend our tax dollars wisely.

After being shocked at the notion that the only branch of government some people trust is the branch with all the weapons, it occurred to me the way we really need to sell universal health coverage in America. We have to make it a national defense priority!! Put a national health system under the defense department nominally. Sell the benefits of universal health coverage in terms of maintaining a healthy population in case of a draft. Sell it in terms of being more capable of detecting a biological threat early if terrorists use bio-weapons. I don't care what lies are used (since the lies used to justify wars never seem to really matter either), the way to win massive support for universal health care from right-wing ideologues is sell it in the name of national defense. As we have seen over and over in the national health care dialog, fear trumps reason over and over again. And fear for our "national security" seems to be the most easily exploited fear in America. Let's exploit it for something positive for a change.

A NATO for health care

One of the few valid criticisms I've heard for health care reform and trying to control the costs of health care delivery goes something like this: Medical companies spend billions creating new medical innovations--drugs, machines, devices, etc. The only reason they invest these billions is they know, when successful, the US market will pay just about any price for these innovations, allowing them to earn their money back. They can also sell to other nations, but because of the cost controls in those nations, they won't be able to make nearly as much money. So, the argument goes, if the US implemented cost containments practices similar to other nations, medical companies would lose a powerful incentive to innovate and the US and the whole world would see a dramatic decrease in new medical innovations.

I don't entirely buy the argument. Plenty of medical innovations come from countries with strict cost controls, and some of these innovations have not (yet, anyway) made it to the US market. I've read about very wealthy Americans travelling to certain European nations for the superior treatment for certain types of cancer, for example. Even with cost controls, there is still plenty of money to be made in the health care field. Plus, there are doctors and researchers who actually care about helping people, and would do so even without the carrot of billions of dollars being dangled before them.

But I agree there is a grain of truth to that argument. I think the massive pool of money available in America, particularly Medicare, the largest buyer of health services in the world, is a powerful incentive for medical innovation. And I think the US does tend to bear a disproportionate share of the costs of medical innovation, giving the rest of the world...well, not quite a "free ride", but certainly a cheaper ride, in enjoying the benefits of these innovations without bearing nearly as much of the cost.

So suppose the rich nations of the world created a sort of medical NATO. In NATO, all the members have to spend a minimum amount on defense (I believe it's 2% of GDP), and they are sworn to defend each other if attacked. With the medical NATO (MNATO), all rich nations that agree to it would put up a given amount of money, say 1% of GDP. This money would go to reward medical companies that come up with new treatments that are proven effective. The remaining budgets for health care in these countries could focus on delivering proven, established services and treatments at costs that are tightly-controlled. It seems like this would allow the US to achieve some level of control over our health-care costs, while still providing tremendous incentive for medical innovation. And in this solution, the cost of that innovation would be shared equally among many nations, rather than shouldered disproportionately by the US.

Obviously, not all rich nations would be interested in joining, but that could easily be addressed by requiring all medical companies who want access to the money for their new products to then offer those products to member-nations at a specified discount to member-nations below what they offer the products to non-member-nations. Sure, the details could get ugly at times, but the same is true of NATO, and that seems to have worked out pretty well for many decades now.

Infrastructure follow-up

As I write this, the famous Bay Bridge connecting Oakland to San Francisco is closed for four days of construction. This vital link between two major cities normally carries tens of thousands of cars (hundreds of thousands, maybe?) every single day between the two sides of the San Francisco Bay. So did the closing lead to massive grid-lock? Are people unable to get around without this major highway--without being able to use their cars to get where they need to go?

No.

On the traffic report today, the worst traffic snarls were in San Jose, nearly an hour south of the bridge in an area absolutely unaffected by the closing. People were told about the closing ahead of time and made other plans. Some went the long way around, adding 10-20 miles to their trips by using other bridges. But most, apparently, resorted to public transit, since the other bridges didn't have much higher volume than usual. And word is public transit is handling the extra capacity just fine. I'm sure there will be some minor snags here and there...hard to reroute 100,000 people without some unexpected incidents arising. But all in all public transit has demonstrated just how flexible and accommodating it can be.

The point is that we don't need to stay on the treadmill of endless road expansion. Building new roads just encourages more driving, and more congestion. Narrowing roads, closing roads, these activities encourage people to find other options. And people are usually smart; they'll find another way. Shifting our nation to a cleaner, more efficient form of transportation isn't nearly as hard as critics make it out to be. Stop spending on roads, build better public transit. People will adapt just fine. The proof is on the (empty) Bay Bridge right now.