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Is Healthcare a ‘Tapeworm’ in the American Economy?

Tapeworms cause health problems in our bodies. They can rob us of important nutrients, block our intestines, and take up space in organs so they don’t function normally. Tapeworms keep our bodies from operating efficiently.

Warren Buffett described the American healthcare system as a “tapeworm in the American economy.” Given the latest failure of Haven, a joint health care venture with JP Morgan, Amazon and Buffett’s Berkshire Hathaway – the tapeworm appears to be live and well.

Buffett’s comment is brutally honest.

The tapeworm analogy is demonstrated in a new article from the New York Times, “Buoyed by Federal Covid Aid, Big Hospital Chains Buy Up Competitors.” This article paints a picture that some larger hospital chains are using Covid bailout money from the Provider Relief Fund and purchasing other hospitals and physician groups to grow their footprint in markets. Without much federal scrutiny, this bailout allows hospital chains to grow larger and dictate higher prices from private insurers, employers and individuals.

Multiplier Effect

I have to hand it to the American Hospital Association (AHA) and their state-based hospital members, including the Iowa Hospital Association (IHA). When payers demand to hold hospitals accountable to improve their outcomes at lower associated costs, hospitals revert to a tried-and-true formula to combat public scrutiny: Remind the public about how hospitals provide economic contributions to our communities and states.

As an example, in 2017, the AHA stated the “Health care sector has traditionally been an economic mainstay, providing stability and job growth in communities. Health care added more than 35,000 jobs per month in 2016.” The AHA mentions that hospitals employ more than 5.7 million workers, are one of the top sources of private-sector jobs, and purchase nearly $852 billion in goods and services from other businesses. More recently, Rick Pollack, President and CEO of the AHA, had a paid AHA advertisement in the Wall Street Journal titled, “Value of Health Systems Shown Clearly During the Pandemic.

This information is pumped out every few years for each state to tout, including Iowa. The AHA provides a state-by-state economic impact grid that illustrates the value hospitals provide to their respective local economies. The IHA readily uses this information to display on their website. Of course, we are constantly reminded of the ‘multiplying effect’ that supports “thousands of additional jobs.” We are told that “more than 143,000 jobs are tied to Iowa hospitals, creating an overall impact that is worth nearly $8.6 billion to Iowa’s economy.” It is true that, along with public schools, hospitals are the largest employers within many of our communities.

Not to be outdone, the lobbying organization for insurance companies – America’s Health Insurance Plans (AHIP) – employs a similar approach to tout how private insurance is an economic boon for local economies. In early May, AHIP posted By the Numbers: How Health Insurance Providers Contribute to State Economies and Peace of Mind.” The 2021 AHIP biennial report discusses how the economies of each state are impacted by health plans, specifically on the number of jobs generated and tax revenues paid to support the local economy.

Based on AHIP data, Iowa employs over 4,000 health plan employees and almost 13,000 insurance-related employees. Average annual wages for health plan employees are over $86,000 while insurance-related employees earn about $63,000 annually. By most standards, these wages are good for the Iowa economy, especially when using the multiplier effect.

Zero-Sum Game

Given the narratives being sold to us, perhaps we should supersize the entire U.S. economy by continuing to expand healthcare and health plans beyond their current size. But that simply will not work. There are economic tradeoffs that come into play.

It brings to mind poker and gambling, two popular examples of the zero-sum game. In poker, the sum of the amounts won by some players equals the combined losses of other players. In a zero-sum game, there is one winner and one loser.

“Currently, the U.S. healthcare and health insurance systems are really a patchwork of different programs, which create gaps and expensive inefficiencies”, according to economic health researcher, Katherine Baicker.

But who pays for these inefficiencies? ALL OF US.

What we pay to healthcare providers and insurers will indeed fund the job growth of doctors, nurses, medical technicians, health insurance personnel and professionals. To be sure, we need these services. But, as a consequence, we don’t have this money to spend (or save) on other economic necessities or preferences. This becomes an economic tradeoff that adversely impacts other parts of our economy.

Inefficient and opaque spending on healthcare creates another problem: a redistribution of our hard-earned money that is often being used to our own detriment – for lobbying efforts to ensure the status quo remains unchanged. Opaqueness breeds blind spending by those who pay. This is a vicious cycle that perpetuates the zero-sum game.

Law of Diminishing Marginal Returns & Opportunity Costs

Another economic term, Law of Diminishing Marginal Returns, is typically used when analyzing the production of a particular commodity. For example, when a factory employs workers to manufacture its products, at some point during production, the company will operate at an optimal level (with all other factors remaining constant). Over time, however, adding additional workers will result in less efficient operations.

At what point has healthcare exceeded the optimal revenue from its payers? When will the best possible returns obtained by healthcare diminish with every dollar invested? Are we there yet? The latest Kaiser Health News poll that found large employers are ready for more government involvement may suggest this point has been reached.

Put yet another way, what are the opportunity costs with each dollar spent on healthcare? Opportunity cost is the loss of the benefit that could have been enjoyed if the best alternative choice was chosen instead. Continuing to pay higher healthcare costs without receiving the commensurate benefits represents a lost opportunity of investing that money elsewhere – such as investing in updated infrastructures, efficient factory equipment or paying higher wages. Redirecting financial investments into other worthwhile opportunities would provide a multiplier effect for local economies.

Continuing to accept overpriced care is not the solution to sustain economic growth. In fact, overpriced and inefficient care is holding the economy back from becoming MORE robust. This is precisely Buffett’s point.

Summary

Contrary to the argument of being an ‘economic stimulus’ to local economies, the REAL purpose of healthcare is to enhance the quality of life by enhancing our health. It is true that creating reasonable profits to remain financially viable is necessary to stay in business to serve others. However, healthcare must focus on creating social health and well-being to fulfill its fundamental promise to society.

Marketing platforms being used by healthcare-related associations on how hospitals and health plans will benefit our communities is, at best, disingenuous. We live in a world of unfulfilled opportunities. Until these opportunities are given the chance to succeed, we will never know just how robust our economy can become.

How long do we allow the tapeworm to control our economic well-being?

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