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SEIFFE:  Infinite Demand Meets Limited Supply

Monday, May 15 2006

By Ralf Seiffe

Over a shared magnum of Ballantine Ale, my late partner, John Pearson speculated on what the best marketing assignment might be.  By the time we had consumed most of the forty ounces, he reckoned that the best product would be one named “StopDeath.” By the time we opened the second bottle, he had imagined nearly infinite demand for a product that delivered on that claim.  Medicare is the federal government’s version of “StopDeath,” and as Pearson recognized, there is a nearly infinite demand for this entitlement.  Unfortunately, Medicare is not a packaged good one can manufacture cheaply and ship to a store shelf near you.  

Recently, a number of health care experts and health entrepreneurs were convened by the Institute For Truth In Accounting to discuss the nature of Medicare, its trajectory and what might be done. The proceedings were eye-opening as speakers juxtaposed the insatiable appetite to avoid room temperature against the American economy’s ability to provide it.  Unfortunately, the financial prospects for Medicare are even worse than the obvious shortcomings of the pay-as-you-go Social Security system.  Promised but unfunded medical entitlements are actually a bigger future federal obligation than Social Security; Medicare is a program headed for the same financial train wreck that awaits Social Security, only sooner. 

In thinking about possible remedies, several inconvenient truths jump out.  Medical costs consume more than 10% of the total economy and these costs are growing at more than twice the rate of inflation.  The huge number of aging baby boomers will exacerbate this unfavorable situation because they will soon begin to swell the population entitled to Medicare coverage.  As they do, they change from a population that pays for Medicare to a population that consumes it.  And, because they are older, they will need more health care, generally, making the medical slice of the nation’s economy even bigger than it is now. 

Attendees heard these riveting facts: 5% of Medicare’s beneficiaries consume more than 50% of all spending.  20% of the population with multiple chronic conditions like diabetes, heart disease, kidney failure and other unattractive afflictions account for 66% of all Medicare spending.  A medical economist traced a significant portion of old age conditions to negative--and positive--lifestyle choices and Medicare costs are often a consequence of these choices. 

The other large cost category stems from the futile medical efforts made at the very end of life; Medicare beneficiaries’ with multiple health issues generate extraordinary costs during the last month or two of life.  These costs do not extend life much and the quality of the life it does extend isn’t very high.  

The instant reaction is to think of ways to reduce the expenses these high cost populations generate but isn’t the point of old age medical insurance to cover the few folks who will suffer catastrophic costs?  The insurance principle is to spread the risk among a large population who will not suffer these big expenses and make the resources available to those who do. 

Systematic approaches to medical cost control are particularly insensitive to the usual forces that operate in other industries.  For example, other high technology businesses have “learning curves” that tend to reduce unit costs.  Medicine does not have large opportunities to increase productivity because it’s a personal service business that requires human support.  In other industries, scientific advances provide the twin benefits of better capability and lower costs but in medicine, they simply increase demand for these new services.  It’s not hard to understand why; there is an infinite demand to avoid expiration.

But that doesn’t mean we should not make any effort to control Medicare expenses.  Connecting the notion of insurance and the nature of Medicare costs might be one way to start solving the financial problems the system faces.  After all, we accept the fact that insurance companies charge drivers with bad records more and charge careful drivers less.  Health care policies that aren’t part of large groups are priced to reflect risk and all have a lifetime limit on benefits.  

Would Americans accept a change to Medicare that imposed a lifetime, upper limit on benefits like private policies we now have?  All private health insurance has an outside limit, why couldn’t Medicare, which is public insurance, have the same sort of cost control? 

The obvious place to start thinking about this concept is at the end of life.  End-of-life medical rationing is fraught with ethical questions because everyone knows an anecdotal story of a senior that medical heroics dragged from the grave and who went on to live many more years. When the end is near, the beneficiary’s adult children, who make most of these medical decisions, are very mindful of their fiduciary responsibility to parents and often insist doctors take steps they know are pointless.  If there were a limit, would the children, who now have no reason not to spend the limit, make more rational decisions?
   
Coming to more rational decisions is a cultural, not a medical matter. The fact that the Americans have invented amazing ways to extend life 60 days does not mean we should always use them.  If the care of 2.5% of Americans who will die very soon keeps the other 97.5% from getting care that will improve their lives for years, are we making the best choice?  Is it smart to spend one quarter of all Medicare costs on medical battles that will always be lost?  Besides, if one wanted to take these extraordinary efforts, they could privately insure, presumably at premiums that reflected the real costs.  

From this vantage, Medicare is a noble idea that is a victim of its own success.  That it exists has vastly expanded life expectancy for which we should congratulate ourselves.  But, with that extension there are more of us and we cost more.  Until we decide on ways to rationally allocate our resources, Medicare will remain in precarious financial straights.

©2006 Ralf Seiffe

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.