Tuesday, January 08, 2013

We Don't Have A Spending Problem

... so saith President Obama, according to an interview with Speaker of the House John Boehner.
What stunned House Speaker John Boehner more than anything else during his prolonged closed-door budget negotiations with Barack Obama was this revelation: "At one point several weeks ago," Mr. Boehner says, "the president said to me, 'We don't have a spending problem.' " ...

The president's insistence that Washington doesn't have a spending problem, Mr. Boehner says, is predicated on the belief that massive federal deficits stem from what Mr. Obama called "a health-care problem." Mr. Boehner says that after he recovered from his astonishment—"They blame all of the fiscal woes on our health-care system".
I find that fascinating. How can that make any sense at all? If the problem is health care, then they must believe one or more of the following things about health care:
  1. Private firms are making too much profit,
  2. With more preventive care we can save enormously on later treatments and/or
  3. Health care allocation is way out of balance.
To think that we can find a trillion dollars a year in government savings with those three things boggles the mind. #1 is not born out by the financial statements of the companies involved, #2 sounds like one of those Lean Six Sigma hallucinations about efficiency and #3 flies in the face of millenia of experience about central planning.

Focusing on the profit idea and looking at Aetna, one of our big health insurance firms and presumably a Vortex of Evil, it's net profit margin is 5.88%. That's not exactly robber baron territory right there. It's total net profit for 2011 was $1.98B. Stomping on one of our largest insurance companies and taking all of its disgusting profits would take care of less than half a day of government borrowing.

This is basic math. Does anyone in the White House understand basic math or have their PowerPoint presentations achieved such a level of sophistication that they no longer resemble anything in the real world?

Or is it that their boss thinks he knows more than everyone else and won't listen to reasonable voices so the math never reaches him or is dismissed out of hand?

“I think I’m a better speechwriter than my speechwriters. I know more about policies on any particular issue than my policy directors. And I’ll tell you right now that I’m gonna think I’m a better political director than my political director.”
Thanks to Gateway Pundit for the image and the quote.


Anonymous said...

If you look at what the US spends per year on health care (2.5-3 trillion) and compare the per capita amount spent to similar industrialized nations with similar or longer mortality rates, it doesn't seem unreasonable to say there might well be close to a trillion dollars in there.

K T Cat said...

Comparisons with other countries is always suspect. Different ways of collecting data, different cultures, different economic realities. Stick with the US. Where are you going to cut a trillion dollars from health care and how are you going to do it?

Tim Eisele said...

Along those lines, have a look at this article.

Checking both what I paid, and the insurance records, my appendectomy cost $25,000, even though I was home from the hospital 20 hours after I checked in for the surgery. My daughter's tonsillectomy last year cost $7000, and she was only in the hospital for about two hours. $1000 of that was so that she could sit in a room with a cot for an hour and eat popsicles while a nurse checked on her periodically. I really doubt that the nurse was getting paid anything like $1000 an hour.

Are those really appropriate prices for two of the most common and routine surgeries that doctors perform these days?

K T Cat said...

Tim, it's guaranteed that the hospital and insurance companies weren't making a profit on the excess costs. The balance sheets and income statements available online prove that conclusively. If they did, they'd have AAPL-sized profit margins. I haven't looked at the data, but I would bet that doctor and nurse salaries haven't skyrocketed.

So where is the money going? Is there any chance that government intervention in the market has grown over time with it's attendant increase in costs?

tim eisele said...


K T Cat said...

I looked at Aetna already and it's no AAPL. The other big one in that chart is DVA and its net margin is 6.9%. Meh.

As a reference point, Caterpillar (CAT) has a net margin of 8.19%. Wal-Mart (WMT) is 3.55%. I just don't see the excessive profits. Two of the big boys, AET and DVA are right in line with normal margins.

Tim Eisele said...

I was mainly looking at the medical device companies, not the insurers. Specifically Stryker - they made practically every major item of hardware that I see in every hospital room. The page I linked to gave their "TTM Pretax" valueat 20.3, compared to only 9.11 for Aetna. And it gave the *average* for the medical devices industry at 10.85.

I don't think the insurance companies are making the money. How could they? They're the ones that pay it out. The people making the money have to be the ones selling things to the insurance companies. That would be the device makers, and the drug manufacturers, and the consumables suppliers.

And it isn't that they are making an excessive profit per unit of the things they sell, but that they are selling more of it than is really necessary. Whether it's materials for tests that didn't really tell you anything, or using the expensive CAT scanner instead of a cheaper ultrasound, or putting the air-pulsation leggings on the guy in the bed to prevent the blood clots that can form with prolonged bed-rest even though he's going to be up and around after only a few hours.

My main observation is that once you go into a hospital, they use everything they have on you because they can, with not one mention to the patient about what it's going to cost. The profit margin on any one thing that they use up isn't that high, but man, can they burn through a lot of consumables and plug you into a lot of fancy gear.

K T Cat said...

SYK is one of my favorite companies. They're an outlier because they've been managed so brilliantly.

As for using everything they can on you, I'd suggest that it is partly a function of having an intermediary pay the bill, be that insurance or the government. If you're not paying, you don't really care what they do. You just want them to make you all better.

For all that, they're still not raking in monster dough. It's all pretty average.