Health care costs, a simplistic reason to why they are increasing

A recent report from the Center for Progressive Reform  touched upon a subject that  that plenty people like to raise when the discussion of healthcare costs comes up – Tort Reform.

The report concluded that in no way shape or form would the cost of healthcare go down if the court system could somehow figure out a way to get rid of all the frivolous law suits that unfortunately follow when a patient or beneficiary is dissatisfied with the outcome.

To quote William Eadie of the Blog Report “The report asks a simple question that certain politicians and political pundits can’t answer: how can we reign in healthcare costs through “tort reform” if the costs of malpractice insurance and fairly compensating injured patients amounts to only 0.3 percent of total healthcare costs each year?

You can’t.

The report then places the blame squarely on the shoulders of the insurance companies.

“The report finds that the insurance companies are at the root of the problem, and that the focus on “tort reform” and claims about the costs of “defensive medicine” is nothing more than: a politically expedient straw man, allowing policymakers and the insurance industry to ignore or obscure the real drivers of rising medical costs, including the high costs of prescription drugs; the high demand for, and increasing use of, state-of-the-art technology; the growing incidence of chronic diseases; and an aging population that lives longer and consumes more medical care.”

So, here’s the million-dollar question:  Do insurance companies, like the attorney’s organization concluded cause skyrocketing healthcare? Or is it really the fault of the attorneys, like the insurance industry would like us to believe?

Well, we can place some of the blame on “Tort Reform,” and there is also some room at the table to pass blame onto the insurance companies, but the true cause of the nation’s current healthcare nightmare can be found in what Adam Smith taught all of us many years ago…

Supply vs Demand.

Yup, simple economics should explain all of this.

In 1965, when Medicare was first introduced by Lyndon Johnson as a piece of his “Great Society,” the program was meant to provide access to basic healthcare for those who were no longer working, no longer covered by a health plan, or simply needed care.  It was designed to handle about 15 million beneficiaries in total. (Please note that many retirees were covered by the Military for their service and were not projected to live much longer after retirement.)

Today ,we are looking at roughly 45 million people currently using the Medicare system, with another 70 million coming in behind them. Yes, people will pass away and drop off the system, but as they do, 2 others will be registering for benefits.

We now have a demand over supply problem, and Adam Smith taught us that when this happens, prices of goods and services will inevitably rise.

Believe or not, it is this simple.

With the U.S. population currently around 313 million, we can expect, in the next 18 short years, to see that about 1/3^rd of our total population will  Medicare, with another 1/3^rd not being old enough to actually pay for the benefits and with the current economy the remaining segment not earning enough to be taxed accordingly.

To put it another way, just look at the chart below;

We had a steady decline in the birth rates throughout the mid 1960’s, 1970’s and 1980’s.

Not only do we have a demand over supply problem, but also as Americans retire, fewer workers (who could be earning less due to a stagnant economy) will be funding our healthcare system exactly when it will be utilized the most.

Again, I apologize for answering a complex problem (rising health care costs) with a simple solution (the Baby Boomers can’t be stopped), but until someone can disprove Adam Smith, it may prudent to start planning for this stark reality.