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Commentary: Health-care costs: adding imaginary numbers

This article first appeared in the St. Louis Beacon, Oct. 1, 2009 - In my last column , I discussed two issues that have galvanized opposition to government-sponsored health care reform: choice and privacy. Though these concerns are both reasonable and legitimate, I pointed out that many of the intrusions that critics fear the most are already taking place under the bureaucratic regulations of private insurance providers.

While much of the protest against the various health-care reform proposals appears to be somewhat hyperbolic, the matter of cost has provoked somber commentary that merits serious consideration.

I did not include this crucial issue in the previous article due to limitations of space. Computing the cost of universal health coverage involves imaginary numbers, and detailing the mischief that those phantom integers can cause requires a generous allotment of column inches.

The Housing Example 

We all got an object lesson in the perils of imaginary numbers during the great financial collapse of last fall. With the sub-prime mortgage collapse, the market became inundated with foreclosed properties. This development increased housing supply while suddenly sobered bankers tightened lending criteria, thus decreasing demand.

With more houses for sale and fewer people able to buy them, unit prices fell precipitously. Unfortunately, many people had borrowed against the equity in their home -- a figure calculated before the market tanked.

A couple who owed $100,000 on a home thought to be worth $200,000, for instance, believed they had $100,000 in equity. As even prudent lenders would allow them to borrow up to 80 percent of value, they thus had $60,000 in imaginary money to play with. Once they maxed out, they could still sell the house and walk away with $40,000 for a down payment on a new mortgage. What's not to like?

However, when the market dropped 25 percent -- as it did in many places -- they suddenly owed more than the property was worth. The couple now had to come up with $10,000 just to sell the place to get out from under. A lot of people defaulted because they literally couldn't afford to sell.

The loss of imaginary equity prompted even more foreclosures and further deepened the housing crisis. In terms of real money, all mortgaged property has zero equity until it is sold. Calculating the profit potential (equity) of a potential event (the possible sale) is a gamble in abstraction. Which brings us back to the cost of universal coverage.

The Insurance Gap 

Current estimates indicate that just under 85 percent of Americans have some sort of health insurance. As the Census Bureau estimates the domestic population at 303 million, that leaves about 46 million citizens uninsured.

Most people are covered through their employment. Normally, the employer contributes most of the premium payment with the employee remitting the remainder via payroll deduction. Some people have private insurance and shoulder the total cost themselves. Senior citizens enjoy tax-supported benefits through Medicare, although some seniors augment coverage with supplemental policies from private carriers.

Whatever giant number all of the above - plus Medicaid - add up to represents the total current payment for health insurance in the United States. The question, then, is how do we add 46 million people to the pool without a.) raising taxes or b.) cutting benefits for the already insured?

The disingenuous answer usually offered involves savings realized through some combination of reduced waste/increased efficiency, elimination of transferred costs and prevention. Sounds reassuring but just try to quantify any of these variables.

How does one measure the waste and inefficiency in the present system? Hospital bills don't itemize the portion of the total that can be attributed to apathy and incompetence. One practitioner's pointless duplication is another's due diligence. Should a doctor's treatment protocol be tailored to limit costs or to cure the patient?

The $10 Aspirin 

Call the billing department to ask why you were charged $10 for an aspirin and you'll be told that the hospital has to recoup the costs of treating the uninsured. These are called "transferred costs" -- transferred from those who can't pay to those who can. But how do we determine the percentage of the bill that is due to these?

The aspirin was served to you in a well-equipped, climatic-controlled, hygienic treatment room by a licensed nurse. Obviously, it costs more to deliver an aspirin in this environment than it does at the corner drug store. On the other hand, you're already paying a daily room fee, so the aspirin itself shouldn't cost that much more than it does at the neighborhood apothecary.

What percentage of the inflated costs is due to transferred costs and what percentage is simple greed? And how does the hospital compute the cost of charity care? Does the welfare patient get "charged" $10 for his aspirin? If so, you're getting hit twice: once when you overpay for your aspirin; once again, when the hospital values an aspirin at $10 when it figures the price of the uncompensated treatment it dispenses that it can pass on to you. You pay $10 for an aspirin because of the welfare case; the welfare case costs more because the price of an aspirin is $10. Catch-22.

Similarly, prevention is a nebulous concept. How do you accurately measure something that didn't happen -- or that may have never happened, regardless of preventative intervention? A $50 inoculation to prevent a disease that costs $10,000 to treat seems like a good bargain. And it is -- unless the disease is rare. If the incidence of the illness is 1 in 2,000, it's 10 times more expensive to prevent it than it is to treat the occasional case.

To make matters worse, all of these imaginary numbers and the conclusions we draw from them are inter-dependent. If one estimate is badly off, all subsequent calculations are worthless. As we saw with the real estate market, such miscalculations can have disastrous consequences.

The only tangible money in the pot that could be applied to providing for the uninsured is the insurance company profits. By adopting a single-payer system, you eliminate the middle-man, leaving cash available for expanded coverage.

Would those funds be sufficient to defray the extra cost? It really doesn't matter because the insurance lobby is busy working Capitol Hill to make sure this doesn't happen.

What are the odds that our lawmakers' imaginary numbers will add up to a fiscally sound system? I can't even begin to imagine.

M.W. Guzy is a retired St. Louis cop who currently works for the city Sheriff's Department. His column appears weekly in the Beacon.

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