Just before the collapse of the Soviet Union and President Reagan’s victory in the cold war, it was widely speculated that an increase in military spending by the USA would lead to an increase in military spending in the Soviet Union and, ultimately to the collapse of the Soviet economy and communist government system. At it’s post-WWII peak, the Soviet economy spent close to 20% of GDP on military spending. However, contrary to US intent, the spending was not in response to US policy, but rather a domestic Soviet policy to willingly and intentionally spend a high percentage on a domestically and politically popular sector. [See: Soviet Union Military Spending]. Nevertheless, when one sector of the economy consumes a disproportionate share of wealth it skews other sector’s development and future potential.

As the USA economy tilts toward 20+% of our domestic gross product on health care services, we forego investments in other sectors of the economy that provide future growth and vitality for our nation. The sage investor, Warren Buffet calls this high expenditure on healthcare the ‘tapeworm of American economic competitiveness’ [See:Warren Buffet: Healthcare Is the Real Problem…]. So how do American enterprises react?

Labor Markets – tight labor markets (as we now experience) put dual pressure on employers to keep benefits competitive and the labor force healthy and productive. Getting the best value on the health care spend is paramount.

 

Cost Shifting – PwC’s recent health industry analysis suggests that employers have reached the limit of cost shifting (e.g. HDHP’s and co-pays) with deductibles for many employers resembling catastrophic insurance plans with HSA’s to help with ‘first dollar’ coverage.

 

Bundled/Fixed Price Services – although Medicare is focusing on closing the gaps in care for chronic and preventive diseases, the working age population purchases are looking toward capping the spend on high cost elective and planned procedures (e.g. elective surgical interventions with bundled payments).

 

Defined Contributions – ultimately, capping the overall healthcare spend may come down to creation of defined contribution medical benefit plan designs, much like was done for pensions and retirement savings programs years ago.

 

As health care costs continue to rise the fundamentals are clear. Too much expense in one sector squeezes out spending in other sectors of the economy — for now, however, it is good domestic policy to spend more on healthcare.

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