Monday, March 29, 2010

Who Dominates Health Care Costs?

There's nothing like a little bout with MRSA to make one pay a little more attention to the state of health care legislation. Two nights in the ER are definitely making me thankful for health insurance. Knowing that it wasn't going to cost me an arm and a leg to get antibiotics through an IV (in fact, it probably saved me the leg) definitely helped me to seek care early, rather than waiting for the infection to get truly life-threatening. And that probably saved in health care costs in the long run.

I've heard it argued many times by the other side that universal health care will drive up the cost of health care for everyone, because so-called "healthy people" will be paying, through their premiums, for the bills of the "unhealthy". Ignoring that:
  1. the above is a tautological statement about what insurance is
  2. people routinely go from the "healthy" group to the "unhealthy" group and back again
  3. we should maybe feel a moral obligation to care for the unhealthy
Yeah, ignoring that, I wanted to know if the underlying assumption was, in fact, true. Who dominates health care costs? Is it the small number of extremely sick people? Or is it the larger number of moderately sick people?

To answer that question, I went searching for the population distribution of health care costs. I found the following publication: Variations in Lifetime Healthcare Costs across a Population (Forget et al. 2008). To the left are reproduced Figs. 4 and 5.

Given all the hype, I was somewhat underwhelmed to see that these curves depict (with the exception of an excess at the lowest cost bin) a gamma distribution. This isn't surprising, because a gamma distribution is supposed to represent the sum of a bunch of exponentially-distributed random variables.

To find the contribution of people in each cost bin to the total health care cost of the population, we simply need to multiply the population of that bin (drawn from a gamma function) by the mean health care cost of that bin (a linearly increasing function). Setting the mode of the gamma distributon to $90k for females, and tweaking the k and theta parameters (I'll chi-by-eye it at k=4.5, theta=1.0) we get the following distributions of fractional population (black) and fractional total health care cost (red), as a function of lifetime healthcare cost:

So who dominates health care costs? Those just slightly above the mode, which is to say, the large number of people who are just a little sicker than most. And that really could be any of us, folks.