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An interesting twist on consequential risk assessment is to examine the capital structure of the economy
and ask if capital is being invested productively to grow the economy in a sustainable fashion.1 For
example, if other industrialized, capitalistic, democratic global competitors of the U.S. can deliver the
same, or better, health results for their citizens at <10% of GDP, there must be a cost to the U.S. economy
for continuing to over-allocate its available capital for health care. 2 Given that there is only so much free
cash flow available in any one period, if health care is over-consuming available capital, then less is
available to invest in R&D (research & development), O&M (operations & maintenance), and R&R (repair
& replacement) for other, relatively more-productive sectors of the economy. Thus, there should be a hit
on Incremental Capital Output Ratio (ICOR) for this capital allocation choice to invest less productively in
health care. 3 If this calculation was performed, and one converted % productivity loss to dollars of GDP,

1Capital is defined in this instance as annual free cash flow available from the nation’s productive operations
(business and consumer discretionary) available to reallocate to technological innovation and to create new jobs.

2 U.S. health care costs 17.6% of GDP today; 20% of GDP by 2017 (CBO est.). If HR 3962 in 2009, 20% by 2026.

3Incremental Capital Output Ratio (ICOR) is a metric that measures the marginal amount of investment capital
necessary for a measurable improvement in the national economy’s level of production efficiency. The converse use
of ICOR is the loss in annual GDP as a consequence for not investing adequately in productivity efficiency.

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one might arrive at an imputed ICOR value of ~$149.50 billion in lost (foregone) annualized GDP as the
tradeoff for spending 20% of GDP on health care if only 10% of GDP, which has been amply
demonstrated, is adequate to keep a country’s citizenry healthy-enough to perform economic work.

The decision table below summarizes the consequential risk impact on U.S. economic GDP (e-GDP) over
ten-years among three health care options. Note that doing nothing is the most expensive option:

TEN-YEAR COMPARISONS OF HEALTH CARE CHOICE & CONSEQUENTIAL ECONOMIC RISK

Private, Employer-based Single Payer, Medicare-for- Do Nothing - Keep Health

Health Insurance for All All Health Insurance Care As Is

UNIVERSAL $1,200 billion cost to +$6,500 billion addition of $3,300 billion cost for not
COVERAGE economy for universal capital to economy for receiving preventative &
IMPLEMENTATION health care reform (CBO reallocating to technological timely care by un/under-
COST best-case estimate) innovations & jobs creation insured pop. of ~80m

IMPACT ON GDP $2,695 billion loss in e-GDP +$1,495 billion gain to e- $4,795 billion loss in e-
(ICOR) THAT and resulting drag on new GDP over 10-years GDP and resulting drag
EITHER jobs formation due to advantage from reducing on new jobs formation
RESTRAINS OR spending 20% of GDP on health care expense to ~10% due to spending 20% of
IMPROVES JOBS health care when other of GDP through cost GDP on health care while
FORMATION IN countries w/ universal care containment and switching to leaving ~80 million
THE ECONOMY spend <10% of GDP single payer Medicare-for-All Americans un/under
health insurance system insured

Notes: (1) +6,500 billion 10-year savings from switching to Medicare-for-All, single-payer system
operated with about the same efficiency as other, existing universal care systems in other nations is from
published research by McKinsey & Co. business strategy consultants. See McKinsey Quarterly, “Why
Americans pay more for health care” (December 2008) at http://www.mckinseyquarterly.com/
Public_Sector/Why_Americans_pay_more_for_ health_care_2275. For discussion of risk concepts see
“Consequential and Catastrophic Risks” at http://www.scribd.com/doc/22163392/.

(2) For government-run health care programs to actually produce the level of annual savings of $650
billion projected by the McKinsey study requires that the U.S. health system was run as efficiently as
the various health care models of other industrialized countries offering universal care for their
citizens. The various models include:

The military and Veterans Administration ( VA) run socialized health care in the U.S., similar to the
National Health Service (NHS) in the United Kingdom (UK), Spain, most Scandinavian countries,
New Zealand, Hong Kong, Cuba have for all their citizens (Beveridge model).

Federal employees, Congress, and their staff have a single payer, similar to what the Swiss, Germans,
France, Switzerland, Belgium, the Netherlands, Japan have for all citizens (Bismarck Social
Insurance model).

Medicare, available to U.S. citizens over 65-years old is a single payer system similar to what Canada,
Taiwan, South Korea have for all their citizens (National Health Insurance model).

In all the above national health care models, the national government has instituted policies that
limits or eliminates profits from primary health care insurance, even if that insurance is provided by

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private carriers. Primary insurance under the Beveridge, Bismarck, or National Health Insurance
models is a not-for-profit activity. National governments also negotiate national pricing for health
care services, medical devices, and pharmaceuticals.

In the U.S. health insurance for citizens under 65-years of age, those who are not military personnel
or government employees, is linked to employment. Those working for certain private and public
employers get insurance. Those working for other employers, changing jobs, or out of the workforce
for any reason don't get it and may even be denied coverage from the individual health insurance
market at the discretion of the insurer and get nothing. - that's 'free market' health care, U.S. style.
Prices for services from one provider may cost $60. The same service from another provider may cost
$600.

In the U.S. individual insurers may attempt to negotiate in-network pricing for services, but other
insurers do not. Often the patient has no idea of their personal out-of-pocket cost for services until they
get a bill and receive notice of coverage from their insurer. The rest of the charge is hidden from the
consumer, but is either deducted pre-tax from their salary, or becomes a cost-of-doing business for the
employer and is spread to citizens through lower wages and higher prices for products and services. 4

Under the Beveridge, Bismarck, and National Health Insurance models citizens may pay for health
care exclusively through different forms of taxes, or a combination of taxes and out-of-pocket
payments. There is no free lunch. One way or another citizens pay the entire cost of health care
provided under any of the four models. From a consumer’s perspective, the only economic question
should be: Which model offers the best value for the money invested by citizens for these health
services?

(3) So what is economic GDP (e-GDP)? GDP is Gross Domestic Product, an accounting number that sums
all the income producing activities of the economy over the year and reports this sum as GDP. This
number accounts for all the employment income to all the workers in the U.S. during the year, as well
as all income to all the businesses producing products and services in the economy during the year.
Essentially, GDP is the income statement for the economy and provides some measure whether the
economy is growing, and by how much during the year. What GDP does not account for are charges
and prudent amortization against the balance sheet of the nation. For example, every business person
knows that it is possible to deplete capital in order to inflate income for a short time. But over time,
income will drop as capital charges for depleting capital impacts the economic viability of the firm to
generate revenue and profits.

Likewise, GDP is artificially inflated as it reports income from activities that deplete natural capital or
treat ecosystem services as ‘free’ with a discount rate of zero (i.e. the value of these services is not
priced into the cost of market transactions). One sterling example of how this distorts GDP income
accounting is the situation where industrial activities discharge anthropogenic carbon into the earth’s
atmosphere and assume that these emissions occur at no cost to the economy. We now know for
certain that this is not the case. For example, if 350 PPM is the tipping point (e.g. recent MIT studies),
then the ‘cost‘ to abate anthropogenic climate change may exceed $20,000 billion globally. As the U.S.
is accountable for ~50% of the anthropogenic CO2 presently in the atmosphere, the potential
contingent liability of the U.S. for these externalized and unaccounted for (as of yet) real economic

4 See “Health Insurance by the Numbers” at http://www.scribd.com/doc/20014395/.

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costs is ~$10,000 billion, an amount that should have been amortized annually against GDP, but has
not.

But GDP is inflated not only because it does not amortize capital charges from the balance sheet side,
it also artificially inflates the income side by not distinguishing between accounting income and
economic income. A good example of this deficiency is the recent 2008 distress of the financial
services market in the U.S. occasioned by the meltdown of the CDO (collateralized debt obligations)
derivatives market. Trillions of dollars of CDOs were sold and hundreds of billions of dollars in
income was recognized by Wall Street banks as billions of dollars in bonuses were paid to traders and
executives at these firms for ‘a job well-done.’ But in the pricing of these insurance policies, no
systemic risk was costed and priced into the transactions. Thus, when the CDO market collapsed,
what was left were toxic assets. The reserves to cover expected systemic losses of these insurance
policies were non existent. Taxpayers in the U.S. came to the rescue of Wall Street (through actions of
the U.S. Treasury and Federal Reserve) and put-up $17,489 billion in ‘reserves’ to back-up these toxic
assets. To date, there has been no ‘adjustment’ of GDP backwards in time to ~2002 to account for
these dis-economic transactions that, at the time, accounted as GDP income, but today are pure future
contingent liabilities. Any income from these CDO transactions were mere accounting fiction all
along. Essentially our GDP accounting is doing the same thing that got Wall Street in trouble. That is,
not costing systemic risk and adjusting the income statement to account for the risk that these
reserves will need to be drawn down during any accounting period.

The issue with health care and its GDP accounting is similar to the smoke and mirrors accounting for
CDO derivatives. E.g. If the citizens of the nation continue to eat lots of high fructose corn syrup
foods that produce obesity in many children and adults (increasingly well-documented research
indicators), this results in ~$600 billion/year in additional health care costs (best estimate based on
morbidity of a range of obesity-determined illnesses). This is ‘good’ from a GDP accounting
perspective as GDP increases by $600 billion/year. But, from a economic perspective, this $600 billion
produces no economic value. Instead, it destroys ~$600 billion of economic value by making the
workforce less healthy which reduces productivity, increases training costs as workers die off earlier,
etc.

Health care costs, after some basic amount, become charges against income rather than income. This
is readily understood by just taking this argument to an extreme: if the population was separated into
caregivers and bedridden patients requiring 100% intensive care, nominal GDP would skyrocket
through the roof for a few years as the cost of this arrangement would be reflected in the GDP
accounting where health care constituted 100% of GDP. But, collapse would soon follow at some
point, since economically nothing of value is really being produced in the economy. Thus, the
objective of any economy must not be to increase health care as a percentage of GDP beyond that
amount of health care where no economic value is achieved. That is why we are differentiating
economic GDP (e-GDP) from nominal GDP.

There are many activities where this relationship between e-GDP and nominal GDP holds. For
example, a nuclear terrorist attack that destroys Cleveland and results in $6,500 billion in damages,
but over 10 years, the economy spends $6,500 billion to rebuild a new city a few hundred miles from
the radioactive heap of rubble that was once Cleveland. In nominal terms, over a ten-year period,
nothing of consequence has occurred in the economy. But in economic terms, over this same ten-year
period, the economy took a $6,500 billion hit to not only its balance sheet, but also its income

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statement. The income statement was affected because the $650 billion spent annually for ten-years
was spent to return the economy to approximately the same level of productivity as before the
nuclear event that wiped Cleveland off the map of the U.S. One should not get income credit for
breaking a dozen eggs and then running to the store to purchase another dozen. If that was the case,
it would be economically productive to consume all the earth’s natural capital, to pollute its
freshwater, land, and atmosphere because we could ‘make money’ from the clean-up. This is
nonsense. In real-world economics, there is no free lunch. One way or another, economic costs always
come due, however we may choose to account, or not account for them.

(4) The $1,495 billion projected gain in e-GDP from implementing a Beveridge, Bismarck, or National
Health Insurance model universally in the U.S. is the compounded return for freeing up $6,500 billion
and being able to invest this capital in other more productive sectors of the economy. This entails
reallocating this capital to technological innovation and employing labor at an economic return of
$1.23 (compounded) at the end of the ten-year period for every $1.00 invested during the ten-year
period. This amount then becomes the opportunity cost for choosing a different, less economically
advantageous model for health care for America.

(5) The $1,200 billion ten-year cost to the economy for implementing universal care is the Congressional
Budget Office (CBO) estimate for adding about 35 million additional, presently uninsured to the rolls
of the insured under HR 3962 bill recently passed by the U.S. House of Representatives.

(6) As there are no effective cost-containment mechanisms built into HR 3962, the projected impact on
GDP is the sum of the incremental cost of insuring 35 million citizens, primarily through existing
private health insurance programs, an expanded Medicaid program and an estimated enrollment of 6
million in a new public insurance program and the opportunity cost of forgoing the least-cost health
care model option ($1,200 billion + $1,495 billion = $2,695 billion 10-year e-GDP lost).

(7) The $3,300 billion 10-year cost to the economy of doing nothing, involves keeping the present U.S.
health care system intact, just as it is, with a projected 45-million uninsured and as many as 35-million
underinsured. However, there is a real-dollar annual cost of approximately $330 billion for having 80-
million un/underinsured citizens in the system. For this class of patients without insurance, they
tend to wait longer to see the physician and are sicker for waiting, receive more expensive care from
emergency rooms rather than in a doctor’s office, and have more absences from work due to
untreated illnesses or inability to follow through on treatment regimes due to the cost of medications.
When all these cost-escalating factors are considered, adding $330 billion in cost incurred due to un/
underinsured individuals out of a total annual health care budget of $2,500 billion (estimate for 2009)
may be a conservative estimate.

Note: This $330 billion estimated annual real-dollar cost for maintaining a large population of
uninsured and underinsured does not include a probabilistic risk assessment cost of the national
security concerns should a pandemic occur. Maintaining a large pool of individuals who do not have
ready access to primary health care should a pandemic occur potentially raises the cost for the entire
population as untreated infections reinfect the healthy. If a particularly lethal pandemic would occur,
this large pool of uninsured individuals without ready access to primary health care might constitute
a national security problem. Like all other national security risk, there is a opportunity cost attributable
for not adequately addressing this systemic risk. On a local level, the devastation of New Orleans by
Katrina was a result of not adequately managing systemic risk. On a national level, the terrorist

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attacks of 9/11 and their aftermath is an example of not adequately managing systemic risk that had
national security implications and attendant costs.5

(8) The $4,795 billion in foregone e-GDP over 10-years for keeping the existing health insurance system
intact in the U.S. is the sum of the dollar cost for maintaining ~80-million un/underinsured
individuals in the U.S. plus the opportunity cost of not choosing the least-cost health care model
alternative ($3,300 billion + $1,495 billion = $4,795 billion).

(9) This argument, based on experience from other industrialized, capitalistic, democratic countries with
universal health care, is that expenditures more than 10% of GDP do not produce a healthier or more
productive work forces. My assertion is that health care is not the sum total of factors leading to a
work force healthy enough to perform work in an economy, only that spending more than 10% of
GDP provides no measurable productivity benefit. Based on the data we have, 10% of GDP is
investment in keeping a nation’s work force healthy enough (given present allopathic medical
advances) to do real work in the economy. Any expenditures beyond this amount represent capital
allocation choices that, assuming there are other alternatives with a greater economic return on
invested capital (EROIC), are dis-economic.

(10) My argument is that the 10% is not arbitrary. It is based on solid data from other industrialized
countries. Health researchers have examined cross-country to the procedural morbidity level that
targets efficacy of medical treatments: e.g. # of hip replacements not needing corrective second
surgery, recovery from breast and other cancers, etc. For example, this is similar to what results-
based-medicine research has done in U.S. looking at post-surgical readmission rates for surgical
infections, recovery rates for various diseases, etc. that show significant differences among hospitals
and treatment centers for certain types of diseases. If one has a heart attack or stroke, it is often best
not to go to just any hospital for treatment if one has any choice at all, as there are sometimes large
and statistically important differences in morbidity (recovery from these illnesses) depending on
which hospital one goes to. The impact of differing cultural diet, exercise, stress, etc. has effects in
terms of what a population gets sick from, how many get sick, etc. is filtered out to some extent, as it
is outcomes from medical care that are being compared, not the incidence of sickness. Differences in
cultural norms average out when one looks at the entire economic ecosystem.

(11) When one looks across all the health delivery system components and then across advanced health
care nations, modern allopathic medicine produces similar overall results across these nations. The
only big outlier is the U.S. where producing these similar health outcomes costs about 2X more than
the rest of the sample. For twice the money (normalized for per capita income disparities, relative
value of currencies, etc.), the U.S. achieves about the same health outcomes as other countries with
advanced health care systems (lower on some outcomes indices and higher in others).

(12) From a cost accounting perspective, researchers know that overall, about 69 cents of every health care
dollar paid for U.S. health care (however that happens), ~31 cents is used-up for system overhead
(the system is very creaky). The figure for the best of other nations with universal care is that about 94
cents – 97 cents of every health care dollar is used to actually deliver health care services to patients.
Essentially, the U.S. is running a huge public works employment program, similar to how the military
is now considered in this country (e.g. try to close a base anywhere in the U.S. or shut down an
obsolete weapons program). Unfortunately, these publics works programs have a negative impact

5 See “The Theopolitics of Health Care” at http://www.scribd.com/doc/16487050/.

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both on business profits by making capital less available and more costly, and on truncating GDP
growth as capital is diverted to less productive business sectors of the economy.

(13) Some might make the argument that American’s want to spend more of national income on health
care. Offering people the choice whether they want to “spend more money on health care” assumes
health care is a market when it is not, for a variety of well-known reasons. From an individual choice
perspective, health care is more a cost like a mortgage payment or monthly rental payment that one
does not shop for in any economically meaningful fashion due to the asymmetric information about
choices and prices. Largely non-negotiated payments come due regularly, whether one chooses to
ignore the payment due or not. The Stanford economist and Nobel Prize-winner, Kenneth Arrow,
wrote the definitive paper on the the non-market characteristics of health care in 1963. This is one
reason why Medicare in the U.S. was enacted in 1965 as is. In all other countries with universal care,
health care is not considered a market, but a utility.

(14) This analysis approaches choice of health care system from a capital allocation perspective. If the nation
collectively has an incremental $1.00 to invest (spend): if it puts it into health care, the return beyond
10% of GDP is negative. But if it puts it into decarbonization technology, for example, the nation may
get $1.23 back in return. If we are a rational nation, where will we place our dollar bet?

(15) Investing an incremental dollar beyond 10% of GDP into improving healthcare does not work because
we know from past experience that the extra investment in health care is put into increasing health
care revenues (more GDP is spent on health care). The returns are negative relative to placing that
same capital to work in other, more productive sectors of the economy.

(16) From an economic perspective, the point of improving productivity and growing sustainable GDP is
not to just employ people for doing unproductive jobs. Otherwise having people stand in lines to
collect unemployment checks might be considered employment. The objective is to have the nation’s
workers actually producing something of value, measured in terms that account for real economic
wealth creation. From an individual firm perspective, it would be like continuing to do business the
old way without any computers when all one’s competitors had already automated. Soon, if you did
not also automate, you would be out of business. Attempting to continue to afford to do health care
the old way in the U.S. by maintaining an antiquated employer-based, profit-motivated private health
insurance industry that continues to eat-up more and more of national income may put the U.S. at a
competitive disadvantage in the global marketplace.

(17) The choice to reform the U.S. health system is really one of supporting capitalism or choosing to
support corporatism. Today, corporatism, the resistance to economically productive change and
preservation of dis-economic activities may be more a threat to capitalism than socialism. The
economist, Joseph Schumpeter (1883-1950, Austria/Hungary), in his book, Capitalism, Socialism and
Democracy, discussed capitalism’s greatest strength as creative destruction - old ways of doing things
are destroyed and replaced by new ways through entrepreneurship. For Schumpeter, socialism was
no match for capitalism. However, he predicted that corporatism would threaten and would finally
undermine capitalism. Where today some see government bringing socialism to the health care
industry, Schumpeter would see government fighting corporatism, providing the necessary energy to
reform and replace market structures that are dis-economic and destructive of wealth.6

6 See “Capitalism, Socialism, and Corporatism” at http://www.scribd.com/doc/19538880/.

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(18) Some object to government run health care (while vehemently opposing any threat to Medicare, a
government-run program) due to a mistaken, and out-of-date ideology. The foundational belief is that
markets are always efficient at allocating capital. If one believes in the ultimate wisdom of markets,
then it follows that any government regulation of markets is bad as “Any attempt to regulate prices
or business activity was doomed to thwart the movement of knowledge needed to make the economy
run smoothly.”7

This mentality was most vigorously marketed by Milton Friedman, a professor of economics at the
University of Chicago in his Capitalism and Freedom that expresses the idea that “whatever the
government does is bad” (Fox 93-4). This Chicago School understanding of economics devolved into
what some refer to as Disaster Capitalism: making a huge fortune specifically from natural and
planned disasters exacerbated by poverty, social tensions, environmental degradation, ineffectual
leadership, and weak political institutions.

Disaster capitalism’s raison d'être may be the promotion and generation of market inefficiencies –
pricing signals that distort real prices for goods and services and their real cost to the environment,
public health, and social justice. The most recent result of this economic theory of disaster capitalism
might be considered the 2008 financial crisis. As the asset values of the real estate that provided the
collateral for collateralized debt obligations derivatives (CDOs) collapsed, the CDOs themselves
became toxic assets. As systemic risk was not priced into the cost of the CDO contracts, there were
inadequate reserves to back the fall in value of these insurance contracts. The end result is that the
U.S. taxpayer, through a variety of mechanisms is now on the hook for $17,489 billion in reserves that
provide the financial insurance for these toxic assets. 8

(19) In some respects the present for-profit health insurance industry might be considered a form of
disaster capitalism - making money off the ill-fortune of others. Capitalism, in its original form as
envisioned by Adam Smith was to use markets to efficiently allocate capital to address real needs of
the community. It is hard to imagine how the health care insurance industry fits that original vision of
capitalism and the value of markets when the end result is ever-increasing cost to consumers for a
service than non-market actors have demonstrated can be delivered at equal or better quality for
about half the cost. Clearly, the market for health care services in the U.S. is not efficient and at least
the data from other industrialized, capitalistic, democratic countries with universal health care, health
care is not a good candidate for market-based transactions and resulting profits-motivated activities.
Thus, health care appears to exhibit characteristics of a utility, similar to the fire and police
department, water utility, public school system, etc. - those activities of a modern, industrialized
society that work most efficiently when they are socialized. They work most efficiently because profit-
motivation and growth for growth sake is taken out of the economic dynamic. Instead, efficiency or
quality service delivery and cost containment are the the primary economic drivers.

(20) Free markets are not a panacea in all areas of the economy. Markets are not always applicable for all
transactions. Instead of encouraging the proper allocation of capital to economic activities, the use of
markets for some economic activities can be destructive of capital and harmful to the economy even
when ‘properly’ regulated. Health care may be an economic activity where markets are inappropriate

7Fredrich Hayek, “The Use of Knowledge in Society,” (1945) quoted in Justin Fox, The Myth of the Rational Market: A
History of Risk, Reward, and Delusion on Wall Street (New York: HarperCollinsPublishers, 2009), 91-2.

8 See Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism (New York: Henry Holt and Company, 2007).

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for very good reasons. See link to Kenneth Arrow’s Uncertainty and the welfare economics of health
care in Paul Krugman, “Why Markets can’t cure healthcare,” NY Times (July 25, 2009) at http://
krugman.blogs.nytimes.com/2009/07/25/why-markets-cant-cure-healthcare/?pagemode=print.

(21) In the final analysis, “reforming health care is a moral obligation, and that the responsibility to heal
the sick is at the heart of every faith tradition and is required for a civilized society.” These
imperatives are not typically what drive markets. See Marshall Gantz, “We Have the Hope. Now
Where’s the Audacity,” Harvard Kennedy School (August 30, 2009) at http://www.hks.harvard.edu/
news-events/news/commentary/we-have-the-hope.

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