Spiraling health care costs, both government and private, are the greatest danger to a more prosperous American future. The share of the federal budget devoted to health care (principally though the Medicare and Medicaid programs) is growing rapidly every year, and the entrance of the baby boomers into Medicare will accelerate this trend. Unfunded Medicare and Medicaid liabilities currently run in the tens of trillions of dollars. As with Social Security, there is no real Medicare Trust Fund. The monies raised each year from the Medicare tax are not put into a lockbox for elderly Americans. Rather, they are used to care for Americans today, or to subsidize the current budget.
John Goodman, President of the National Center for Policy Analysis, has outlined the dangers:
A recent forecast by the Congressional Budget Office… shows that Medicare and Medicaid alone are going to crowd out everything else the federal government is doing by mid-century… national defense, energy, education, the whole works. We’ll only have health care. If, on the other hand, the government continues with everything else it is doing today and raises taxes to pay for Medicare and Medicaid, the Congressional Budget Office estimates that, by mid-century, a middle-income family will have to pay two-thirds of its income in taxes!
Every serious health care economist knows that health care costs are a big problem, yet the current health care reform debate in Washington centers on a far less critical issue —insuring the roughly 15 percent of Americans without health insurance. While conservatives favor a private market solution, the current administration favors a new government insurance option, which will only saddle Americans with more spending, debt, and taxes far into the future.
Comparing Costs
According to the National Coalition on Health Care, the cost of medical care rose at more than twice the rate of general inflation in the United States in 2008, just as in prior years. In 2007, health care consumed 17 percent of U.S. Gross Domestic Product (GDP), or $2.4 trillion. By the year 2017, healthcare costs are projected to be 20 percent of GDP, or $4.3 trillion, according to a study in the journal Health Affairs.
No other country in the world spends nearly as much of their national income as we do on healthcare. Some advanced nations, such as Switzerland, France, and Germany, spend 11 to 12 percent of their total GDP on health care expenditures. The difference is their populations are older than ours (requiring more health care), and their systems insure a higher percentage of their population than we do.
The high cost of American health care stems from one fundamental difference between the U.S. system and those of other countries: most American insurance coverage insulates subscribers or recipients from the cost of the health care at the time they receive it, and does not limit the amount of care provided. This leads to greater demand for services, and increased volume. Other countries, by contrast, have cradle-to-grave insurance systems, which are largely government administered. The systems’ providers limit the provision of care to meet annual budget allocations. In other words, the providers ration their health care. They withhold certain types of care, based on cost-benefit analysis, thereby creating lengthy wait lists for non-emergent care. Specifically, they can withhold care if it is deemed too expensive, or unnecessary, such as elective surgeries. Providers in these countries can even limit the use of aggressive treatments for patients with bad prognoses.
By contrast, U.S. physicians routinely practice defensive medicine (more tests and preventive procedures) to indemnify against lawsuits. American doctors are also permitted by insurers to aggressively treat most conditions. The insurance companies, Medicare, and state Medicaid programs have all attempted to impose some modest utilization review controls on procedures and treatments, but they use rate cuts as their primary vehicle for cost reduction. Since healthcare providers are paid for their volume, the savings through the price mechanism are cancelled out through higher volume.
One Size Fits All?
The advocates of universal healthcare are most comfortable with a “one size fits all” approach. Inevitably, this would have to mean a resort to a rationing type approach, masked by the euphemism of “best demonstrated practices.” President Barack Obama’s 2008 stimulus bill provides $1.1 billion for such initiatives.
As Jerome Groopman and Pamela Hartzband argued in the Wall Street Journal, best demonstrated practices are not always best. “In too many cases, the quality measures have hastily been adopted, only to be proven wrong and even potentially dangerous to patients.”
Driving Out Private Firms
A new government program could worsen significantly the already daunting federal budget forecasts. The proposed government insurance leviathan could easily under-price its private market competitors, by underpaying providers relative to private insurers, just as it does for Medicare and Medicaid patients. Over time this process would drive many corporations to drop private health insurance, making room for the government program to replace it.
The highly-respected Lewin Group estimates that a new government insurance option could drive up to 130 million Americans currently insured through the private market to the government insurance at a net cost of $2 trillion in federal spending over ten years. Indeed, U.S. taxpayers would essentially subsidize the collapse of the private health insurance market.
Administrative Waste?
Supporters of universal health insurance like to argue that the real problem is the administrative waste and higher costs of the private U.S. health insurance market. They cite numbers to show, for example, that Medicare and Medicaid spend a much smaller percentage of their budgets on administration than private companies.
These numbers are deceiving. For one, private insurance companies have to pay for marketing. After all, these companies need to sell their product. It is also important to note that Medicare and Medicaid pay providers (hospitals, nursing homes, physicians) significantly less than private insurers for nearly all services, often below the actual cost of care. By contrast, providers charge private insurance patients higher prices to compensate. Remember, also, that the uninsured pay little or nothing for their care, often delivered in expensive emergency room settings. Private insurance patients also subsidize this free care or bad debt burden. On top of that, the federal and state health programs set price caps for all providers, but private insurers have to wrangle over prices with individual providers.
The Uninsured
It may come as a surprise that the problem of America’s uninsured may not be as grave as advertised. Many of the estimated 45 million uninsured Americans could obtain insurance if they chose to. Sally Pipes, President of the Pacific Research Institute, has summarized the issue:
“About 18 million of the uninsured make more than $50,000 a year—and almost 10 million have yearly incomes over $75,000. More than 10 million aren’t U.S. citizens. And as many as 14 million already are eligible for government programs like Medicare, Medicaid and SCHIP—but haven’t signed up.”
These numbers suggest that the problem of the uninsured does not require a large new government insurance program. Many of America’s uninsured would purchase insurance if it was more affordable, and millions are simply unaware that they qualify for an existing government insurance option. Certainly a federal program can create a safety net for those who fall within the gaps.
Alternatives
The Healthy Americans Act, introduced by Senators Ron Wyden (D-OR) and Bob Bennett (R-UT) and endorsed by others from both parties, presents one potential alternative. The legislation proposes a hybrid of public and private coverage, with a regulated private insurance market. The proposal has a smaller federal price tag, and it relies more on company and individual payments for coverage. However, it guarantees a standardized benefit package (similar to that of members of Congress) that ensures higher levels of utilization and cost.
Regardless of the approach taken with the uninsured, Americans must still address the rapidly escalating cost of both private and government insurance programs. The following six suggestions may provide a point of departure:
1. Allow insurance companies to sell their products nationwide, rather than deal with 50 state bureaucracies. Expanded insurance pools reduce the risk to insurers of high cost patients with chronic diseases, and should result in lower premiums.
2. Reduce the state-regulated mandates for services that must be covered by health insurers. Companies should be allowed to offer a menu of plans, with varying lists of covered services, as well as different deductibles and co-pays. Competition drives down costs in all other areas of the economy, but it is neglected in health care. Without it, costs rise rapidly.
3. Equalize the after-tax treatment of health care benefits for individuals insured through their companies and those who are individually insured. When he ran for president, Senator John McCain (R-AZ) proposed taxing employee health care benefits and offering a tax credit to individuals to purchase insurance. This would provide an incentive to the uninsured to buy insurance, and potentially encourage employees to consider more carefully the costs and benefits of their existing coverage, not to mention their alternatives.
4. Encourage the use of the Health Savings Account (HSA), and other high deductible plans that make health insurance more of a catastrophic benefit, and leave the costs of more routine or day-to-day health care to consumers. While proponents of nationalized health care hate calling patients “consumers,” or calling providers and insurers “competitors,” HSAs are more affordable than first dollar coverage plans and provide more choices. With consumers more in command of their health care dollars, providers would compete for patients’ business on price, service, and convenience. This could set the stage for less costly alternatives to emerge.
5. Provide more significant incentives for greater use of generic drugs and health improving behaviors such as smoking cessation and weight reduction.
6. Address the litigation issue by placing reasonable caps on malpractice awards. In states where such caps exist, physicians pay far lower malpractice premiums, and there are fewer shortages in the high-risk specialty practices, thereby increasing supply and competition. There tend to be greater physician shortages in states that are known to have high malpractice insurance costs resulting both from courts sympathetic to the plaintiffs’ bar, and the absence of limits on awards. The problem is most serious in these locations for obstetricians and neurosurgeons.
No Silver Bullet
Reducing national health care spending so that it is closer to the economy’s overall growth rate is essential to avoiding fiscal catastrophe. Government health care coverage with rich benefit packages to millions of Americans, many of whom are already insured, may only exacerbate the problem. The government option would provide care to the uninsured, but also to others diverted to this new plan, and significantly increase demand for services, which would drive up costs. The government would then impose price cuts, which would likely drive some physicians and other providers out of the market. Eventually, the government would be forced to ration care to control spending.
This is not the way to improve health care in America. A greater injection of competition, on the other hand, might do more to both improve quality and address the spending levels that are now spiraling out of control.
Richard Baehr is a distinguished fellow at the JPC, and co-founder and political director of The American Thinker, a web-based policy journal. He has worked in the health care industry as a financial and planning consultant for providers for 35 years.
