Health Care in America

It is hard to get our arms around the issues raised by health care in America. Indeed, President Trump was telling the truth (for a change) when he said that health care “is so complicated.” There are a lot of trees in that forest, and each one matters, but it is helpful to see the forest first, which is my modest objective for this note.

Cost

Americans spend twice as much on average for healthcare as do Europeans and with poorer results. To take one example, the U.S. has an infant mortality rate of 5.8 deaths per 1,000 births while in South Korea it is 3.0. How the delivery of medical services is paid for is a critically important part of why healthcare is so expensive in the U.S., but it is not the only factor. Most health services in the U.S. are provided by the private sector. Government and professional regulations and restriction on how these services may be delivered play a very important role in their cost.

These regulations govern the extent to which technology and medical experts with less training than MDs (e.g. nurse practitioners) may be used to provide routine medical advice. The use of computer diagnostics, either to assist MDs or directly accessed via the Internet by patients; phone consultations, assisted by Internet delivered medical metrics; and nurses for routine medical treatment, will significantly reduce costs while improving the average quality of service. Some of this is already happening, but the American Medical Association, the union for doctors, like most unions, has historically “protected” the incomes of doctors by restricting completion in providing their services. In this instance, I believe that technology, when allowed will make a major contribution.

Improved transparency with regard to the cost of alternative treatments would help reduce the shocking disparity between the costs of the same treatment from different providers. How medical services are financed (the subject of the next section) profoundly influences whether patients care about and monitor costs and what doctors provide and charge for.

Financing

The provision of health care services in the U.S. can be divided into five categories – five separate systems. Data reported here is for 2014 as reported by the U.S. Census Bureau. https://www.census.gov/content/dam/Census/library/publications/2015/demo/p60-253.pdf

U.S. military veterans receive care through the Veteran’s Administration. The VA program covers 14.1 million people or 4.5 percent of the population. The VA health service is a single payer (government), government run program, which is regularly condemned for its poor service and corruption.

Medicaid and Medicare are single payer (government) programs for the poor (Medicaid) and the elderly (Medicare) that finance privately provided medical services. The single payer, the government, sets the service standards and their costs for the health services financed by these programs, but they are delivered by the private sector, though the government determines which doctors may participate and thus must be used by the program’s beneficiaries.

In 2014 Medicaid covered 62 million people or 19.5% of the population and currently covers 68 million. Quoting from government websites: “Medicaid is an assistance program” (i.e. not insurance). “It serves low-income people of every age. Patients usually pay no part of costs for covered medical expenses. A small co-payment is sometimes required. Medicaid is a federal-state program. It varies from state to state. It is run by state and local governments within federal guidelines…. In all states, Medicaid provides health coverage for some low-income people, families and children, pregnant women, the elderly, and people with disabilities. In some states the program covers all low-income adults below a certain income level.”

In 2014 Medicare covered 50.5 million people or 16% of the population, a number that is growing rapidly as the U.S. population ages. “Medicare is an insurance program. Medical bills are paid from trust funds that those covered have paid into. It serves people over 65 primarily, whatever their income; and serves younger disabled people and dialysis patients. Patients pay part of costs through deductibles for hospital and other costs. Small monthly premiums are required for non-hospital coverage. Medicare is a federal program. It is basically the same everywhere in the United States and is run by the Centers for Medicare & Medicaid Services, an agency of the federal government.” This program seems broadly to have been operating satisfactorily. Hence the often-heard demands from older Republicans of “don’t touch my Medicare.”

In addition, 208.6 million people or 66% of the population had private health insurance plans in 2014. Of these, most (175 million or 55%) had insurance plans offered by their employers. The rest (47 million) bought their health insurance directly. Employer provided plans are subsidized because their premium payments are not taxed as part of an employee’s remuneration while the income from which people buying their own policies pay their premiums is taxed (including the amount they spend on insurance). This has created several serious problems.

Employee provided insurance policies are not portable, i.e. when a worker leaves that employer (fired, resigned, or retired) she cannot take the policy with her. This creates the preexisting condition problem. But first a time out for a quick look at the nature of insurance.

Insurance is a mechanism by which a group of people (the insurance pool) shares the costs of expenses (heart operation, car repair from an accident, home repair from a fire, etc.) that are expected to fall only on a few of them. Those who are lucky enough not to incur such costs help pay for those not so lucky. The group as a whole pays the entire cost of what ever was insured, but the lucky help out the unlucky. This means that the over all aggregate cost, and thus each person’s share of it, depends on who is in the insurance pool. If the pool is the entire population of a country, city, or company, then (if we are discussing health insurance) there will be more healthy people than unhealthy and the average insurance cost per person will be lower than if only unhealthy people are in the pool. Any one who knows that he will not get sick or have an accident (and who doesn’t care about sharing the cost of the less fortunate) would have no reason to join the pool and buy insurance. But of course no one can know that for sure.

If in the course of your employment you acquire or learn that you have a liver disease, the costs of your treatment will be covered by your company insurance plan. But if you change jobs and must take out a new insurance policy with your new employer (or as self employed) your condition will be known in advance and no insurance company would want to insure you at their normal group rates knowing that they would lose money by adding you. This is the origin of the pre existing condition problem. Anyone who acquires an insurance policy in his or her youth and is able to keep it continuously will not face a preexisting condition problem.

At the end of 2014, 33 million people (10.4 percent of the population) were uninsured. This dropped to 27 million people at the end of 2017. The Congressional Budget Office expects that number to rise modestly under Obamacare to 28 million by 2026. This group on average receives less medical care and relies more on emergency room services.

Two major objectives of Obamacare were: a) to forbid insurance companies from denying policies to people with preexisting medical conditions or to charge them more for coverage, and b) to reduce the number of uninsured in part to increase the size of the insurance pool with more healthy members to help cover the costs of the unhealthy. It also expanded eligibility to Medicaid to all able-bodied adults below 138 percent of the federal poverty level and initially covers 95% of the cost to each state for its expansion of enrollees.

To encourage the uninsured (those not eligible for Medicaid choosing not to have insurance) to join the insurance pool, thus helping to pay for the sick, Obamacare subsidizes the premiums of policies purchased on health insurance exchanges established under Obamacare in most states for anyone whose income is less than 400% of the federal poverty level. However, the number those uninsured that have acquired health insurance under Obamacare has fallen short of expectations. Those who have signed up have often had preexisting medical problems. As a result the cost of insurance acquired on these exchanges has risen more than expected. The rising cost of insurance is discouraging more people from acquiring it, a phenomenon referred to as a “death spiral.”

American Health Care Act

The House GOP’s American Health Care Act (AHCA) proposal to “replace” the Affordable Care Act (Obamacare) tweaks many of the costs and subsidies in Obamacare in an effort to improve the structure of incentives for cost effective care but this would take us from the forest to some of its individual trees.

The GOP proposal would eliminate Obamacare’s penalty for those choosing not to insure and allow people to keep their policies (portability) when they change jobs or become unemployed. If there is a gap in coverage, a person would have to pay a one time penalty over standard insurance rates of 30%. Republican leadership argues that these incentives are sufficient to encourage more people to get and retain health insurance thus solving the prior condition problem and provide for a large enough pool of insured to keep premiums down.

The assessment of the Congressional Budget Office, on the other hand is “that 24 million fewer people would have coverage a decade from now than if the Affordable Care Act remains intact.” Obamacare-revision-would-reduce-insured-numbers-by-24-million/2017/03/13/. The Washington Post titled their report on the CBO’s findings “Affordable Care Act revision would reduce insured numbers by 24 million, CBO projects”. Readers would be forgiven for thinking that the GOP proposal would take away or eliminate coverage by that amount, when in fact the CBO estimate reflects their expectation of the number of people who would choose not to insure given the terms proposed by the Republicans. The Wall Street Journal gave a more balanced headline to its report on the CBO assessment: “CBO Sees 24 Million More Uninsured, $337 Billion Deficit Cut With GOP Plan”

Whenever costly services are provided free of charge, they are not allocated and rationed by price. In place of market price allocation, the mechanism by which almost everything else in a free market is allocated, services provided “free” must be allocated and rationed by regulations. Whoever pays for the medical care received determines the care options chosen and thus has a major impact on its cost. Currently for most people (other than the poor and elderly who qualify for Medicaid and Medicare) the payer is the insurance policy they chose plus the copay that it requires. For a single payer insurance program such as Medicaid and Medicare, the payer is largely the government, which determines by regulation the quality, choice and cost of service. Democrats generally favor a single payer approach and the government regulation of the health service industry that that would require, while Republicans generally favor government financing only for the poor and disabled (safety net) and reliance on greater individual choice in a more competitive market for both insurance and medical care. This reflects the more general preference by Democrats for government regulation of products, services and markets and by Republicans for primary reliance on individual consumer choice.

An alternative Approach

In my opinion, the public policy goal for the provision of health care should be to provide satisfactory care to those who cannot afford it (the poor) in a cost effective manner, to provide everyone else with as much choice as possible and the information that would be helpful in making such choices, and to open medical practice to as much flexibility and competition as possible. The tax proposals I have made earlier would lay the best foundation on which to build such policies: My political platform for the nation-2017.  I would replace all business and personal income taxes and payroll taxes with a flat consumption tax (Value Added Tax—VAT) and introduce a per person minimum guaranteed income (tax credit) that varies with age but not income and is sufficient for a minimum level of healthy existence. US federal tax policy, Cayman Financial Review July 2009 A mandatory health savings account contribution (in place of Medicaid and Medicare and any other insurance subsidies) and a mandatory retirement account contribution (in place of Social Security) would be made from the monthly minimum guaranteed income payments in amounts sufficient for satisfactory health care insurance and retirement. Saving social security. The administrative requirements for such a simple system would be minimal.

I do not wish to suggest for a second that providing everyone with a satisfactory guaranteed minimum income will deliver the good life to everyone. In fact, most people are not happy—do not feel fulfilled and whole—without a decent job. Most people want to work. The recent spike in suicides and opiate overdose deaths seems related to the idleness of those who have given up looking for work. Nicholas N. Eberstadt points out that:

“According to [Alan Krueger’s] work, nearly half of all prime working-age male labor-force dropouts—an army now totaling roughly 7 million men—currently take pain medication on a daily basis…. But how did so many millions of un-working men, whose incomes are limited, manage en masse to afford a constant supply of pain medication? Oxycontin is not cheap…. One main mechanism today has been the welfare state: more specifically, Medicaid, Uncle Sam’s means-tested health-benefits program.

“By the way: Of the entire un-working prime-age male Anglo population in 2013, nearly three-fifths (57 percent) were reportedly collecting disability benefits from one or more government disability program in 2013. Disability checks and means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age. We cannot say that these programs caused the death of work for millions upon millions of younger men: What is incontrovertible, however, is that they have financed it—just as Medicaid inadvertently helped finance America’s immense and increasing appetite for opioids in our new century.” Commentary Magazine, Our miserable 21st century February 15, 2017.

Getting the incentives in government assistance programs right is difficult. But better jobs are needed as well. The government’s stifling regulations of too many aspects of the private economy have reduced investment and growth in productivity (the basis of increases in our standard of living) to a crawl. The medical care industry is only one of many in which a better balance between government and market regulation of economic activity and smarter policies with better structured incentives for those making decisions are badly needed.

Post Script

PS: The Republican leadership has chosen to put forth its American Health Care Act (AHCA) in the form of a budget “reconciliation” bill. This allows its adoption by simple majority rather than the usual 60% majority, but it limits the scope of the act to what might be considered budgetary aspects. This is behind the rush and the limited range of changes that are possible for the AHCA. There are pros and cons to such a process, which was also followed for Obamacare.

The advantages are that the bill can be passed with a lower level of congressional support and that the sectors of the economy adversely effected (a bill that changes anything will necessarily have winners and losers) will have less time to mount a fight to save or promote their special interests. The disadvantages are that the potential to improve the bill by hearing and considering all views will be limited and that the opportunity to build broad support via compromises will be missed. In my opinion such important and fundamental legislation should obtain broad support. The failure to do so was one of the flaws of Obamacare.

PPS. When new rules change the outcomes for some, fairness dictates an as painless as possible transition from the existing rules to the new ones. Some of the debate among House Republicans concerns transition issues, such as from current Federal financing of state expansions of Medicaid coverage to Federal block grants meant to give states more flexibility in how they use these funds.

About wcoats

Dr. Warren L. Coats specializes in advising central banks on monetary policy, and in the development of their capacity to formulate and implement monetary policy. He is retired from the International Monetary Fund, where, as Assistant Director of the Monetary and Financial Systems Department, he led missions to over twenty countries. Before then, he served as Visiting Economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at the Univ. of Virginia from 1970-75. Most recently he was Senior Monetary Policy Advisor to the Central Bank of Iraq; an IMF consultant to the central banks of Afghanistan, Kenya and Zimbabwe; and a Deloitte/USAID advisor to the Government of South Sudan. He is currently a member of the Editorial Board of the Cayman Financial Review and until the end of 2013 was a member of the IMF program team for Afghanistan. His most recent book is entitled "One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina."
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4 Responses to Health Care in America

  1. KARL ZIEBARTH says:

    Good piece — but you omit one of the great hidden drivers of the skyrocketing health care cost structure: Plaintiffs lawyers. Every doctor (we have many, many friends who are physicians, dentists, etc.) lives in mortal terror of these animals. To have a perfect “paper trail”, they routinely order multiple tests for EVERYTHING. While individual tests are not insanely expensive, the multiples of them amount to a huge burden. Keeping track of all that is another huge cost. And if there is any flaw in a doctor’s records, the litigation cost (in time and distraction) is crippling. Not to say that there are not bad doctors, of course there are, but the concept of the lottery winnings expressed by a plaintiffs lawyer taking a cut (sometimes up to 50%) of the “winnings”. i.e. punitive damages is unsound and unethical. In general, I do not favor limitations on compensation for anyone, but in this narrow area, am inclined to think that an attorney should lose law license, be convicted as a felon, and spend 20 years in the slammer without parole for demanding a contingent fee from the “winnings”. So much of the complexity of medical treatment is driven by the paper trail. Got to be a better way.

    Karl

  2. Bob Schadler says:

    A fine overview and analysis. It is dismaying that three obvious points seem often overlooked:
    1. Health care is a concrete beneficial “thing”; health care insurance is simply one way to pay for it.
    2. The price of health care is responsive to both supply (of health care) and demand. Increasing “supply” (i.e. doctors, nurses, hospitals, clinics, equipment, medicines, etc.) often have a long lead time, but government, philanthropy, and the private sector can do much more on this front. As this is achieved, presumably the cost of health care will decline; and then insurance premiums would also.
    3. While favoring free market approaches generally, pre-existing conditions cannot be part of insurance — since, as Warren explains above, insurance is about future possibilities not current or past certainties. We all have some conditions that “pre-exist”: most are negligible and inexpensive. As part of a safety net, a certain cluster of pre-existing conditions cannot be funded by the person: government (federal, state, local), philanthropy (incl. crowd-funding) should help pay for those who truly cannot afford to pay.
    Politically, that would get a very powerful argument for government intervention of the table for genuine “insurance” and economically, it would allow insurance companies to then do what they are designed to do: manage actual health insurance.
    (ObamaCare, in part, was designed to obscure a tax/subsidy from the young and healthy to the old and those with pre-existing conditions — but not through the a government tax, but a price distorted mandate forcing the young to over-pay to the insurance companies — which has not worked very well.

  3. Joe Cobb says:

    Your analysis is thorough, but I did not see much discussion of how “costs” are calculated on the supply side. I know there is not really “a market” there today, due to price controls from government programs which also act as benchmark prices for next year’s negotiations between large providers (conglomerate hospital chains and HMOs) and conglomerate health insurance companies. It almost resembles a bizarre version of “collective bargaining” with only rare marginal cost considerations. The overhead costs of providing medical services are very large (visualize how the price of a new MRI machine is amortized, and allocated among hundreds of patients who will pay).

    I remember from my cost accounting classes at UChicago, the whole process of “allocating overhead costs” is more of a political art form than an economic analysis. Yet almost all of the surging costs of medical services are set internally by large organizations, and consumers cannot even be told what a retail price for their own medical treatments might “cost.” Does accurate “transfer pricing” even exist in modern medical organizations?

    The transition from America’s current half-Soviet-style system to a working “market for health services” will be as painful as the first 10 years after the Berlin Wall fell was for the Reds, and their victims who were “liberated” by collapse.

  4. KARL ZIEBARTH says:

    One further thought: FOX cable has interviewed Dr. Josh Umbehr, of Tulsa (I think) OK. He has set up, with some other doctors, a local “subscription” medical plan. Each participant pays a flat monthly fee, plus actual costs for drugs, etc. This set-up lets the group of doctors negotiate for better drug prices, hospital costs, etc. Deserves some research — I have no knowledge of details, but might be interesting, if actuarially sound. Karl

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