Our current health care system fails at almost every level. Because the health care for most people is paid for by third parties (mostly the government), costs have exploded to levels far high than optimal. This has reduced real wages for millions of Americans. And yet tens of millions of lower and moderate-income people have no health insurance at all.
Liberals want to remedy this situation with some form of universal health care, while conservatives would like to the system to adopt more free market mechanisms to hold down costs. Both will likely fail.
The basic problem here is that health care has grown to 17% of GDP, a level where the industry is simply too powerful to reform. Washington state recent adopted a public option, allowing its citizens to buy into a Medicare type insurance policy. But opposition from the health care industry was so strong that they had to boost payments to 160% of Medicare levels to buy off the opposition.
But the law also made big compromises that experts say will make it less powerful. To gain enough political support to pass, health care prices were set significantly higher than drafters originally hoped.
“It started out as a very aggressive effort to push down prices to Medicare levels, and ended up something quite a bit more modest,” said Larry Levitt, senior vice president for health reform at the Kaiser Family Foundation.
The basic problem for both liberals and conservatives is that their proposed reforms would imply a huge fall in income to the health care industry, and that’s not politically feasible for the following two reasons:
1. Liberals favor European style health care, which typical costs about 10% of GDP. It’s not politically feasible to raise enough revenue to pay for a Medicare program costing 17% of GDP. Indeed that sum is greater than the total amount of revenue currently raised by the federal government. Socialized medicine in America can only be achieved by slashing the incomes of doctors, nurses, administrators, support staff, and other medical industry personnel to much lower levels.
2. Conservatives favor a more market-oriented approach, as in Singapore. But Singapore spends only 5% of GDP on health care, a sum that would be completely unacceptable to America’s health care industry.
Liberals believe their opponents on health care are heartless conservatives. Conservatives believe their opponent are starry-eyed liberals. Both are wrong; it is the health care industry itself that blocks all meaningful reforms.
Maybe change will be possible in the long run, if we nibble away at the power of big medicine in a 100 tiny reforms, one step at a time.
HT: Tyler Cowen
READER COMMENTS
LK Beland
Jul 16 2019 at 1:55pm
“Maybe change will be possible in the long run, if we nibble away at the power of big medicine in a 100 tiny reforms, one step at a time.”
That’s correct.
Suppose that the US limits annual nominal increase in healthcare spending to 2%, coupled to 5% NGDP growth. In 10 years, healthcare would represent 13% of GDP. In 15 years, it would represent 11% of GDP.
Limiting increases in healthcare spending to 2% would be quite a policy and political challenge, but it’s a plausible target.
Dave Smith
Jul 16 2019 at 3:38pm
How do you do that? Tax providers? Force down prices? Make doctor’s offices close at the point in the year when spending has reached the cap?
LK Beland
Jul 16 2019 at 4:49pm
That’s a good question. As I mentioned, it’s challenging. Remember, the point is not to have the total cost decrease, but rather to limit its growth rate. A few options, from the most libertarian to the least libertarian:
Progressively remove tax subsidies (maybe start with Cadillac plans); this would also reduce the deficit.
Tweak IP laws
Tweak regulations c.f. Board Certification
Enable “medical tourism” (i.e. let Americans get cheaper treatments abroad)
Continue the type of data analysis that was introduced by the ACA (to identify the most cost-efficient treatments, etc.)
Cap reimbursement for drugs (i.e. save on cost, at the expense of innovation, imitating most other countries)
Is that enough to limit growth of healthcare spending to 2-3% per year for 10 years? Your guess is as good as mine.
robc
Jul 17 2019 at 10:06am
My number 1 would be to use the Interstate Commerce Clause for good instead of evil (for a change), and allow insurance companies to sell across state lines.
Scott Sumner
Jul 16 2019 at 6:35pm
In a technical sense, it’s easy to hold down health care costs. Reduce subsidies and reduce barriers to entry. The problems are political.
U Man
Jul 21 2019 at 3:18am
Abolish the tax deduction on employer sponsored health insurance.
Alan Goldhammer
Jul 16 2019 at 2:23pm
The trouble with posts such as this one is that only a couple of options are presented. The real world outside the US is very much different and more nuanced that Scott or Tyler (in many of his posts on the topic) set out. Like a broken record, I would suggest that everyone read T.R. Reid’s very fine book “The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care.” He not only discusses the health care systems in a number of countries but he and his family used these systems when he was a foreign correspondent with the Washington Post. Though published in 2008, it is still relevant today.
the Japanese use much more health care than their counterparts here in the US, yet their costs are lower. The Swiss, Dutch and Germans all have subsidized insurance systems. Fuchs and Emanuel proposed a universal voucher system for the US that would replace Medicare, Medicaid, and corporate provided private insurance by relying on the existing insurance & managed care systems already in place. I had Zeke Emanuel come down to PhRMA in 2007 to give a talk on the proposal and it was well received. This has the advantage of setting up a capital budget for health care and funding is done via a VAT. Sure it’s politically challenging but so is every thing else including the Obamacare Kludge.
Walter Boggs
Jul 17 2019 at 2:43pm
Alan, I’m afraid all you’ve done is to lay out several more options which, even if they really do work as claimed, are not politically palatable in the US.
Floccina
Jul 16 2019 at 5:40pm
I wonder if the Feds could offer a plan that only pays for what the NHS pays for allowing people to slowly migrate toward it.
One interesting piece of data is that UT, GA and AZ seem have much lower per capita spending on Healthcare.
Scott Sumner
Jul 16 2019 at 6:38pm
Utah is the real outlier. I’d guess it’s a combination of healthy lifestyles and low levels of corruption. Much of healthcare spending is due to corruption, ripping off insurance companies, Medicare, Medicaid, etc.
Thomas Sewell
Jul 17 2019 at 8:35pm
The U.S. government already spends more per capita on health care than most other countries do, including Britain’s NHS.
So any new plan the government offers is either going to be worse for people already having their health care paid for with tax money, or else require additional tax money(/borrowing) to pay for it.
The problem isn’t that enough isn’t being spent (quite the opposite), it’s that the various governments involved have setup the rules of the game to incentivize even less economic efficiency than if someone were designing the system to slowly fail on purpose.
We need to allow basic competition in the supply of health-related services and products, plus reverse the incentives for third-party payers on the demand side. The results would only be popular with the people paying for it all, not all the specific special interests involved, so politically it’s mostly dead.
Matthias Görgens
Jul 17 2019 at 7:54pm
Instead of voting for Democrats or Republicans, you can vote with your feet.
It’s still relatively easy for skilled workers to migrate to Singapore.
Mark Z
Jul 21 2019 at 12:57am
Unfortunately people who vote with their feet can also vote in the voting booth, and in their they tend to vote for the same things they rejected with their feet.
Mark Brophy
Jul 21 2019 at 10:47am
Where do you emigrate if you’re not a worker or are an unskilled worker or a skilled worker in a specialty where there are no jobs in Singapore?
Mark Brady
Jul 18 2019 at 2:56pm
Scott writes, “The basic problem for both liberals and conservatives is that their proposed reforms would imply a huge fall in income to the health care industry, and that’s not politically feasible for the following two reasons.”
“My concluding reflection to all ‘opinion-formers’ is that no policy which is for the advantage of the people is incapable of being effectively explained to them. It will of course take time and persistence to convince a majority. In the mean time compromise will be needed whenever urgent steps are required. But compromise, while it is the politician’s privilege and necessity, is the scholar’s deadly sin – unless it is presented clearly and unmistakably as compromise and is always accompanied (a) by a non-compromising proposal and (b) an explicit explanation of the vote-procurement reasons for the compromising proposal. That is the justification for the thesis of this book.” -W. H. Hutt, Politically Impossible…? (London: Institute of Economic Affairs, 1971).
https://iea.org.uk/publications/research/politically-impossible
Mr. Econotarian
Jul 18 2019 at 7:00pm
How about step 1 is to eliminate the tax advantage of employer provided healthcare payments, but phased in over some long time (like 20 years) so that it is more palatable (frog in kettle slowly getting warmer).
Scott Sumner
Jul 19 2019 at 8:27am
They were trying to gradually phase in the Cadillac tax, and that didn’t work.
Mark Brophy
Jul 21 2019 at 10:50am
The voters are too stupid to realize that the Cadillac tax is the only good thing about ObamaCare. Essentially, the problem is that the healthcare system can’t be fixed until the education system is fixed.
Niko Davor
Jul 19 2019 at 1:55am
To recap: US health care is terrible and there is no solution to fix it.
I’d get a second opinion. The Grumpy Economist says, “Health care policy isn’t hard at all”. I nominate that guy.
Mark Z
Jul 21 2019 at 12:55am
My synthesis of the two opinions: understanding healthcare policy (and what’s wrong with it) isn’t hard. Changing it is nearly impossible, because it’s in the interests of too many people to not understand it.
Bashar H. Malkawi
Jul 19 2019 at 2:05am
The U.S. health system is broken and politicians have failed to agree on fixing it. It is sad. Many countries allow the government to provide for health services and cover substantial costs. This is a basic right for every human being to have an affordable healthcare. It does not matter the percentage of the GDP. There are many ways to offset the costs. Bashar H. Malkawi
Mark Brophy
Jul 21 2019 at 10:53am
Healthcare isn’t a right nor is food, water, or shelter. If you want to improve your health, lose some weight, act like an adult, and accept responsibility for your actions.
Jeff
Jul 22 2019 at 12:00am
You’re not going to reduce the demand for healthcare. Once people have decent places to live and enough to eat, the next thing they want is to stay as healthy as they can for as long as they can. So the demand for healthcare is immense and growing.
Prices rise because this growing demand is being met by a static supply that is held back by various barriers to entry. Getting rid of those barriers is the only healthcare policy that has a prayer of “working”, in the sense that it will make it less expensive and more available.
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