During Trump’s first year, Paul Ryan attempted to pass two healthcare bills, both of which were rejected in the House and vehemently opposed by the public. Healthcare is a major issue that Trump must address. This is because if the US reduced health expenditures (public and private), this would make it much easier for Trump to cut taxes further and/or spend $1trn on infrastructure without increasing the deficit.
This article outlines the major problems with the US healthcare system and hence policy recommendations to address these problems.
In short, the US spends 18% of GDP on healthcare because it subsidises demand and limits supply. As a result, supply cannot keep up with the ever-increasing demand in healthcare services. This is the result of government action and hence ‘RyanCare’ must do more to reduce the role of government in the healthcare system. Part 2 will discuss supply-side reforms.
Subsidising Demand: Third Parties Dominate Spending
The US healthcare system subsidises demand simply because people pay for healthcare with another person’s money. It has reached the point where out of pocket spending is low and third parties account for a large share of healthcare spending. In 2016, just 10.5% of health spending came out of pocket and the other 89.5% came from a third party. The effect is that consumers do not think about how much things cost, nor how much they consume, and doctors do not have any incentive to reign in their costs and hence pass on higher prices to consumers, who are not paying the bill. Fundamentally, incentives are distorted. Another consequence is that those who are uninsured and don’t qualify for government services risk bankruptcy and very limited access to care. This explains why the US ranks among the worst in access in the OECD.
Since 1965, US healthcare spending has increased from 5% of GDP to over 18% today. In 1960, out of pocket spending accounted for 55% of spending compared with 10% today. Singapore in 2015 saw out of pocket spending account for 65% of all health expenditures in the country. Singapore, last year, spent just 4.5% of GDP on healthcare, with only 28% of healthcare spending coming from the public spending, whilst also having the highest life expectancy in OECD and less consumption of healthcare.
These are the sources of Third Parties:
- Medical Insurance through employers
- Individual insurance plans
- Medical insurance plans on the Obamacare exchanges
- Medicare – healthcare at the point of use for senior citizens – seniors pay no upfront cost
- Veterans’ Health
- Native American Health Service
Collectively, these sources account for 89.5% of healthcare spending, with Medicare and Medicaid accounting for over $1trn per year.
Post-1965, out of pocket spending began to fall at a much faster rate. For the first time, in 1965, the medical price index began to exceed inflation.
Americans Spend Too Much Both Privately and Publicly
As mentioned earlier, third parties encourage people to overconsume and overcharge for healthcare because they aren’t paying the bill. This is particularly true for Medicare and Medicaid, which have exploded in cost since 1965. Between 1965 and 2008, federal spending on Medicare has increased by 1,319% adjusted for inflation, despite an increase of 74% in the number of beneficiaries. This implies that the large increase in Medicare costs is not caused by the growing number of beneficiaries (a small part of the reason); it’s the change in incentives once beneficiaries understand that the government is paying the vast majority of the bill. The effect of such large increases in Medicare costs is that, firstly, the Medicare Part A trust fund will be exhausted by 2026 and the US suffers from trillions in unfunded liabilities and a large structural budget deficit. The last time the US ran a budget surplus was in 2000.
High Administrative Costs
Another problem that has arisen from the third-party fiasco is that the US healthcare system is the most expensive to administer. Over $300bn is spent to investigate insurance claims and personnel need to be paid for the billing process and complying with terms of insurance plans. As a result, 30% of medical bills are spent on administration. 25% of hospital budgets are dedicated to administration and since 1973, the number of administrators has increased by 5,000%. If consumers were paying the full bill out of pocket, hospitals could cut their administration budgets and use the money left over to reduce bills or expand care. In addition, doctors would have to reduce their prices as consumers now pay the lion’s share of the bill.
Lack of Transparent Pricing
Another consequence of the US Third Party system is the lack of price transparency. This is due to the US adoption of ‘tiered coverage’. This means that there are many types of insurance, which means doctors cannot charge a uniform price as different patients have different plans, which have different deductibles and co-pays. The patient’s final bill depends on age, whether insurance is gained through employers or personally, whether it is a high deductible plan, whether their income falls below the Medicaid threshold or whether the insurance plan was on the Obamacare exchanges. Depending on which category a patient fits in, co-pays vary and hence the hospital bill is very different.
Who Is Driving the Third-Party Phenomenon?
The third-party tragedy is driven largely by government action. The first way in which the government has caused this is the introduction of public health programmes like Medicare and Medicaid, which put medical bills on taxpayers’ shoulders. Secondly, new programmes such as Obamacare and S-CHIP provide subsidies for health insurance.
In addition, the government also distorts private insurance markets by providing tax credits for insurance. Under Obamacare, a family of four making less than $100,000/year can deduct their insurance expenses on their tax returns. Also, employers get a tax cut if they provide health insurance benefits as compensation, as opposed to regular money wages. Consequently, employers have an incentive to purchase comprehensive plans that cover everything.
Private medical insurance or insurance through employers also cover a wide range of services, thereby shielding patients from out of pocket costs and hence leading to doctors over-charging and patients over consuming. In 2013, the average US resident paid $1,074 per year out of pocket when private spending was $5,000. As a result, only 21% of private spending was out of pocket, once again distorting incentives like Medicare and Medicaid and insulating consumers from costs.
- Abolition of Medicare and Medicaid – this would save almost $10trn over the next 10 years in government spending.
- Abolition of health insurance – the replacement could be a universal government insurance plan. There is only one plan that consumers buy, which covers few services. As a result, households would be forced to pay completely out of pocket for the vast majority of services. In other words, preventative services, check-ups and specialists and certain surgeries would be paid for completely out of pocket. Also, hospitals and doctors would be able to price more transparently as all patients have purchased a universal plan. Ideally, out of pocket spending should reach or even exceed Singapore levels. Singapore has a government insurance plan called MediShield which covers only life-threatening care and has a monthly premium of $14. Services not covered by MediShield are usually paid out of pocket.
- Complete repeal of Obamacare and government programmes that subsidise insurance (through the abolition of insurance in favour of a new government)
- Removal of tax deductions and credits for health insurance (both for employers and households)
The central feature of Paul Ryan’s healthcare reform should be to remove third parties as much as possible. As a result, Ryan Care should go much further than repealing Obamacare. It should involve repealing S-CHIP, Medicare, Medicaid and other programmes such Veterans’ Healthcare and Native American Healthcare service. Fundamentally, the US makes the mistake of assuming that health insurance is the means to receive healthcare.
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