My father served in the U.S. military for the nearly three decades – a few years first in the Army, then twenty-three in the Air Force. By the time I was in high school, I had lived in Europe, Asia, and four different states. And when I was sick or injured – the latter of which occurred a little too often for my mom’s sanity – I was treated at a military hospital. Dad retired in 1984, but he and mom continued to receive medical benefits as part of his retirement benefits. It made a lot of sense for my parents to retire near an Air Force base, where they could shop at the Base Exchange – where prices are lower and there is no sales tax – and they would be close to a military hospital. They chose an area where he had been stationed a few times near one of the largest military installations in the world, with two medical facilities close by, and a VA Clinic in a neighboring city.
When mom turned sixty-five, she was forced into Medicare – and a world very different from which she had been accustomed for the majority of her life. Not long after that, her doctor told her she needed a surgical procedure that could not be performed at any of the local military facilities. And because of some weird rule, governmental restrictions forbade military personnel from recommending a provider. Mom had always been able to go the base hospital for anything; now she was on her own to find a health care provider. She and my sister began a three month ordeal of trying to locate a physician who specialized in the procedure she needed, was within driving-distance, and the biggest challenge – would accept Medicare payments. Fortunately for my mom the procedure was not life-threatening. But she unnecessarily endured months of pain and discomfort while trying to locate a doctor who could treat her.
If you want to know what is wrong with the U.S. health care system, just ask the person next to you. Chances are she will also have a personal horror story to share about outlandish costs, inaccessibility of care, the regulatory stranglehold on innovation, or the battery of tests that physicians order out of fear of lawsuits. The issue of health care has become a point of contention for many Americans and a hotly-debated issue among politicians. But what is health care? What services should be covered by health insurance providers? Should everyone be covered for every hiccup and scrape we encounter in life? And is health care a right, an entitlement that each of us are owed?
It is no secret that America spends a lot of money on health care. In 2010, we spent about $2.6 trillion. But what I find interesting is that while the cost of most new technologies goes down after time, health care costs continue to rise. The costs for mammograms, CAT scans, and MRI’s are still nearly as high as when these technologies were introduced. Since the Industrial Revolution, technological advances in agriculture, transportation, telecommunication, and information technology have continued to reduce the amount of national income spent on food, travel, computers, and phones – but not health care. Not only has the percentage of income spent on health care risen, the dissatisfaction with the delivery of care has increased as well. What can be made of this inconsistency between health care services and other industries?
Many observers believe the key difference is the role of government.
In all other industries, government has sometimes played a supporting role, but in health care, government plays a primary role in financing and the delivery of services. It is estimated that payments from the U.S. government accounted for forty-six percent of all health care spending in 2011. And if subsidization through tax credits, deductions, and exemptions are included, the government’s share increases to nearly sixty percent. Before World War II, health care spending in the U.S. was roughly four percent of the Gross Domestic Product (GDP). Today health care spending accounts for more that sixteen percent of the total economic output of the United States – nearly quadruple what is spent on defense.
But unlike other industries, the majority of health care costs are not paid directly by the consumer (i.e., the patient), but by a third party – an insurance company, employer, or government. This system of third, and sometimes fourth-party payers, where someone else is picking up all or the majority of the tab, has created a world in which patients are insulated from the true cost of the services they receive. Contrast this to the purchase a new television or gas for your car, where no third-party is involved. The same could be said for most consumer goods, services, and food. But because health care expenditures are exempt from taxes when provided by your employer, the result has been a strong incentive for many Americans to get their health care through their employer or their spouse’s employer. Furthermore, in 1965, when Medicare and Medicaid were enacted, it effectively made the government the third-party health care payer for the poor and most elderly citizens in the United States. You may have heard some say that we are headed toward socialized medicine. In fact, we are more than halfway there.
An entire generation of Americans has grown up in the world of employer-provided health insurance; and to many, it may seem like a part of the natural order of life. You may be old enough to remember how AT&T was commonly referred to by many in my grandparent’s generation as simply “the phone company.” That was until the telecommunications industry was deregulated and AT&T’s monopoly was dissolved. But before that happened, nearly everyone got a phone and their phone service from one company. Today, nearly everyone over the age of fifteen owns a mobile phone – many with built-in video cameras, calculators, and more computing power than the computers in the first space shuttles. Competition has led to a greater number of features at less cost. One could say that government-induced competition led to employer-provided health insurance and its favored tax treatment.
During World War II, the U.S. government printed extra money to help finance the war effort, and at the same time, imposed price and wage controls. This resulted in labor shortages and provided incentives for businesses to find other ways by which to acquire labor within the restrictions of government-controlled wages. Companies began offering health insurance as a fringe benefit, but initially, did not report the benefit’s value to the Internal Revenue Service (IRS). By the time the government realized what was happening, workers were so accustomed to the health insurance benefit’s favorable tax treatment, that it essentially forced Congress to enact legislation making employer-provided health insurance benefits tax-exempt.
Who knew that wage controls would lead to the employer-provided health insurance system? But in all too many cases, unintended consequences result from wrong-minded policies – like price controls – and then become exacerbated when one bad government policy leads to another.
The other part of our health care system I find curious is the almost universal misapplication of terms. In every other type of insurance, it is an instrument for neutralizing financial risk. We purchase insurance to protect against financial losses from an automobile accidents or catastrophes that severely damage other property like a home or a business. Medical insurance originally served the same purpose – protect a family’s assets against an illness or injury requiring care so expensive it would financially devastating. But the employer-provided model, to a large degree, has caused the term “insurance” to have a different meaning when applied to health care. We do not expect our auto insurance to cover regular maintenance or tire replacement, yet we have come to expect our health insurance to cover everything related to health care. How many times have you heard a politician say that forty-something million Americans are without health care, when he or she likely meant they have no health insurance? How has a method of financing health care (insurance) become synonymous with care itself? Until we stop confusing health insurance with health care, we will have a tough time reforming the nation’s health care system.
Consider the way in which insurance works: An estimation of risk to an individual is spread among a larger pool of people. So if a million people join a pool to insure against a loss that actuaries predict will happen to one in a million people, the theoretical break-even cost to the insurer is one dollar per person. Let us say that each person in the pool will accept an insurance rate of five dollars per person. The insurance company is likely to stay in business even if the one-in-a-million claim comes in each year. But if the people in the pool decide they want to be insured against things that are guaranteed to happen to most people, the business model goes out the window. The insurance pool becomes a pre-payment and wealth-transfer plan. And once you go here – as has happened with the government’s intervention in health care – there is a strong argument to be made that politics, rather than individual choice, decides what is to be covered, inevitability raising the cost of everyone’s coverage. But often, these issues become highly-charged as many are highly personal. So when we force coverage of say, contraceptives, onto the pool, it will naturally offend some who disagree with the coverage and who are now forced to pay for it. Politicians have been quick to pick up on this mindset using inflammatory language condemning insurance companies for not covering pre-existing conditions and misleading slogans like “investing in health care.” And the generations of Americans who have come to expect health care coverage through their employer seem to be easy fodder for politicians promising something for nothing.
Some argue that health insurance is not only a right, but it should be free – and cover everything from routine check-ups to gender re-assignment surgery. That some things like health care should be covered for the “greater good” of society, and in that sense we are spreading the risk across a larger pool. But often lost in this discussion is the idea of individual responsibility, or in the case of contraceptives, the infinitesimally small cost of prevention. Some in our society seem to believe that all risk can be avoided – and politicians have been more than eager to accommodate this idea. What has not been honestly discussed is the cost of this “risk-free” society.
Clearly, the health care system in America is in need of reform. But given our government’s track record in the health care arena, does it really make sense for unelected bureaucrats to have a larger role? Unfortunately, the one-sided debate during the 111th Congress resulted in passage of a truly partisan bill, the Affordable Care Act (ACA). Not a single Republican in the House of Representatives or the Senate supported it. The Act totals more than 2,700 pages and left many important regulatory decisions to unelected persons such as the Secretary of Health and Human Services – the same cabinet position responsible for the management of Medicare and Medicaid. The stated goals of the ACA were to provide health insurance coverage to all Americans and to lower the costs of health care. But many economists are in agreement that the only way government could lower health care costs would be institute a single-payer system with mandates, price controls, and rationing. While the costs associated with a single-payer system may go down, it is likely to lower the quality and supply of care as has been the case with the health care systems in Canada and Great Britain.
Can America’s Health Insurance System Be Fixed?
One misguided government policy after another has created a system with perverse incentives and terrible results – one that disguises true costs and removes consumers from the role of ensuring value. But in the process, the health insurance system has become a means by which health care costs are subsidized by the government and paid for by others. Today, health insurance is not an instrument that protects the insured from just catastrophic financial risk, but a form of pre-payment for expenses likely to be incurred. At the heart of this arcane system is the employer-sponsored insurance model that reduces choice and incentivizes people to use more health care services, with little regard or knowledge of what they cost.
What is remarkable is the degree to which our thinking has become so wrong-minded in just a few generations. We have no problem allowing the free market to identify the way we purchase any other good or service, but it is entirely different with regards to health care. Most Americans deal with major purchases like an automobile or a home through short or long-term financing, but if we face a health care crisis, we have come to expect that someone else will pay for it.
As history suggests, more “reforms” will likely do little good and are likely to do what reforms in the past have done – more harm. We need to reduce, rather than expand, the role of insurance and the government’s role in it, relying more on ourselves – the consumers – as the ultimate guarantors of good service and reasonable prices.
This article is an excerpt from The Paul Society, How politicians use other people’s money to buy votes and gain power. And how it’s bankrupting America.
Learn more at www.PaulSocietyBook.com