How America’s Healthcare System Got So Jacked Up — and How We Can Fix It
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. So, 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.
When mom turned sixty-five, she was forced into Medicare — and a world very different from that which she had been accustomed. Not long after, 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 forbid military personnel from recommending providers.
My mom had always been able to go the base hospital for anything; now she was on her own. She and my sister began a three-month ordeal of locating 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.
Why Healthcare Costs Rise
It is no secret that America spends a lot of money on health care. In 2016, we spent about $3.4 trillion — significantly higher than the $2.6 trillion spent in 2010.
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.
Unlike other industries, most 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.
It is estimated that payments from the U.S. government accounted for sixty-four percent of all health care spending in 2016. And if subsidization through tax credits, deductions, and exemptions are included, the government’s share increases to over seventy percent.
This system of third, and sometimes fourth-party payers, where someone else is picking up all or most 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 of a most consumer goods, services, and food, where no third-party is involved.
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.
How We Got Here
You may be old enough to remember how AT&T was commonly referred to 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 — most with built-in video cameras, calculators, and more computing power than the computers in the first space shuttles.
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.
It all began in the midst of World War II when the U.S. government decided to print extra money to help finance the war effort, while 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 value of these benefits 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?
In all too many cases, unintended consequences result when wrong-minded policies — like price controls — become exacerbated after one bad government policy leads to another.
And over the past several decades, our thinking about health insurance has become warped.
We purchase insurance to protect against financial losses from automobile accidents or catastrophes that have the potential to severely damage property like a home or a business.
Medical insurance originally served the same purpose — to protect a family’s assets against an illness or injury requiring care so expensive it would be 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 conflating health insurance with health care, we will have a tough time reforming the nation’s health care system.
Regulated Like Nothing Else
Health insurance is regulated at the state level across our nation. And legislative mandates that states place on health insurance companies can also cause cost shifting as each state has a different list of priorities of medical services and conditions that providers must cover to conduct business in their state.
Just like uncompensated care, the cost of providing coverage for the range of goods and services that all will use is shifted to those who can afford to pay more, or at least, cannot refuse to pay.
Some have more than others, but on average there are more than 2,000 state-level mandates. Few of these mandates are burdensome in and of themselves, but when added together in an insurance plan, the cost of coverage becomes considerably higher.
And it what some states require health insurance plans to cover is fascinating.
In three states, policies are required to provide benefits for something called “Oriental” medicine. Other states require coverage for everything from acupuncture and fertility treatments to hair prostheses and athletic trainers.
Then there are the simply incredulous mandates issued by some states that require men to be covered for in-vitro fertilization and maternity leave and coverage for women for prostate cancer. (No, I did not get that reversed.)
In a 2008 study by the University of Minnesota, economists found that these type of burdens substantially increase the costs of insurance premiums and that allowing insurers to sell across state lines would likely reduce costs to consumers. Additionally, they discovered the number of uninsured might also be reduced.
Set the Healthcare Market Free
People are fallible and they will make mistakes regardless if they are acting as consumers in a free market or working as an agent of the government. The important difference is what happens when they make mistakes.
In a free market environment, we have signals for profit and loss (prices). These signals do not occur when government intervenes, so there is no mechanism for identifying and correcting errors.
If every insurance company in the United States had to compete for individual business, we would likely buy health insurance the same way we buy auto, life, and home insurance — by finding the lowest price for our needs and purchasing only the insurance we need.
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. And 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.
Portions of this article were excerpted from my book, The Paul Society.