In this post, I propose to examine what makes the healthcare system in the United States so dysfunctional and inefficient. How is it that we pay much higher costs for healthcare than other advanced, industrialized countries, with similar health outcomes, while insuring less people? What are the main contributing factors to the rapid rate of healthcare cost inflation? Why are costs lower in other countries? Why are so many Americans left outside the health insurance market?
I begin by describing the characteristics of our healthcare system and how it is structured. I then proceed to compare the U.S. system to other countries’ systems. And finally, based on that understanding, I will argue why reform is necessary.
I. The U.S. Healthcare System
The structure of our healthcare insurance system arose out of historical accident. It is a patchwork system that includes both public and private insurance, as well as a significant percentage of uninsured. Of those privately insured, most get their insurance through employer-based group healthcare plans, while a smaller percentage obtained insurance on the open market, for a total of 67.9 percent of the entire population. Of the remaining population, 13.5 percent obtain insurance through the federal government run Medicare program, which is open to all citizens over 65 years of age; 12.8 percent are covered by Medicaid, which is a means-tested program whose financing is shared between the federal government and the individual state governments; and, finally, 15.8 % are uninsured. (Note: there is some overlap in private and public coverage for some citizens).
Source of Insurance (2006) | Total enrolled (2006) | Percentage of people (2006) |
Employer-Based Insurance (Private) | 177,152,000 | 59.6 |
Private Insurance (Non-employer-based) | 24,538,000 | 8.2 |
Medicare (65+) | 40,343,000 | 13.6 |
Medicaid | 38,281,000 | 12.9 |
Uninsured | 46,995,000 | 15.3 |
Source: U.S. Census Bureau (http://www.census.gov/compendia/statab/tables/09s0146.pdf)
(a) Employer-based insurance
The current system, to the extent that it does work, is largely due to employer-based private insurance, which grew out of historical accident during World War II. Corporation profits were heavily taxed and wage controls were instituted, resulting in employers offering health benefits to attract workers, which was fully tax exempt. The tax exemption continues to this day, allowing millions of workers to obtain health insurance for themselves and their family members as part of their overall compensation package. It remains to this day a pretty good deal, to those who are fortunate enough to benefit. But increasing premiums, due to a number of factors, including skyrocketing medical costs, are slowly unraveling this arrangement, leading to fewer and fewer people obtaining insurance through their employer, and at increasing costs for those who continue to receive such benefits. Additionally, such a system, as beneficial as it is to those who remain employed, can be equally tumultuous to those who become unemployed, particularly within the context of a prolonged economic downturn.
Employer-based insurance, also referred to as group coverage, is typically less expensive than purchasing insurance directly on the open market, mostly due to sheer numbers and bargaining power, presenting a “partial solution to the problem of adverse selection,” according to economists Paul Krugman and Robin Wells[i]. Of course, the bargaining power of a particular group plan will vary depending on the number of participants in the group and the degree of the insurance company’s market concentration, which varies by state.
To complicate matters further, this arrangement, as noted above, is slowly unraveling. Premiums have increased at a faster rate than income (measured in GDP growth), prompting fewer and fewer employers from offering insurance.
Below is a chart demonstrating the rise of employer-based health insurance premiums since 1999:
Source: Kaiser Family Foundation Employer Health Benefits 2008 Survey – Exhibit 1.9 http://ehbs.kff.org/?page=charts&id=1&sn=6&ch=616
And here is a chart demonstrating the cumulative changes in health insurance premiums compared with inflation and workers’ earnings:
Source: Kaiser Family Foundation Health Care Costs: A Primer http://www.kff.org/insurance/upload/7670_02.pdf
The above premium increases are well above the rate of inflation and income growth during the same time period. The increase in premiums is leading many employers to drop such benefits. Since peaking in 2000, the percentage of people who receive health insurance from their employer has begun to steadily decline (see chart below), which correlates with fast growing premium rates and turbulent economic conditions (which lead to a higher number of unemployed).
Source: U.S. Census Bureau (multiple years)
http://www.census.gov/compendia/statab/past_years.html
The increase in employer-based insurance enrollees during the mid to late 1990s can be attributed to the short-lived relative success of the emergent “managed care” systems in holding down costs during that time period. For several reasons, however, managed care failed to deliver sustained long-term cost reduction. With premiums growing at a significantly faster rate than both inflation and workers’ earnings, an ever-increasing proportion of total employee compensation is being devoted to health insurance.
While the percentage of people obtaining health insurance through their employer has begun to decline, employer-based insurance still represents approximately 59.6 percent of the population. What happens to the people who lose their employer-based insurance, either due to unemployment or their employer eliminating the benefit? What about those people who are self-employed or work for a business that does not offer group health insurance? What means do these people have in obtaining health insurance and at what price?
(b) Non-employer-based private health insurance
Individuals and their family members who are covered by employer-based health insurance, despite facing rising premiums, do not face the type of financial and health insecurity that those outside of the employer-based system face. Indeed, those who are not fortunate enough obtain insurance through an employer, and fail to qualify for Medicaid coverage, face enormous uncertainty and risk, leading many to forgo necessary medical procedures or face financial ruin, often culminating in bankruptcy. In fact, according to health economist Jacob S. Hacker, “roughly half of bankruptcy filings are related to medical care, with the vast majority of medical bankruptcies involving households that have health insurance.”[ii]
Purchasing insurance on the open market is much more complicated than obtaining coverage through an employer. Past medical history is highly weighted in an insurance company’s decision process as to what a particular insurance plan will cost the applicant and whether coverage will be offered at all. This, by itself, does not necessarily make the insurance company evil—after all, insurance companies need to turn some profit. But the fact remains that many people—often those who need it most—are unable to obtain health insurance on the open market, whether due to costs or access. Furthermore, those individuals who are fortunate enough to gain access to private insurance and are able to afford it, cannot be guaranteed that their coverage will not be rescinded upon serious illness—what is referred to as “rescission.” (Imagine that: paying enormous sums of money to purchase health insurance only to find out, upon becoming seriously ill, that your coverage doesn’t cover your illness; or that it only covers your illness for a certain amount of time; or that the insurance company has found some convenient loophole that renders them not responsible for coverage.)
In addition to the insecurity that many privately insured individuals face, private health care insurance has simply failed to control health care costs. In fact, private health care premiums have risen at a much faster rate than both publicly administered plans in the United States (such as Medicare) and compared to heath costs across industrialized countries. The track record is not very good. Healthcare economists point to several reasons why healthcare costs are so high in the United States and growing much more rapidly than other industrialized countries. Two of these reasons are (1) the unusually high administrative costs as a percentage of all healthcare spending and (2) the distribution of market power among insurers and healthcare providers. (I address these two factors primarily, as reform efforts to contain costs over time will hinge, at least initially, on addressing the high administrative costs and the market structure of the various insurance markets across the country).
Contrary to what free market ideologues would have you believe, the health care market has never been, nor could ever be, structured on free market principles, where goods and services are traded freely and resources allocated efficiently. The free market simply runs contrary to the very nature of health care and, in particular, health insurance, where there is considerable risk and uncertainty. For example, an individual does not know when or whether he or she will need care. And care, if needed, can be extremely expensive—hence the need to pool risks, the need for insurance. But insurance companies suffer a loss if and when the insured party requires medical payment. In such an environment, insurance companies spend considerable amounts of money attempting to deny as many claims as possible and also to screen applicants so as to avoid covering people most likely to need care. High administrative costs—from “underwriting” to marketing to profits—account for an ever-increasing share of premiums. For instance, plans for large employer-based groups contain administrative costs in the range of 5-10 percent of premiums, plans for companies in the “small group market” contain administrative costs of 25-27 percent of premiums, and, in the individual market, as high as 40 percent of premiums.[iii] Compare those numbers to the public Medicare plan (in the range of 3 percent) and the OECD average—where the U.S. pays approximately six times more per capita on administrative costs—and you begin to understand why both insurance market regulation and a competing “public option” plan are being discussed as part of the reform effort.
Market structure—both on the provider side and the insurer side—contributes to the unusually high health care costs in the United States in relation to other industrialized nations. According to a study of insurance market consolidation by James Robinson, “in 36 of the 50 states, three or fewer insurers accounted for 65 percent of the commercial [insurance] market in 2003.”[iv] And according to a 2008 study by Holohan and Blumberg, “thirty-four states had values of the Herfindahl-Hirschman Index (a measure of market concentration) that exceeded federal guidelines that deem industries of anti-trust concern.”[v] According to the study by Robinson (2004), private insurance revenue has increased even faster than medical costs, “indicating that insurer market power allowed the firms to not only pass on rising health care costs to purchasers but to also increase profits at the same time.” (For instance, while health spending by the privately insured increased by 6.7 percent annually between 2000 and 2007, increases in single and family premiums rose by 8.9 and 9.5 percent, respectively, over the same time period).[vi] On the flip side, hospital and provider rates are not set by the market either, but by hospitals (and providers) with different degrees of market power, according to the study by Holahan and Blumberg.
(c) The uninsured: who pays the cost?
A total of nearly 47 million people, or 15.3 percent of the population, were uninsured in 2006, a number that continues to rise and does not account for those who are underinsured. For starters, many people are self-employed, transitionally unemployed, employed by a business not offering insurance, and either cannot afford private health insurance or have been denied coverage. Several trends can account for this increasing number, including the aforementioned decline in employment-based insurance, rapidly increasing premiums, and increased efforts by insurers to screen applicants deemed too risky. Granted, some of the people who fall under the classification of “uninsured” choose to go without insurance, particularly, but not limited to, healthy young persons. But even the uninsured cannot be denied medical treatment in an emergency—nor should they—resulting in those costs being recycled back into the system in the form of higher premiums for everyone else. Therefore, as will be argued later, in addition to the moral imperative to provide all citizens access to affordable basic healthcare, there is also an economic imperative that effects us all—in the form of higher healthcare costs and premiums for everyone else. The United States is the only advanced country that does not guarantee basic healthcare to all citizens.
(d) Medicare: A brief word on cost inflation
Despite what critics of government-administered health insurance would have you believe, the United States already has in place a government-run single-payer insurance program that is both wildly popular and considerably more effective at holding down costs than private insurers. That program, of course, is Medicare—the federally financed health insurance program for seniors, instituted in the mid-1960s. Despite its flaws, the Medicare system has performed far better than private health insurance since at least the early 1980s, as the chart below demonstrates.
Source: Hacker, Jacob S. The Case for a Public Choice in National Health Reform
http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf
II. Cross-Country Health Care Cost Comparison
Before we examine U.S. health spending in relation to other countries, let’s first take a look at the actual growth in U.S. healthcare expenditures in isolation. Even without seeing these costs in relation to other advanced countries, we can see that healthcare costs have risen significantly and have accounted for an ever-increasing share of national income, or GDP—from a mere 5.2 percent in 1960 to 16.2 percent in 2007.
Source: Kaiser Family Foundation Health Care Costs: A Primer
http://www.kff.org/insurance/upload/7670_02.pdf
Both health expenditures per capita and the percentage of national income (GDP) spent on health care in the United States far exceed that of almost all other advanced industrialized countries. According to the Organization for Economic Cooperation and Development (OECD), the United States spent $7290 (adjusted for international purchasing power parity PPP) per capita in 2007. Compare that with France ($3601 PPP) or our neighbors to the north, Canada ($3895 PPP). Additionally, all other OECD countries spend a significantly lower percentage of national income, measured as GDP, on health care than the United States, but with no obvious advantage in health outcomes for the U.S. Such significant differentials in health spending would lead one to believe that health outcomes in the United States are at least somewhat better than in the other OECD countries, but that is clearly not the case:
OECD Country | Health Care Expenditure (% of GDP), 2007 | Per capita health care expenditure ($PPP), 2007 | Public health expenditure (% of total), 2007 | Life Expectancy, Years, 2006 | Infant Mortality Rate (Per 1000 births), 2006 |
| United States | 16% | $7290 | 45.4% | 78.1 | 6.7 |
| Canada | 10.1 | $3895 | 70 | 80.7 | 5 |
| France | 11 | $3601 | 79 | 80.7 | 3.8 |
| Germany | 10.4 | $3588 | 76.9 | 79.8 | 3.8 |
| UK | 8.4 | $2992 | 81.7 | 79.1 (2005) | 5 |
| Switzerland | 10.8 | $4417 | 59.3 | 81.7 | 4.4 |
| OECD median | 8.2 | $3588 | 80.7 | 73.3 | 9.5 |
Source: OECD Health Data 2009
http://www.oecd.org/document/16/0,3343,en_2649_34631_2085200_1_1_1_1,00.html
As can be seen from the table above, the United States spends at least 40 percent more on health care than the other OECD countries listed, yet life expectancy is slightly lower and infant mortality rates slightly higher in the United States. Life expectancy and infant mortality rates are not, prima facie, the only indicators by which we should measure a health care system, however. Other indicators, such as the number of deaths incurred from various medical conditions—cancer, diabetes, respiratory system diseases, and cerebrovascular diseases—paint a picture in which the United States is marginally better than other advanced counties in some health outcome indicators, while lagging behind in most others, despite enormous expenditure differentials:
OECD Country | Deaths per 100,000 – Reparatory system diseases, 2005 | Deaths per 100,000 – Diabetes, 2005 | Deaths per 100,000 – Cancer, 2005 | Death per 100,000 – Cerebrovascular diseases, 2005 |
United States | 59.8 | 20.3 | 157.9 | 33.4 |
Canada | 43.3 (2004) | 18.4 (2004) | 169 (2004) | 31.2 (2004) |
France | 30.6 | 10.9 | 165.6 | 29.9 |
Germany | 38.6 | 16.2 | 159.3 | 42.9 |
United Kingdom | 75.3 | 6.7 | 173.3 | 52 |
Switzerland | 31 | 10.8 | 139.4 | 28.5 |
Source: OECD Health Data 2009
http://www.oecd.org/document/16/0,3343,en_2649_34631_2085200_1_1_1_1,00.html
To what extent does the American lifestyle, with its higher propensity for obesity and chronic illnesses, such as diabetes, contribute to the higher health expenditures? According to a study by the McKinsey Global Institute, only a fraction of the entire cost differential between the U.S. and other countries, or what amounts to approximately $100 per capita.[vii] A closer look at the numbers, and we’re not getting more for our health care buck, despite spending much more than other countries. For instance, according to the OECD, there are actually fewer physicians per 1000 people in the United States (2.43) than in France (3.37), Germany (3.50), and even the UK (2.48). The same applies to hospital beds per 1000 people, with vast differentials between the United States (3.1) on the one hand, and France (7.1) and Germany (8.2).
What accounts for such cost differentials between the United States and other industrialized countries? Princeton health economist Uwe E. Reinhardt, in a 2004 paper, identifies several factors:
(1) Higher GDP per capita in the United States, which provides us with a greater ability to pay for health care services.
(2) The distribution of market power and prices in the United States (i.e. market structure). Reinhardt points out that Americans “pay much higher prices for the same health services than citizens in other countries pay.” Reinhardt attributes this to the “highly fragmented organization of the financing of health care in the United States” which “serves to allocate relatively greater market power to the supply side of the health care system then to the demand side,” a point that will become important when analyzing potential reform proposals. Other countries, such as Canada, have large single-payer systems with significant market power, and others (such as Germany) are multipayer, but bargain collectively with the health care providers.
(3) According to OECD data, many countries have higher physician- and nurse-to-population ratios than the United States, as well as a higher hospital beds per capita. This puts more strain on the health care system, and increases demand relative to supply.
(4) Administrative complexity and costs, which, as we have seen above, is much higher in the United States system than in other countries’ systems.[viii]
As disquieting as the above comparisons may be, they only deal with cost differentials and speak nothing of the millions of Americans who are uninsured or underinsured. Remember, the United States is the only advanced democracy to not provide essential health insurance to all of its citizens. As these numbers come into view, it becomes very easy to see why the World Health Organization (WHO) ranked the United States 37th in the world in terms of health care.
III. Concluding Remarks
Even those of us who feel secure in the current arrangement may find ourselves on the “outside” when the time for care arises. We have a system that contains out of control costs and does not adequately serve millions of Americans. The data above paint a clear picture for the need for reform. But what types of reforms are policymakers seriously proposing, and what effect will such reforms have on lowering costs while providing greater access, choice, and security?
[i] Krugman and Wells (2006) – “The Health Care Crisis and What to Do About It,” The New York Review of Bookshttp://www.nybooks.com/articles/18802
[i] Jacob S. Hacker (2008) – “The Case for Public Plan Choice in National Health Reform” http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf
[iii] David Himmelstein, et al., "Illness and Injury As Contributors To Bankruptcy." Health Affairs, 2005. Accessed November 25, http://content.healthaffairs.org/cgi/reprint/hlthaff.w5.63v1.
[iv] Robinson, James C. 2004. “Consolidation and the Transformation of Competition in Health Insurance.” Health Affairs 23(6): 11–24. Cited in John Holahan and Linda J. Blumberg (2009) – “Is the Public Plan Option a Necessary Part of Health Reform?” – Urban Institute
http://www.urban.org/UploadedPDF/411915_public_plan_option.pdf
[v] Holahan and Blumberg (2009)
[vi] Robinson (2004)
[vii] Angrisano, et al (2007) – “Accounting for the Cost of Health Care in the United States” McKinsey Global Institute http://www.mckinsey.com/mgi/reports/pdfs/healthcare/MGI_US_HC_synthesis.pdf
[viii] Reinhardt, et al (2004) – “U.S. Health Care Spending in An International Context,” Health Affairs May/June 2004
