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WHY HEALTH CARE COSTS SO MUCH AND WHAT WE CAN DO ABOUT IT
(Springfield, Ill.) Government intervention in the economy, whenever it is tried, often comes with unintended consequences that make matters worse. The arena of health care is no exception.
Over recent decades, the debate over what has caused health care costs to rise so swiftly has intensified, developing two largely distinct groups of argument. There are those who blame bad actors for enriching themselves at the expense of the sick and infirm. This group believes that greater government intervention and more control can fix "market failures" and punish the greedy. On the other side, there is a group that believes that smaller is better, and that if consumers are put in charge of health care dollars, innovation and entrepreneurship will bring about access to quality health care in a more efficient manner.
In examining these two competing paradigms, it is abundantly clear which is better. In the areas of tax policy, insurance market structures, and regulation, attempts at government intervention have only made what is a naturally expensive proposition even more so. Only by understanding the fundamental incentives created by current policies can we understand how to attack health care inflation and continue to keep health care inflation in line with the economy as a whole.
The Enemies List
Critics of the health care industry like to place blame for rising costs on an ever-growing list of enemies. In the 1970's it was the doctors, so the answer was health maintenance organizations (HMOs), which were used as a way to control doctors”doctors who were then rebelling at low reimbursement rates by supplying more services than needed. This, argued the critics, was a way of padding their wallets. HMOs controlled costs by denying treatments and services through rationing of care. By the 1990's, when HMOs worked as advertised, they became the bad guy and over time they were overthrown.
In the latter part of 1990's and in the early years of this decade, prescription drug companies became the culprit. Yet, for every $18 spent on prescription drugs, $72 is saved on health care, because drugs are less expensive than hospitalization and other labor-intensive practices. Moreover, throughout the 1990's, prescription drugs were being utilized much more often than in previous decades. 60% of the growth in drug spending was a result of increased utilization, while 40% of the increase was due to price inflation. Again, interfering with this marketplace is a self-defeating exercise.
Today, we're back to insurance companies, the latest group to be targeted as health care enemy number one. The Democratic presidential candidate, Senator Barack Obama, has attacked excessive health insurance profits. According to his website, "Barack Obama will prevent companies from abusing their monopoly power through unjustified price increases. In markets where the insurance business is not competitive, his plan will force insurers to pay out a reasonable share of their premiums for patient care instead of keeping exorbitant amounts for profits and administration."
Even the Republican nominee can't help himself. Even though his health care plan is chock full of pro-market reforms, Senator John McCain (R-AZ) has announced plans to meddle with the market through "reasonable limits on premiums" for certain segments of insurance consumers.
Yet, the profits of the five largest insurance companies in the US account for a mere 0.5% of the nation's total health care spending. The five biggest insurance giants, who cover more than 105 million Americans more than half of those enrolled in private insurance had profits of $11.8 billion last year. To put that in perspective, Americans spent $2.3 trillion on health care last year. If government seized every profit made by health insurers, there literally wouldn't be a dime's bit of difference per dollar spent on health care.
Previous efforts to punish perceived enemies have resulted in a regime in which health care decision-makers have become hospitals, insurers and "experts" in and out of government and these decision-makers often trample the best interests of patients. Non-profit hospitals have leveraged their status to stop innovations such as specialty hospitals and other for-profit ventures to protect their turf. Insurers have used their gatekeeper status to limit what doctors can be seen and have relied on denying services to individuals to cut costs. Health care experts in academia have challenged the idea that doctors and patients are best at determining the course of care.
A Better Approach to Understanding Rising Health Care Costs
Policies designed to "fix" health care in the past have repeatedly been undermined by the law of unintended consequences. The idea behind government intervention is that somehow health care experts, non-profit hospital directors, and government officials are immune to both self-interest and fallibility and that a few thousand people can out-think and out-guess three hundred million Americans.
Past attempts at curbing doctors' costs, prescription drug costs and now insurance costs all point to the folly of this thinking, resulting in poor tax policy, intrusive regulations and other ineffective government interventions. The answer to fixing these problems isn't more of the same, but is instead undoing the discriminatory tax treatment of health; addressing an insurance market replete with incentives to spend more than is necessary; and deregulating health care. Letting individual choice dominate decision making just as it does in most other parts of the American economy is the key to delivering better services at ever lower prices.
Fixing Tax Policy
An early incarnation of poor health care tax policy came as a result of wage caps placed on employers during World War II. In order to attract quality workers, fringe benefits such as health insurance became part of compensation benefits that are now codified by IRS rulings and the US Congress. Today, employers are currently able to offer health insurance as an untaxed benefit.
With this ostensibly positive development, of course, come many unintended consequences. The top of list is the fact that individuals face tax discrimination when not insured by an employer. Alleviating this tax discrimination could be achieved by allowing individuals to deduct health insurance expenses from their personal income taxes. This would break the tie between employment and health insurance, allowing greater personal job mobility and addressing the portion of the uninsured that are uninsured due to job losses.
These steps would also make the health care finance system more transparent. With consumers purchasing their own health insurance, they would know the true cost of care and thus spend their dollars wisely. By having fewer uninsured, there would be less pressure on expensive government-run programs such as Medicaid as well.
Ending Third Party Payer
When the user of a service doesn't have to pay for the service directly, thus giving the user no incentive to control costs, economists call it price illusion. Price illusion is an important unintended consequence of the third party payer system developed in the U.S., in which the insurance provider (the third party) pays the majority of the insured's medical bills.
This leads to over-utilization of health care services (higher demand driving higher costs).Ending this price illusion can only occur when the individual making the treatment decisions is the person paying the bill. As originally conceived, health insurance was only supposed to cover catastrophic costs while routine care needs were paid for out of pocket. However, distortions in the tax code and the advantages of having employer-provided care has morphed health insurance into pre-paid health care.
With the growing popularity of health savings accounts and innovations such as low-cost retail clinics, consumer-driven health care is already driving down costs for many. It should be noted in the areas of plastic surgery and certain laser eye surgeries, costs are dropping while quality is improving. These are services not covered by traditional insurance policies and must operate in a transparent marketplace where consumers are privy to such information as true pricing and provider success rates. This set of circumstances can be replicated in other areas of health care but face stiff opposition among those who believe greater government intervention.
De-Regulating Health Care
From insurance coverage benefit mandates at the state level to the US Congress literally dictating things like which drugs doctors can prescribe and the dosage of medication that can be given to dialysis patients, health care is one of the most if not the most regulated markets in the US. Fifty cents out of every dollar paid for health care, in fact, comes from the government. The US system is not a market-based system but instead a hybrid system that incorporates market mechanisms in some areas and government intervention in others. The result: an inefficient, bureaucratic mess.
According to the Council on Affordable Health Insurance, state government mandates mandates that prescribe everything from the treatments private insurance must cover or additional services they must add can increase the cost of health insurance sold in the individual market by 20% to 50%, depending on the state and the mandate. In its annual survey, the group counted more than 1,900 benefit mandates this year.
Ending the practice of state health insurance mandates or allowing stripped down, low-cost catastrophic polices for those who can't afford top of the line comprehensive coverage is one way to address rising costs.
The federal government, through the "Health Care Choice Act," would allow health insurance to be sold across state lines. Through existing federal law, states could open their own markets to competition. In New Jersey, with the highest insurance rates in the country, this has just been done. If it were done in Illinois, a family living in Chicago, for example, could save upwards of $3,000 per year if they were able to buy their insurance in Iowa.
Licensure requirement abuse, tort reform, and ending centrally planned facilities boards are means by which states and the federal government could alleviate pressure on health care costs. Existing institutions such as medical societies and non-profit hospitals can use licensure and central planning authorities to capture regulatory bodies and use them to artificially protect turf and profits. Opening up the marketplace to retail clinics operated by nurse practitioners, and cracking down on non-profits abusing their status are two ways to improve both the quality and access to care in a cost efficient manner.
The Bottom Line
The key to addressing America's long-term fight with rising health care costs lies not in attacking and demonizing groups in an effort to punish perceived enemies. Instead, by understanding the underlying cost structures and incentives, we can develop strategies to improve access to quality care in a much more cost-efficient manner.
Randall J. Pozdena, PhD. "First, Do No Harm: Why American Health Care Policy is Failing and How to fix It." Illinois Policy Institute: 2004 p. 18.
M. Merlis. "Explaining the Growth in Prescription Drug Spending: A Review of Recent Studies." U.S. Dept. of Health & Human Services. August 2000
"Barack Obama's Plan for a Healthy America" Obama for America: 2007, p. 10
John McCain, "Straight Talk on Health Care Reform." http://www.johnmccain.com/Informing/Issues/19ba2f1c-c03f-4ac2-8cd5-5cf2edb527cf.htm
Mark Gimein. "Stop Blaming the Insurers." Slate. April 30, 2008. http://www.slate.com/id/2190273/
See Regina Herzlinger. Who Killed Health Care? America's $2 trillion Medical Problem And the Consumer-Driven Cure. McGraw-Hill: 2007
Greg Blankenship. Con Job: Health Facilities Planning Board has No Rationale for Continued Existence. Illinois Policy Institute, Nov. 2007. Or, Michael Cannon & Michael Tanner. Healthy Competition: What's Holding Back Health Care and How to Free It. Cato Institute, 2005.
See Regina Herzlinger. Who Killed Health Care? America's $2 trillion Medical Problem And the Consumer-Driven Cure. McGraw-Hill: 2007: Chapter 2: Killer No. 1: The Health Insurers.
JP Wieske & Victoria Craig Bunce. "Health Insurance Mandates in the States 2008." Council on Affordable Health Insurance, 2008, p3.
Greg Blankenship. "Should Affordable Health Care Stop at the State Border." Illinois Policy Institute. February, 2008. http://www.illinoispolicy.org/news/article.asp?ArticleSource=237
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