The current debate over health care reform obscures the many problems that exist in the U.S. health care system. Too many people are uninsured – approximately 29 million – despite spending billions of dollars under the Affordable Care Act. We spend way too much money on health care – about 18 percent of GDP, twice that of comparable nations in Europe and Israel. And we have significant disparities: if you have quality health insurance, you can have access to the best healthcare in the world. If you are on Medicaid or lack insurance completely, then you may not get the care you need or even maintain the type of preventive care that can keep you healthy over the long run.
How we got to this place is a long and painful story, often paved with good intentions but more often leading to bad results. Since 1965, the main building blocks for our health care system have included employer-sponsored care, Medicare for the elderly, and Medicaid for the impoverished. Medicare and Medicaid came about in 1965 as a part of Lyndon Johnson’s Great Society. The idea was to fill in the gaps of those who were not getting employer-sponsored health care, namely the elderly, the disabled, and the very poor. This approach, expecting people to be covered by their employers unless they were elderly or impoverished, worked for a time, but gaps in the system began to emerge in the 1990s. One problem was the higher than expected cost of health care. When Medicare passed Congress, the House Ways and Means Committee projected that it would cost $12 billion by 1990; the actual cost of the system in that year was $107 billion, about nine times that initial projection.
Health Care Inflation
The problem of health care inflation surpassing inflation overall has been a feature of our post-1965 system, in which the vast majority of people have recieved their health services via third party payments. What this means is for a long time you would go to the doctor, show your insurance card and not have to pay anything at the point of service. Not paying anything out of pocket for services made it appear as if these services were “free.” Making health services appear to be free had its appeal but it also took the consumer element out of health care.
In so many areas of our economy, we have experienced the consumer revolution so that we are constantly encountering higher quality goods for lower price. Think of consumer electronics like TVs, computing devices, cars, etc. Products improve and prices go down because consumers have choices. In exercising their choices, consumers impose market pressures that force manufacturers to compete, either making their products better and cheaper or going out of business.
This consumer revolution has clearly not happened in health care. (One noticeable exception to this is in LASIK surgery. LASIK surgery is less expensive, safer, and more effective than it was years ago. This can be attributed, in large part, to the lack of coverage provided by insurance companies. The fact that the service is paid out of pocket forces consumers to shop for the best deal.)
As the chart shows, since we moved to a largely third-party payment system in 1965, the amount of out of pocket spending has been consistently dropping, while the percentage of health care as a percent of GDP has been steadily on the rise. More than half of health care spending came in the form of out of pocket expenses in 1965. Today, that figure is barely above 5%.
The growth of health care spending has had a number of deleterious effects. The increasing share of health care as a percentage of GDP meant that the government began spending a greater and greater amount on health care, not only creating a challenging fiscal situation but also making government more and more involved in the health care system. This problem has become increasingly acute in Medicaid. Medicaid is a program that is financed by a mix of federal and state spending. As the federal government – namely Congress – has frequently voted to increase the size and scope of the program, the obligations on the states to cover the people mandated by the government have increased. It is true that the federal government pays the majority of Medicaid spending, but the states still do pay a significant percentage, traditionally about 44 percent. In addition, the states often have balanced budget amendments, something the federal government decidedly does not have. This means that the states cannot run deficits to pay for the Medicaid program, but must instead squeeze out services such as education, public safety, and transportation. In the aggregate, states now spend about 25 percent of their total budgets on Medicaid. This aggregate figure is expected to pass $1 trillion by 2025.
In the Medicare program, spending is much greater than originally anticipated because of increased life expectancy. At the time that Medicare passed, the average life expectancy was about 65 years. It was not unusual for people to retire and then pass away shortly afterwards. Now, life expectancy is closer to 80, and Americans enjoy decades of life following retirement, which is a wonderful thing. Many retirees travel, consult, spend time with their grandchildren, and do other great things in their post full-time working lives. However, they are also being financed by the Medicare system, which heavily subsidizes health care for post-65 retirees. As a result of these increased obligations on the federal government, we are looking in the long term at the bankruptcy of the system. The baby boomers are currently retiring at the rate of 10,000 a day. When the last baby boomer retires around 2029, the Medicare part B hospital insurance system will be facing insolvency.
The third problem that emerged out of the post-1965 consensus was that changes in the work force meant that people have different relationships with their employers. The time of starting a job with a large corporation at 22 and retiring from the corporation at 65 with a gold watch, pension, and lifelong health insurance is no more. The average American has 10-15 jobs over the course of a career. Many more Americans are self-employed, or employed by small businesses that do not provide health insurance for employees. Americans also spend periods of time out of the workforce on self-development, or just taking a break. All of these people who are not employed by traditional employers must get health insurance in some other way, often via the individual market.
Individuals in the Market
By the 1990s, it became apparent that those who were entering the individual market were experiencing high costs and significant challenges in procuring the health insurance they needed. At this time, politics started to pay a bigger role in health care. In the 1992 presidential race, Bill Clinton made health care a major issue, and pushing for expanded health care coverage via government programs has been a standard part of the Democratic playbook ever since. All of these factors – higher costs, financially strapped government systems, people lacking coverage – came to a head after the 2008 election of President Barack Obama, leading him to push for and pass the Affordable Care Act in 2010. The ACA largely failed to solve all of the many problems facing our health insurance system. But it did create subsidies for an additional 20 million or so Americans. It is these additional subsidies that have made it much harder to actuate changes along the lines of what the Republicans are trying to do. Any changes lead to accusations of Republicans “taking away” health care from people.
Challenges to the System
Given these many challenges, what is to be done? How can we improve our health care system in a time of extreme polarization and partisan bitterness?
There are a number of plausible pathways for improving health care in this country, but the main goal in doing so should be to reduce the cost. For too long, the default DC option has been to increase subsidies for some as a means to get more people covered. This approach has had the opposite effect of that which was intended. Increasing government subsidies for a product tends to make that product more expensive for those who wish to purchase it. Reagan era Education Secretary William J. Bennett coined the “Bennett Hypothesis” distilling this concept. As Bennett put it in a 1987 New York Times essay, “increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase.” Health care does not work in precisely the same way, but it is also the case that more taxpayer money in health care has not been an effective way to drive down costs.
In addition to recognizing that more government money is not the answer, policy makers need to understand the impact of incentives in health care. The incentives in our current system do not reward consumer-based behavior, which limits market disciplines from having a positive impact on price and quality. Reducing government involvement and increasing consumer engagement can help change the misaligned incentives that currently plague our health care system. In recent years, employer-sponsored plans have been making the transition to HDHPs, or high deductible health plans, in order to increase employee engagement. According to the Kaiser Family Foundation, the percentage of workers with HDHPs grew by 8 percent in 2014 and 2015. At the same time, Kaiser Family Foundation also found that average premiums are significantly lower in those HDHP plans with a savings option. This kind of successful private sector innovation should be driving health policy changes, such as health savings accounts, which encourage individuals to save tax-free to pay for health care costs. HSAs, which came out of the Bush-era Medicare Modernization Act, could be expanded to help taxpayers act more like savvy consumers rather than passive beneficiaries of third-party payments.
This leads to another point about the benefit of private sector innovation overall. Private sector changes in plan design such as the one outlined above are only one way in which innovation can drive down cost. We are in the midst of a technological revolution that is allowing providers to wield new treatments and new cures, and also to allow analysts to evaluate vast swaths of data to determine what is and what is not working in health care. As promising as these new technologies are – and they are indeed quite promising – their deployment and utilization will not be driven by government. Government health determinations are too slow, too determined by politics, and too far divorced from the bottom line to allow government programs to serve as a leader in bringing health care innovations to market. The private sector is far better equipped to take that leading role, with government to follow once the innovations are recognized and integrated into the system. That is why we need to maintain and even expand the role of the private sector in health care. If we are going to be able to find ways to drive down the cost of healthcare in the years ahead, we will need the private sector to take the lead.
Finally, it is extremely important that policymakers proceed with modesty. No government program or single piece of legislation can fully reform our enormous and inefficient $3.2 trillion health care system. The Affordable Care Act, with its 2,700 pages and tens of thousands of pages of regulations was a misbegotten attempt to control health care from Washington. It proved that hundreds of millions of people making billions of health care interactions cannot be controlled or made more efficient by Washington. Going forward, policy makers should heed the lessons of the ACA and aim for more manageable health care policy changes in the future.
Tevi Troy, Ph.D, is a Jewish Policy Center Fellow, CEO of the American Health Policy Institute, and a former Deputy Secretary of Health and Human Services under George W. Bush. His latest book, Shall We Wake the President? Two Centuries of Disaster Management from the Oval Office, is reviewed in this issue.