The Picture of Health

Friday, April 6, 2012

From the facts, we know that Americans enjoy outstanding access and quality in their health care system. The only real “crisis” in America’s health care today is the unsustainable, increasing burden of health care costs on the government budget and the economy. The federal budget is directly affected by the rising cost of health care in two major ways: first, Medicare and Medicaid outlays increase as the population ages and as medical practice expands along with more advanced interventions; and second, tax subsidies for health care are massive, and they increase as the cost of tax-sheltered insurance rises.

According to the Centers for Medicare and Medicaid Services (CMS), total health spending has reached about $2.6 trillion, amounting to 17.6 percent of GDP in 2010. Although part of the rise results from a predictable growth in the number of aged beneficiaries, more of it is attributed to the way costs per beneficiary are expected to continue growing faster than per capita GDP. National health spending is expected to rise 5.8 percent per year from 2010 through 2020, culminating in a 19.8 percent share of GDP by 2020.

If such excess growth—as economists call it—continues as projected, federal spending on health care alone will approach the total amount collected in federal tax revenues within fifty years.

And then there are the subsidies delivered through the tax code. In 2009 dollars, the state and federal governments will lose roughly $260 billion from the fact that expenditures by employers (and more than 80 percent of expenditures by employees) on employer-sponsored health insurance are not taxed as compensation.

Within fifty years, federal spending on health care will approach the total amount of federal tax revenues.

On its current trajectory, spending on Medicare and Medicaid health care threatens to severely restrict or even eliminate spending on all other critical public needs and strategic national priorities.

The recent health reform legislation known as the Patient Protection and Affordable Care Act (PPACA) imposes drastic changes on the health care system of the United States. In a significant shift of control of medical care and health insurance to the government, the health care bill

  • imposes an individual mandate for the purchase of health insurance;
  • creates government-regulated “insurance exchanges” through which individuals would choose among plans defined as acceptable by the government, within a subsidized and highly regulated framework;
  • imposes coverage requirements on larger employers;
  • sets up new regulatory committees, like the Independent Payment Advisory Board, to dictate prices for medical care (without admitting that this is virtually identical in result to rationing);
  • provides tax credits to certain small employers who offer health insurance; and
  • expands eligibility for Medicaid, shifting over twenty million patients to an already unsustainable program and its current limited access to doctors and hospitals.

Despite the mandates, shifts to Medicaid, new regulatory bodies, new taxes, and other parts of the legislation that radically change the landscape of health care and health insurance in the United States, the new law will not significantly reduce the costs of health care. Most recent projections indicate that the law will increase health spending. As the Congressional Budget Office stated in 2010, “Rising health costs will put tremendous pressure on the federal budget during the next few decades and beyond. In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure.”

One of the primary ways the PPACA intends to reduce the number of uninsured Americans (another flawed calculation that has been grossly exaggerated) is by shifting twenty million newly eligible Americans to Medicaid. Adding more patients to a failing and financially unsustainable entitlement program defies logic—even if one could overlook existing problems already identified in Medicaid, such as lack of access to doctors and scandalously poor health outcomes linked to inadequate reimbursements of health care providers. One in four Americans are to be covered by the failing program by 2016. A joint analysis from the Republican members of the Senate Finance and House Energy and Commerce committees estimates that this will force an additional $118 billion in Medicaid costs onto the states. This is even more sobering in light of the dismaying tendency of health care entitlements to exceed cost projections.


The perils of the unanticipated price tag were visible in President Lyndon Johnson’s own words when he introduced Medicare to the nation. As he signed it into law in July 1965 with former president Harry Truman at his side, Johnson stated that “there are more than eighteen million Americans over the age of 65. Most of them have low incomes. Most of them are threatened by illness and medical expenses that they cannot afford. And through this new law, Mr. President [Truman], every citizen will be able, in his productive years when he is earning, to insure himself against the ravages of illness in his old age. This insurance will help pay for care in hospitals, in skilled nursing homes, or in the home. And under a separate plan it will help meet the fees of the doctors.”

Johnson went on to explain how Medicare would affect the taxpayer: “During your working years, the people of America—you—will contribute through the Social Security program a small amount each payday for hospital insurance protection. For example, the average worker in 1966 will contribute about $1.50 per month. The employer will contribute a similar amount. And this will provide the funds to pay up to ninety days of hospital care for each illness, plus diagnostic care, and up to one hundred home health visits after you are sixty-five. And beginning in 1967, you will also be covered for up to one hundred days of care in a skilled nursing home after a period of hospital care. And under a separate plan, when you are sixty-five—that the Congress originated itself, in its own good judgment—you may be covered for medical and surgical fees whether you are in or out of the hospital. You will pay $3 per month after you are sixty-five and your government will contribute an equal amount.

“The benefits under the law are as varied and broad as the marvelous modern medicine itself. If it has a few defects—such as the method of payment of certain specialists—then I am confident those can be quickly remedied.”

Adding more patients to a failing and financially unsustainable entitlement program defies logic.

While LBJ was overly optimistic that the “few defects” in the law would be “quickly remedied,” he was also far off base in his projections about costs to American taxpayers. Adjusted for the consumer price index (CPI) for inflation, that $1.50 monthly payment for Medicare would equate with about $10.50 for the average worker today. According to CMS, the average worker under sixty-five pays about $450 per month in 2011 for Part A; the premium for Part B, which depends on income, ranges from $115.40 to $369.10 per month. In other words, approximately fifty to eighty times Johnson’s anticipated price, adjusted for inflation. When Medicare was enacted in 1965, it was expected to cost $3 billion a year, equivalent to $20 billion in 2008 dollars. In 2008, net outlays for Medicare exceeded $400 billion.


The overall goal of any health reform plan should be to increase the opportunity for good health for Americans and their families. Providing health care excellence and structuring a system to reduce costs and improve access require caution and great care, particularly in a country where quality, access, and innovation are already outstanding and valued. Unfortunately, many factors intrinsic to progress in medical care adversely affect the cost of health care and insurance, including desirable scientific advances that allow unforeseen treatments, the increasing reliance on sophisticated technology, innovative drugs, and safer but more expensive medical devices. Independent demographic factors, such as the aging of the population and increasing rates of risk factors for chronic diseases, also play a part.

“The average worker in 1966 will contribute about $1.50 per month,” President Johnson promised when unveiling Medicare. Today’s cost is fifty to eighty times higher.

Financial resources are always, and always will be, limited. It is true, but often denied, that health care is not really different from other essential goods and services like food, housing, and clothing—all are vital, yet none can be free from cost consideration. Reforms, therefore, must focus on the goals most critical to solving the serious problem at hand—exploding costs to the government and society—without harming the proven distinction and unique access the American health system already offers.

Policy and government leaders must take their direction from the American people, who differ from residents of other countries over even fundamental features of health care systems, such as access and quality of care. Americans value prompt access, while people in other countries may not. For example, the OECD noted that “almost 60 percent of Americans thought it was essential or very important to get elective surgery without much delay, whereas 72 percent of Dutch physicians and patients thought waiting lists were acceptable to regulate access to medical services.” Americans also prioritize the latest technology, perhaps more than citizens of other countries. Surveys demonstrate that 80 percent of Americans say that being able to get the most advanced tests, drugs, and medical procedures and equipment is “very important” or “absolutely essential”; a full 67 percent say technologies such as digital imaging and advances in health information technology will improve patient care and/or reduce medical costs, while only 10 percent think these advances cost more than they are worth. High interest in medical technology cuts across income and education subgroups in the United States.

No society would want its citizens to forsake essential medical care because of financial need, and insurance reduces the financial barriers and trade-offs that limit the delivery and purchase of medical care. But health insurance is a source of significant cost escalation if structured inappropriately, because it can shelter the consumer from considering price and value in health care decisions and lead to excess demand. Health insurance clearly has evolved to be very different from other forms of insurance. Instead of insuring against an unanticipated and significant financial loss, health coverage has been distorted so that even the most minor, fully predictable expenses are paid. The ramifications of widespread insurance that covers virtually any expense go beyond the high price of the coverage itself; such insurance interferes with consumer-driven price controls by encouraging excessive use of medical care and omitting value-based decision making. Insurance-market reform should lead to coverage that not only is affordable but provides the protections desired and valued by its purchasers, rather than coverage decreed by some third-party surrogate of government.

Health insurance reform should lead to coverage that is not only affordable but exactly what the buyer wants.

Fortunately, there is an approach to reforming health care in the United States that would increase competition in the health care and insurance markets and empower consumers at the same time. Under this approach, costs come down by consumer-driven, value-based purchasing rather than artificial government edicts. Its foundations are: substantive tax reforms that allow for government-provided assistance for those in need; serious regulatory overhauls of private insurance; and steps to reduce the role of the government as a direct insurer. Governmental impediments to competition and access should be removed; governmental efforts to have a positive impact on health care should be pursued. Government can remove the harmful incentives of a liability system out of control, which generates unnecessary and costly defensive medicine. It can also force transparency about price and quality, stimulating competition for care and coverage. The ultimate goal should be to reduce cost while shifting authority and control to individuals and their families for these most personal and critical decisions.