We’ve all heard the scary projections about US health-care costs – particularly the soaring costs of the government programs Medicare and Medicaid. Typical of the alarm bells is an analysis by the Heritage Foundation showing that so-called entitlement costs (chiefly government health-care programs, but also Social Security) are projected to exceed 25% of gross domestic product (GDP) by 2085 and to exceed all tax revenues by 2045.
In a recent article in the Financial Times, President Obama’s former budget director Peter Orszag said, “Official projections show federal health expenditure rising between now and 2050 from 5.5 per cent of gross domestic product to more than 12 per cent.” Total US health-care costs, private and public, will be nearly a fifth of GDP by 2021.This situation, we are told, is unsustainable, calling for radical changes in health-care policy, especially government policy.
Before tackling those changes, two preliminary questions must be asked. How much of GDP should be devoted to healthcare? And how high should the government-provided safety net be? Only after those questions are answered can the issue of how to change government policy be addressed – if indeed it needs to be changed at all.
How much of GDP should healthcare be?
Consider the following chart:

The median age of women at marriage in the US was 20 in both 1950 and 1960. Fertility peaked at 3.8 children per woman in 1959, then fell to less than half that in the early 1970s.
A woman married in the 1950s was likely to have three or four children and to be occupied with childrearing for the next 25 years. Let’s hypothesize that women occupied with childrearing constituted more than 20% of the adult population under the age of 65 in the 1970s.
Assuming that all pre-retirement-age adults were equally capable of contributing to GDP, childrearing in the 1970s hypothetically consumed more than 20% of GDP – more than all healthcare is projected to consume in 2021. And the impact on GDP didn’t end there – women preoccupied with childrearing when they were young may have been deprived of the type of job experience that would have allowed them to contribute productively to GDP later.
Of course, childrearing was not monetized and included in GDP then, but the greater part of caring for the health needs of the aged is now. Much of the health-care costs being consumed now, and to be consumed in the coming years, are devoted to the aged – and administered to them by the cohort whom they reared in the 1950s, 60s and 70s.
Why, then, is it of such great concern that nearly as much of GDP is being consumed in healthcare for the elderly as was consumed in the rearing of their offspring 40 years ago?
It is important to think about it in this manner because it also makes you realize that you can’t extrapolate the trend too far into the future (careful analysts like the Congressional Budget Office do realize this, of course). The baby-boomers who are entering their highest health-care years will be followed by the baby-bust generation, which should relieve some of the pressure.
Evaluating the safety net
In developed countries, it is presumed that no one should be forced to die in the street, suffer beyond some threshold level of distress, steal or eat garbage to survive. Hence, some minimal level of support must be provided to those who cannot afford to obtain it themselves. It is assumed that this minimal level of support will be guaranteed by government – for what other social institution can provide the same level of near-absolute guarantee?
Governing philosophies differ starkly on this point. At one extreme, Communism believes the safety net should be set at the level of average welfare, so that everyone is supported to achieve the same equal level. There is, to my knowledge, no government philosophy (except for anarchy) that believes in the opposite – no safety net at all.
There is, however, another consideration. All Americans agree, following Jefferson’s opening in the Declaration of Independence stating that “All men are created equal,” that equal opportunity must be provided to all Americans. Communists might go so far as to declare that equal results should also be provided (“to each according to his needs”). Complaints of socialism leveled at the Obama administration, coming from many on the political right, intimate that Obama’s policies are attempting to assure equal outcomes, not just equal opportunities.
It is not easy, though, to distinguish between providing equal opportunity and outcomes. The United States has a strong public library and public education policy, on the principle that everyone should have an equal opportunity to benefit from knowledge and education. Most states also provide the opportunity for a tertiary education, even though the ability to obtain tertiary education might be considered more of an outcome – depending on one’s prior achievements at educational institutions – than an opportunity to which one is entitled.
Does a guarantee of equal opportunity entitle everyone to equal healthcare? Many believe it does. Unfortunately, adherence to that belief will spell ruin. If everyone is entitled to the latest, highest-cost advancement in technology – whether or not it really is a boon to healthcare – the cost and waste will run amok.
Hence – because it is not possible to provide all health-care amenities, real or imagined, to everyone – a minimum safety net must be set. The problem is to determine what that minimal level should be.
EMTALA and the ad hoc emergency room safety net
President George W. Bush was ridiculed by many for saying, “people have access to healthcare in America. After all, you just go to an emergency room."
But what he was saying was true – and it is an explicit safety-net policy of the federal government.
The Emergency Medical Treatment and Active Labor Act (EMTALA) was passed by the U.S. Congress in 1986. It requires all hospitals that receive payments from Medicare or Medicaid to provide emergency treatment to anyone who shows up in a hospital emergency room, regardless of ability to pay. No government resources are provided to fund this mandate. Hospitals can – and will – charge patients and attempt to collect payment for the services they provide.
It is assumed that hospitals, in order to pay for this emergency room care, shift the costs to privately insured patients. (I believe this to be true anecdotally, because when my wife gave birth in a hospital many years ago, I noted on the itemized bill that a box of Kleenex cost $25.)
Many of those who believe in a stronger government role in healthcare point to this as an example of how absurd the current system is – it provides a kind of backdoor insurance through sleight-of-hand hospital accounting. But the policy is not necessarily absurd if one concedes that the safety net should be set only at the level of need required for emergency room care.
But what costs are shifted?
The need for sleight-of-hand hospital accounting may actually be due to the belief that every individual in the U.S. is entitled to the full panoply of health services (that is to say, that the right to health services above a minimal safety-net level is not an earned right but one that must be provided to all, to ensure equal opportunity).
I credit the distinction to Avik Roy, a Senior Fellow at the Manhattan Institute for Policy Research. Roy says that the bulk of hospital cost shifting is not to pay for emergency room services for those without means to pay but to make up for Medicaid underpayment for all levels of health-care services.
According to Roy, healthcare for patients covered by Medicaid is reimbursed at less than 60% of what private insurance pays. He says that this underpayment to hospitals for healthcare delivered to Medicaid patients accounts for much more cost shifting than healthcare delivered to the uninsured.
So the problem is not so much the cost of a safety net, but the cost of trying to provide all health services to all people.
One proposal for containing costs
How, then, can the costs of healthcare be contained? There are essentially two proposed solutions. One is to become more like Europe (and Canada, Japan, New Zealand and Australia), where it is taken for granted that social welfare systems for healthcare are a government responsibility. The other is to become more like the United States, where there is a strong philosophical preference for privatized delivery of most services.
For an informative and entertaining survey of how public health-care systems work in France, Germany, Japan, the U.K., and Canada there is no better source than former Washington Post correspondent T. R. Reid’s The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care. Reid suggests that we might better keep costs under control if, for example, we had a more efficient chip-based transferrable health records system like France, Spartan physicians’ offices like Japan or rationing like the UK.
All of these, however, are functions of the centralized, socialized health-care systems of those countries. And all of them entail measures that we appear to have taken off the table: strictly enforced information sharing among competitors, lowly fees and lifestyles for medical practitioners and decisions by panels on which ailments are worth curing and which are not.
If, on the other hand, you are philosophically opposed (or believe it will eventually blow up, fiscally, in the faces of the French, Japanese and British), you can turn for an alternative to Saving Medicare: A market cure for an ailing program by Joseph Antos, an American Enterprise Institute scholar.
Antos covers the specifics of Medicare in excruciating detail (if you want to know what wonky means, read this). Tediousness aside, it is nevertheless a good introduction to the fine points of Medicare.
Antos’ solution is another matter. He believes in a “premium support” program, also referred to as a “voucher” system. Under this system, instead of paying directly for healthcare, the government provides a chit to each recipient with a certain value that can be used to pay health insurance premiums. Recipients can then choose to use this to buy health insurance as they see fit.
The purpose is to make health insurance buyers aware of what they are buying and the cost, instead of having it handed to them by government nearly cost-free. This gives them an incentive to pick and choose among competing alternatives, thereby keeping costs under control and balancing costs against benefits.
Antos refers to this as a “defined contribution” system as opposed to a “defined benefit” system. In an analogy to two retirement-security systems, the 401(k) plan represents the defined contribution approach, while the traditional pension plan represents the defined benefit approach.
A serious problem with using this as the sole system for paying for healthcare is the same as the problem with the 401(k) – it doesn’t have a safety net. The premium support provided by government cannot be sufficient to pay for whatever health insurance premiums an insurance company demands – otherwise the same incentives for spiraling costs will kick in as with the present system. If the recipient cannot afford to supplement the premium support, however, how will a safety net be provided? Antos proposes a hodge-podge solution, offering a choice between premium support and remnants of the current system of Medicare and Medicaid. It is impossible to evaluate this proposal without becoming a true wonk oneself.
Another problem is that for cost control to depend on consumer choice, the consumer must be able to discern which health services are worth more than others – which hospital, for example, provides better value. There is little evidence or reason to believe that consumers are able to make such an informed choice.
The fundamental problem
Our fundamental problem in the United States when it comes to healthcare is the same as our problem with many other things these days: we think, being a big country with big dreams and ambitions, that we can do everything we want. We want to provide all health-care services to all people, depriving no one of any service, and we want to pay people handsomely for providing it under private market conditions – no rationing, no meager pay for physicians, no information sharing coerced by government.
At the same time, we don’t want to pay for it. And we don’t want the health-care cost bubble that incentives can bring – as we were famously warned they can bring in a paper on the financial industry delivered by former IMF Chief Economist Raghuram Rajan at a Jackson Hole conference in 2005.
The remedy for spiraling costs will come only when we bite the bullet and explicitly accept rationing and other features we find hard to accept. The premium support alternative is, in fact, a backdoor approach to getting people to accept that, but not explicitly.
Like a lie, it winds up tangled in the details. If it could succeed, however, in getting people to realize all the true costs and difficult choices of healthcare, it might help contribute to the solution.
Michael Edesess is an accomplished mathematician and economist with experience in the investment, energy, environment and sustainable development fields. He is a senior research fellow with the Centre for Systems Informatics Engineering at City University of Hong Kong and a project consultant at the Fung Global Institute, as well as a partner and chief investment officer of Denver-based Fair Advisors. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler.
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