Health Care – Obamacare Failed. Here’s Why, & How to Really Fix Health Care
U.S. Health Care Is Good But Unsustainably Expensive
American health care leads the world in access to treatments and tests, cancer outcomes, and medical technologies. Mortality rates, when based on health care outcomes, are the best in the world. From the mundane to the difficult-to-treat ailments, the American health care system performs admirably when compared with the rest of the world.
It is not without its warts, however. The United States spends an enormous amount on its health care. Health care spending made up 5 percent of GDP in 1960 but had ballooned to 17 percent in 2013. During the 2000s, insurance premiums increased 131 percent, compared with an overall inflation rate of just 28 percent. Clearly something is not right with our health care system and reform is necessary.
Everyone’s Got a Plan
Too often the national conversation on health care is just clamoring about process and plans – which politicians have a plan, and what are their chances of working through Congress? But this kind of coverage comes at the expense of understanding the root causes of the problems with our health care system. Why do premiums keep going up? Why is everything so expensive? If we’re going to fix things, we’ve got to know how and why they’re broken. That way we can target the cause of the problems and not just the symptoms.
How Did We Get Here?
When you want car insurance or renters insurance, you go to an insurance agent and choose a policy from the variety they offer. Do you want roadside assistance? Uninsured driver coverage? You can choose higher or lower deductibles, and options in between.
But you don’t get to pick your health insurance the same way. For most people – about 90 percent of private plans, in fact, you get your health insurance through your employer. Which means an insurance salesman meets with your bosses, sells them on a plan, and your HR department in turn tells you what your new insurance is. If you’re lucky you’ll get a couple similar plans to choose from. The coverages, the deductibles, the premium – all chosen for you by someone else.
But it wasn’t always that way. When health insurance first came about, people chose their own coverages, usually through co-ops or associations. In fact, getting insurance through one’s employer happened mostly by accident: As is too often the case, a federal government effort to control one part of the economy led to unintended consequences that completely transformed another part of the economy.
During World War II, the government put a cap on how much employers could pay their employees. Well, markets emerged regardless, and the demand for employees caused companies to think of other ways to compensate their workers. Enter health insurance. Employers could compete for workers by offering to pay them more, via paying for their health insurance, but in a way that didn’t run afoul of the government’s wage laws. Then, in 1943 and 1954, and without much fanfare or really much thought about the consequences, the IRS declared the money companies spent on employee health insurance wasn’t taxable like their wages were. The worker doesn’t pay income tax on that benefit, and neither the worker nor the employer are charged payroll tax on it. This turned out to be a major turning point for health care in America.
Suddenly it became much cheaper to get insurance through an employer than on your own. How much cheaper? For the average middle-income earner the tax benefit is 30 percent. Nobody would want to choose to buy insurance with after-tax money when employer plans have that kind of subsidy. So the individual market was harmed as a result.
Problems With Employer-Based System
As more and more people began to get health insurance through work, the problems of an employer-based system were amplified. The tax subsidy encouraged employer plans to further separate consumers from health care prices. Instead of people buying most of their own health care services and using health insurance for the big expensive stuff, insurance started paying for more and more everyday things. In 1960, consumers of health care paid out of pocket for about half the cost of the services they used. By 2015 consumers only paid 10 percent of the cost out of pocket. Naturally, when someone else pays 90 percent of the price of health care, consumers consume more of it.
And maybe that’d be OK if it meant people were getting healthier by using so many more services. But they weren’t. The most significant research studies in health care have shown that while people use up to 30 percent more health care the cheaper it gets, the surprising findings are that despite all that care, they don’t get any healthier. Americans have been spending more and more on health care, but it hasn’t improved their health. And all that increased demand, with little regard for prices, has caused prices to skyrocket.
This policy of shielding consumers from prices couldn’t last forever in an environment of skyrocketing costs. Which is why insurance plans began to change. Premiums went up and continue to go up drastically each year. Not only premiums, but co-pays and deductibles went up as well. We now pay much more for much less.
ACA Tried and Failed to Fix Health Care
In the face of rising health care costs and skyrocketing premiums, Congress in 2010 passed the Affordable Care Act, or what came to be known as Obamacare. Unfortunately, it focused on the symptoms rather than the root causes of the problems in the system. The ACA was a massive and complicated law, with government trying to further control insurance prices and coverages. Its proponents promised that insurance companies would pay for even more services, more people would be covered by insurance, and somehow it would still lower premiums for the average American by $2,500. In other words, it doubled down on the same policies that got the U.S. health care system so mixed up in the first place. Promising to cover everything for everyone for little cost may be well intentioned, but in practice the ACA has simply given further proof that the old system of insurance paying for everything is an unsustainable and self-defeating model.
Despite the claims made by its supporters, as the ACA has been slowly implemented over the last few years, most of its promises could not be kept. Rather than $2,500 in premium savings, premiums actually increased 25 percent more than if the ACA had never been passed. Rather than keeping existing plans that consumers were happy with, millions of insurance plans were canceled in the face of such enormous new government regulations. Instead of increasing choice, ACA plans made it more difficult to find doctors that accepted the new insurance plans.
The ACA was a heady and bold attempt to fix the problems plaguing our health care industry, but it failed to address the underlying problems. And despite having over 70 updates to it since it was passed, it can’t escape the flaws in its very design. It’s time to reverse course, repeal the law and replace it with something that will truly reform health care.
Addressing the Underlying Problems
When we look at the history of health care and health insurance, the reasons for their current problems become clear. The unintended consequences of the special tax treatment given to employer-sponsored plans has distorted the system and caused prices to skyrocket and services to shrink.
If we were to remove the tax favoritism from employer plans, premiums would go down 45 percent and total health spending would decrease by 43 percent. This comes as no surprise to policymakers. In fact, there have been efforts to repeal the tax favoritism since at least the 1980s. President Ronald Reagan tried to cap the tax break in 1983, but Congress rejected his proposal. He tried again in the tax reform bill of 1985 but again it was rejected. President George W. Bush proposed it in 2005, and presidential candidate John McCain made it a part of his campaign platform in 2008. In fact, the ACA has a provision to tax high-cost health plans by 40 percent beginning in 2018, but it has so many loopholes its effectiveness will be minor. It turns out few politicians from either political party have an appetite to what would amount to, at least in the short run, a tax increase for millions of voters.
Since it has proven to be politically impossible to simply reverse the tax policy that caused the problems in the first place, here’s the next best way to equalize the health insurance marketplace: Level the playing field and extend those tax advantages to the individual insurance market by making all your out-of-pocket health care expenses tax-deductible – including insurance premiums. Everything you spent on a doctor visit, hospital stay, pharmacy purchase and even the monthly insurance premium would be deducted from your tax bill. This would make the tax code fairer, reduce the reliance upon employer plans, promote consumer shopping habits, and improve insurance plan design.
Critics of tax-deductibility proposals argue it results in people spending more of their own money on their health care. But not being exposed to health care prices is the very cause of the problem with our system. Health care is expensive precisely because people aren’t spending their own money when they consume health care services.
By leveling the tax playing field through a tax deduction, premiums would fall, making insurance more affordable to more people. As noted previously, research suggests getting rid of tax favoritism would cause premiums to drop 45 percent and total health spending to fall 43 percent. Achieving those kinds of massive savings doesn’t require more government control over people’s medical decisions – government just needs to allow doctors and patients to deal directly with each other without all those layers of bureaucracy.
Making all health care expenses tax-deductible would not only lower premiums, it would also help fix the structure of health insurance. Paying for services directly would be cheaper because they’d be tax-deductible, so insurance plans would be structured to take advantage of that even as cost for services fell. Consumers would take advantage of health savings accounts tied to these plans to help pay for health care expenses as they arise. To assist in this transition, tax reform should include a credit that can be used for health care expenses or to fund a health savings account. These reforms would help roll back the distortions to the health care market that government caused decades ago. They would jump-start a system that simplifies the patient-doctor relationship and which will lower premiums and the prices we pay for health care.
But What About Pre-Existing Conditions?
One of the most publicized provisions of the ACA is ending hassles over pre-existing conditions. However, according to the US Department of Health & Human Services just 1 percent of Americans have ever been denied coverage because of a pre-existing condition. Research has shown that even with a pre-existing condition, most people are able to get insurance coverage. Regardless, many Americans legitimately fear losing their jobs, losing their insurance, and then getting sick and being denied insurance coverage thereafter. The best way to end that fear is to end the system where your employer chooses your insurance for you. Decoupling insurance from employment would drastically reduce anxieties brought on by a pre-existing condition because insurance coverage wouldn’t end unpredictably.
How Do We Cover the Poor?
Even with the lowered costs these reforms provide, there are many among us for whom paying for their own health care is impossible, and any policy proposal must also serve this disadvantaged population. As we noted earlier, in a landmark study RAND researchers found that when you make health care services free or nearly free, people use a lot more of them but don’t really get any healthier. However, there was one subset that did see an improvement in health from the additional care – the chronically ill poor. There are a number of ways to accomplish this goal. Using block grants to distribute federal Medicaid funding would allow states to design Medicaid coverage specific for their needs without the current cumbersome and costly regulations. For instance, Utah passed an expansion of Medicaid that would serve many in this needy population, but a year later it is still waiting for federal government approval to implement the program. Block granting would end these needless bureaucratic delays and spur states to implement caring and compassionate solutions. The federal government could also block grant funds to states to subsidize a secondary insurance coverage for the chronically ill that consistently have health care expenses in excess of their primary coverage. This would help this population without the costly distortions other efforts have caused.
The Affordable Care Act’s failures have taught us the hard way that to change the costly trajectory of our health care system, we need to understand how we got here and attack the root causes of our system’s failures. Treating the failures with the Band-Aids of mandates and subsidies merely allows the infection to grow and worsen.
The proposals discussed here reflect real reform that will transform our health care system into one that is more affordable and restores the link between doctor and patient, while maintaining insurance levels and caring for the neediest among us.
Utah Citizen Network: Health Insurance
Econtalk Podcast: Scot Atlas on American Health Care
Econtalk Podcast: John Cogan on Improving the Health Care System
Economics 21: America’s Healthcare Spending Slowdown
National Review: Pre-Existing Conditions
Health Affairs Study: Consumer Decision Making in the Individual Health Insurance Market
Utah Citizen Network: Utah’s Medicaid Expansion
Mercatus Center Research Paper: Earnings Inequality – The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance
National Bureau of Economic Research Paper: The Effect of Tax Preferences on Health Spending