Origin of healthcare problems

US healthcare is generally recognized for its significant innovation and quality medical care. However, it is even more widely recognized for having certain problems.

Two main problems are usually cited. Problem #1 is that 10-15% of the population is uninsured at any point in time. Problem #2 is that medical care and health insurance are expensive.

The question is, why do these problems exist? Quite a bit of the answer lies in events of many decades ago.

Problem #1 – Why so many uninsured?

Why does the US have millions of uninsured people? There are two main causes.

First, health insurance has become expensive. Some people don’t buy insurance because they can’t afford it. Others don’t buy it because they don’t think it’s worth the price.

Therefore, Problem #2 (high cost) also aggravates Problem #1 (uninsured). See the Problem #2 section below for more on the cost issue.

Second, because most working-age people get health insurance through their employer, when they lose their jobs, they also lose their health insurance. Some unemployment always exists in the normal churn of the economy, because unemployed people do not find new jobs instantaneously. At any given point in time, millions of people are temporarily between jobs and uninsured.

The follow-up question is, why do Americans get health insurance through their employer? It was not always like this, nor is this the norm in other countries. The root causes are government wage controls and tax preferences:

Wage controls: During WWII, government placed wage controls on businesses, preventing them from offering higher pay to attract workers. To sidestep wage controls and still attract employees, businesses started offering free health insurance.

Tax treatment: In the years after WWII, government made health expenditures tax-deductible for businesses. However, the same favorable tax treatment was not given to individuals. As a result, it became cheaper for businesses to provide health insurance for its employees than for employees to buy it themselves.

The combination of wage controls followed by tax preference thus cemented employer-provided health insurance as typical American practice. The unfortunate side-effect is that millions of people temporarily lose their health insurance when unemployment strikes.

Problem #2 – Why expensive?

Why are US healthcare and health insurance expensive? A major reason is that the ‘markets’ for these products bear little resemblance to free markets.

Some people think that US has free-market healthcare, but it certainly does not. There are some free-market aspects, but government is more dominant.

Government intervention: Government pays something like one-half to two-thirds of all health expenditures via Medicare, Medicaid, VA, CHIP, etc. Government also imposes lots of regulations on the portion of the industry that it does not directly control. Government’s position is so dominant that it even indirectly controls some prices in the private sector.

When government allocates resources, imposes regulations, and indirectly sets prices, the inevitable outcome is less efficiency. Some people who prefer socialized medicine claim that Medicare is more efficient than free markets. Don’t believe it; it’s flawed analysis.

Little shopping for insurance: Most consumers do not shop for health insurance because it is provided to them by employer or government. This disrupts the normal coordination between supplier and consumer to find common ground and make transactions mutually beneficial.

Little shopping for medical care: Then, because they have insurance, most people don’t shop for medical care, either. Consumers naturally lose interest in being savvy shoppers when someone else (insurance or government) pays the bills.

Americans do indeed pay less of the medical bill than they used to. In 1960, individuals paid 52% of total healthcare themselves, out-of-pocket, with the rest paid by insurance or government. By 2015, this had shrunk to only 11%. This reduces the opportunity for consumers to behave as savvy shoppers.

No market signals: Even without insurance, consumers who want to be savvy shoppers of medical care are handicapped because prices and other information are hidden from them. They can’t as easily shop around as they do for shoes or cars.

Results: There is a price to be paid for all this. When government intervenes this heavily, and the normal coordination of buyers and sellers in a free market is thwarted, it can only lead to less market competition and less consumer choice. This in turn leads to inefficiency and higher cost.

How do we know government is the problem?

How do we know that government is the primary cause of high-cost healthcare? Well, I admit it’s hard to prove outright. But there are strong clues pointing in that direction.

The soaring cost of medical care has occurred during the past fifty years or so. That coincides with (a) employer-provided health insurance becoming widespread and (b) increased government involvement in the medical industry (Medicare and Medicaid were created in 1966 and regulations increased).

Furthermore, most of the other things we buy have NOT experienced the same soaring inflation. Not other types of insurance such as auto, home, and life. Not peripheral medical care such as laser eye surgery, cosmetic surgery, and veterinary medicine. Not ordinary goods such as food and clothing.

What is the common element among these diverse goods and services? Consumers buy them using their own money in free or somewhat free markets.

Not only government

To be fair, it is not only government that has caused high costs. Various special interest groups also contribute to higher costs with anti-competitive behavior.

For example, special interest groups for doctors restrict the supply of new doctors. For example, special interest groups for lawyers resist tort reform that could reduce the amount of unnecessary ‘defensive medicine’ that is performed.

But government is the primary culprit. Remember that special interest groups themselves often work through government to achieve what they want. Government should encourage freedom and competition, not enable special interest groups.

Can we do better?

Can we do better? I’m sure of it. We’re in an awkward middle place now. We can move toward total government takeover, or toward freer markets.

I’d like to try freer markets. We’ve tried lots of government intervention, and that hasn’t worked too well. Rather than going the full socialized medicine route, it seems appropriate for the “land of free enterprise” to give freedom and competition a try.

It’s highly likely that injecting more freedom, consumer choice, and competition would lower cost and improve quality. This is not farfetched. It’s exactly what happens with most of the other products and services we buy.

Admittedly, shopping for medical care is somewhat different than shopping for toothpaste. But it’s not completely different. There is room for more freedom, choice, and competition.

In case it helps, here is a diagram of the issues raised in this post:

Healthcare problem diagram


I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.

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