U.S. Healthcare Reform Passage: Preliminary Musings

March 22, 2010

A debate as polarizing as healthcare reform figured to evoke widely different verdicts in the business press, and so it has.  Today’s Wall Street Journal editorial predicts a “very steep” price and reminds readers, “We fought this bill so vigorously because we have studied government health care in other countries, and the results include much higher taxes, slower economic growth, and worse medical care.”  The Economist takes a mixed view, calling the final bill a “terrible disappointment” because it retains a payment model and does too little to contain costs.  Yet that champion of economic liberalism declares the bill is better than none at all for two reasons: 1) the “extension of coverage to millions of uninsured erases one of the least creditable differences between America and the rest of the industrialized world” and 2) some cost cuts were made and uncorrected shortcomings will probably get tackled later.  The New York Times also recognizes that only a start has been made with this bill on controlling healthcare costs and concedes that ultimate success is contingent upon “whether future presidents and Congresses stick to the savings and deficits set in this legislation; on how aggressively states administer the new exchanges; on how health care professionals and institutions respond to the challenge of changing their ways; and on how the public responds to the mandate that everyone obtain insurance or pay a penalty.”

The NYT editorial makes an assertion that resonates with me, calling the old system “dysfunctional.”  The Journal seems to refute this point, identifying three undesirable consequences of healthcare reform in other countries, namely higher taxes, slower growth, and worse care.  However, this is merely an opinion that the new system will be worse than what now exists.  Even if true elsewhere, that needn’t be so in the United States, and it doesn’t prove that the present U.S. healthcare system was functional and worth preserving.  Comparisons of  life expectancy from birth in the United States to the records of many other countries indicate that Although Americans devote much more of their economy to health, their lives are not longer.  Market capitalism is about satisfying consumer wants, like a longer life span in least-cost, efficient, ways.  Many activities, but not healthcare, can meet this challenge best when done entirely by the private sector with a framework of legal guidelines to ensure competition.

No country spends more on healthcare than the United States, absolutely or relatively.  The U.S. price tag amounts to roughly 16% of GDP, yet people are living longer than Americans in over 30 other nations.  Judging the quality of healthcare in cost effective terms can get complicated, but why get bogged down in the details?  Two variables suffice to show which way the wind is blowing: how long do the people live and how many resources are not available for uses other than health while we are alive?  With a population of almost 309 million, the United States spends about $7.5K on average for every person on health each year.  Two of the countries often singled out by healthcare reform opponents were Canada and Britain.  If the United States’ share of healthcare spending matched Canada’s 10.1 percentage of GDP instead of the actual 16.0%, only $4.7K per person would be devoted to each person’s health in America.  Britain spends 8.4% of GDP on healthcare, a share that if matched in the United States would cost about $3.9K per person.  The kicker is that people in Canada’s harsher climate can expect to live 2.5 years longer than in the United States.   Britons live 1.2 years longer on average than Americans.  These two examples are not exceptions that prove the rule.  The table below gives a wider selection of country rankings of lifespan and healthcare spending-to-GDP ratios.

  Lifespan (Yrs) World Rank Health Cost/GDP
U.S. 78.2 38th 16.0%
France 80.7 10 11.0%
Switz. 81.7 04 10.8%
Germany 79.4 23 10.4%
Canada 80.7 11 10.1%
Holland 79.8 17 9.8%
Sweden 80.9 07 9.1%
Britain 79.4 22 8.4%
Japan 82.6 01 8.1%
Mexico 76.2 48 5.9%

Japan tops the leader board in life expectancy.  The average Japanese person lives 4.4 years longer than a typical American, yet the United States would be spending just $3.8K per person annually if it had the same share of gross domestic product as Japan.  Mexico is not an advanced economy with a per capita GDP of only about $12.8K, so it is not surprising to see a low 5.9% of GDP devoted to healthcare there.  If the United States spent at that rate, it would cost $2.8K per person and produce a savings of $4.7K each year, that is $18.9K for a family of four and $189K over the course of a decade (and $1.48 million over the typical lifetime of that 4-person family).  In return for that extra share of resources, Americans on average get to live two years longer than Mexicans.  Moreover, the final half-year in the lives of Americans, let alone two years, consumes a vastly disproportionate amount of the nation’s health bill.

The diversity of costs measured against other nations would in fact be wider than I’ve indicated, and this goes to the heart of the dysfunctionality of the existing U.S. healthcare system. Healthcare costs are rising faster than inflation in the United States and are eating up an increasing share of GDP each year.  Long-term models projecting healthcare deep into the future suggest that this upward trend is likely to continue and would strangle the economy to an increasing extent.  I submit that the Wall Street Journal’s prediction of weaker economic growth would be true if the healthcare system had not been modified and might already be happening.  U.S. real GDP rose 1.8% per annum between 4Q99 and 4Q09, down from growth rates of 3.3% in the 1990’s and 3.7% per annum between 4Q49 and 4Q89.  U.S. healthcare was on an unsustainable trajectory.  Non-economists don’t like to hear economists call a condition unsustainable because the day of reckoning generally cannot be pinpointed.  A lot of yawns greeted warnings about the unsustainability of current account imbalances, and until the Great Recession, the concerns seemed way too alarmist.

But if this is a bad piece of legislation as opponents maintain, why not reject it and go back to the drawing board?  If the past year of polarizing politics demonstrated anything, it is the difficulty of passing a contentious piece of legislation like healthcare.  Failures in 1993 and 2010 might mean ten, twenty, or more years before the next serious attempt.  A lot more lead time would be lost, and the problems would be all the harder to fix.  This law will truly not do enough to reduce heath costs.  It would be nice if health insurance from the start had been limited to only catastrophic illness and injury.  That’s not going to happen.  So you settle for what might be possible.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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