Health care

Lane Kenworthy, The Good Society
January 2017

An ideal healthcare system has universal health insurance coverage, quality healthcare services at an affordable cost, and patient choice among providers. Is it possible to combine these? How is America doing?

HEALTH INSURANCE

People need health insurance. Health care, unlike food and clothing, is too expensive to purchase on an as-needed basis. If you go without insurance and end up needing a coronary bypass operation, you’ll have to pay around $60,000 out of pocket. About 40% of Americans have zero net worth and so wouldn’t be able to come up with that much money without going deeply into debt.1

As figure 1 shows, the United States is the only rich democratic nation in which a nontrivial share of the population lacks health insurance. As of 2015, approximately 91% of Americans are insured.

Figure 1. Health insurance coverage
Share of the population. The vertical axis doesn’t begin at zero. Data source: OECD, oecd.stat, “Total public and primary private health insurance.” Data source for the US: Council of Economic Advisors, “Methodological Appendix: Methods Used to Construct a Consistent Historical Time Series of Health Insurance Coverage,” 2014, using data from the National Health Interview Survey and other surveys. This matches with other data sources that cover only a portion of these years: OECD, 1997ff; Marc Miringoff and Margue-Luisa Miringoff, The Social Health of the Nation, Oxford University Press, 1999, p. 198, using Center for National Health Program Studies data, 1976-86; Carmen DeNavas-Walt, Bernadette D. Proctor, Jessica C. Smith, “Income, Poverty, and Health Insurance Coverage in the United States: 2013,” Current Population Reports P60-245, US Census Bureau, 2013, table C-1, using Current Population Survey (CPS) data, 1987-99 and 1999-2012; Jessica C. Barnett and Marina S. Vornovitsky, “Health Insurance Coverage in the United States: 2015,” Current Population Reports P60-257, US Census Bureau, figure 2, using American Community Survey (ACS) data, 2008-15. The other countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Korea (South), the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

Why doesn’t everyone purchase health insurance? The reason is that it’s expensive, so people with limited income are inclined to go without, despite the risk. That’s especially true of those who are young and/or healthy. And when the healthiest don’t buy health insurance, insurers not only receive fewer premiums (payments) but also pay out more per customer; to offset this, they charge more for the insurance they offer, which further reduces the number who can afford to buy it.

The chief way to alleviate this problem is for government to help. Government can purchase insurance directly, it can provide a subsidy to people to help offset the cost of insurance, it can subsidize employers (via a tax break) to encourage them to offer health insurance for their employees, and it can require that individuals purchase insurance. In the US, there have been two big leaps in insurance coverage in the past half century, one in the 1960s and the other in the 2010s (figure 1). In both instances the driver was an expansion of government insurance provision or subsidization: Medicare and Medicaid were created in the mid-1960s, and the Affordable Care Act, passed in 2010, took full effect beginning in 2014. The Affordable Care Act has expanded health insurance through an assortment of means: expansion of Medicaid, subsidies for direct purchase on exchanges, tax credits to small businesses to encourage them to offer insurance to their employees, allowing young adults to remain on their parents’ insurance policy through age 25, preventing insurers from denying coverage to persons with a preexisting condition, and a fine for people who don’t have insurance (“individual mandate”).2

Americans currently get health insurance in the following ways: 56% employer-based private, 16% direct purchase private, 16% Medicare, 20% Medicaid, 5% Veterans Administration (VA).3 The remainder, 9%, are uninsured. (These percentages sum to more than 100% because some people have more than one source of coverage.)

One of the goals of health insurance is to improve people’s financial security by reducing the possibility of a large unexpected cost. It achieves this goal. Large medical debt and related problems are less common among those who have health insurance.4

At the same time, some Americans are underinsured: they have health insurance, but they nevertheless can end up with a large medical bill.5 In a 2014 survey by the Commonwealth Fund, 29% of adults aged 19 to 64 who had health insurance throughout the year reported that they had outstanding medical debt, had trouble paying medical bills, were contacted by a collection agency for unpaid medical bills, or had to alter their way of life in order to pay medical bills.6

The other main goal of health insurance is to improve health by facilitating people’s access to medical care. Here too the evidence suggests that it succeeds. As noted earlier, the US is the only affluent nation with a substantial share of citizens who lack insurance, and among these countries we have the lowest life expectancy.7 About one in three Americans, a far larger share than in any of ten other rich nations, say that in the past year cost considerations prevented them from getting recommended care, filling a prescription, or visiting a doctor or clinic when they had a medical problem.8 Americans who don’t have health insurance are less likely to have screening tests for breast cancer and colorectal cancer, so if they get either of these types of cancer, they tend to be diagnosed later; as a result, they have lower survival rates.9 Among persons aged 50-64, those without health insurance have worse health outcomes than those who have insurance; when they turn 65 and get Medicare, this difference shrinks significantly.10 Oregon conducted an experiment in 2008-2010, expanding Medicaid to a randomly-selected group of low-income persons and comparing them to a control group. After two years, the Medicaid group had better mental health and expressed better subjective assessment of their physical health, though they weren’t better off in blood pressure, cholesterol, and some other health measures.11 In 2013, Arkansas and Louisiana expanded Medicaid (largely paid for by the Affordable Care Act) whereas neighboring Texas chose not to. One year later, in 2014, the new Medicaid recipients in Arkansas and Louisiana were more likely to have received medical care and were better off than their counterparts in Texas on objective and subjective measures of health, and the following year, 2015, the gap had expanded.12 A study comparing all states that expanded Medicaid following the ACA with all states that didn’t found a larger increase in access to healthcare services and a larger improvement in self-assessed health in the expanding states.13

QUALITY PROVISION AND AFFORDABLE COST

The United States spends a lot of money on health care, and our spending has increased very rapidly. Figure 2 shows that over the past generation America’s health expenditures have soared past those of other rich nations. Yet the health outcomes we get aren’t as good as they should be. Life expectancy during this period dropped from the middle of the pack to the bottom, as figure 3 indicates. (The same is true for “healthy life expectancy”.14) This isn’t due to our rates of change in obesity, smoking, or homicide, which have been similar to those of other countries. Death rates in America exceed those in most other rich countries for many different sources, from cardiovascular disease to neuropsychiatric conditions to infectious and parasitic diseases. And we see a similar pattern for infant mortality.15

Figure 2. Health expenditures
Share of GDP. Includes public and private expenditures. Data source: OECD. “Asl” is Australia; “Aus” is Austria.

Figure 3. Life expectancy
Years of life expectancy at birth. The vertical axis doesn’t begin at zero. Data source: OECD. “Asl” is Australia; “Aus” is Austria.

Figure 4 brings together the data on health spending and life expectancy to highlight the degree to which the United States stands apart from other affluent countries.

Figure 4. Life expectancy by health expenditures
The data points are years, from 1970 to 2013. The lines are loess curves. Life expectancy: years at birth. Health expenditures: public plus private, as a share of GDP. Data source: OECD. The other countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

Attempts to rate healthcare quality directly also judge America’s system to be comparatively mediocre. The Commonwealth Fund periodically assesses the quality of our health care and that of ten or so comparable nations on four dimensions: prevention, chronic care, safety, and coordination of care.16 As figure 5 shows, in the most recent Commonwealth Fund assessment, in 2012, America’s healthcare system was ranked in the middle for quality. That would be fine if it weren’t for the fact that we spend far more than the other countries while leaving about 10% of the population uninsured.

Figure 5. Healthcare quality by health expenditures
The data are for 2012. Healthcare quality: ranking. Based on assessment of the quality of prevention, chronic care, safety, and coordination of care. Data source: Karen Davis, Kristof Stremikis, David Squires, and Cathy Schoen, “Mirror, Mirror on the Wall, 2014 Update: How the Performance of the U.S. Health Care System Compares Internationally,” Commonwealth Fund, 2014. Health expenditures: public plus private, as a share of GDP. Data source: OECD.

Why is our healthcare system so expensive? Other rich countries typically have one or more powerful actors — government (Japan, the UK, Sweden, France, Canada, Taiwan) or large insurance funds (Germany, Switzerland) — that set healthcare prices and thus have incentive and ability to keep a lid on cost increases. In the US, most health insurance companies and healthcare providers (hospitals, small groups of physicians, and solo doctors) are for-profit and insurers are fragmented, reducing their bargaining power vis-a-vis providers. These features lead to higher costs in a variety of ways.

The fragmentation of insurers produces high administrative costs. Each insurer has its own set of provisions, costs, and billing arrangements, so providers have to spend a lot of time checking to see what procedures are and are not covered for each patient and filling out billing forms.

In other affluent nations, health insurance firms and healthcare providers tend to be public or nonprofit. They often compete with one another, but they don’t need to earn a profit on top of their salary or break-even revenues. The fact that our insurers and providers are for-profit contributes to higher costs for medical services and procedures. So too does the high compensation levels of hospital administrators and medical providers, which is a consequence of the fact that there is a limited number of providers in each geographic area coupled with the fragmentation of insurers. No single insurer has enough power to drive down payment levels. As of 2012, an MRI scan cost, on average, $1,000 in the US, compared to $600 in Germany, $400 in France, $300 in Canada, and $200 in the UK. An average hospital stay in the US cost $14,000, versus $7,000 in Canada and $5,000 in France and Germany. Bypass surgery cost $60,000 in America, while in Germany and Canada the cost was less than $30,000 and in France and the UK less than $20,000.17

The fragmentation of insurers along with generous patent protections enhance pharmaceutical firms’ ability to charge very high prices for new drugs they develop. By one estimate, the resulting above-market addition to the price of pharmaceuticals is nearly $300 billion per year, which is about 10% of our total spending on health.18

Insurers frequently compensate healthcare providers on a “fee for service” basis. Payment is for services performed, rather than for patient outcomes. This encourages overuse of tests, procedures, and other medical services. Compared to the average among OECD countries, Americans get twice as many CT scans, MRI scans, caesarean sections, and coronary bypass operations.19

Finally, the fact that some Americans lack health insurance or are underinsured encourages them to wait rather than going to see a primary care physician when they need medical attention. When the problem gets bad enough, they then go to the emergency room, which is much more expensive than an ordinary doctor visit.

America’s healthcare system is more market-driven than those of most other affluent countries. Why doesn’t that push prices down? One reason is that competition among providers often is quite limited. The number of hospitals in many areas is small, sometimes just one. Meanwhile, licensing requirements constrain the number of physicians. A second reason is that the direct payers for health care are insurers. Insurers pool funds from individual consumers, and this means they can afford to pay more for healthcare services than those individual consumers could. The combination of fragmented-but-rich payers with quasi-monopolistic providers contributes to high prices.

Is America’s heavy expenditure on medical equipment and medicines needed to stimulate innovation? One view says yes, because the cost of research, particularly for pharmaceuticals, is so high.20 Skeptics contend that it isn’t clear the United States is the world leader in medical innovation, especially when measured on a per capita basis. In addition, America’s universities and venture capital system are key contributors to its success in medical research, and they arguably would be quite robust and effective even in the absence of high healthcare prices.21

PATIENT CHOICE OF PROVIDER

Most of us want to be able to choose our doctor(s). In comparing healthcare systems, this is a nonissue. All rich countries — even those with full public provision of health care, such as Sweden, Finland, and the United Kingdom — allow individuals and families some choice among providers. People also can purchase additional private health insurance if they’re willing and able, which expands choice.

WHAT TO DO

In a rich nation such as the United States, everyone should have health insurance. America also should do better at controlling healthcare costs. While we won’t go bankrupt spending 17% of our GDP on health, or even more, the fact that every other rich democratic country can achieve equivalent or better health outcomes while spending far less suggests that we have considerable room for improvement. How can we achieve these two goals?

The most straightforward path would be to expand coverage through Medicare, Medicaid, and a “public option.” The age at which Americans can get Medicare could gradually be lowered, the income limit for Medicaid eligibility could be raised, and a Medicare-like insurance program could be made available for individuals to purchase on healthcare exchanges.22 Eventually a large portion of the population would be covered by one of these programs. At that point they could be merged and coverage extended to the full population. The US would then have a single-payer healthcare system. This would achieve universal coverage, and the government, as the dominant insurer, would be in a strong position to control healthcare costs.

Canada’s experience suggests that this type of arrangement can function quite effectively. Every Canadian has health insurance, and as figure 6 indicates, over the past half century life expectancy has increased just rapidly (slightly more so) as in the US despite a far smaller rise in healthcare costs.

Figure 6. Life expectancy by health expenditures
The data points are years, from 1970 to 2013. The lines are loess curves. Life expectancy: years at birth. Health expenditures: public plus private, as a share of GDP. Data source: OECD.

Such a system wouldn’t eliminate private insurers. There surely would be a market among the affluent for insurance plans better than the one(s) offered by the government. And many individuals might choose to supplement the basic plan with an additional one, just as many elderly Americans currently do with Medicare.

Over time, government has gradually increased its role in promoting access to health insurance. The Veterans Administration (VA) was created in 1865 and significantly reformed in 1930 and 1994. In the 1940s and 1950s the federal government created and expanded a tax deduction for firms that contribute to health insurance for their employees. Medicare was created in 1965 and extended to cover prescription drugs in 2004. Medicaid too was created in 1965, and the share of the population it covers was expanded in the 1980s, in 1999 with the S-CHIP program, and in 2010 via the Affordable Care Act. The 2010 ACA also requires that medium-size and large firms offer health insurance to their employees, it establishes an individual mandate to have health insurance, it provides subsidies for persons and families with modest incomes, it requires that health insurers allow people to remain on their parents’ plan through age 25, and it forbids insurers from denying insurance to persons with preexisting conditions. Figure 7 shows the rise in the share of Americans covered by Medicare and Medicaid since the mid-1960s.

Figure 7. Health insurance via Medicare and Medicaid
Share of the US population. Data source: Centers for Medicare and Medicaid Services, “Medicare and Medicaid Statistical Supplement,” tables 2.1 and 13.4.

Why not expand employer-based health insurance? Our employer-centered health insurance system was a historical accident. It originated during World War II, when wage controls made it difficult for firms to offer higher pay to attract and retain good employees. Some decided to offer health insurance instead. After the war, encouraged by a new tax break, this practice proliferated, and it has remained in place ever since. But in a society where people switch jobs frequently, it makes little sense for insurance against a potentially major and very costly risk to be tied to one’s employer. Moreover, it’s expensive for firms that provide it, putting them at a disadvantage relative to small firms and foreign competitors. And it likely acts as a brake on wage increases.

Why does employer-based health insurance work well in some other countries, such as Germany and Japan? The reason is that if people quit or lose their job, they’re automatically switched into a government (“community”) health insurance plan. And the cost of health care is contained, so it’s less of a burden for employers. This happens in part because health insurance firms and funds aren’t for-profit, so they aren’t inserting additional costs into the system, and partly via cost controls set by centralized agreements between insurers and providers, with government stepping in if that fails.23

In 2015, the US spent $3.2 trillion, 18% of the country’s GDP, on health care. Government spending is a little less than half of this total. The tax benefit to employers cost about $250 billion, Medicare $650 billion, Medicaid $560 billion, health care for veterans $65 billion, and health care for military personnel and their families $40 billion.

Medicare and Medicaid limit the amount they will pay to healthcare providers, and they have relatively low administrative costs. As figure 8 shows, even though they’ve been covering more and more of the population (figure 7), the share of GDP spent on these two programs has been rising at about the same pace as the rest of the healthcare system. Their cost is projected to rise going forward, owing partly to population aging and expansion of Medicaid coverage and partly to the general rise in healthcare costs, but the projected increases are fairly small.24

Figure 8. Health expenditures
Share of GDP. Data source: Centers for Medicare and Medicaid Services, “National Health Expenditures by Type of Service and Source of Funds.”

Should government not only pay for health insurance and oversee it but also be the provider? That’s how countries such as the United Kingdom (National Health Service), Sweden (county councils), Finland, and some others do it, and it tends to work well. Indeed, as figure 5 above shows, the UK gets top ranking in the Commonwealth Fund assessment of healthcare quality in affluent nations. This also is how military veterans in the US get their health care. It’s extremely unlikely, however, that America will replace its existing array of private for-profit and nonprofit medical providers with a fully government-run physician and hospital system.

SUMMARY

America’s healthcare system performs poorly in three key respects: it fails to insure everyone, it’s very expensive, and its quality is average. Other affluent democratic countries structure their healthcare systems in varying ways, but each insures everyone, costs less, and achieves quality and outcomes similar to or better than ours.

One possible route to improvement would be to double-down on employers as the key source of health insurance. A more sensible alternative is for government to step in as payer for more Americans. We could allow more people to shift into Medicare or Medicaid (and eventually combine these two programs). This will free employers from having to deal with the cost and hassle of health insurance and free employees to move more readily from job to job. And it will give Medicare and Medicaid more leverage to impose cost controls on healthcare providers.


  1. Lane Kenworthy, “Stable Income and Expenses,” The Good Society. 
  2. Margot Sanger-Katz, “The Biggest Changes Obamacare Made, and Those That May Disappear,” New York Times, 2017. 
  3. Data source: Census Bureau, “Health Insurance Coverage in the United States: 2015,” table 1. 
  4. Kenworthy, “Stable Income and Expenses.” 
  5. Kenworthy, “Stable Income and Expenses.” 
  6. Sara R. Collins, Petra W. Rasmussen, Michelle M. Doty, and Sophie Beutel, “The Rise in Health Care Coverage and Affordability Since Health Reform Took Effect: Findings from the Commonwealth Fund Biennial Health Insurance Survey, 2014,” The Commonwealth Fund, 2015, p. 6. 
  7. Lane Kenworthy, “Longevity,” The Good Society. 
  8. Karen Davis, Kristof Stremikis, David Squires, and Cathy Schoen, “Mirror, Mirror on the Wall, 2014 Update: How the Performance of the U.S. Health Care System Compares Internationally,” Commonwealth Fund, 2014, p. 20. 
  9. American Cancer Society. 
  10. J. Michael McWilliams et al, “Use of Health Services by Previously Uninsured Medicare Beneficiaries,” New England Journal of Medicine, 2007. 
  11. Ezra Klein, “What if Health Insurance Doesn’t Make You Much Healthier?,” Vox, 2015. 
  12. Benjamin Sommers et al, “Changes in Utilization and Health Among Low-Income Adults After Medicaid Expansion or Expanded Private Insurance,” JAMA Internal Medicine, 2016. 
  13. Kosali Simon, Aparna Soni, and John Cawley, “The Impact of Health Insurance on Preventive Care and Health Behaviors: Evidence from the First Two Years of the ACA Medicaid Expansions,” Journal of Policy Analysis and Management, 2017. 
  14. US Burden of Disease Collaborators, “The State of US Health, 1990-2010: Burden of Diseases, Injuries, and Risk Factors,” JAMA, 2013. 
  15. National Research Council and Institute of Medicine, U.S. Health in International Perspective: Shorter Lives, Poorer Health, National Academies Press, 2013, ch. 1 and figure 2.4. 
  16. (1) Prevention: physicians report it is easy to print out a list of patients who are due or overdue for tests or preventive care; patients receive reminders for preventive care; patients are routinely sent computerized reminder notices for preventive or follow-up care; doctors or other clinical staff talk with patients about healthy eating, exercise or physical activity, health risks and ways to quit. (2) Chronic care: patients with diabetes receive all recommended services; patients with hypertension have had cholesterol checked in past year; patients with a chronic condition aren’t impeded from receiving recommended tests, treatment, and follow-up care by cost; physicians report it is easy to print out a list of patients by diagnosis; physicians report it is easy to print out a list of all medications taken by individual patients, including those prescribed by other doctors; pharmacist or doctor reviews and discusses all medications patient used in the past year. (3) Safety: patients know of no medical mistakes made in treatment or care in the past 2 years; patients weren’t given wrong medication or wrong dose at a pharmacy or while hospitalized in the past 2 years; patients weren’t given incorrect results for a diagnostic or lab test in the past 2 years; patients experienced no delays in being notified about abnormal test results in the past 2 years; hospitalized patients report no infection while in hospital or shortly after; doctors routinely receive a computerized alert or prompt about a potential problem with drug dose or interaction; doctors routinely receive reminders for guideline-based interventions and/or tests. (4) Coordination of care: patients have a regular doctor or place; regular doctor or place always or often helps coordinate and arrange care from other doctors or places; specialists have information about medical history; when primary care physicians refer a patient to a specialist, they always or often receive a report back with all relevant health information; when primary care physicians refer a patient to a specialist, they always or often receive information about changes to a patient’s medication or care plan; when primary care physicians refer a patient to a specialist, they always or often receive information that is timely and available when needed; doctors receive alert or prompt to provide patients with test results; patients know who to contact for questions about condition or treatment; patients receive written plan for care after discharge; hospital makes arrangements for follow-up visits with a doctor or other health care professional when leaving the hospital; primary care physician always or often receives notification that patient has been seen in emergency room; primary care physician always or often receives notification that patient is being discharged from hospital; primary care physicians receive the information needed to manage a patient’s care within 2 days after they were discharged from the hospital. 
  17. Philip M. Boffey, “The Money Traps in U.S. Health Care,” New York Times, 2012, using data from the International Federation of Health Plans. See also Gerard Anderson, Uwe Reinhardt, Peter Hussey and Varduhi Petrosyan, “It’s The Prices, Stupid: Why The United States Is So Different from Other Countries,” HealthAffairs, 2003. 
  18. Dean Baker, The End of Loser Liberalism, Center for Economic and Policy Research, 2011, ch. 10. 
  19. OECD. These data are for 2012. 
  20. Tyler Cowen, “Poor U.S. Scores in Health Care Don’t Measure Nobels and Innovation,” New York Times, 2006; Glen Whitman and Raymond Raad, “Bending the Productivity Curve: Why America Leads the World in Medical Innovation,” Policy Analysis 654, Cato Institute, 2009; Sally C. Pipes, “Those Misleading World Health Rankings,” Wall Street Journal, 2013. 
  21. PricewaterhouseCoopers, “Medical Technology Innovation Scorecard,” 2011; Thomson Reuters, “2016 State of Innovation,” 2016. 
  22. On the public option, see Jacob S. Hacker, “Stronger Policy, Stronger Politics,” The American Prospect, 2016. 
  23. Ezra Klein, “Why an MRI Costs $1,080 in America and $280 in France,” Washington Post: Wonkblog, 2012. 
  24. Doug Elmendorf, “Revisions to CBO’s Projections of Federal Health Care Spending,” Congressional Budget Office, 2014.