In yesterday's Financial Times James Mackintosh wrote an excellent article about how government healthcare spending affects the share price of healthcare companies. But what I found particularly interesting is how inefficient the US healthcare system is:
As usual in politics, neither is addressing the real question: why is American healthcare such poor value for money?
This is best shown by just one amazing statistic: the US government spends a bigger chunk of GDP on health than the British government – which gets a nationwide healthcare system for it. Americans only get care for the elderly (Medicare) and the poor (Medicaid).
The numbers: British public spending on health is 7.8 per cent of GDP, according to the latest figures from the World Bank (2009). The US government spends 7.88 per cent. Britain’s much-loved National Health Service may have been an odd Olympic star (and is derided as “socialised medicine” by US rightwingers), but it is at least cheap. Brits only choose to pay an extra 1.5 per cent of GDP on private health, while Americans fork out 8.3 per cent for insurance and off-plan extras.
With a gold-plated cost totalling 16 per cent of GDP, Americans should get gold-plated healthcare (and perhaps British-style dancing nurses). They don’t. The statistics tell a shocking story about life expectancy, child mortality and infant deaths, all of which are worse than Britain and the rest of the rich OECD world.
This chart shows total health spending for the OECD, UK and US, along with the death rate of children under 5.
So in summary healthcare spending is very high in America, but the quality is very low. The article then continues:
But the US is spending so much more than the rest of the world on healthcare that it should expect to get something in return. The NHS is far from a perfect model, but European countries – often working with variants of government-sponsored insurance and private delivery – offer plenty of alternatives. What is clear is that the US could get much better outcomes for its public spending. What matters is not just how much is spent, but how it is spent.
And on that point, it would appear the money isn't spent very well at all:
America has a talent for wasting money on health care. It has devised many ingenious ways to do this. A patient may see many skilled specialists, none of whom co-ordinate with one another. Payment systems are unfathomably complex and highly variable. Doctors order duplicative or unnecessary tests. The country excels at treating sick people and does a horrible job keeping them from getting sick in the first place. All these problems, however, are due to a simple, structural failing: the more services a hospital provides, the more it is paid.
And it could be this consistent over-treating leads to the insurance market becoming more expensive than necessary:
...adjusting for overall inflation, Medicare spending per beneficiary rose more than 400 percent from 1969 to 2009. But inflation-adjusted premiums on private health insurance rose more than 700 percent over the same period.
In fairness, there could be another reason for rising insurance premiums. Uninsured people in crisis cannot afford their healthcare needs, and so the cost falls upon the hospitals and government. To make up for the cost of the uncompensated care hospitals charge insurances more for their services, who in turn increase premiums (the so-called 'hidden tax'):
When someone without insurance (or with inadequate cover) falls ill, they are obliged to pay their medical costs out of their own pocket. Half of all personal bankruptcies in the US are at least partially the result of medical expenses. Rising costs also mean the government is spending more and more on Medicare and Medicaid. US government spending on the two schemes is projected to rise from 4% of GDP in 2007 to 7% in 2025 and 12% in 2050, making rising healthcare costs one of the biggest contributing factors to the spiralling US budget deficit.
And so Obamacare is designed to tackle both of these problems - rising health care costs and under-coverage.
My understanding is that the proposals may or may not reduce the cost of healthcare. Democrats say it will as people cannot 'free ride' on the system, and will therefore not be subsidised by those who buy insurance. Furthermore, a study by FamiliesUSA argues that the average household will be $1,571 better off in 2019 due to the Affordable Care Act. Critics disagree:
Obamacare forces insurers to offer more benefits, requires them to spend more money on health expenses, and subsidizes the consumption of richer insurance packages. The laws of economics dictate that these costs will get passed down to consumers. It shouldn’t take a microsimulation from MIT to know there’s no such thing as a free lunch—but now you have one for good measure.
So whether Obamacare addresses the problem of rising insurance costs is up for debate. However, the one thing Obamacare does do, with certainty, is extend coverage to some 30 million uninsured Americans and move the US closer towards a system of universal healthcare (something many other developed countries have managed much better - see here). But Republicans remain angered by this, arguing it is unreasonable for the government to force people to buy insurance or fine them if they do not (in other words impose a tax upon them).
To me, it seems this is becoming a debate between Democrats and Republicans about the size of the state and the role of government in society - not about how to make the healthcare system more efficient, improve quality, and achieve universal coverage in the most cost-effective way (surely this should be the real objective). It has a lot to do with political ideology. Expect it to be a recurring theme leading up to the general election in autumn.