America's headache
Jan 26th 2006
From The Economist print edition
How to start fixing the world's costliest health-care system
EVERYONE, it seems, has a health problem. After pouring billions into the National Health Service, Britons moan about dirty hospitals, long waits and wasted money. In Germany the new chancellor, Angela Merkel, is under fire for suggesting changing the financing of its health system. Canada's new Conservative prime minister, Stephen Harper, made a big fuss during the election about reducing the country's lengthy medical queues. Across the rich world, affluence, ageing and advancing technology are driving up health spending faster than income.
But nowhere has a bigger health problem than America. Soaring medical bills are squeezing wages, swelling the ranks of the uninsured and pushing huge firms and perhaps even the government towards bankruptcy. Ford's announcement this week that it would cut up to 30,000 jobs by 2012 was as much a sign of its legacy health-care costs as of the ills of the car industry. Pushed by polls that show health care is one of his main domestic problems and by forecasts showing that the retiring baby-boomers will crush the government's finances, George Bush is expected to unveil a reform plan in next week's state-of-the-union address.
America's health system is unlike any other. The United States spends 16% of its GDP on health, around twice the rich-country average, equivalent to $6,280 for every American each year. Yet it is the only rich country that does not guarantee universal health coverage. Thanks to an accident of history, most Americans receive health insurance through their employer, with the government picking up the bill for the poor (through Medicaid) and the elderly (Medicare).
This curious hybrid certainly has its strengths. Americans have more choice than anybody else, and their health-care system is much more innovative. Europeans' bills could be much higher if American medicine were not doing much of their R&D for them. But there are also huge weaknesses. The one most often citedespecially by foreignersis the army of uninsured. Some 46m Americans do not have cover. In many cases that is out of choice and, if they fall seriously ill, hospitals have to treat them. But it is still deeply unequal. And there are also appalling inefficiencies: by some measures, 30% of American health spending is wasted.
Then there is the question of state support. Many Americans decry the socialised medicine of Canada and Europe. In fact, even if much of the administration is done privately, around 60% of America's health-care bill ends up being met by the government (thanks in part to huge tax subsidies that prop up the employer-based system). Proportionately, the American state already spends as much on health as the OECD average, and that share is set to grow as the baby-boomers run up their Medicare bills and ever more employers duck out of providing health-care coverage. America is, in effect, heading towards a version of socialised medicine by default.
Is there a better way? Even a glance around the world shows that there is no such thing as a perfect health-care system: every country treads an uneasy compromise between trying to harness market forces and using government cash to ensure some degree of equity. Health care is also the part of the public sector where market forces have had the most limited success: it is plagued by distorted incentives and information failures. To begin with, most health-care decisions are made by patients and doctors, but paid for by someone else. There is also the problem of selection: private-sector insurers may be tempted to weed out the chronically ill and the old, who account for most of the cost of health care.
In the longer term, America, like this adamantly pro-market newspaper, may have no choice other than to accept a more overtly European-style system. In such a scheme, the government would pay for a mandated insurance system, but leave the provision of care to a mix of public and private providers. Rather than copying Europe's distorting payroll taxes, the basic insurance package would be paid for directly by government, though that cash might be raised by a hypothecated tax which would make the cost of health care more evident. The amount of cash given to insurers would take account of individual health risks, thus reducing insurers' incentives to compete by taking only the healthiest patients.
Such a system would not be perfect but it could mitigate the worst inequities in America's health-care system, while retaining its strengths. In practice, however, it will not happen soon. American politicians are still scarred by the failure of Hillary Clinton's huge health-care plan (which tried in 1993 to force companies to insure workers). Incremental change, of the sort that Mr Bush is talking about, looks the only way forward.
In fact, there are plenty of incremental changes that could help, especially when it comes to curbing costs. America's health industry is already experimenting with new ways to improve efficiency (see article). As the biggest buyer, the federal government has plenty of power to push for pay for performance. And many of Mr Bush's mooted reforms make sense, such as limiting absurd medical litigation claims, deregulating the stifling state-based insurance market and making insurance policies more portable.
Plastic surgery may work for a while
But there is a flaw at the heart of his proposal. Mr Bush goes straight to one of the biggest distortions in American health carethe generous tax subsidies doled out to firms providing insurance. These help to promote a culture where costs do not matter. But his prescription is the wrong one. Rather than reducing this distortion, which would force firms and employees to be more cost-conscious and free up money to be spent on bringing more people into the system, the president wants to even things out by doling out yet more tax subsidies to othersfor instance, letting individuals set more of their out-of-pocket medical expenses against taxes. Such hand-outs may have political appeal, but they will worsen the budget deficit and, most probably, drive up the pace of medical spending. America's health-care system could be improved in small steps. But those steps need to be in the right direction.
