Editor’s note: This commentary is by Fred Jagels of Cabot.
“The Board is very frustrated about the unaffordable rate increases …”
— Green Mountain Care Board Chair Kevin Mullin
in a press release dated Aug. 8, 2019
The outpouring of commentary on the American health care system that has occurred since 1965, a time when health care absorbed a mere 6% of GDP, would probably fill the football stadium of an average size public university and spill over into the parking lots below. The tons of printed pages, the tank loads of printers ink expended has been truly prodigious. Yet American health care today continues, as it has for more than half a century, to be an outlier, costing Americans twice as much as other advanced nations and delivering significantly worse outcomes in the balance. And nobody has come up with a good explanation as to why this is so.
If anyone could supply this answer it would be the late Ewe Reinhardt of Princeton University, one of the most highly regarded health economists in the country. His swan song book, “Priced Out: The Economic and Ethical Costs of American Health Care,” published this year, is an exhaustive attempt to do so. (The Milken Institute Review has published an excerpt from the book in its Third Quarter 2019 issue. It is chock full of charts and graphs depicting just about everything you would want to know about the economics and finance of American health care).
Reinhardt doesn’t actually provide a definitive answer. Rather, he offers four “possible explanations.”
- U.S. income levels are higher, and health care spending tends to rise as incomes rise.
- U.S. demography leads to higher health care spending.
- Health care, or at least certain kinds of health care, cost more in the U.S.
- High administrative costs in the U.S. health insurance system.
He finds that the first three don’t have definitive explanatory power but the fourth has real meat. Given the multiple payers that are involved in the 35% of total health care expenditures paid for with private insurance in the U.S., there is an army of administrators and coders that are not needed in a single payer system. Reinhardt shows that between 1970 and 2009, while the number of physicians in the U.S. rose by 100%, the number of administrative personnel rose by 3200%. This, indeed, is a significant part of the problem. The GMCB should pay close attention.
However, in my opinion, Dr Reinhardt didn’t go far enough. He didn’t get to the heart of the matter. The problem with most of the literature filling that hypothetical stadium, is that it was written by economists.
Under prevailing growth policy, our economy is “healthy” when it generates greater GDP. The proliferation of waste, fraud and duplicity in American health care do a particularly good job of generating GDP.
At the micro level, however, economists have not been paying attention. They still see society as divided between the “private sector,” the market, and the “public sector,” the state. They have not understood that nearly half of all “private” activities in the U.S. today have departed this neat dichotomy. These post-market activities are distinguished from market activities because they are collectively funded and indirectly paid. They include not only health care, but higher education, infrastructure development, military procurement, scientific research, the “security-industrial” complex, private prisons and many others. All of these activities experience the same runaway price inflation and cost overruns as health care.
This should tell us something.
Third party payment reverses the incentives, behaviors and outcomes compared with the direct (buyer-seller) market transactions built into economist’s models. Competition among hospitals and universities, for example, raises prices. It doesn’t lower them. Unacknowledged as a distinct branch of the economy, post-market activities are not equipped with the checks and balances built into both the market and the state. Rather, they are flying blind. Lack of effective fiscal control enables them to expand in scope and price without limit. Without appropriate checks and balances–such as the budget ceiling that is built into a single payer system–a syndrome of endless profiteering and proliferation is unleashed.
Economists end up looking at the wrong end of the equation. They believe that the ‘costs’ which drive health care inflation are intrinsic to health care itself. They don’t see that, irrespective of the actual health of the population or the sophistication of the technology applied, the ‘costs’ are generated by the nature of the transaction, a syndrome that is common to every activity that is similarly funded and paid.
Vermont has already tried single payer only to be throttled by the monster of American health care writ large. Nevertheless, I believe if the GMCB would take a closer look at the mechanism which actually fuels health care inflation, perhaps some progress could be made.
