The True Cost of Care: The complicated relationship between the market and government health programs

As the presidential campaign goes into full swing, the American public is likely to be bombarded with the kind of misleading clichés and false dichotomies that distort serious discussion of health care reform in this country. One of these false dichotomies is “private market versus government” health care or “private market versus socialized medicine.” Both terms mislead because their users seem not to understand precisely what the terms mean or, if they do, use them mischievously. The term “socialized medicine” in particular conveys to some an objectionably “un-American” form of government: socialism.

A major problem with the term “private market” is that the term refers not to one single thing, but to a wide range of alternative mixtures in which a government interacts with private players in the health care sector. In fact, there hardly exists a private market in which the government does not play some role. Worse, the term frequently is misused as a synonym for “competition,” which, when placed in opposition to “government,” implies that government-sponsored care is not and cannot be competitive. Yet competitive health care already thrives in heavily government-controlled health systems, like Medicare. In Medicare and in the Canadian provincial health plans as well, private and public providers of health care compete purely on quality of service for patients covered by government-run health insurance systems.

Finally, in the American vernacular the term “socialized medicine,” when it is not being confused with “socialism” outright, often is confused with “social health insurance.” But these terms are refer to very different things.

With “social insurance” a government operates or tightly regulates large risk pools to which individuals can shift the financial risks they face as individuals with premiums based on their ability to pay. Both Medicare and the Canadian government-run health plans work in this way. Typically, the sickest patients are not kept out of the pool, which includes all those who are eligible. Social insurance systems typically buy health care from a mixture of private for-profit and not-for-profit institutions. This takes place under both Medicare and Medicaid in the United States, under the single-payer, government-run provincial health plans in Canada and under Taiwan’s government-run, single-payer health insurance system. Examples of social insurance outside of health care can be seen in the principle of limited liability for corporate shareholders, which has made modern capitalism possible, in the federal government’s current bailout of Wall Street or in the federal government’s provision of disaster relief to afflicted states.

By contrast, “socialized medicine” implies that a government not only organizes the risk pools for health insurance, but also owns and operates the health-care delivery system. The National Health Service of the United Kingdom or the county-based health systems of the Scandinavian countries represent socialized medicine, as does the health system of the U.S. Department of Veteran’s Affairs. Luckily for our veterans, the V.A. is now widely regarded as being on the cutting edge of the smart use of health-information technology and quality control. A European must find it amusing to hear American politicians rant against socialized medicine while at the same time supporting the V.A. health system.

The advantages many proponents see in social insurance systems are these. First, they offer individuals financial protection over their entire lifespan. Second, they are relatively inexpensive to administer. Third, they obey the principle of solidarity, which requires that all members of society have access to needed health care on roughly equal terms. That principle is sacred in European nations, being viewed as part of the cement that forges a nation out of a group of people who happen to share a geography. It is a term not usually employed in the American debate on health policy. A pitfall inherent in these social insurance systems is that governments may underfund them.

In the United States, when private insurance is procured by an employer in the group market for health insurance, premiums tend to be community-rated over all the employees in the firm. In a sense, such group insurance may be described as private social insurance. Because that form of coverage is tied to a particular job, however, it is temporary and lost with the job. On the other hand, if private insurance is purchased by individuals in the non-group market, premiums tend to be “medically underwritten,” which means that they reflect the individual’s state of health. Such insurance, like the social insurance systems just described, usually does not provide coverage for the full life-cycle.

Health System Basics

To think more clearly about the issue of private market versus government care, it is helpful to list the distinct economic functions any modern health system must perform, and then to ask who best can perform each of those functions, given the ethical constraints a nation is willing to impose on its health system. The five functions are:

• the financing of health insurance and health care, by which is meant the process by which money is extracted (premiums or taxes) from households and individuals, the ultimate payers for all health care;

• the protection of individuals from the financial inroads of illness through larger risk pools (i.e., health insurance);

• the production of health-care goods and services;

• the prudent purchasing of these goods and services by or on behalf of “consumers” (formerly called patients);

• the stewardship of the health system, by which is meant the regulation of the health system to assure safety, quality, integrity and fair play among the various agents interacting in the health system.

Whether individuals, government, a nongovernmental entity or the patient best performs each of these functions depends on two distinct considerations.

First, ideally there should be a political consensus on the ethical precepts that the health system is to observe. Should health care be available to all members of society on roughly equal terms, or is it ethically acceptable to allow access to health care, its quantity and its quality to vary by income class? Should health care transactions be ruled by the principle of caveat emptor, or would that be unfair? Is it ethically acceptable, as it seems to be currently in the United States, to let individuals and households slide into bankruptcy because of unpaid medical bills? In their debates on health policy, Canadians, Europeans and Asians usually make explicit these ethical precepts and view them as binding constraints on public health policy. In the United States, remarkably, the social ethics of health care are rarely discussed explicitly. Instead, the ethical norms are allowed to fall out of the technical parameters —e.g., deductibles, coinsurance or the basis for setting insurance premiums—settled on in these debates.

Second, given an agreement on the social ethics that a health system is to observe, one can next inquire through robust empirical research who best performs each of the basic functions of health care: government, private not-for-profit entities, private for-profit entities or all of these.

To explore these two considerations further, it is useful to imagine initially a purely laissez-faire private health care market. In this context laissez faire means “let the health system do without government interference of any sort.” For all of the advantages one may claim for such a system (for example, the unleashing of human ingenuity and entrepreneurial energy), the arrangement also would have a number of attributes many Americans might find dubious:

• Real resources in such a system would be allocated strictly to those individuals willing and able to bid the highest prices for them—that is, to the wealthier members of society.

• Individuals with superior information about the health care being sold in this market (e.g., physicians) would be able to take advantage of individuals with less information (e.g., patients).

• Individuals with superior mental acuity (the quick-witted) would be able to take advantage of the less quick-witted.

• In the short run at least, and possibly even over the longer run, individuals with more “flexible” moral standards would be able to take advantage of individuals with more principled moral standards.

It is clear that no modern society would long tolerate the unfettered operation of such a laissez-faire market in health care. Indeed, since the Great Depression no society has tolerated such a market even for much less complicated goods and services, like financial services. Recently, for example, the chairman of the Federal Reserve and the U.S. secretary of the treasury both realized that as simple a market transaction as a mortgage loan requires much stricter government control than that imposed on it in the years just before the subprime mortgage crisis.

In sum, the choice in modern economies is never between government and private markets, but is among varying mixtures of government- and private-market activities. The false dichotomy between government and private markets is meaningless. Any politician caught mouthing that empty slogan should be asked to define precisely what is meant by those terms.

The Private Sector and Cost Control

But what about costs? It seems to be taken as an axiom in the U.S. debate on health care reform that private-sector institutions are inherently more efficient than are similar public-sector institutions, so that health systems relying heavily on private institutions operating in a free-market environment could control both quality and cost better than similar government-run institutions. That proposition, however, lacks any robust empirical foundation. In fact, the available research on this issue does not permit a general statement on the relative efficiency of different types of health systems.

To illustrate, it is frequently alleged that costs under the government-run Medicare program for the elderly are out of control, and that Medicare can be fiscally sustained in the future only if it is privatized, that is, administered by private health plans. The Medicare Advantage option introduced as part of the Medicare Modernization Act of 2003 is a legislative expression of just that opinion.

Under the program, however, taxpayers are required to pay an estimated average of 12 percent more for a beneficiary using a private Medicare Advantage plan than that same beneficiary would have cost taxpayers in the traditional, government-run Medicare program. In some regions, especially rural regions, the overpayment to private health plans is closer to 20 percent relative to traditional Medicare. If private health plans are more efficient purchasers of health care than is traditional Medicare, why do the private plans need extra payments to compete with government-run Medicare for enrollees?

Research has shown that when analyzed over several decades, Medicare spending per enrollee, although higher in absolute dollars than health spending for younger individuals, has not grown as fast as has health spending for privately insured individuals. As Cristina Bocutti and Marilyn Moon recently concluded in their comparative analysis of cost trends in Medicare and the private insurance sector: “Medicare has proved to be more successful than private insurance has been in controlling the growth rate of health care spending per enrollee. Moreover, recent survey research has found that Medicare beneficiaries are generally more satisfied with their health care than are privately insured people under age sixty-five.”

Finally, it is well documented that in nations using social insurance, coupled with a mixed delivery system or outright socialized medicine, health spending per capita tends to be only about half of what is spent in America in terms of comparable purchasing power. Although some costly high-tech services in those countries are rationed by the queue, recent cross-national research funded by the Commonwealth Fund does not support the notion that the United States ranks among nations uniformly at the top in terms of health status indicators or quality indicators.

In short, the proposition that a so-called private-market approach to health care would be the best means of controlling the cost and quality of care, or the annual growth in health care spending, does not find empirical support.

View the chart that accompanies this article.

Listen to an interview with the author.

8 years 7 months ago
I am a retired health benefits professional with over 30 years of experience that span senior positions in the consulting, health insurance and corporate marketplaces. I have consulted for State Governments, the Federal Government, Healthcare Organizations and Private Corporations. I also have conducted international healthcare studies. The pros and cons of private versus government administered health plans or social versus private insurance schemes has gone on for the past 30 years. During the early 1990s, a major federal government, universal health care initiative, was tried by the Clinton Administration. During this time, the firm I worked for was hired to conduct an extensive review of the health care systems of 12 countries in an effort to identify the advantages and disadvantages of various healthcare systems. The reason such a study was undertaken was because there was too much misinformation about different country systems including the U.S healthcare system. More importantly, many conclusions by various individuals were highly misleading. In my opinion, the article in America magazine was a little misleading and too simplistic. I wish to add a few commments. 1. The article stated that the Federal Government provides HMOs and other healthcare organizations, who administer Medicare Advantage Plans, a 12% premium over existing Medicare plan costs. I don't have anyway to verify if this is a correct statement. Nevertheless, if it is correct, do not be mislead into thinking this means that privately-administered health benefits is less efficient that government-administered health benefits. Just recall the disaster that occurred when such plans were first established. Initially, the government offered private organizations, like HMOs, a premium over current Medicare plan costs as in incentive for HMOs to get into the Medicare business. The Federal Government wanted to shift the cost of Medicare plans to the private sector and they needed an incentive to do it. The incentive was a higher reimbursement or premium level offered to HMOs for administering Medicare plans. Rules were established that any money received by the HMOs, over and above their actual cost, must be given back to Medicare beneficiaries through lower contributions or higher benefits. In other words, the government did not want the HMOs to profit from this deliberate over-reimbursment. So, what happened? Once, the government started to cut back on the level of reimbursement to the HMOs, through smaller annual increases in reimbursement levels, the actual premium-over-costs eroded. Eventually, government reimbursement was not sufficient to cover the cost of Medicare benefits. The result: an avalanche of HMOs dropped out of the Medicare-administered program leaving beneficiaries to return to the government-administered Medicare system. It was a dismal failure. In my experience, no one that has analyzed the cost of private versus government administered health benefit plans correctly, concluded that the private sector is less efficient than the government sector. Unfortunately, these facts were not discussed in the article. 2. Any professional knows that one must always guard against the so-called apples-versus-oranges issue because it leads to incorrect conclusions. This often occurs when analyzing the costs of health benefits between two different plans and administrators. Any actuary or expert will tell you that in order to accurately analyze health benefit costs between two plans, costs must be normalized for age, sex, benefit levels and severity, emphasis added. Simple cost comparisons are always misleading. The article was too vague about this point. I doubt that the analysis discussed was performed with proper normalization. 3. Healthcare benefits in foreign systems are often rationed. Try getting certain elected surgical procedures or an organ transplant performed in a foreign healthcare system. In some<
E.Patrick Mosman
8 years 7 months ago
To the editor, As one who lived and worked for 20 years in various European countries with government run health care systems it appears that Mr. Reinhardt has little or no actual experience on the consequences of of such systems. And contrary to the economic studies used by Mr. Reinhardt the costs of state of sponsored health care systems are, by most reports, out of control and growing year-by-year. The truth is that there are two health care systems in most, of not all, European countries, one for those with additional private insurance or who can afford to pay and those relegated to the government run For those who can pay there are the Harley Street physicians in the UK, the private clinics with private rooms, no wait for laboratory tests, i.e., X-ray, MRI, CT scans, no wait for elective surgery and no rationing of services. For those ensnared in the government system there are assigned doctors, choice is not option, there are no private or semiprivate rooms, wards only, the wait for tests can be weeks, unless one can pay and then there is no waiting, the wait for elective surgery can extend for weeks if not months if one is found eligible under the rationing guidelines. Under the rationed care of most state run health care systems older patients, over 65 in some countries , are no longer eligible for transplants or other costly operations and even expensive drug treatments. An alternative readily available and often used by Canadians and Europeans is to seek treatment especially operations in the USA or other countries. There is no free lunch in any government run service and those who advocate for a government run health care system are either misinformed or pushing a political goal, socialism. E. Patrick Mosman
Larry Hunt
8 years 7 months ago
I don't know where you got your information about the V.A. Health System; but for some of us who battle this system in an attempt to get decent care for our Veterans, you are describing a system we do not know. "...the V.A. is now widely regarded as being on the cutting edge of the smart use of health-information technology and quality control." My opinion of that statement is that it came directly from the Veterans Administration. Few Veterans I know believe it.
8 years 7 months ago
Although I appreciate the responses to my commentary so far, I do find them more than a little bizarre. First, readers of America Magazine should know that the commentary was severly constrained in length and did not permit footnotes. In an earlier draft, I did in fact have numerous footnotes to document any asssertion I made, as is my profession's wont. They had to be excluded.) Second, the responders themselves make numerous bold assertions without any documentation whatsoever. For example, Mr., Barberi writes: "With all of our problems, it [the American health system] is still the best healthcare system in the world." What empirical evidence does he have for this brash assertion? Numerous empirical studies in recent years (see, e.g., the Commonwealth Fund studies published in Health Affairs) cast doubt on this credo. I wonder how many Americans staring at bankruptcy over health care bills share Mr. Barberi's view. To my mind, there is a simple test to evaluate the relative efficiency of the Medicare Advantage plans and traditional Medicare. Why not pay the Medicare Advantage plans a premiums equal to 100% the actuarially adjusted average per capita cost (AAPCC) per Medicare beneficiary under traditional Medicare in a given county, and then let's see if the private plans can make do with that amount, given their requirements for marketing, administration and profits? Why do the plans need more than 100% of the AAPCC (some Medicare Fee-for-Service plan up to 20% more) to be able to attract Medicare beneficiaries? Does it make Medicare more fiscally sustainable? And, yes, the studies on which I drew, some of them done by the MedPAC or by other highly reputable scholars, do adjust properly for demographics and health status. It is well recognized that all health systems ration health care in some ways. The United States does as well. Indeed, after a lengthy study, the Institute of Medicine of the National Academy of Sciences concluded that some 18,000 American residents die every year for want of health insurance and the timely health care it facilitates. That is rationing, too. Finally, I wonder what policy makers at the state or federal level, or even in the private sector, are to make of Mr. Barberi's sweeping conclusion: "In conclusion, there are solutions to our nations' healthcare crisis. None are easy, quick fixes. If costs are to be controlled, and universal healthcare given to all citizens, the solution will require large-scaled changes for providers, payors and beneficiaries. In the end, any viable solution for the U.S. Healthcare System must balance cost, quality and access." Yes, I have heard this statement for over 30 years now. It is a truism lacking profundity. My hunch is that we'll hear it for another 20 years or so in lieu of concrete health reform. According to the Milliman Medical Index, on average the total health care costs (employer plus employee-paid premium plus out of pocket spending) for a typical American family of 4 that is privately insured is about $14,500 now. That figure has grown at an average annual compound rate of 9.5% since 2000, according to the Milliman Medical Index. At that growth rate, these total cost will reach $35,000 ten years hence. Wages and salaries, which have been growing at only around 3% per year in the recent decade, are unlikely to keep up with that rapid rise in health care costs. What solace, then, might the hard-working lower middle-income class (families with incomes between $20,000 and $60,000 per year now) that will find themselves increasingly priced out of health care in the decade ahead take from Mr. Barberi's vague policy recommendation? Uwe Reinhardt
Gary Peterson
8 years 6 months ago
The conclusion of the article did not square with my experience with Medicare. The Medicare Advantage program in many cases provided additional benefits to those who enrolled in the program. Many of these benefits were directed at wellness. These additional benefits are important to individuals on limited incomes who by joining an Advantage program can get more care for their dollar. Second, most of Medicare cost controls were focused on limiting payments or treatments through regulation. In many cases dollars from private insurance payed for the Medicare treatment.
8 years 6 months ago
While visiting Plymouth, Englind, in 1994, I read of a poor fellow who had lost the sight in an eye while waiting (and not receiving) for an operation on the government healthcare que. The procedure would have cost about L2,000 ($3,200 at the time). As I read, the story went on to state with one now blind eye, the ailment had returned again to take the sight from the remaining, sighted eye. Now, back on the waiting line, his drinking mates at the local pub were passing the hat that he could go outside the national healthcare system and pay cash for the operation, rather than be left totally blind over the lack of a few thousand pounds/dollars. Remember when we would go to doctor or hospital and simply reach into our pockets to pay the bill? Then when socialized medicine came in 1965, everybody wanted to jump on the public nipple. First nibbling, then grinding and ngnashing for all they could get. That floated the cost of healthcare for all, to get us to where we are today. This is what is instore for America if we go for the "Free" healthcare for all bait. We should be careful when we wish. Our wishes might, sadly, be granted. Robert Langworthy Rio Rancho, New Mexico
8 years 6 months ago
Many thanks to you for publishing Uwe Reinhardt's thoughtful, helpful, but concise article. Too concise, in fact, for as he notes, limitations of space forced him to pack a lot of information into only a few pages. Hence my appeal for help, from Prof. Reinhardt, or indeed anyone else: Where can I find an comparative analysis, comprehensible to one who is neither a medical professional nor an economist, of the health care systems of various countries, comparing them to the US, and suggesting in what ways they may do better -- or worse -- than the US? Presumably such comparative studies exist, and perhaps I've simply been looking in the wrong places. Many thanks in advance for any suggestions. An e-mail response would be fine:
8 years 6 months ago
Thank you, Professor Reinhart for this expert summary. Recognizing in excess of 44 million uninsured Americans and 75 million medically under insured, we can hardly claim to have the best health care system in the world. Is our social contract, that we are all in this together, to be shreded for a new vision that everyone is this for themself? The issue is complex and well worth a series of essays.
8 years 5 months ago
In his reply of September 2nd, Professor Reinhart laments the limitations which did not allow footnotes which also applies to those who have cited the out-of-control costs, the rationing and the actual experiences of government run health care systems in Europe and Canada. Both the English and Canadian newspapers/media report on the costs and problems of their nationalized health care and the increasing limitations on care, drugs and operations being imposed to reduce the costs. They could have been cited as examples of the things to expect under government controlled health care systems.

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