In 1960, the private sector funded over three quarters of the nation’s health care expenditures. Individuals paid nearly one-half of the total national health care expenditures through out of pocket expenditures. Beginning in 1967 the way health care is purchased in the U.S. began to completely reverse itself:
- The private sector has been slowly funding less and less of the total national health expenditures; as of 2007 less than 54 percent of total national health care expenditures are paid for by the private sector.
- Reciprocally, the public sector has been slowly funding more and more of the total national health expenditures; as of 2007 public expenditures at the federal and state levels now fund nearly one-half of the total health care expenditures in the U.S.
- Total out of pocket expenditures have been plummeting as a share of total health expenditures at an even faster rate; today only a bit more than $1 out of every $10 spent on health care is being funded by individuals through out of pocket expenditures.
This has resulted in a large and growing government health care wedge—an economic separation of effort from reward, of consumers (patients) from producers (health care providers), caused by government policies. Rising government expenditures on health care are the main factor driving the growth in the wedge. The wedge is a primary driver in rising health care costs, i.e., inflation in medical costs.
President Barack Obama’s principles to drastically alter U.S. health care policy—a public health insurance exchange, mandated minimum coverage, mandated coverage of preexisting conditions, required purchase of health insurance—do not address the growing wedge and its role as the fundamental driver of health care costs. In fact, they will further increase the wedge, and can thus be expected to increase medical price inflation.
Specifically, the estimated $1 trillion increase in federal government health subsidies over 10 years based on President Obama’s principles will have the following consequences:
- Overall, total federal expenditures will be 5.6 percent higher than they otherwise would be by 2019, adding $285.6 billion to the federal deficit in 2019.
- An increase in national health care expenditures by an additional 8.9 percent by 2019.
- An increase in medical price inflation by 5.2 percent above what it would have been otherwise by 2019.
- Reduce economic growth in 2019 compared to the baseline scenario by 4.9 percent for the nation and 5.1 percent in Pennsylvania.
- Higher medical inflation and overall expenditures will ultimately lead to government expenditures that exceed the $1.0 trillion in expenditures on health subsidies. The net present value of all additional federal government expenditures through 2019 that will occur as a result of a federal health care reform is $1.2 trillion, or a $3,900 bill for every man, woman, and child in the U.S.
- In addition to federally-funded expenditures, the net present value of all Pennsylvania state government expenditures through 2019 that will occur as a result of federal health care reform is $6.9 billion, or a $552 bill for every man, woman, and child in Pennsylvania.
- The current net present value of funding health care reform based on President Obama’s priorities will be $4,453 for every person in Pennsylvania. This comes to a total net present value of $55.4 billion in total costs that Pennsylvania residents will have to bear.
- Despite the additional $1 trillion in expected health care subsidies by the government, 30 million people would remain uninsured. The cost to reduce the number of uninsured by 16 million people is $62,500 in subsidy expenditures per person insured.
- The cost on Pennsylvania could be higher, and the national cost lower, if the federal government pushes the financial responsibility for covering the expansion of lower income individuals’ health insurance coverage off to the states. While the federal costs will decline, Pennsylvania’s costs will increase by a total of $21.8 billion (the net present value being $16.8 billion).
Rather than expanding the role of government in the health care market, Congress should implement a patient-centered approach to health care reform. A patient-centered approach focuses on the patient-doctor relationship and empowers the patient and the doctor to make effective and economical health policy choices. A patient-centered health care reform would:
- Begin with individual ownership of insurance policies.
- Leverage Health Savings Accounts (HSAs).
- Allow interstate purchasing of insurance.
- Eliminate mandated benefits that insurers are required to cover.
- Reallocate the majority of Medicaid spending into simple vouchers for low-income individuals to purchase their own insurance.
- Eliminate unnecessary scope-of-practice laws and allow non-physician health care professionals to practice to the extent of their education and training.
- Reform tort liability laws.
Successful reforms will directly address the root causes of the problems in health care—the adverse government policies that have diminished the incentives and ability for either doctors or patients to control costs and experiment with alternative and more effective ways to deliver health care.