A Health Care Catechism : What are the Real Problems? Eight Difficulties Considered

Because God clearly commands His followers to care for the sick, the lack of universality in health insurance coverage is of more than passing importance to Christians. But achieving universal coverage creates a dilemma that has troubled theologians, the Church, and practical Christians for a long time, and it is now a central political issues for the Congress and the President — how to help those who cannot help themselves, without creating incentives for those who can help themselves to abuse the generosity of others.

The best way to take a careful look at health reform is to raise three fundamental questions: What are the problems in the current health care market? What are the causes of these problems? And finally, what institutional structure — government, private industry, or a combination thereof — will best solve these problems?

The crisis mentality currently gripping Washington is a direct result of the following four easily identifiable problems: the number of people lacking health insurance (the “uninsured”); rising medical prices; the increasing portion of the economy being allocated to medical care, and the fear that one’s health insurance will not transfer to a new job or be renewed after a major illness. While each of these problems is cause for concern, none should be considered a “crisis.”


Problem 1: The Uninsured

Approximately 3 7 million people (17 percent of the non-elderly population) are currently without health insurance (the elderly have Medicare). This is easily the most often quoted and least understood statistic in the health reform debate.

The vast majority of the uninsured, 76 percent, are without insurance for less than a year. Only 4 percent, or 1.5 million people, go without insurance for more than two years. In addition, most of the uninsured are young and thus are less likely to be unhealthy or in need of medical treatment. Thirty-two percent are between the ages of 18 and 2.9, while another 25 percent are between the ages of 3o and 39. Most of the uninsured are not poor- 40 percent have annual incomes exceeding $20,000. Most of the very poor receive health care through Medicaid.

Finally, and most importantly, one should not confuse the lack of health insurance with the lack of health care. The uninsured poor (and not so poor) do receive medical treatment — either through government assistance, by paying out-of-pocket (usually at steep discounts), or through “charity care” from public hospitals and church-affiliated institutions. In fact, in 1985 it became illegal to refuse treatment to individuals that show up in an emergency room in need of medical care. This is no small matter. The American Hospital Association estimated that in 1990 U.S. hospitals provided $10 billion of uncompensated care.

In short, if 37 million people were going without health care, that would be a crisis! Closer examination reveals that the 37 million uninsured do receive care, are not necessarily poor, and are predominantly young and likely healthier.


Problem 2: Rising Medical Prices

While inflation, as measured by the consumer price index, increased at an average annual rate of 4.7 percent during the 198os, the medical component of the index increased at an average rate of over 8.7 percent. This inflation is reflected in the average charge for a hospital room jumping from $127 per day in 1980 to over $300 in 1990.

While medical inflation is a concern, the quality of care received has also changed dramatically. In other words, the medical care one received in 1980 is not necessarily the same quality or type of care one would receive today. Health care is rapidly improving — new technologies and procedures are continually decreasing morbidity and mortality rates and leading to more productive recoveries from injury, illness, and disease. These improvements are not reflected in the medical price index. Medical inflation is therefore somewhat overstated.

Finally, economist Herb Stein has humorously noted that any trend that cannot continue will cease. This is certainly true with health care price increases. Medical prices can only go as high as demand will allow. In this regard, the private sector has drastically changed the way it purchases health care in an attempt to slow ever-increasing medical prices. These initiatives include the increased utilization of managed care facilities (HMOs, PPOs, etc.), workplace wellness programs, direct contracting, and purchasing cooperatives. These changes have helped to reduce medical inflation from 8.7 percent in 1990, to 6.3 percent in 1992, and to around 5.4 percent today.


Problem 3: Rising Medical Expenditures

Between 194o and 1960, health expenditures rose from 4 percent of Gross Domestic Product (GDP) to just over 5 percent, a modest increase at best. But since 1960, this trend has accelerated. In the 1980s health expenditures increased at an average annual rate of 10 percent — increasing from $240 billion in 198o to almost $650 billion in 1990. Today health expenditures exceed $950 billion annually, an amount equal to 14.4 percent of GDP. To put this in perspective, $950 billion is almost equal to the entire GDP of the United Kingdom.

Because it is difficult to know what percent of an economy should be devoted to different sectors, like health care, automobiles, or computers, analysts will usually compare the U.S.’s 14 percent spent on health care to the 8.7 percent spent in Canada, the 8.z percent spent in Germany, or the 5.8 percent spent in the U.K. While the U.S. does spend more than any other country, this comparison mistakenly assumes three things: first, that the quality of health care received in other countries is the same as that received in the U.S.; second, that actual dollar spending is all that matters in comparisons of cost; and finally, that other countries have similar physical health problems as are experienced in the U.S. None of these assumptions is true.

Quality: The U.S. has the highest quality health care anywhere in the world. We lead all other countries in the pioneering of new drugs, in the development of new medical procedures, and in the availability of critical medical technology. This fact is buttressed by the number of ordinary citizens, especially Canadians, as well as world leaders, who come to the U.S. to be treated by U.S. doctors renowned as the best in their fields. This fact is rarely disputed.

Costs: While the U.S. does spend more in accounting terms than other countries, we do not have the hidden costs and lost productivity associated with long waits for medical care or people foregoing needed medical treatment all together. We have the shortest “lengths of stay” in hospitals for many medical conditions, and perform many procedures on an outpatient basis. Many countries with socialized systems hide the bureaucratic costs of their health systems in the operations of their general government accounts. Some economists have concluded that once hidden costs are accounted for, U.S. health care expenditures are not that far out of line with other countries.

Social pathologies: The most important problem with international comparisons of health systems is the difference in societal pathologies between countries. The U.S. is crippled in such comparisons by its increasing rates of violence, drug abuse, sexually transmitted diseases, alcoholism, and poor eating habits. Over half-a-million emergency room visits a year are due to violent injury, at an estimated medical cost of $5 billion. The estimated cost of treating people with HIV in the U.S. last year was well over $10 billion. In hospitals, approximately 12 million cases of sexually transmitted diseases were treated last year, at an annual cost of over $3.5 billion. Approximately 34 million adults in the U.S. are overweight, of whom 13 million are severely overweight. This excess weight increases the risk for gallbladder disease, gout, and heart disease — all with obvious costs to the U.S. medical system. Estimated medical costs for tobacco, alcohol, and drug abuse run close to $15 billion per year. No other country has to deal with these kinds of extremely expensive conditions. While $950 billion may seem like a lot, given the breakdown in behavior being experienced in our country, it could be much worse. Reforming our health care system, even if we copied the Canadian or British systems, would not do anything to reduce the cost of these social problems that are now adding to our total health expenditures.


Problem 4: Fear of Losing Coverage

It is estimated that 3o percent of workers, or others in their household, have stayed on a job they wanted to leave because they did not want to lose their employer-provided health insurance. This fear has become known as “job-lock.” Unfortunately, it is impossible to know how many of those that fear losing coverage after a job change would have actually been denied coverage. Because only 3 to 4 percent of the U.S. population is thought to be uninsurable, this fear is probably exaggerated. However, because job mobility is important to a functioning economy, and fear is all that is needed to impede mobility, this problem cannot be ignored.

Clearly, these four problems are not as bad as they may have initially appeared. Yet while not a crisis, they do still represent a major problem for some individuals and families not well served by our current system. Before delving into the plethora of alternative solutions being proposed by the President and the Congress, we must first try to gain an understanding of the root causes underlying these problems. Only then can a just solution be identified.

Many in the media, government and academia have spent long hours trying to identify a villain. Some have pointed to lawyers, whose malpractice awards have raised costs and led to unnecessary treatments. Others have blamed insurance companies for raising prices or refusing to insure those who become sick, thus padding their profits at the expense of those in need of care. Pharmaceutical companies, medical device manufacturers, and small businesses that do not offer health insurance coverage for their employees complete the list of villains commonly blamed for the current health care “crisis.”

Conspicuously omitted from this list, however, and for reasons that many would not initially accept, is the government. Government is in fact the central figure behind the gaps and inefficiencies evidenced in our current health care system.

The crime is not that the government has hampered the quality of services provided, but rather that it has created a crisis in how health care services are being financed. The four problems identified above can be directly linked to how health care is paid for.


Root Cause 1: A Crisis in Health Care Financing

Over the last 3o years the method of paying for health care in the U.S. has dramatically changed. In 196o, over 56 percent of health care expenditures were paid directly out-of-pocket, while the government and private insurance each paid 23 percent. Today only 23 percent of health expenditures are paid for directly, while the government pays 41 percent and private insurance pays 35 percent. This shift away from direct medical payments lies at the root of our current health care problems.

The government plays a very large and increasing role in the financing of health care in the U.S. Before 196o, the government’s role in health care was limited mainly to research. But with the passage of Medicare and Medicaid in the late 196os, the government has become the primary payer of health care services for the poor, the elderly, and the disabled. While most are familiar with the growing amounts the government spends in these two public programs ($219 billion in 1993), few are familiar with the government’s other, more menacing role — the subsidy it provides for the private purchase of employerprovided health insurance. This subsidy is hidden through the tax code and directly affects the amount of insurance workers buy and where they buy it.

This subsidy is the exclusion from taxable income of employerprovided health insurance. If an employer purchases health insurance for its employees as part of their compensation, the value of that insurance is not included in the employees’ gross income and thus is not taxed. For example, if an individual earns enough to be placed in the top tax bracket and has the option of receiving a $100 raise or a $100 increase in health insurance coverage, after taxes, the value of the raise would fall by the marginal tax rate (around 5o percent with federal, state, and local taxes combined). The high-wage worker is really choosing between $5o in after-tax wages or $100 in extra health insurance — which leads most to opt for the extra insurance.

According to the Congressional Budget Office (CBO) this tax provision will cost the federal government $79 billion in 1994 alone. Because the value of the exclusion is linked to the tax bracket in which one falls, the higher one’s income, the higher the subsidy. The CBO estimates that the average family earning between $20,000 and $30,000 will receive a federal subsidy equal to $800, while a family earning between $100,000 and $200,000 will be subsidized by $1,910 — more than twice that of the lower-wage family. In addition to subsidizing those who need it least, the tax exclusion leads to the following three other root problems.


Root Cause 2: Third-Party Payer Problem

At the core of the health care financing crisis is the “third-party payer” problem, or more appropriately, the “someone else’s money” dilemma. As more and more health care spending is paid for by the government and insurance companies (with employers paying the insurance premiums), patients and doctors have less and less incentive to control costs. In fact, they have every incentive to spend more. The patient, whose insurance is typically paid for by his employer, views medical care as a fringe benefit to be fully utilized without concern for cost. Thus, the more care received, the higher the perceived compensation. Oddly, the patient often has the incentive to seek out the highest-priced doctors, because he reasonably assumes that price may be related to quality, and knowing that someone else is paying the bill, may seek out the higher-priced physician.

The doctor has equally perverse incentives. Because few shop for the lowest-priced doctor, the doctor has less reason to concern herself with competitive pricing. To a limited extent, the doctor may actually be better off competitively having somewhat higher prices. The doctor does not have to worry about the ability of the patient to pay for her services, and thus can recommend lots of services regardless of their total cost (or benefit). And finally, the doctor does not have to worry herself with the accuracy of her billing, knowing that the only one who will read the bill (the insurer) will have little idea what services were actually provided.


Root Cause 3: The Problem of Overinsurance

In addition to the third-party payer problem, the tax treatment of health insurance leads to overinsurance — buying insurance beyond what is necessary to reasonably lower one’s risk. Insurance was never meant to cover routine and expected expenses. This is true in all forms of insurance. One does not include the cost of an oil change in auto insurance, nor does one include the cost of re-carpeting one’s house in the insurance on one’s home. However, because of the government tax preference given employer-provided health insurance, the cost of routine physical exams and other minor medical treatments are included in almost all health insurance policies. This is the only way under present tax law to have these services subsidized by the government. Unfortunately, this is a very expensive way to “prepay” for routine medical expenses.

Correcting the distorted incentives in health care would require us to return to the concept of insurance rather than the concept of prepayment. Health insurance, like all insurance, should be purchased to cover the risk of catastrophic and expensive events. Minor medical expenses should be paid for directly out-of-pocket. In the long run this would lower administrative costs, reduce premium prices, encourage people to shop for their doctors, and would likely reduce overall medical spending for both the government and for private individuals.


Root Cause 4: The Problem of Employer-Based Insurance

Because the tax subsidy is limited to employer-purchased health insurance, there is little incentive to buy insurance individually or through other groups — like churches or civic organizations. This limits the ability of low-risk groups to reap the benefits of their combined healthier (low-risk) lifestyles. Mormons, for example, should be able to purchase health insurance as a group and pay lower premiums due to their healthier lifestyles — which includes abstinence from tobacco, alcohol, illicit drugs, and sexual promiscuity. Such a system could be utilized to allow churches to provide low-cost health insurance as an act of charity to the poor or unhealthy through their lower risk health insurance pools.

Finally, because the law encourages employer-based insurance, one often has to find new insurance upon changing jobs, or becoming unemployed. This inextricably links one’s security in the health system to one’s present job. As the economy moves into recession, people begin to worry about the health care system — which ultimately leads to the fear behind “job lock.”


The Solution

There are currently nine different health reform proposals being considered on Capital Hill, with variations and combinations being added daily. Only one eliminates the tax exclusion given employer-provided insurance — the villain behind the “crisis” in health care financing.

The Clinton Plan: President Clinton’s Health Security Act attempts to eliminate the surface problems of uninsurance, medical inflation, spending, and job lock through a system of mandates and price controls. The President would mandate that all employers join a health alliance through which they would be required to pay roughly 80 percent of health insurance premium costs for their employees. Everyone would be required to have very comprehensive insurance benefits with low out-of-pocket costs. There would also be limits on drug prices, premium increases, and independent doctor fees, as well as new and expanded government subsidies for small businesses, early retirees, and the severely disabled. Clinton also proposes to regulate the number and types of physicians allowed to practice medicine in the U.S.

This proposal runs counter to what lies at the root of the current problems. It does nothing to change the basic economic incentives of patients and doctors. In fact, because of its mandated employer payments and its standard benefit requirements, it actually worsens the third-party payer problem and the problem of overinsurance. This proposal will lead to increased demand for medical care, and force the government to increase its controls on prices and expenditures. In short, the Clinton plan is the equivalent of putting a lid on a boiling pot while turning up the heat. It is a prescription for disaster.

Alternative Reform Proposals: There are still a lot of politicians who think health care is a right that should be paid for through a payroll tax, as in Canada. Such plans ignore the market incentives necessary for an efficient allocation of resources; they lead to waiting lines, lower quality care, and in the long run, the politicization of medical care.

Another alternative being considered is to expand the tax exclusion currently provided for employer-sponsored plans to include an exclusion for what are called “medical savings accounts” (MSA). Under this approach, money could be set aside tax-free in an account to cover routine medical expenses. A high deductible health plan could be purchased to insure against catastrophic events. The money saved from purchasing a high deductible policy could be placed in the tax-free MSA. Such an account would encourage people to shop for cheaper services so as to limit spending from their account. It would also expand the availability of insurance, since it would not be limited to employer plans.

While this plan has a lot of merits, it continues the tax preference for health insurance and encourages spending on health care above all other spending — like food, housing, and education.

While it is often thought easiest to meet God’s commands to care for the sick or the poor by organizing a solution around government action, a government-centered approach will exacerbate the problems of costs and lack of insurance coverage. Real health care reform will require the immediate removal of the tax preferences for health insurance and medical care and the reform of government programs for the poor and the elderly. Additionally, congressional action on health reform can do nothing to deal with the problems of violence, drug abuse, and other high risk anti-social behaviors that have very real economic and non-economic costs for our country. When, and if, health reform is passed, regardless of how it is written, there will still be a role for the church and concerned individuals to care for the sick and for the poor. While Congress cannot solve the dilemma of how best to help people, if it brings about efficient reform of individual incentives, it can greatly improve our current system and make it possible for charity to do a lot more good.


In 1994, Robert B. Helms was director of health policy studies at the American Enterprise Institute. Derrick A. Max was a research assistant in health policy.

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