US Healthcare Overview

Single payer advocates typically use two primary arguments to support a single payer system:
1) The US system is more expensive per patient than single payer systems, and
2) Health outcomes are better for those in single payer systems

It is necessary to understand these issues before coming to the conclusion a single payer system will correct these problems.

In truth, health outcomes in the United States are far better than those of single payer nations. Further, the cost of care in the United States is the result of government interventions for over a century. The difference is the single payer systems have the means to control expenses through the rationing of care.

Every government-run healthcare system around the world rations care to control costs. In Great Britain, the National Institute on Clinical Effectiveness makes such decisions, including a controversial determination that certain cancer drugs are “too expensive.” The government effectively puts a price tag on each citizen’s life—some $44,305 per year, to be exact. That’s just a baseline, of course, and, as the British Institute’s chairman, Michael Rawlins, points out, the agency has at times approved treatments costing as much as $70,887 per year of extended life. But these are approved only if it can be shown they extend life by at least three months and are used for illnesses that affect fewer than 7,000 new patients per year.

This is the reality of socialized medicine. But the mercantile system in the US is little better as noted in this quote describing the problems with the US system:

Both the current public and private insurance systems main techniques for holding down costs are practicing third party rationing by limiting the services covered, price controls by constraining payments to providers, and shifting costs to patients. But given the system's fragmentation and perverse incentives, much cost-effective care is squeezed out, resources are increasingly allocated to costly, inefficient and opaque administrative and regulatory procedures and central organizational overgrowth with un-necessary and in-efficient micro-management of physicians rather than medical need. The system wastes money on unnecessary premium care workups for all patients, and inappropriate use of expensive technology. Other inefficiencies include information failures, inefficient moral hazard issues, adverse selection, distorted incentives, inflated hospital and pharmaceutical pricing and cost shifting. Many attainable efficiencies are not achieved. We also use medicines and technologies that cost a lot for little or no marginal health benefit. Administrative expenses are high, and enormous sums are squandered in efforts to game the system. Given the mercantile emphasis on production and the ignored consumer it is no wonder that between one fifth and one third of medical outlays do nothing to improve health.[i]

So, what then is the answer to this? More government, the same government which created the US system we have now? "What? The US did not create our healthcare system", you are probably saying. Indeed it did and is described in this article.  But managed care and our current single payer government systems, Medicare and Medicaid, are not fixing what is broken.  Cookbook medicine does not contain costs. All current cost containment strategies are failing.

For a more detailed explanation of how government created the system we have, it started about 100 years ago with medical licensing laws which created a crony relationship between the American Medical Association (AMA) and government which removed competition from within the medical community. Dr. Michel Accad, M.D. describes this in detail in his healthcare blog, alertandoriented.com.  In it, he describes the transition of healthcare following the Flexner Report in 1910. He goes into detail concerning the results of the report:

The main effect of the report was to change public and political opinion about medical education and to influence the implementation of strict licensing laws.  The change in sentiment was facilitated by the political and financial influence of organizations such as the Carnegie Corporation and the Rockefeller Foundation.

In the wake of the report, and under the lobbying efforts of the AMA, states rapidly established medical acts to regulate the issuance of medical licenses.  Henceforth, licenses would only be given to graduates of schools that met criteria set forth by the Flexner report.  Those medical schools would have to be accredited by the Liaison Committee on Medical Education, a joint venture of the AMA and its close ally, the American Association of Medical Colleges.

From an economic standpoint, what happened next was a period of severe medical price inflation which occurred quickly and dramatically.  The situation was so serious that in 1925, a national Committee on the Costs of Medical Care (CCMC) was organized to address the question.

The CCMC was also funded by the Carnegie Corporation and by a number of other private foundations, such as the Rockefeller Foundation.  The committee received material assistance from the AMA, the American Hospital Association, and other leading professional organizations, as well as from many government agencies, including the National Bureau of Economic Research.  Numerous reports were issued over the next few years, and those were compiled in 1932 into a large volume entitled The Costs of Medical Care.

The CCMC confirmed that the costs of medical care had risen dramatically in the prior years.  The committee also found that health care disparities had increased, with access to medical care in rural and poor areas being particularly problematic.[ii]

Coinciding with the Flexner Reforms was the active effort by the government to terminate the relationship people had with mutual assistance organizations.  Mutual assistance organizations used to be a source for primary care for working poor across the country.  Lodge practice was the means by which doctors provided primary care to members of these organizations.  Removing primary care as a benefit to lodge membership, by making lodge practice illegal, forced people to pay for care out of pocket.

"Lodge practice" refers to an arrangement, reminiscent of today's HMOs, whereby a particular society or lodge would contract with a doctor to provide medical care to its members. The doctor received a regular salary on a retainer basis, rather than charging per item; members would pay a yearly fee and then call on the doctor's services as needed. If medical services were found unsatisfactory, the doctor would be penalized, and the contract might not be renewed.

Most remarkable was the low cost at which these medical services were provided. At the turn of the century, the average cost of "lodge practice" to an individual member was between one and two dollars a year. A day's wage would pay for a year's worth of medical care. By contrast, the average cost of medical service on the regular market was between one and two dollars per visit. Yet licensed physicians, particularly those who did not come from "big name" medical schools, competed vigorously for lodge contracts, perhaps because of the security they offered; and this competition continued to keep costs low.

The response of the medical establishment, both in America and in Britain, was one of outrage; the institution of lodge practice was denounced in harsh language and apocalyptic tones. Such low fees, many doctors charged, were bankrupting the medical profession. Moreover, many saw it as a blow to the dignity of the profession that trained physicians should be eagerly bidding for the chance to serve as the hirelings of lower-class tradesmen. It was particularly detestable that such uneducated and socially inferior people should be permitted to set fees for the physicians' services, or to sit in judgment on professionals to determine whether their services had been satisfactory. The government, they demanded, must do something.

And so it did. In Britain, the state put an end to the "evil" of lodge practice by bringing health care under political control. Physicians' fees would now be determined by panels of trained professionals (i.e., the physicians themselves) rather than by ignorant patients. State-financed medical care edged out lodge practice; those who were being forced to pay taxes for "free" health care whether they wanted it or not had little incentive to pay extra for health care through the fraternal societies, rather than using the government care they had already paid for.

In America, it took longer for the nation's health care system to be socialized, so the medical establishment had to achieve its ends more indirectly; but the essential result was the same. Medical societies like the AMA imposed sanctions on doctors who dared to sign lodge practice contracts. This might have been less effective if such medical societies had not had access to government power; but in fact, thanks to governmental grants of privilege, they controlled the medical licensure procedure, thus ensuring that those in their disfavor would be denied the right to practice medicine.

Such licensure laws also offered the medical establishment a less overt way of combating lodge practice. It was during this period that the AMA made the requirements for medical licensure far more strict than they had previously been. Their reason, they claimed, was to raise the quality of medical care. But the result was that the number of physicians fell, competition dwindled, and medical fees rose; the vast pool of physicians bidding for lodge practice contracts had been abolished. As with any market good, artificial restrictions on supply created higher prices — a particular hardship for the working-class members of fraternal societies.[iii]

Then, along comes WWII and government policies which connected health insurance with one's employer and began the 3rd party payer system we have made into law with ACA.

It started with wartime wage freezes. Employers desperate to entice employees used health insurance benefits as an enticement since wages were frozen by law.[iv] After the war, the tax code was altered to give tax benefits to employers for providing health insurance.[v]  So, what happens over time is that individual ownership of health insurance policies ownership slows or stops while simultaneously premiums and costs begin to go up. Why? Because now insurance pays for everything and the user does not even pay for the insurance. Prices are the means of communicating value, but with healthcare, prices are irrelevant as a result of the 3rd party payer system. This video briefly describes the problem.

Because insurance companies are — partly — obligated to pay for any expenses of their customers, and the inability of customers to establish what the real prices of their services provided are — something readily available in a real free market — prices are able to rise far beyond what would be the case in a free market with functioning price signals. Because governments, through taxation, pay for the largest part of these health insurance schemes, we as consumers are not aware of the total costs of these medical services. This lack of awareness in turn contributes to the possibilities of rising prices for medical services.[vi]

But then, what happens when one needs to change jobs for better money or whatever...fine, if you are healthy but not if you are sick. Voila, the pre-existing condition problem. Again, the result of employer provided insurance which had been incentivized by government wage and tax policy. So, what happens when one retires from all but a handful of the largest employers which have healthcare plans for retirees? Since the insurance was employer provided and not individually owned, no more insurance at retirement. Add to this the expense at that point of trying to obtain insurance, which at 65 is not cheap, and you have the need for Medicare. Again, a problem caused by government.

So along comes the HMO law the brainchild of Ted Kennedy[vii]. "Combined with Medicare, the HMO Act eventually eliminated the market for affordable individual health insurance".[viii]  Within 20 years of that law, the system is hopelessly damaged and the 3rd party payer system is the rule. Do not also forget the prices of policies are forced up by numerous mandates by both the states and federal government.[ix] Pricing for medical services is almost universally based on Medicare pricing[x] and policy pricing is regulated by the states[xi]. Thus, bureaucrats have decided what the value of a medical service will be, not the market and there is no pricing mechanism to transmit information.

ACA made the 3rd party payer system, which was already failing, into law by mandating employers offer those benefits. In other words, ACA doubled down on failure.  ACA creates an illusion of having elements of the free market in the form of the exchanges and when the system begins to fail, as it is now, the blame can be laid on the failure of markets so as to usher in a single payer system.

One of the big justifications used by many advocating a single payer system is that in single payer countries, the health of the people is better. Health outcomes in those countries are in fact not better than those in the United States.

For example, life expectancies are affected by exogenous factors such as violent crime, poverty, obesity, tobacco and drug use, and other issues unrelated to health care. As the Organization for Economic Co-operation and Development explains, “It is difficult to estimate the relative contribution of the numerous nonmedical and medical factors that might affect variations in life expectancy across countries and over time.”[xii]

Similarly, infant mortality, a common measure in cross-country comparisons, is highly problematic. In the United States, very low birth-weight infants have a much greater chance of being brought to term with the latest medical technologies. Some of those low birth-weight babies die soon after birth, which boosts our infant mortality rate, but in many other Western countries, those high-risk, low birth-weight infants are not included when infant mortality is calculated.[xiii]

When you compare the outcomes for specific diseases, the United States clearly outperforms the rest of the world. Whether the disease is cancer, pneumonia, heart disease, or AIDS, the chances of a patient surviving are far higher in the United States than in other countries. For example, according to a study published in the British medical journal The Lancet, the United States is at the top of the charts when it comes to surviving cancer. Among men, roughly 62.9 percent of those diagnosed with cancer survive for at least five years.[xiv] The news is even better for women: the five year-survival rate is 66.3 percent, or two thirds. The countries with the next best results are Iceland for men (61.8 percent) and Sweden for women (60.3 percent). Most countries with national health care fare far worse.[xv]

Moreover, the United States drives much of the innovation and research on health care worldwide. Eighteen of the last 25 winners of the Nobel Prize in Medicine are either U.S. citizens or individuals working here.[xvi] U.S. companies have developed half of all new major medicines introduced worldwide over the past 20 years.[xvii] In fact, Americans played a key role in 80 percent of the most important medical advances of the past 30 years.[xviii] Advanced medical technology is far more available in the United States than in nearly any other country.

By the same token, not only do thousands of foreign-born doctors come to the United States to practice medicine, but foreign pharmaceutical companies fleeing taxes, regulation, and price controls are increasingly relocating to the United States.[xix] In many ways, the rest of the world piggybacks on the U.S. system.

Health and medicine present unique challenges but non-coercive measures are best able to address these challenges. A comprehensive functional market-based system is far better positioned to match resources without price controls or rationing care. A market-based system suffers far less of the feast-or-famine misallocation of resources driven by our current mercantile system. It also saves huge sums that our current system wastes on administration, physician micro-management, billing, excessive executive compensation, and risk selection signing up only the healthy and wealthy leaving the sick and poor to be paid at the maximum rate by the American taxpayer.

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[i] Lanzalotti, M.D., J. (2011). Jeffersonian Health Policy Foundation -Single Payer vs. Market System. [online] Jhpf.org. Available at: http://www.jhpf.org/research/healthcare/singlepayer.asp [Accessed 10 Jan. 2020].

[ii] Accad, M.D., M. (2015). An economic history of the American health care system-Part 1 | Alert & Oriented. [online] Alert & Oriented. Available at: http://alertandoriented.com/an-economic-history-of-the-american-health-care-system-part-1/ [Accessed 10 Jan. 2020].

[iii] Long, R. (1993). How Government Solved the Health Care Crisis. [online] Freenation.org. Available at: http://www.freenation.org/a/f12l3.html [Accessed 10 Jan. 2020].

[iv] Institute of Medicine (US) Committee on Employment-Based Health Benefits; Field MJ, Shapiro HT, editors. Employment and Health Benefits: A Connection at Risk. Washington (DC): National Academies Press (US); 1993. 2, Origins and Evolution of Employment-Based Health Benefits. Available from: https://www.ncbi.nlm.nih.gov/books/NBK235989/

[v] Ibid

[vi] Cornax, W. (2014). How Third-Party Payers Drive Up Medical Costs | Willem G. Cornax. [online] Mises Institute. Available at: https://mises.org/library/how-third-party-payers-drive-medical-costs [Accessed 11 Jan. 2020].

[vii] En.wikipedia.org. (2019). Health Maintenance Organization Act of 1973. [online] Available at: https://en.wikipedia.org/wiki/Health_Maintenance_Organization_Act_of_1973 [Accessed 11 Jan. 2020].

[viii] Holleran, S. (1999). The History of HMOs - Capitalism Magazine. [online] Capitalism Magazine. Available at: http://capitalismmagazine.com/1999/11/the-history-of-hmos/ [Accessed 11 Jan. 2020].

[ix] New, Michael J, Ph.D (2005). The Effect of State Regulations on Health Insurance Premiums: A Preliminary Analysis, Center for Data Analysis, CDA05-07, October 27, 2005

[x] Roger Feldman, Bryan Dowd, and Robert Coulam. “Medicare’s Role in Determining Prices throughout the Health Care System.” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, October 2015.

[xi] New, Michael J, Ph.D (2005). The Effect of State Regulations on Health Insurance Premiums: A Preliminary Analysis, Center for Data Analysis, CDA05-07, October 27, 2005

[xii] OECD, “Health at a Glance: OECD Indicators, 2005” (Paris: OECD Publishing, 2005), p.11

[xiii] World Health Statistics Quarterly 36 (1983), cited in Nicholas Eberstadt, The Tyranny of Numbers: Measurements and Misrule (Washington: AEI Press, 1995), p. 50.

[xiv] Arduino Verdecchia et al., “Recent Cancer Survival in Europe: A 2000–02 Period Analysis of EUROCARE-4 Data,” The Lancet Oncology 8, no. 9 (2007): 784–96, http://www.thelancet.com /journals/lanonc/article/PIIS1470204507702462/abstract

[xv] Nicole Martin, “UK Cancer Survival Rate Lowest in Europe,” Daily Telegraph, August 24, 2007.

[xvi] “Nobel Prize in Physiology or Medicine Winners 2007–1901,” The Nobel Prize Internet Archive, http://almaz.com /nobel/medicine/medicine.html.

[xvii] “Pharmaceutical Research and Manufacturing of America,“ R&D Spending by U.S. Biopharmaceutical Companies Reaches a Record $55.2 Billion in 2006,” February 12, 2007.

[xviii] Economic Report of the President (Washington: Government Printing Office, 2004), p. 192.

[xix] “The Novartis Warning,” Wall Street Journal, May 8, 2002

State Actions to Reduce Healthcare Costs

The State of Tennessee is attempting to expand access to care for more people.  Medicaid expansion or a single-payer system and other subsidies will increase demand for healthcare when people perceive it as a "free" service.  Meanwhile, regulations and laws restrict the ability of the market to supply that increased demand.  The result will always be increased prices.  To control costs, governments will be forced to ration care, as all government-run healthcare system do.

Therefore, rather than increasing prices, allowing the supply of medical care to grow will have the opposite effect, allowing for more access to healthcare for more people.

In order to achieve this goal, Tennessee can enact five reforms which are demonstrated to reduce costs and increase access to healthcare.

1.     Expand telemedicine to embrace technology and innovation which are leading the way towards drastically reducing patients costs while increasing patient access—particularly for those who are low-income or living in rural areas.

Compelling evidence shows that telemedicine does work for a wide range of conditions if the process is structured in a smart way. And the health care system will only get better at utilizing telemedicine. Better software platforms to manage telemedicine and changes to the patient interaction process, e.g. making it more asynchronous, promise improvements. Entrepreneurs and startups are leading the way here.

Second, the economics of telemedicine are compelling for providers. Telemedicine visits tend to be shorter than office visits, so provider time is used more effectively. The overhead required to support telemedicine visits is also less: office space, receptionists, and data collection time. From my work with a primary care provider organization, I’m convinced that about half of primary care visits can be accomplished by telemedicine at about 2x the productivity of office visits. This can go a long way to alleviate the shortage of primary care providers and help hold down the cost of medical care.[i]

2.     Reduce existing state-level mandates so that Tennessee insurers can begin offering plans that give patients more affordable and customized options that fit their individual needs.

While a single health benefit mandate may only increase premium rates between $50 and $700 dollars annually per employee depending on the plan type and coverage, the accumulation of multiple health benefit mandates can result in a significant increase in the cost of health insurance benefits for small business employers and employees. Even at the lowest annual increase of $50, 20 mandates will result in an increase in premium costs of at least $1,000 annually.[ii]

3.     Authorize Health Savings Accounts (HSAs) within the TennCare program. In doing so, we provide those low-income Tennesseans with more options to make cost-conscious and individualized decisions that improve their financial and healthcare outcomes, while also addressing concerns over ballooning state costs. 

4.      Eliminate Certificate of Need (CON) laws

      Tennessee, in detail:  https://www.mercatus.org/system/files/tennessee_state_profile.pdf

The weight of evidence suggests that a full repeal of CON laws would expand access to healthcare in Tennessee that is of both high quality and low cost.

Given the substantial evidence that CON laws do not achieve their stated goals, one may wonder why these laws continue to exist in so much of the country. The explanation seems to lie in the special-interest theory of regulation. Specifically, CON laws perform a valuable function for incumbent providers of healthcare services by limiting their exposure to new competition. Indeed, recent evidence suggests that special interest groups are able to use political donations to increase the odds that their CON requests will be granted. This aspect of CON laws helps explain why economists as well as antitrust authorities have long argued that these regulations are anti-competitive and harmful to consumers.[iii]

5.      Eliminate professional licensing in medicine and leave education, credentialing, and scope-of-practice decisions entirely to the private sector and the courts.

Medical licensure fails to meet expectations in the area of discipline and consumer protection. State medical boards’ disciplinary efforts can arguably be said to protect clinicians more than consumers. Many actions against clinicians are settled privately and after extended periods of time. Clinicians who have faced disciplinary actions often continue to practice, with no public disclosure of the reasons for the sanction. The persistent difference between the promise of licensing and its actual performance is summarized by one long-time observer of New York’s licensing laws, who describes that state’s statutory authority as “exemplary” but the state’s use of that authority “shameful.”[iv]

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[i] Hixon, Todd. “Will Telemedicine Change Healthcare Or Prove To Be Another Venture Fad?” Forbes, 10 June 2016, www.forbes.com/sites/toddhixon/2016/06/10/will-telemedicine-change-healthcare-or-prove-to-be-another-venture-fad/#418129744248.

[ii] COST OF STATE AND FEDERALLY MANDATED HEALTH BENEFITS

Report to the Tennessee General Assembly. Prepared by the Fiscal Review Committee Staff, June 29, 2011

[iii] Mitchell, Matthew D. Tennessee's Certificate-of-Need Program: Lessons from Research. Mercatus Center - George Mason University, 31 Oct. 2019, www.mercatus.org/system/files/mitchell_-_testimony_-_testimony_on_tennessees_certificate_of_need_program_-_v1.pdf.

[iv] Svorny, S. (2008, September 17). Medical Licensing: An Obstacle to Affordable, Quality Care. Retrieved January 3, 2020, from https://www.cato.org/sites/cato.org/files/pubs/pdf/pa-621.pdf.