Part one of this series, “The High Cost of Low Taxes,” noted that while Americans enjoy a tax burden lower than that of other wealthy countries, we also pay four times as much as they do, on average, for out-of-pocket “social costs” in the private sector – on health care, retirement security, disability and unemployment insurance, and the rest of the safety net. When you add up what we pay in taxes and what we pay out of pocket, the US spends about the same amount on social costs overall as some of the most generous, heavily taxed social democracies, but we get a far less secure safety net in return.
The federal government doesn’t have a deficit problem. Its fiscal issues are entirely related to the bloated cost of American health care. If we paid the same amount for health care per person as people do in other wealthy countries with longer average life expectancies, we’d have a balanced budget now and surpluses projected for the future.
But those are just numbers on a spreadsheet. Fran and Randy Malott understand those costs more viscerally. The Whittier, Calif., couple aren’t living the American dream right now. They haven’t for a while. They were slammed when Wall Street’s house of cards came tumbling down, and now they’re feeling the squeeze of the Great American Rip-off.
Fran lost her job as a customer service representative in 2009, at the height of the Great Recession. “A lot of companies are getting rid of customer service these days,” explains Randy. He lost his job managing a temp agency a year or so later. The Malotts are two of what Paul Krugman called “the forgotten millions” – the long-term unemployed who face unique barriers to reentering the workforce, including discrimination by potential employers just because they’ve been out of work for an extended period. “And our age doesn’t help either,” says Randy. He’s 59 and she’s 60. “There was unemployment for a while,” Randy says, “and now we’re getting by on savings.”
He tells Moyers & Company, “we live pretty frugally,” but the $1,600 a month they’re forking over for health insurance represents about half their total spending. The Malotts are a healthy couple, yet they’re watching their life savings drain away, in large part due to their health insurance company. The $140,000 the Malotts had socked away for retirement is now down to around $45,000. “We’ve got quite a ways to go before Social Security and Medicare kick in,” says Randy.
The Malotts are in a tough spot, like a lot of people who find themselves in similar circumstances. Studies have shown that long-term unemployment causes stress and illness. In the rest of the world’s highly developed countries, the Malotts’ health care would be covered by their government – the risk of long-term unemployment would be spread across an entire society – which means they’d have one less serious stressor, and around $45,000 more in the bank than they do today.
When Competition Drives Up Costs
The US system is a stark testament to the fact that, at least when it comes to health care, more competition doesn’t lead to lower prices or better outcomes.
Three facts are indisputable. First, the $8,500 we spent per person on health care in 2011 was around $5,000 more than the average among developed countries in the Organization for Economic Cooperation and Development (OECD) — and almost $3,000 more than the average in Switzerland, which was the next highest spender.
Second, multiple studies have found that we have significantly poorer health outcomes than most developed countries (see here, and here) – by some measures, we rank dead last. And it’s not just because we have higher rates of poverty and inequality — a study conducted by the National Research Council and the Institute for Medicine accounted for those factors and found that, as Grace Rubenstein summarized for The Atlantic, “even white, well-off Americans live sicker and die sooner than similarly situated people elsewhere.” (American men are also becoming shorter relative to men in other highly developed countries – the average height of a population is a proxy for the quality of prenatal health care and nutrition.)
Finally, we rely much more heavily on the private sector to finance our health care than any other wealthy country. Every developed state finances health care through a mix of private and public spending, but the balance between private and public health care in the US looks different from the rest of the wealthy world. Across the OECD countries, governments pick up 72 percent of the tab for health care, but our government finances just under 48 percent – only the Chilean government covers a smaller share (XL). (In the eight social democracies with the highest tax burdens in the OECD — Denmark, Sweden, Norway, Belgium, Italy, France, Austria and Finland — 79 percent of health costs are financed through the public sector.)
There are several reasons why our outsized reliance on the private sector ends up costing us so dearly. The first is a simple matter of scale. In 2009, at the height of the debate over Obamacare, economist Josh Bivens wrote that “health care is an area where the more costs are loaded up on the federal government, the more efficiently care tends to be delivered overall.” This is a big reason why costs in America’s public health care programs, with their purchasing clout, have grown more slowly than they have in the private sector.
When a single-payer system covers a vast pool of people, it has more bargaining power to negotiate with providers. It needs significantly less administrative overhead to figure out who will pay which bill (a question which is regularly litigated). A 2003 study published in the New England Journal of Medicine found that three out of every 10 health care dollars spent in the US goes to administrative costs rather than care.
And in health care, competition often drives costs up rather than down. According to Adam Linker, a policy analyst with the Health Access coalition, Medicare costs are highest where there are the most treatment facilities competing for patients. He writes:
More competition drives up the cost of care because when several hospitals are competing for patients and doctors they feel more pressure to build more beds, provide more amenities, and purchase the latest expensive gadgets. Instead of focusing on patient preference and improving care, hospitals are in an arms race to gain market share. That makes health care more expensive for everyone.
A 2011 study by the Robert Woods Foundation found that new medical technologies are the number one driver of US health care costs. When it comes to purchasing the latest gadgets, our providers are close to the top of the heap: In 2009, only Japan had more MRI machines and CT scanners per million people than the U.S. And we use them, too, getting twice as many MRIs and CT scans per person as the OECD average.
Health Care as a Commodity
All of these differences in how we pay for health care may pale next to a more fundamental one: We view health care as a commodity and allow providers to set prices as high as the market will bear. The problem with that is that health care is a market in which we often don’t have enough information to shop and choose, and because most of us have a good chunk of our costs picked up by a third party – an insurance company – the market often ends up bearing ludicrously high costs.
It may sound obvious, but the biggest reason we spend so much on health care is not only because insurance companies take out profits and overhead — it’s that health care costs us more than citizens of other wealthy countries. Everything from pharmaceuticals to surgical procedures to tests costs us more than citizens of other rich countries (the linked study found only a single exception: cataract surgeries cost more in Switzerland). Even a basic checkup is more expensive here than in other highly developed states.
A big reason for that is that government cost controls – both soft and hard – are common in the rest of the world. Pharmaceuticals provide a good example. We paid $947 per person for prescription drugs in 2009, on average, which was almost double the $487 per person in the OECD as a whole, but we don’t take twice as many pills. We just let big pharma charge whatever it can get away with.
Some other countries only approve drugs at a price that’s in line with what those medications cost in other countries. Many countries evaluate new drugs not only on safety and efficacy, but also on whether they provide better value than existing medications. The U.K. has a board that sets the amount that its National Health Service will pay for a drug and limits how much profit drug companies can make from the British public.
As Jonathan Wolff, a professor at the University College London described it:
Each year pharmaceutical companies have to open their books to the [National Health Service] accountants and if the profits they make are above a certain level then there is a ‘clawback’. Furthermore, the agreements have to be renewed every few years and each time price cuts are negotiated as part of the contract. Hence although it appears that drug companies can charge what they want, in practice there are both price controls and profit controls, enforced by the government.
US big pharma, like other providers, argues that it needs to charge high prices to pay for innovative new research. But a 2006 study by the Congressional Budget Office found that the pharmaceutical industry already benefited greatly from government-sponsored research: Much of the $25 billion the federal government spent on basic scientific research accrued to an industry that itself spent $39 billion on research and development. And, as economist Dean Baker has argued, there are other, more efficient ways to finance drug research, but they would also require more, not less, involvement by the government.
Shackled by Private Health Care
Our sky-high health care costs place a huge burden on American families. Medical bills are the leading cause of bankruptcies in this country, ahead of credit card debt and unwieldy mortgages. Rising costs for health benefits are a big reason for flat wages: What employers pay in total compensation, including health benefits, has grown a lot faster than wages in recent years.
Conservatives believe that more government involvement in health care will lead to less freedom and personal liberty, but when it comes to health care, the opposite is true. Why? First, because private insurers aren’t in the business of liberty. They set rules on what they’ll cover and give you lists of doctors you can see without paying extra out-of-network costs. Until new regulations were enacted under the Affordable Care Act, they shopped for the cheapest customers, denying coverage for people with preexisting conditions and using fine print to deny payments to those they did cover.
But on a more fundamental level, millions of Americans are trapped by high private health care costs – stuck in dead-end relationships or jobs that they hate because leaving would mean shouldering the entire burden themselves. It’s not only a rip-off, but a big part of the high costs we end up paying to keep taxes low.
Next in the series: How our low tax burden makes the financing of our social welfare system less fair for average working people.