In yesterday’s article I pointed out that the first and most important question to ask regarding government’s role in our lives in general and in health care in particular, is ideological. There is, I explained,
an overarching issue that deserves our attention first: should, or should not, government be a provider of health care in the first place? This is an ideological question, and as such it seems to suffer from an ill-deserved pariah status in the current public discourse. Yet behind every debate over new government spending lurks a grain of generic opposition to that growth in the burden being placed on taxpayers’ shoulders. It is about time that we bring that debate out in the open and outline the ideological positions on the role of government.
Once we have settled this question with a decision on whether we want no government, a little government or a lot of government involved in health care, we can move on to the practical issues regarding the organization, operation and funding of health care.
These are big issues that, for obvious reasons, cannot be dealt with in a blog article. We can, however, get a good idea of the most important structural aspects of health care by looking at some key statistical information. For starters, it is often claimed that a health-care system run by government is better than one based on private funding and provision of health care. The profit motive, it is sometimes said, distracts resources from providing quality health care.
Criticism of the profit motive is often based on a misunderstanding of what profit actually is. For example, a couple of years ago some political pundits threw an allegation around the internet that Walmart was making a 20-percent profit on its operations. The legal definition of profit – the one that applies in stock-market corporate reporting standards and in corporate tax law – shows Walmart making only three percent profit.
It is entirely possible that critics of the profit motive are such critics of free-market Capitalism that they simply rely on the Marxist definition of profit. If so, the debate is immediately elevated to one regarding economic systems per se, one that I addressed at length in Democracy or Socialism. If for now we keep it more grounded, the question about profit in health care becomes one of how our health care systems are actually organized. This question, in turn, can be divided into two parts:
- Funding, which breaks down to taxes, private insurance or other non-government resources; and
- Operation, in other words the conditions under which health care is provided.
To start with the latter, the arguments here are centered around the role of private hospitals in our health care systems. This debate is now new, but is often based on misinformation or, as mentioned, a skewed idea of what profit means. However, there is a third aspect to this that is surprisingly often ignored, namely the fact that many of our private hospitals are incorporated as non-profit entities.
Just as conventional wisdom leans toward defining all private hospitals as “profit” entities, there is also a tendency to suggest that the provision of health care under single-payer models requires all hospitals to be run by government. Neither is true, and the best example is the U.S. health-care system, which has a mix of all three forms of hospitals. In 2018, 23 percent of all hospitals in this country were public, i.e., run by government; half of them were private non-profit entities and the rest were private for-profit hospitals.
The Netherlands is an interesting counter-example. There are no government-run hospitals in that country, and up to 2008 all hospitals were private non-profit. Since for-profit hospitals were allowed, their share has increased steadily; in 2019 almost four in five hospitals were private for-profit.
Other countries with a large share of for-profit hospitals are Colombia (78 percent), Mexico (70), Italy (56), Greece (53) and Germany (44). The private non-profit model dominates in South Korea, where almost 95 percent of all hospitals are private non-profit entities. The non-profits account for 31 percent of hospitals in Israel and Germany and 24 percent in Portugal.
By contrast, only one country in the OECD database, namely Iceland, reports all its hospitals being in government hands. Slovenia has 90 percent public hospitals, as does Lithuania. Latvia (74 percent), Costa Rica (68) and Estonia (67) also report a high share of government hospitals.
It is worth noting that the Nordic countries do not provide the OECD with appropriate data. However, as country-specific databases would suggest – such as this one for Sweden – there are practically no private hospitals anywhere between Nordkapp and Fehmarn Belt.
Since private provision of medical services is globally accepted, it is odd to notice the continuous push here in America for increased government control over our health-care system. It is particularly interesting to contrast America against the Netherlands: the two countries are moving in the opposite direction with regard to the private-public balance. Not only did the Dutch reform their health-care laws in such a way that most hospitals are now private for-profit entities, but they also decided to drastically reduce government’s role in funding the health care system. In 2006, a reform ended the single-payer model in the Netherlands, replacing it with a system with mandatory, employer-based private insurance.
The current trend in the U.S. system is one of increased government presence in funding health care. In 2018, according to the U.S. Department of Health and Human Services National Health Expenditure database, governments at all levels accounted for 45 percent of all health-care spending. In 1988 that share was less than 31 percent:
This expansion of government funding has come with very little ideological debate. The growth of government funding has essentially been matter-of-factly, rolling out gradually with the occasional leap; the creation of SCHIP – Medicaid for kids – in 1997 is a classical example.
Ironically, the government share of health expenditures seems to have plateaued after the Affordable Care Act was passed in 2010. Since the ACA came with Medicaid expansion and tax-funded subsidies for private insurance, this is a curiosity that can reasonably only be explained by the increased cost of private insurance (since the NHE numbers are reported in current prices).
That said, there is still a weak trend upward in the government share of the NHE, and if the Democrats get what they want in Congress, there will be more to come. As a case in point, on November 16 the Kaiser Family Foundation published a report on the potential costs of the health-care spending items under Build Back Better. Using their account, let us look at two examples to illustrate the point about how ideology affects the configuration, and eventually the cost, of government programs.
Subsidies for insurance plans under the Affordable Care Act
Explains the KFF:
In 2021, the American Rescue Plan Act (ARPA) temporarily expanded eligibility for subsidies by removing the upper income threshold. It also temporarily increased the dollar value of premium subsidies across the board, meaning nearly everyone on the Marketplace paid lower premiums, and the lowest income people pay zero premium for coverage with very low deductibles. The ARPA also made people who received unemployment insurance (UI) benefits during 2021 eligible for zero-premium, low-deductible plans. However, the ARPA provisions removing the upper income threshold and increasing tax credit amounts are only in effect for 2021 and 2022. The unemployment provision is only in effect for 2021. Section 137501 of The Build Back Better Act would extend the ARPA subsidy changes that eliminate the income eligibility cap and increase the amount of APTC for individuals across the board through the end of 2025.
The cost estimate for these measures and a few smaller ones under the same headline, is $20.95 billion per year. In designing the BBBA, the Democrats cut off the ACA-related subsidies and benefits after 2025, but this is just an accounting trick: they needed the entire package to look as if it balances its spending and revenue over a ten-year period. Nobody in his right mind believes that Congress would cut these benefits come January 1, 2026, which means that the subsidy package is now perpetual.
It is worth noting two things about this part of the health measures in the BBBA. First, the annual cost will not remain where it is. No government program ever stays within its predicted cost framework, especially not over such a long period of time as ten years. Historically, health-care costs in general have increased approximately twice as fast as GDP, which is almost entirely due to advancements in medical technology. The product we know as “medical services” is simply getting better and more advanced with time.
Due to a faster-than-GDP increase over time, the services that these subsidies are meant to pay for will simply require higher subsidies in the future. There is nothing in the BBBA that suggests its authors factored in this cost trajectory, nor did the KFF take it into account. Therefore, we can expect these subsidies to cost significantly more going forward.
Secondly, these new ACA-related measures are part of a gradualist expansion of government’s responsibility for funding health care. It would be foolish, frankly, to assume that more of the same will not be coming. With these subsidies a growing share of the population will pay close to nothing for their health insurance, provided of course they enroll under the ACA. This is by design, and the motivation behind this is entirely ideological: government gives a product – health care – by private-insurance proxy to a select group of entitled citizens. The larger this group gets, the closer the entitlement program gets to the point where there are no economic differences between citizens: we all consume the same health care.
Since the underlying motive is ideological, we can expect this ideology to motivate more gradual steps toward the end goal: socialized health care. Therefore, the costs will of course also increase, and increase faster than the BBBA bill suggests.
Lowering Prescription Drug Prices and Spending
The KFF summarizes this feature of the BBBA, which
would allow the federal government to negotiate prices with drug companies for a small number of high-cost drugs lacking generic or biosimilar competitors covered under Medicare Part B and Part D. The negotiation process would apply to no more than 10 (in 2025), 15 (in 2026 and 2027), and 20 (in 2028 and later years) single-source brand-name drugs lacking generic or biosimilar competitors, selected from among the 50 drugs with the highest total Medicare Part D spending and the 50 drugs with the highest total Medicare Part B spending (for 2027 and later years). The negotiation process would also apply to all insulin products.
Again, we are dealing with a gradualist expansion of government’s role in health care. The price-negotiation feature is designed so that it can easily expand over time, and we can safely expect it to do so.
The purpose behind these negotiations is to manage the cost of health care, but not by means of a free market. This cost management feature is instead based on a central-planning model where government uses its bulk-buying power as leverage vs. the pharmaceutical companies. While this sounds attractive – people will get good medical drugs at a cost affordable to taxpayers – in reality the measure has limited latitude to do what it is designed to do. The development costs for a pharmaceutical product is what it is: beyond small adjustments, any price pressure from government will erode quality and ultimately lead to a slowdown of, or even end to, the supply of new, high-quality medicines.
If price negotiation were an isolated phenomenon, there would not be much reason to discuss it. But since the expansion of government in health care under the BBBA is motivated by a gradualist approach to an ideological end goal, it is not to be read as an isolated phenomenon. Instead, it is a feature of government’s presence in health care that we have to account for on the same terms as the expansion of the ACA subsidies: they will apply more broadly over time. Therefore, we can expect them to gradually restrict the supply of medicine, first to select, entitled groups of citizens, then – over time – gradually toward covering all Americans.
The consequence will not be a drive-up in cost as much as a lowering of quality. This phenomenon is already visible in single-payer countries, where access to medical drugs is restrictive, in some cases even non-existent. As the quality of and access to medicine are worsened under price controls, medical procedures – especially more complex ones – become less effective. This has negative consequences for patients, and in the end increases demand on the health care system as people, who are not fully cured or even remain with unchanged health conditions, demand help to cope with their situation.
Again, this is not a hypothetical scenario. As I explained in Remaking America already in 2010, this is very much how a single-payer system functions. By importing more and more elements from it, we also import its effects on the health-care system.
As for the alleged savings from price controls, listed in the KFF article: once the price controls start affecting the supply of pharmaceutical products, the cost savings will translate into a lowering of the quality of health care. This means, plainly, that the savings are not savings, but traditional, fiscal austerity measures. Think of it as negotiating the 2019 price for a new car of the 2021 model year, then being delivered a 2019 car instead of the new one.
Again, these are only two examples of how government is expanding its presence in American health care, and how this expansion is ideologically motivated. The fact that they can pass through the legislative process with relative ease, and there is virtually no attention being given to them – especially not from the viewpoint of an ideological analysis – tells us a great deal about how desperately we need to have a principles conversation in our country about the role of government. That conversation should start with the health care system, but not end until it has exhausted all of the 70 percent of the federal budget that is designed to advance one particular ideology.