America’s health care system is collapsing, and we can blame the Economics
profession. Most economists approach health care in the wrong way,
viewing it as a commodity like shoes or the laptop on which I write.
Instead, health care is an idiosyncratic commodity, subject to uncertainty
and “asymmetric information” leading to destructive behavior. Trying to
force health care into a box, treating it like other commodities,
economists have promoted cost sharing, market competition, and insurance
oversight of health care providers that have inflated the administrative
burden while denying ever more Americans access.

Health care spending has been rising throughout the world as aging and
more affluent populations spend on their health. Nowhere, however, has
the cost of health care risen as fast as in the United States where costs
soared because of rising administrative expense. Compared with other
affluent countries in the Organization for Economic Cooperation and
Development (the OECD), the United States spends over twice as much per
person as is spent elsewhere. Before 1971 when Canada enacted its
Medicare program, a single-payer government funded health care system,
Canada spent a higher share of its national income on health care than did
the United States; since then, however, while Canada has controlled costs,
spending has soared in the United States so that we now spend over $3000
more per person. That is $12,000 for a family of four that is not
available for travel, education, housing, or food.

Elsewhere, increases in health care spending have been associated with
improvements in the provision of health care and, therefore, go with
increasing life expectancy. In the United States, however, spending has
increased because of rising administrative costs and increases in the
price of prescription drugs and, therefore, has yielded relatively few
benefits in improvements in care. Comparing changes in health-care
spending and life expectancy between 1971 and 2008, other affluent OECD
members gained a year of life expectancy for every $453 in spending; in
the United States, however, life expectancy has increased less and
spending has risen sharply more so that each year of increased life
expectancy has cost over twice as much as in these other countries.
Health care spending in the United States has increased by $1283 for every
additional year of life expectancy; had our spending per year of added
life increased at only the rate of other countries we would be spending
over $4500 less per person, $18,000 saved for the average family of four.
Most of the difference in relative expenditures, most of the growing waste
in spending in the United States, is due to increasing administrative
costs in the provision of private health insurance and in the billing and
insurance operations within doctors’ offices and in hospitals. The
average physician in the United States now spends four-times as much
interacting with insurance companies as does the average physician in
Ontario, Canada, over $80,000 per physician compared with a little over
$20,000 in Ontario. Prescription drug prices and administrative expenses
have been the fastest rising costs in the United States health care
system; from 1980 to 2005, administrative costs rose by 1300% while drug
prices rose by nearly 2000%. There are now 2.5 million administrative
support personnel in the American health care system; more than the number
of nurses, and five times the number of physicians. We now have more
health-care managers than physicians and surgeons.

Rising costs drive up health insurance premiums so that a family health
insurance plan now costs about 40% of the average family wage income, up
from 7% in 1960. Rising costs are denying ever more Americans access to
health care even while businesses and governments wrestle with rising
health care spending that squeezes resources available for other purposes.
While other countries have controlled health care costs by restraining
administrative expenses and drug prices, ballooning costs in the United
States come from policies promoted by economists who have urged
governments and providers to control costs by making consumers responsible
for more of the costs even while raising administrative costs and ignoring
monopolistic pricing of pharmaceuticals. Viewing the injured, sick, and
disabled as “consumers,” economists see insurance as the source of rising
costs because they are not responsible for the costs of care they receive
and, therefore, overuse health care. Rising copayments and deductibles
are intended to discourage “consumers” from “abusing” health care, as if
the victims of auto accidents or cancer should shop around for cheaper,
and competition among insurers while limiting provider services by
providing more administrative supervision. Ignoring evidence that
Americans are less likely to see doctors and other health providers than
are residents of other affluent countries, these economists have blamed
the high cost of our health care on insurance which, they assume, leads to
wasteful over-practice and the provision of unnecessary health care
services. Their solution is greater cost sharing, more regulation of
providers, capitation, and even the end to insurance by substituting
medical savings accounts for insurance.

For 40 years, many economists’ have promoted increasing cost sharing
through higher copayments and deductibles, the replacement of
fee-for-service payment systems with capitation where providers are paid a
fixed amount for patients as in Health Maintenance Organizations, and
competition where multiple insurers offer a variety of plans catered to
individual consumer’s interests and in competition with each other. Far
from limiting health care cost increases, these practices have produced
the worst of all worlds, rising costs along with restrictions on access.
Costs have risen because these recommendations have inflated the
administrative burden in health care, the costs of the billing and
insurance activities within provider offices as well as the cost of the
health insurance industry itself. While restricting access, limiting the
benefit to Americans of some of the dramatic improvements in health care
practice of the last decades, these practices have not bent the cost curve
or slowed health care inflation even while denying more and more Americans
access to affordable health care.

The failure of price incentives and competition to control health care
costs could have been predicted had economists appreciated that health
insurance is not a commodity and the sick are not consumers like those
shopping for the best pair of sandals or brand of peanut butter.

Producers of commodities might try to accommodate consumer wishes because
they can profit by selling more. Health insurers, on the contrary, can
better increase their profits by selling less, by identifying people
likely to need care and driving them away (“lemon dropping”) even while
attracting the lucky and healthy (“cherry picking”). Most health care
expenditures go to a relatively few people, the unlucky who develop an
illness or suffer an accident; insurers, therefore, can dramatically lower
their costs by finding those who will be expensive and getting rid of
their business; encouraging them to find another insurance plan or even to
die.

A form of “adverse selection,” or screening of potential customers by
insurance companies, can be profitable for the individual firm but it
comes at the cost of raising costs for the community as a whole. As a
country, we now spend almost $200 billion administering the health
insurance industry and over $800 billion in administering the health care
industry, or over a quarter of total spending. Add to this the
inefficiency in delivery that comes from a fragmented finance system that
inhibits coordination of care, and the inflated prices for prescription
drugs, and easily a third of total spending is wasted or going to
monopolistic profits.

The waste involved in the current system has a redeeming feature: it
provides abundant space for an improved system that could improve access
and services even while dramatically lowering costs by eliminating
administrative waste. If we lowered administrative costs and drug prices
to the Canadian level, we could save nearly $600 billion dollars, more
than enough to provide coverage to all of the uninsured while improving
access for the millions of underinsured. If we see past the bad
recommendations of market-fundamentalists, we can improve health care and
save money. An outcome that even economists should favor.

Gerald Friedman
Professor of Economics
University of Massachusetts at Amherst, Amherst, MA. 01003
gfriedma@econs.umass.edu

Professor Friedman has written extensively on single payer health care and
HR 676. His article explaining the economics of single payer is available
here:

http://www.pnhp.org/sites/default/files/docs/2012/Dollars%20and%20Sense.pdf

Distributed by:

All Unions Committee for Single Payer Health Care–HR 676
c/o Nurses Professional Organization (NPO)
1169 Eastern Parkway, Suite 2218
Louisville, KY 40217
(502) 636 1551

Email: nursenpo@aol.com
http://unionsforsinglepayer.org
5/5/13