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Debunking American Health Care Myths
By Grace-Marie Arnett

It often surprises Europeans to learn that the United States has a very significant public health sector. Public spending on health programs represented about 46 per cent of the total $1.1 trillion spent on health care last year in the United States, while about 53 per cent was spent in the private sector for health insurance and direct spending for medical goods and services.

For both private and public health coverage, there are very generous taxpayer subsidies. In the public sector, tax dollars subsidize public health programs directly, primarily to provide medical care for the elderly, the poor, and the disabled. Americans with private health insurance obtain their coverage primarily through their jobs, and these working Americans and their families also receive a very generous tax subsidy. For example, a person making $75,000 a year gets a tax advantage worth an average of about $2,400 towards the purchase of health insurance -- as long as the employer buys the policy for him or her. These subsidies collectively are worth about $125 billion in 2000. Unfortunately, if someone tries to buy health insurance directly, the subsidies are much less generous, if they are available at all.

On the public sector side, we have two established programs, several smaller targeted programs, and one new one. One of the established programs is Medicare, created in 1965 to provide medical services to the elderly and disabled; the other is Medicaid, also established in 1965 to provide care primarily for lower income people. Medicare is available to those over age 65 and is run by the Federal Government with money from general revenues, payroll taxes on workers, as well as premiums paid by beneficiaries. Medicaid is a joint Federal/State program for the poor, with each of the 50 states setting its own eligibility rules and medical benefits for its citizens, within a structure of federal guidelines. Congress also established a new program in 1997 to provide health insurance for children, a program that also is funded jointly by the Federal and State governments. In addition, there are targeted programs, like the Federal government's hospitals that provide medical care for Native Americans and Veterans.

In 1997, 39 million senior citizens and disabled Americans received health coverage through Medicare at a total cost of $215 billion. In that same year, Medicaid covered 36 million lower-income Americans, at a cost of $160 billion. Total spending on public health programs by all levels of government – Federal, State, and local – totalled $507 billion

In 1997, private health spending totalled $585 billion. Seventy per cent of the population – 188 million people – had some form of private health insurance, including those receiving health insurance at work or buying coverage as individuals. (This also includes Medicare beneficiaries who purchased supplementary private insurance to cover the gaps in Medicare.)

And, as we all know, 44 million, or 16 per cent, were uninsured at some time during the year. (The totals add up to a number larger than the American population of 260 million because many people have coverage through more than one source.)

What About The Uninsured?

Our nation is criticized at home and abroad for the large number of Americans without health insurance. It is important to talk about that number. Even though we have 44 million uninsured that does not mean 44 million people do not receive health care in the United States. Any hospital that receives funding from Medicare or Medicaid is legally obligated to provide care to a person presenting for treatment. It is an invisible, but nonetheless very real, safety net.

The number of uninsured is primarily a result of the different financing systems we have. We do not have 44 million chronically uninsured people. The majority are in transition through our various systems. People move in and out of jobs. Therefore, they may have periods in which they are not qualified for private health insurance, and this may lead to three or four months where they and their families are uninsured. They also may be moving onto or off the rolls of a public program, such as Medicaid or the new State Children's Health Insurance Program.

Ironically, the strength of our economy and new work arrangements also are contributing to the number of people without health insurance. More and more people are finding that they can bring their skills to the marketplace to start small companies or work under contract for a number of firms, but these new ways of working may not be in the context of a job that provides health insurance.

As I mentioned, we do have a very strong safety net in the U.S. - both official and unofficial. If hospitals take any Medicare or Medicaid money, they are obligated to provide treatment for anybody who needs care, whether they have health insurance or not. There are Federal payments -- 'disproportionate share' payments, for example, which partially reimburse hospitals for uncompensated care. People come to the hospital, and they receive treatment. They may receive a bill, but some simply cannot pay. Others pay what they can, and still others learn when they do present for medical treatment that they do in fact qualify for a public program, and they are enrolled. This is not a good system, but it does provide an unofficial safety net.

President Clinton proposed, in his most recent budget, to address the uninsured problem by adding more Americans to the rolls of existing government programs. He wants to extend Medicare down to those aged 55. He wants to allow children up to the age of 20 to qualify for Medicaid. He wants to expand the new program for children to allow it to cover the parents of uninsured children as well. He is continuing to say that the solution is more government programs. As I will describe in a minute, we believe that the solution is not more government programs, but a revitalized private health sector offering better and more affordable private health insurance.

The structure of financing health insurance in the U.S., both on the private sector side and on the public sector side, is not keeping up with changes in the economy. Many of us in the health policy community are working for changes that would provide incentives for people to obtain health insurance that they would own and control so they don't have to move in and out of programs that often leave them with gaps in coverage.

The U.S. Employment-Based System

Let us turn now to look at how the employment-based system in the United States has been evolving. Since the early to mid-1990s, the United States has had a period of relatively low inflation in health spending. One of the major reasons is that employers began to aggressively seek out ways to cut the costs of the health insurance that they provide to their employees. There have been a number of efforts to create innovative financing and delivery systems for health care in the United States through "managed care." These managed care organizations have taken many forms – such as a "staff model health maintenance organisation, " in which subscribers see doctors who are employed by their clinics and hospitals; or a "Preferred Provider Association," in which people can choose doctors from a pre-approved list of providers who see patients in their own offices and in the hospitals with which they are affiliated.

Many companies contracted with these managed care companies to control their health insurance costs. Under managed care, workers no longer were able to see any doctor or specialist they choose, but were restricted to the doctors and hospitals that these managed care companies had under contract to provide health services, often at pre-negotiated discount rates. (People could go outside the system, but had to pay more to do so.)

While managed care kept health inflation at quite low levels for most of the 1990s, employees have become more and more unhappy with the restrictions on access to care. Their frustration and their powerlessness in legal redress if they are denied care has gained the attention of politicians and the media.

Politicians have responded in number of ways. State and Federal governments have passed mandates on what medical services private health insurance companies, including managed care organizations, must cover, such as the length of maternity stay in a hospital, and even chiropractic care, hair transplants, and acupuncture. In addition, politicians have regulated how insurance can be sold, to whom, and in many states, how much they can charge.

Many studies have shown that these mandates and regulations have in fact driven up the cost of health insurance, and the higher cost of insurance in turn is driving more and more people out of the health insurance market. As costs rise, more and more people become uninsured. A respected actuarial firm estimates that for every 1 per cent increase in the cost of health insurance, 300,000 people lose coverage.

The Galen Institute recently did a study in which we assessed the experience the 16 States that have been most aggressive in passing insurance regulations that were designed to help people get access to affordable private health insurance. Although the details of the regulations varied by State, they had many common themes. States passed rules saying, for example, that insurance companies had to provide health insurance to anybody who applied for coverage. Many States said insurers had to sell the policies to any new applicant at the same premium rate they offered to everyone in the community.

Our study found that the States that were the most aggressive in passing a package of insurance regulations wound up with much higher uninsured rates than the 34 other states, which did less to intrude in the private health insurance market. We found that the rates of uninsured in the 16 most regulated states rose 8 times faster than the 34 less-regulated States in the first year after the regulations were fully in effect. We believe our study has helped State legislators to see that mandates and regulations on insurance companies are not the solution but rather are very likely part of the problem. We believe they need to rethink how much public direction there can be over the provision of private health insurance. Essentially, if it is too expensive, people do not buy it. The more flexibility, choice, and competition there is in the health sector, the more attractive and affordable the insurance products will be – and the more people will buy them.

A lot of work also needs to be done in the United States to increase the choice of health insurance plans for people. Even if a person has a job that offers health insurance, their chances of having a choice of more than one plan are small. The majority of people who have job-based health insurance are offered only one plan. For most, either they take the health plan that their employer offers, or they do without. Unfortunately, a growing number of people are deciding to do just that, sometimes because they don't like the plan but more often because they believe their share of the premium cost is too high. People are not required to have health insurance in the United States, so more and more of them, especially younger workers, are deciding to go without – and rely in emergencies on the unofficial safety net I described earlier.

The Galen Institute and our colleagues in the Health Policy Consensus Group believe that we need a better system of subsidizing health insurance for those who can't afford the full cost of a policy and who don't either qualify for public programs or get their health insurance at work. We have been working for nearly seven years on proposals that would transfer power and money over health coverage to individuals so they could own and control their health insurance contract.

Individuals would decide which health insurance policy they wanted, and it would be portable so they wouldn't lose coverage between jobs. It would not only reduce the number of people moving in and out of the system, but it would also allow people to more visibly see the full cost of their policy. At the moment too many people think they get free health insurance at work even though this is not true at all. If their employer is paying them $35,000 and giving them a $5,000 health insurance policy, their compensation is $40,000. They just do not see that $5,000 because it is spent by the company on a health insurance policy before the worker ever sees the money. The cost of the policy is "excluded" from their taxable income.

Planting The Seeds Of Change

A number of policy-makers, on both the right and the left, are concluding that public health insurance programs are not serving people as they should and perhaps we ought to try a new idea. Recently a bipartisan/bicameral bill was introduced in the U.S. Congress. Republicans and Democrats from the House and the Senate are jointly sponsoring a bill that could provide a tax credit worth $2,000 a year to families to purchase their own health insurance. There is a lot of energy going into this new solution, but it is not clear which way it is going to go. For most of the 1990s, the argument has been that government programs should be enhanced and expanded, and many people, including politicians, are working to do just that. But those of us who believe that competitive markets are the solution are having an impact by putting fresh ideas into the debate.

So this is the tension point in public policy in the United States: Do we devote more and more resources to expensive government programs and expand them to cover more Americans or do we try the free-market approach by giving people direct subsidies to purchase their own health insurance in what we believe will be a revitalized, competitive market?

Getting Older Is Not Necessarily Going To Mean Getting Sicker

Now I would like to turn to another criticism of the U.S. system – the relatively high percentage of our domestic spending that goes to health care. There is a growing awareness in the United States that more spending on health care is not necessarily a bad thing. We do not have a global budget, and the American people explicitly rejected a global budget during the debate seven years ago over the failed health care reform proposal offered by President Clinton. As we are becoming a wealthier society, people want to spend more on things to keep them healthy, that improve their quality of life, and that allow them to have longer, healthier lives.

There are tremendous innovations in new technologies and new pharmaceuticals, in genetic research and less invasive surgeries, which are allowing people to receive treatments that were not even possible a few years ago. They also offer cheaper and easier treatments that can dramatically enhance and extend life. There is a sense that, as people have more resources, they want to spend their money on things that enhance their life, their health, and their longevity so that getting older does not necessarily mean getting sicker.

A major debate is taking place in the United States over adding a prescription drug benefit to Medicare for over 65s and this debate gets to the heart of the direction our health system will go. Surveys show that seniors know that if government runs the benefit, it will ultimately end in price controls, restrictions on choice, and reduced research into life-saving drugs. Those of us in the free-market health policy community are working to show the American people that the right way to go is to reform Medicare to give beneficiaries a choice of private health plans, including those that provide drug coverage, instead of the one-size-fits-all, out-dated Medicare program. This will preserve and enhance the opportunity for advancement and innovation in the largest, and many say the most important, of our industries for the new century.

So, yes, the U.S. does spend more on health care than European countries, but we also see results. Not only do we have the most important research base for new medicines and treatments in the world, but also we are seeing results in better health outcomes. For example, the number of people in nursing homes in the U.S. dropped by 20 per cent over the last few years. Data shows that if they get the right diagnosis, the right medications, or the right surgery earlier on, the elderly can be independent much longer. Without question, more spending leads to more and better health care. In the U.S., we just need to figure out how to finance it differently.

We are working on solutions for health care financing which would allow a much more vibrant market for private health insurance to emerge. Hopefully that will become a model for others, including Europeans, to look toward free-market solutions appropriate for the emerging 21st century economy.

For Immediate Release
For more information, please contact:
Grace-Marie Arnett
President
Galen Institute
(703) 299-8900
gracemarie@galen.org

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Grace-Marie Arnett is president of the Galen Institute, a public policy research organization based in Alexandria, Virginia. She is the editor of Empowering Health Care Consumers through Tax Reform, published in 1999 by the University of Michigan Press.

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