Just where are we headed when it comes to paying for health care in this country?
Dr. Louis Johnston, who teaches economics at St. John’s and St. Ben’s, does an excellent job at the Senior College at Alexandria Technical and Community College explaining things economic. Recenty he talked about health care, the Affordable Care Act, and the American Health Care Act.
He started with the history of government involvement with health care and the current status of our “system,” which really isn’t a system but four separate systems. The four include YOYO (you’re on your own, you pay yourself or buy insurance yourself), government care (Veterans Administration or Indian Health Care), employer provided health care, and single payer health care (Medicare, Medicaid).
In essence, he said, the ACA expanded health care particularly to the YOYO segment of the market by offering subsidies for insurance premiums and tax credits to businesses. By doing that the program reduced the number of people uninsured in the United States from roughly 50 million to 27 million.
The AHCA, the proposed ACA replacement, would use tax credits rather than subsidies to deal with the YOYO part of the market. The theory is that a competitive marketplace will drive down costs so that lower subsidies will still leave the market affordable.
So, will the AHCA work as advertised?
Johnston has some serious doubts.
Johnston went through several criteria that economists use to be able to say that a market is competitive and therefore have the potential to lower costs. Among them: all firms sell the same standardized product; buyer and seller are price takers (either can walk from the transaction if the price isn’t right); buyers and sellers are well informed; productive resources are mobile; there are no externalities (outside forces like car accidents and falls that create problems); and no joint production (required cooperation between the two parties to get the appropriate result). Health care fails in almost every area.
And there is one more factor Johnston mentioned, the emotional part of health care. “How much would you spend for an extra year of life?” he asked. Many would give everything they have, and do, and that tilts the scale on the economic side; price means little, longer life means everything.
As an economist Johnston had lots of numbers to share, including an interesting chart that showed how the amount spent on health care affected life expectancy. There doesn’t appear to be a direct correlation, at least among developed countries. He also referred to the work of Kenneth Arrow, a respected economist who did much work in studying the medical market’s unique characteristics that make it unlike other markets. (An article about Arrow’s work appeared in the StarTribune March 21, 2017.)
In Chile about $1,600 per person is spent on health care and the life expectancy is about 81.5 years. In the United States about $8,900 per person is spent on health care and the life expectancy is 79 years. Japan, largely a closed society, spends $4,000 per person and has a life expectancy of 83.5 years while Switzerland is closer to the United States with annual expenditures of $7,000 and life expectancy of 82.5.
Where is all this headed?
Johnston thinks that in the future the government health systems like the VA and private business insurance will fade away and the primary sources of health care will be YOYO or single payer, or perhaps a combination of both.
He said people move around enough that employer health insurance doesn’t do what it used to and the government-financed places like the VA can’t pay providers enough to keep the best talent.
It’s not clear at this point what AHCA sponsors anticipate in terms of health care cost savings to get health care premiums below those of the ACA as they have promised to do. It might be a nice thing to know.