The presidential election of 2016 reopened the healthcare debate in the
United States. Republicans were unanimous in urging repeal of the Affordable
Care Act (ACA), or "Obamacare," but were vague on a replacement.
Senator Bernie Sanders, the most creative of the Democratic candidates, wanted
to turn in the other directions. Rather than simply tinker with the ACA, he
urged America to abandon it in favor of a healthcare system more like that of
other wealthy countries. “The United States is the only major country on
earth that doesn't guarantee health care to all people,”
Sanders
said, “And we end up spending far, far more per capita on health care as do
the people of any other country: Canada, U.K., France, whatever.”
Here is why Sanders was right.
What to call it?
Sanders said he wants a healthcare system like those of other wealthy
countries—one that provides better results at a lower cost than the one we
have. Unfortunately, there is no generally accepted term for all such systems
as a class.
Both critics and supporters often call them as “single-payer systems,” but
that is not strictly accurate. Other wealthy countries do not all have a single
agency would make directly pay healthcare providers with funds from the
government budget.
Their plans are
surprisingly diverse. Some, like those of Germany and France, funnel payments
through multiple independent insurance funds. Others, including those of the UK
and Canada, are more decentralized than the “single payer” label suggests even
when the government budget is the ultimate source of funds. And, as shown in
the following chart from an
OECD
report, private funding plays a substantial roll in all OECD healthcare
systems. Government funds account for just 78 percent of total health expenditures
on average, more than in the United States, but far short of “single payer.”
Conservatives describe the
healthcare systems of Scandinavia, Germany, France and other wealthy countries
as “socialized medicine,” but that term doesn’t uniformly fit, either.
Socialized medicine suggests something like Veterans Administration healthcare
in the US—a system that not only features a single payer, but one in which
doctors are salaried government employees and hospitals are government owned.
That description, too, fails to capture the diversity of foreign healthcare
systems, where we find a kaleidoscopic mix of salaried and fee-for-service
doctors; for-profit, private not-for-profit, and state-owned clinics and
hospitals; and both unified and decentralized payment mechanisms.
We could stick with “high performing
healthcare systems of other wealthy countries,” but that is too long winded.
For this post, I will shorten that to Euro style healthcare, despite the
obvious problem that non-European countries like Canada, Australia, New Zealand
and Japan also fit the pattern.
Turning from terminology to
substance, anyone who favors a Euro-style healthcare for for the United States
faces critics both from the left and from the right. Let’s look at what some of
them have to say.
Conservative Argument No. 1: The US
already has the world’s best healthcare system
Many conservatives think, or at
least pretend to think, that the United States already has the best healthcare
system in the world, or at least that it did before the advent of Obamacare.
Senate leader Mitch McConnell and former House Speaker John Boehner are both on record
as having said so. A survey from
Harvard University, taken not long before passage of the Affordable Care Act
(ACA), found that 68 percent of Republicans (but only 32 percent of Democrats)
thought the US healthcare system was the world’s best. To support that belief,
conservatives often note that world leaders like former Italian Prime Minister
Silvio Berlusconi, Jordan’s late King Hussein, and the Shah of Iran have all sought
healthcare in the United States.
Unfortunately, hard data do not
support that optimistic view. One of the most detailed recent comparative
studies of healthcare systems in wealthy countries comes from the Commonwealth Fund.
The following figure shows its ranking of eleven healthcare systems along with
data on expenditures per capita (evaluated at purchasing power parity to avoid
exchange rate distortions):
The United States ranks last in the
fund’s overall evaluation of health care, despite having by far the largest per
capita expenditures. The Commonwealth study is not the only one to have reached
that conclusion. This earlier post
discussed other rankings that agree. (We will return to some of the more
detailed findings of the Commonwealth Fund report shortly, but the whole report
is worth reading.)
Conservative Argument No. 2:
European healthcare saves costs only by severely rationing care
The second conservative myth is that
Euro-style healthcare achieves lower costs only by employing a degree of
rationing that would be unacceptable to Americans. Here, for example, is David Brooks,
writing the The New York Times:
Sanders
would create a centralized and streamlined system. His approach would also, as
in Europe, reduce the rate of medical progress, increase the rationing of care,
increase the wait times for patients, induce many doctors to retire, and
centralize decision-making.
Socialized
medicine is a disaster. It does not work. If you look at the countries that
have imposed socialized medicine, that have put the government in charge of
providing medicine, what inevitably happens is rationing.
Canada is Exhibit A for many who
make the rationing argument. Consider, for example, this “explainer
video” from Vox, titled “What is
Single-Payer Healthcare?” After noting that such a system could save
administrative costs, the narrator says, “But there’s a catch.” The catch is
said to be longer waiting times and other limits on services, illustrated by a
graphic showing that waiting times for health services are longer in Canada
than in the United States.
Detailed data from the Commonwealth
Fund report show how unfair the charge of rationing is, especially when based
on a comparison with Canada. Of the eleven countries covered in the survey, the
US ranks last overall, but Canada is next to last. One of the main reasons for
Canada’s poor performance is its poor record on measures of rationing, where it
has the lowest ratings of the countries surveyed.
- 48 percent of Canadians reported an emergency room
waiting time of over two hours (11th place) compared with 28
percent in the US (7th place) and 14 percent in New Zealand (1st
place).
- 38 percent of Canadian doctors reported that patients
had difficulty getting specialized tests like MRIs (10th place)
compared to 23 percent in the US (7th place) and 3 percent in
Switzerland (1st place).
- 18 percent of Canadian doctors reported a wait of four
months of more for elective surgery (9th place) compared to 7
percent in the US (6th place) and 1 percent in The Netherlands (1st
place).
To compare the US with Canada in
terms of rationing by waiting, then, is to make a sub-par system look better by
comparing it with one that is truly terrible. Most wealthy European countries
do better than either of their North American peers when it comes to rationing
by waiting, and still manage to spend less.
Instead of rationing by waiting, the
American system practices rationing by cost. Relatively few private plans,
whether employer-provided or individual, give free access to a full range of
providers, drugs, and services. Most middle-class insurance plans steer their
members toward hospitals and doctors who are in a preferred provider network
and drugs that are on the company’s preferred list. The uninsured often find
themselves rationed out of anything but emergency services by high prices.
The burden of rationing by cost
shows up clearly in the Commonwealth study:
- 37 percent of Americans reported that they did not fill
a prescription, skipped a test or treatment, or failed to visit a doctor
when ill—the worst of all countries. In Canada, the figure was 13 percent,
a respectable 4th
- 28 percent of Americans reported that their insurance
company denied payment or paid less than expected for treatments they
received, the worst of all countries. In the top ranked countries, Norway
and Sweden, the figure was 3 percent.
What is more, the pressure toward
rationing by cost is intensifying. A recent New York Times article describes the situation in these terms:
Once
emblematic of everything wrong with health insurance, the health maintenance
organization is making a grudging, if somewhat successful, comeback. But its
reputation for skimping on care has so tainted the plans that the insurers and
companies resurrecting them have gone through innumerable steps to try to avoid
using the term H.M.O. . . . Despite the stigma and many failed efforts,
insurers say they are eager to push a revamped version that revives many of the
same features that restrict choices as a way of lowering costs
In short, far from achieving their
cost savings through rationing, European systems provide more timely care with
fewer people skipping needed services for economic reasons.
Liberal critics also focus on cost
Unlike their conservative
counterparts, Liberal critics approve of Euro-style healthcare in the United
States, yet many of them seem to have bought into the idea that such a system
would be unaffordable. That attitude was on display during the 2016 campaign
when supporters of Hillary Clinton turned their fire on Sanders own healthcare
plan, which he called Medicare for All.
The most widely publicized critique
came from Kenneth
Thorpe of Emory University. In this critique, he estimates that Sanders’
plan would be almost twice as expensive as the candidate claims. Instead of
leaving most middle class households better off, Thorpe claims the Sanders plan
would make 71 percent of households worse off, when the taxes needed to fund it
fully are set against savings in healthcare costs.
I find Thorpe’s analysis
disingenuous. The problem is that he construes Sanders’ plan in a naively
literal way that makes it very different from the healthcare systems of Europe
as they actually operate.
The first difference concerns just
who pays for what under high quality, low cost Euro style systems. When many
Americans think of European healthcare, they assume that the government pays
for everything, providing a broad range of services at no charge to the
consumer. That is not strictly true, as the chart given above showed.
Instead, the government share of total
healthcare expenditures ranges from nearly 90 percent in Sweden and the UK to
around 75 percent in Switzerland, compared with a little under 50 percent in
the US.
The reasons for the substantial
private healthcare expenditures vary from one country to another. Most
countries expect copayments for some, if not all, services and medications. In
many, people purchase private insurance to cover services not provided in the
government’s basic package, for example, private hospital rooms. Some countries
do not fully cover dental and vision services. However, it is worth noting that
most Euro-style systems have special mechanisms in place to shield low income
families from some of these cost-saving measures.
One of the reasons that critics like
Thorpe come up with such high cost estimates is that they take at face value
the version of the Sanders plan posted on his campaign website. That version
promised to “cover the entire continuum of health care, from inpatient to
outpatient care; preventive to emergency care; primary care to specialty care,
including long-term and palliative care; vision, hearing and oral health care;
mental health and substance abuse services; as well as prescription
medications, medical equipment, supplies, diagnostics and treatments.”
I do not think we have to take that
language literally in estimating the cost of translating Sanders’ political
aspirations into a specific program for implementation in the real world. The
very fact that Sanders describes his plan as “Medicare for All” suggests that a
final version is likely to include deductibles and co-payments similar to those
in Medicare as it now exists for seniors. Nor would we need all of the features
of the website version of the plan in order to meet Sanders’ often-repeated
goal of equaling the quality and cost performance of other countries.
The hard part lies ahead
It is easy to criticize a campaign
slogan and to inflate the cost of ambitious aspirations. Liberal critics, who
ostensibly share Sanders’ aspirations, ought to put their energies into the
hard part—filling in the details that would allow the US to equal the cost
performance of the best Euro style healthcare systems without loss of quality.
Including Medicare-style deductibles
and co-payments would go a long way toward closing the gap between Thorpe’s
estimates of the costs of Sanders’ healthcare plan and the candidate’s own
estimates, but it would not entirely close it. There are many other problems to
deal with.
Administrative costs are one. The
Sanders campaign estimated that administrative savings from his plan would
reduce total healthcare spending by 13 percent. Thorpe says it would save 4.7
percent. If we split the difference, the savings would be a little under 9
percent. But reducing per capita healthcare spending to the level of The
Netherlands (the most expensive after the US among the eleven covered in the
Commonwealth study) would require US spending to fall by 33 percent. To get to
the level of the UK (the least expensive of the eleven) would require a 60
percent cut. So, even viewed optimistically, administrative savings are just a
start.
A second major saving claimed by the
Sanders team comes from lowering the price of prescription drugs. The US
currently spends about $300 billion per year, or 10 percent of total healthcare
costs, on prescription drugs. Cutting that in half—a truly heroic
accomplishment—would save another 5 percent of total healthcare costs.
Beyond prescription drugs and
administrative costs, where would the additional 20 to 40 percent saving come
from that would be needed to bring US healthcare costs down to the level of the
best performing Euro style systems? There are only two possible sources: Cuts
in quantity of services or cuts in prices.
Cutting quantities is not as easy as
it sounds. To be sure, there are some areas where the US does seem to provide
excessive services or procedures. For example, the US rate for Caesarian
sections is more than 30 percent, compared to around 7 percent in The
Netherlands and Scandinavia. On the whole, however, as healthcare economists
like Princeton’s Uwe Reinhart
note, the quantity of healthcare services provided in the US is actually lower
than in other advanced countries. It does not seem realistically possible to
cut service quantities further while extending healthcare coverage to the 13
percent of Americans who remain uninsured, even under the Affordable Care Act,
and to do so without any loss in quality of care.
Prices, says Reinhart, are the
elephant in the room. US Prices for common medical procedures like
appendectomies or normal deliveries average three or four times the levels in
Europe. What is more, the prices for such services, or for tests like an MRI or
colonoscopy, can vary by a factor of two, three, or more even with in a city.
Worst of all, says Reinhart, “Fees in the private health care sector have been
jealously guarded trade secrets among insurers and providers of health care.”
That makes it impossible for consumers to shop around for the best price, as
they would do if they wanted a new set of snow tires.
Liberal critics don’t even pretend
to address the problem of healthcare prices. The widely cited Thorpe study
simply assumes that prices under the Sanders’ plan would be an average of the
prices now paid by private insurers and the modestly lower prices now paid by
Medicare.
Any serious healthcare reform,
whether it comes from the left or the right, will have to face up to the
problem of prices. Unfortunately, there is no single solution. Instead, the
problem would have to be approached one piece at a time. Coordinated bargaining
for lower prescription drug prices is just a start.
Lowering the prices charged by the
most expensive hospitals to those charged by the most effective ones would
help—and no, they are not necessarily the same hospitals. A single government
payer would have more bargaining power. Greater transparency in pricing would
help, too. So would greater competition among hospitals. The present trend
toward mergers and consolidations
demonstrably pushes up prices.
Another reason for the higher cost
of US healthcare services are higher earnings of physicians. US doctors earn
considerably more than their European counterparts do, even when we adjust fees
for differences in expenses and cost of living. But changing compensation
practices for American doctors would not be easy without reforming other pieces
of the healthcare complex. European doctors typically receive free education,
so they don’t begin practice with tens or hundreds of thousands of dollars in
student debt. Entry into medical schools is not as tightly restricted in Europe
as in the United States. And less adversarial systems to deal with malpractice
claims free European doctors from a major cost item while giving them less
incentive to practice unproductive defensive medicine.
The bottom line
It is hard not to conclude that
Sanders is right to think that America needs a healthcare system more like
those in Europe. True, the campaign version of his Medicare for All plan was
more aspirational than operational, but what did other candidates offer?
Hillary Clinton proposed building on Obamacare, but there is nothing in the
byzantine complexity of the Affordable Care Act that makes it easier to solve
any of the cost and price problems we have discussed, and many things that make
it harder. Republicans have a field day enumerating the problems of the ACA,
but are still struggling to define what they would offer in its place.
This is a substantially revised version of a post from March
4, 2016. The original version is archived
here.
Like most economists, I am strongly inclined toward free trade. I
cringe to see the way free trade is under attack, from both parties,
during this primary season.
