Healthcare: We Spend Too Much and There's Too Much Waste – Or So They Say

In addition to the large number of people without health insurance, the Obama Administration makes two big points to support its claim that we have a healthcare crisis. First, the United States spends much more on healthcare than other countries do. We are spending approximately 16% of our gross national product on health care, and the percentage is going up. According to the Congressional Budget Office, it could be up to 25% by 2025. (See here.) That can’t continue, they say. All that spending on healthcare means we have less money to spend on other things.

Second, one of the reasons our healthcare costs are so high, they say, is because all of the waste in the system. Upwards of 30% of healthcare spending is wasted. (See here.) The fee-for-service model is said to encourage doctors to order tests that aren’t really necessary or aren’t worth what they cost. Getting rid of that waste will not only help control medical costs, but it will help finance the cost of dealing with the problem of the uninsured.

But let’s look at these two arguments more closely. The first argument is that we spend too much money on health care. Who says we spend too much money? A bunch of experts. But what about real people? Do they think they are spending too much money on their healthcare?* We have been told for years that our society is too materialistic, that we need to spend less on things. Well, as many of us get older, maybe we are finally buying into that theory. Maybe we have decided that we don’t need as many things – as long as we have our health. Maybe we would rather spend less of our money on stuff and more of our money on our health. If we want to spend our money on more healthcare instead of more things, what’s wrong with that?

But it’s not your money, comes the retort. Maybe; maybe not. If the money comes from insurance, it may not be my money directly, but it is indirectly. Either I paid for the insurance out of my own pocket or I took less money in wages in order to get my employer to buy me health insurance. Either way it’s my money that is buying the insurance. But what about all those tax subsidies for employer-based insurance, liberals ask? Well, there may be an issue there, but it is not the one they raise, and in any case I will come back to it a little later. But until I do, let me just say that the solution is not more and more government controls.

The second reason for our increasing healthcare costs is all of the waste that occurs in our current system. Our fee-for-service system encourages unnecessary tests and procedures, we are told, because doctors make money from them (and patients don’t have to pay for them). The Obama administration has a plan for this, too.

They claim they can eliminate a good part of this waste through a new cost-effectiveness review board. This Federal Health Board will do the research and weigh the costs and benefits of various tests and procedures to determine which ones are worth it and which ones are unnecessary and a waste of money. If you say that fast enough, it sounds good. But let’s slow it down a little and see what it would mean in practice.

The fact is that very few medical procedures or tests have no value. They almost all have some value. The question is whether the value is more than the cost. It’s not that some $500 test has no value at all. It’s that, according to some group of experts, this $500 test only provides $250 of value. Actually, it could be that this test provides $500 worth of value to some patients but only $250 worth of value to other patients. In any case, we are not talking about $500 of waste; we’re talking about $250 of waste.

But wait a second. Who says that $500 test only provides $250 of value? Is it the patient? No, it’s the new Federal Health Board.

But instead of letting them decide, why don’t we let the patient decide how much good he or she is getting out of that $500 test. The Federal Health Board may say that a particular test only provides $250 of value, but the patient may have a different view of the situation. Some patients may feel they are only getting $100 of good from a particular test. But others might be getting even more than $500 of value from the test. Maybe it will provide piece of mind; that’s hard to value. Or maybe a patient has enough money that they are willing to spend $500 to get what somebody else says is worth only $250. As I said earlier, some of us don’t want more things, but we do want our health. And maybe we are willing to spend the money we have on our health. Should we be prevented from doing so just because some government body decides it is a waste?

But it’s not your money, comes the response, once again. It’s the government’s money (if you’re on Medicare or Medicaid) or it’s provided by your employer and they get to deduct the cost of it. Well, that probably is true in the first case, and there may be some truth to it in the second case. But does that mean, especially in the second case, the solution is to have the government tell me how much healthcare I can have? Maybe we need to change the system so people are, and understand they are, spending their own money on their healthcare. Because then, government – or society – should not care how much people are spending on their healthcare because they are spending their own money.

But what might such a system look like? Here’s an idea: People would buy their own health insurance policies, like they buy car insurance or life insurance today. Because employers would not be buying health insurance, employees’ wages would be more. (If employers paid less in benefits, they would pay more in salaries.**) People would then be able to buy the level of health insurance they wanted. For a lower price they could buy a plan that limited their choices in terms of certain drugs or treatments. A lower cost plan would have tighter rules on what things it would pay for. It might be more of a managed care plan.

On the other hand, people who wanted to spend more money, more of their own money, could buy a plan that offered more choices, that would let them (and their doctor) have more say in what drugs they could get or what tests or procedures they could use. It would be more like today’s fee-for-service plans. And it would cost more than the lower-cost plans.

There would need to be some kind of tax deduction for health insurance premiums.*** (That’s reality.) But it would not be like the medical expenses deduction on Form 1040 Schedule A today. Instead of being able to deduct costs over a certain level, you would be able to deduct health insurance premiums up to a certain level. The cost of a basic plan, and maybe a little more, would be deductible. But the extra costs of expensive plans, the so-called gold-plated plans, would not be deductible. You could get that kind of plan, if you wanted to. You just would not be able to deduct the extra costs of such a plan.

The government would also need to figure out some way to make sure everybody gets health insurance. Maybe it would involve automatic inclusion in a basic plan as a default option or maybe the government would provide a subsidy to buy health insurance.**** I am not sure, but in any case it is beyond the scope of this post. And it really involves problems more on the edges of the issue as compared to the bigger questions of costs and choice for everybody as a whole.

One key to such a system is separating health insurance from employment. The idea is to make people feel like they are "paying" the costs of their own health care – because they are paying it now; they just don’t realize it because of the way the system is set up. If they want the same coverage they have now, then a combination of their employer paying them the money that it presently pays for their health insurance, plus a tax deduction for the cost of health insurance, would put them in the same place – unless they had one of those gold-plated plans that costs more than the standard deduction that would be provided.

Obviously, there would be difficulties in transition, but they could be worked out. The key is to figure out where you want to get to. Then you can judge changes in the health care system based on whether they are helping you get closer to where you ultimately want to end up.*****

Of course, there will be objections to such a system: private health policies cost too much; the system would be too complicated. Except they are wrong. With many more people buying private health insurance, prices would come down. One of the reasons private health insurance is so expensive is that there are not that many customers. If everybody buys health insurance, prices would fall.

Also, I think people are smart enough to buy their own health insurance. In fact, I think a lot of people would like to be able to choose their own health insurance, especially if the alternative is a medical plan with all kinds of government-mandated limits on treatments and care.

In fact, Medicare Part D is a response to both of these objections. The costs under Part D are lower than originally projected (because of competition), and while there were some complaints about complexity at the beginning, once people worked through the initial confusion, they found they liked the program. (See here.)

This kind of system would let people decide on their own health care. We wouldn’t need to worry about whether we are spending too much for health care as a country because the country wouldn’t be deciding how much it spent, people would be deciding how much they spent. And they would be spending their own money in doing so.******

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* Of course, everybody thinks they are paying too much; people think that about everything. One of the problems with the current system is that people do not really feel like they are spending their own money. But I will address that question a little later in this post.

** As I mention later in this post, there would need to be a transition from the current system to the new one. Part of the transition would be changing how employees are paid. We would need to move from employers paying part of employees’ compensation to insurance companies (for health insurance) to paying this money directly to the employees so they could buy their own insurance.

*** Instead of a tax deduction, this could be a tax credit.

**** You might be able to at least partly address this question by going with a tax credit and making the tax credit refundable.

***** Something to consider: Barack Obama has said, I believe, that, if he were starting from scratch, he would probably (or might) favor a single-payer system under which, effectively, the federal government would pay for everybody’s health care. Consider, then, the "public option" that President Obama says we need to keep the private insurance companies honest. Is it really needed to keep private companies honest or is it just a stop on his road to a single-payer plan?

****** The last big objection, by some liberals, to this idea will be that it creates different levels of health care. Rich people would be able to afford a more expensive health plan than poor people. That’s unfair, they argue. Rich people will be able to get better medical care. Well, that’s true. Rich people can buy lots of things that poor people can’t. But if you are going to make medical care equal by not letting rich people use their own money to buy extra medical care, then that is a theory of equality I do not agree with.