Bernie Sanders is right: We have a fundamental right to health care. That is to say, we have an inalienable right to a free market where we can pay for any service we want and providers can offer any service they want – unencumbered by government intervention, market distortions, and onerous regulations. You want to know why health care in America is so convoluted – why it costs hundreds of dollars to get a band-aid in a hospital?
The answer is government interference.
Through government interference in health care, politicians have joined with industry lobbyists to destroy the health care market and the direct relationship between consumers and providers. After destroying health care with third-party and fourth-party insurance payments supplanting direct payments, they then destroyed health insurance, whereby most insurance is provided by the government or paid for by employers, thereby placing individuals at a tremendous disadvantage. Not only do we no longer pay for our own health care, the overwhelming majority of those third-party payments are paid for by a fourth party: employers, government, or both.
In a nutshell, the reason even basic health care is so expensive is because only 10.5 percent of all health care expenditures in America are paid for by the individual to the provider of the service. The majority of health care in America is already directly or indirectly paid for by government, and the remainder is paid for by private insurance.
But even the private insurance is mainly paid for by government or by employers, thanks to both Obamacare and the original sin of health care – the government-sponsored tax exclusion for employer-paid health care. Only a tiny fraction of private health insurance spending is paid for by individuals.
Here is the breakdown of total health care spending in 2015.
Government controls (and destroys) health care in America
In 2015, a total of $3.2 trillion in health care expenditures was paid out by the public and private sectors, accounting for roughly 18 percent of the economy. The reason health care is so expensive is because of the way we pay for it.
In a functioning market, prices reach an equilibrium between the desire of profit for providers and the desire of consumers for the service. When consumers are paying for a service with their own money, there is a limit to what they can and will pay. This forces providers to innovate and cut costs to conform to the organic market demand.
No such organic market demand exists when consumers don’t pay for their own product and all the money comes from a third party, which is primary subsidized by a fourth party. Not only does this fail to lower costs, it encourages providers to charge even more, because they know there is an open-ended spigot from government-sponsored debt fueled by political pressure to keep the gravy train flowing
This principle is clearly reflected in the following pie chart delineating the source of health care expenditures in this country:
As you can see, government pays for almost half of health care in America. Right there lies the answer to why health care and health insurance prices are so artificially inflated. But it’s worse than that. A portion of the household and employer shares of the expenditure pie is composed of … payments to government health care! Both employers and employees pay Medicare payroll taxes. Thus, this share of funding is not going toward medical bills or even toward private third parties to pay the medical bills; it’s going towards government-run health care. As such, government is really responsible for at least 55 percent of health care in America.
Furthermore, the entire employer share of health care is also a legacy of government intervention. The only reason employers offer health insurance as a standard benefit (instead of higher wages) is because the federal government socially engineered the connection between employment and health insurance, and by extension, health care itself, through the tax code. Thus, most of the private insurance in America is paid for by a fourth party.
This in itself has had the effect of inflating the insurance bubble and moving health care away from direct payments towards third-party payments. This is why individuals who do not get insurance from the government or employers are screwed. Individual health insurance is so much more expensive because individuals are placed at a disadvantage in purchasing power for third-party payments. And health care itself is now inflated by the government and insurance bubbles (third- and fourth-party payers), thereby making health care itself gratuitously expensive, even for non-life-threatening illnesses.
Thus, individuals can’t afford basic health care, even if they want to cut out the middle man and pay out of pocket, because most health care expenditures are the result of over-utilization from other people who pay third parties to pay their bills. There is no ability or desire to peg the price to the service. There is no desire on the part of the providers to compete and innovate, and there is no desire on the part of the consumer to be cost-conscience in utilizing the service.
And now, thanks to Obamacare’s onerous regulations, individuals under 65 years old not obtaining insurance through their workplaces (or not on the dole) can’t even utilize the limited individual market that once existed in order to pay a middle man (private insurer), because the premiums and deductibles cost more than a mortgage.
But it gets worse.
Even though 28 percent of health care expenditures are paid for by households, as this chart shows, only a third of those payments (which is 10.5 percent of total national expenditures) are actually out-of-pocket direct payments to providers, and only a small portion go toward private insurance (third party). The remainder goes towards contributions to employer insurance or government insurance (fourth party).
Imagine if only 10.5 percent of all orange juice purchased in America was paid for in the form of direct payments by consumers to the store owners. Picture a scheme whereby the government subsidized the majority of orange juice with Tropicade and Tropicare and concocted a tax scheme to ensure that most employers offer a payment plan to pay a third-party provider in order to pay for the orange juice of their employees. Plus, a myriad of regulations ensures that there is no innovation or array of options even for the third -party payment plans, much less for direct payments.
How much do you think it would cost for an individual to then purchase a bottle of orange juice? $100? $200? Who knows? When there is no effort, desire, or need to peg the price of a service to organic consumer demand, but rather to inefficient payment plans of third parties – and mainly through the narrow confines of government subsidies and regulations – the costs will spiral out of control. Providers of the product know that big insurance companies will have the money to continue paying their increased prices and that the insurance will be paid for by the bottomless pit of government debt or government-sponsored tax treatment of employer-based insurance.
Obamacare simply took all of the existing factors behind government-distorted health care and exacerbated them. First, it regulated insurance into oblivion, transforming it from calculated risk to a private welfare system. This in turn raised the cost of the insurance (already third-party) and created a need for massive private subsidies (in addition to those on Medicaid). Those subsidies are so open-ended, instead of packaged in the form of a defined contribution, that insurers could jack up the price of premiums to $50,000 (like in Alaska) and get away with it. Insurers know that government will ensure consumers earning below a certain income threshold only have to pay a small sum out of pocket and will cover the rest from the Treasury. Furthermore, they will get their lobbyists to threaten government that if they don’t ratchet up the subsidies even more, they will raise the prices further. They can do this because government will always interfere. However, if government interference weren’t an option, they would have to compete for natural consumer demand, rather than through the unnatural confines of regulations and the bottomless guaranteed subsidies from government.
This is our health care system in a nutshell, brought to you by government. This is why health care is the one industry that has missed the technological revolution that has spawned such innovation in almost every other sector.
It wasn’t always like this. The reason health care has gotten so expensive is precisely because individuals are not exposed to any costs and the government inflates the cost. Look at the difference between the composition of health care payments even as late as 1987, even long after the government screwed up the system with employer-sponsored health care and the Great Society programs.
I think we’d all pine to go back to the 1987 breakdown, as imperfect as it was. Federal spending on health care has grown from $85 billion in 1987 to nearly $1 trillion. That is the cause of the problem. Yet liberals in both parties think it’s not enough.
Now take a look at the following chart showing how out-of-pocket payments used to compose almost half of all health care spending and now composes just 10.5 percent.
In one chart, this is why health care is so messed up.
Where individuals have been in control of their own destiny and pay their own way, such as with Lasik and plastic surgery, costs have come down dramatically. This is also one of the reasons why in India, heart surgery costs just $1,583, compared to $106,000 in America.
The path forward
The fact that there are aspects of health care, such as end-of-life care and emergency care, that don’t work exactly like a regular market is no excuse for government ensuring that no aspect of health care works like a functioning market. The fact that we desire some safety net to cover those who slip through the cracks in a free market is no excuse for government to destroy the private market and ensure that nobody can live with dignity without government help or subjecting their health care to maintaining a particular job.
We must first reduce fourth-party-payer and have individuals pay for their own insurance. The only way to do this is to make the individual market work again by getting rid of all regulations and protections for existing insurers that box out competition. Only once we heal the individual market could the proposition of equal tax treatment entice more individuals to forgo their work plans, take their full salary, and purchase an individual plan tailor-made to their families. At that point, we should then encourage individuals to purchase cheap catastrophic plans and spend the remaining funds out of pocket directly to the providers. This will dramatically bring down prices on the health care side and cut out big pharma and the lobbyists.
The only way to achieve this outcome is by limiting the role of the federal government. It’s by not treating the arsonist as the firefighter. Yet given that 90 percent of Republicans and 100 percent of Democrats refuse to recognize government as responsible for the original sin of health care, they will continue doubling down on stupid.