We’ve now entered the unicorn phase of the political season, the time when candidates promise us everything we could possibly desire and explain that it not only won’t cost us anything, it will actually save us money. And there is no unicorn anywhere bigger than health care reform. Candidates are falling all over each other in their rush to tell us how they will cover everyone, provide more benefits, improve quality and reduce the cost of care all at once.
But before we start building the corral for our unicorn, we should remember that the government already pays for more than 45 percent of health care in this country. If the government was really able to reduce health care spending, it would have done so.
There are good reasons that there is no easy way to provide more health care for less money. Of course, the United States already spends more on health care than any other industrialized country both in dollars per capita and as a share of GDP. Waste and inefficiencies abound. And overutilization is a continuing issue.
Yet there is no magic elixir for change.
Contrary to the angry diatribes from Bernie Sanders or Elizabeth Warren, high health care costs are not the result of greedy insurance and pharmaceutical executives.
Yes, those are profitable companies and their executives are well compensated. No one is crying any tears for them.
But health insurance companies’ profit margins range between 4 to 5.25 percent, well within the mainstream of US companies and below that of industries such as oil/gas (9.23 percent) or life insurance (11.24 percent).
Pharmaceutical companies fare slightly better, with a profit margin of 10.94 percent but still rank behind financial services (20.1 percent) or legal services (15.4 percent).
Surprisingly much of the cost of health care is due to labor costs. We may not think of it that way, but health care is a very labor-intensive industry. In fact, 56 percent of health care spending is for wages and benefits. Health care workers make up nearly 12 percent of the US workforce, and increases in productivity have not nearly offset labor costs. That’s one reason why increases in health care costs have largely tracked increases in wages, a phenomenon observed in other labor-heavy industries like education.
At the same time, the cost of technology-based goods and services is dropping, making it appear that health care costs are rising even faster than they are. Ironically, candidates’ proposals to increase the minimum wage or otherwise raise the cost of employment are likely to drive the cost of health care even higher.
It is also important to realize that we spend a lot of money on health care in this country simply because we can. Economists consider health care to be a “superior good,” meaning that spending rises as incomes rise. At the same time, there are natural limits to how much we can consume.
For instance, no matter how wealthy we become, we can only eat so much more food. There are far fewer limits when it comes to health care. We all want to live forever and will consume as much health care as it takes. That is why, across all countries, wealthier people devote a greater share of wealth to health care.
If the government was really able to reduce health care spending, it would have done so.
- Michael Tanner
Looking at other countries, with their government-run health-care systems, provides no easy answers. Yes, as noted, other countries spend less than we do, but that is for the most part because they started at a lower base. If you look at year-over-year spending increases, the growth in US health care expenditures has been roughly in the middle of the pack over the last 20 years.
Systems commonly cited by advocates of single-payer health care have actually been growing faster than the United States. For example, from 2000 to 2015 (the last year for which comparable data is available), health care spending in the United States grew by an annual average of 5.1 percent. That’s considerably less than the 6.8 percent average in the United Kingdom or the 6.4 percent average in Sweden.
US spending did grow slightly faster than Germany (4.7 percent) but slower than the Netherlands (6 percent), Japan (5.8 percent) and Norway (5.4 percent).
None of this means that our health care costs are not distributed in ways that cause hardship for many Americans, that our spending is used in the most efficient and effective manner or that we always receive value commensurate with our spending. We can and should try to do better. In this regard, there are many good proposals for reform from both the left and right.
But when candidates promise a system that will cover every American with benefits far more extensive than dreamed of in other countries for less money than we spend today . . . well, I would like my unicorn to have purple stripes please.
Michael Tanner is a senior fellow at the Cato Institute and co-author of “Healthy Competition: What’s Holding Back Health Care and How to Free It.”