Writing for the Washington Post, Robert Samuelson has a column on “The Folly of Obamacare.” This piece criticizes the President’s signature achievement for many good reasons, including increased uncertainty, the negative impact on job creation, rising levels of red ink, and generational unfairness.
I agree with all those complaints, but then Samuelson makes another point that rubbed me the wrong way because he’s complaining about a symptom and overlooking the underlying problem. Here’s what he wrote.
Uncontrolled health spending is the U.S. system’s main problem — and the ACA makes it worse. Spiraling health costs crowd out other government programs and squeeze wage increases by diverting compensation dollars into employer-paid insurance. Because insured people use more health services than the uninsured, the ACA (covering an estimated 30 million more) raises spending. As for the ACA’s cost-control provisions, even the government’s own actuaries don’t believe they will do much. By their latest projection, total health spending — government and private — rises from 17.9 percent of the economy (gross domestic product) in 2010 to 19.6 percent in 2021. In 1980, health care was 9 percent of GDP.
I assume all his facts are correct, but Samuelson is missing the point. The reason we have “spiraling health costs” is because of something called third-party payer. As the chart shows, nearly 90 percent of health care costs in America are financed by someone other than the consumer. And when folks get to consume with other people’s money, they have very little reason to care about costs.
In my speeches, I frequently cite myself as an example. When my kids were small and it seemed like there was an earache or sore throat every other week, I was always at the pediatrician. But I never cared about the bill because I knew my employer-provided coverage limited the out-of-pocket amount I would pay.
The same is true for the tens of millions of other Americans with health plans provided by their employers, and it’s also true for the tens of millions of Americans who use Medicare, Medicaid, or some other government program.
By the way, this is why undoing Obamacare – either legislatively or through a Supreme Court decision – doesn’t solve the problem. Third-party payer was a huge problem even before the President made the problem a bit worse with his misguided scheme.
This video explains why free-market reform is necessary to solve the problem of third-party payer.
One final point is that there are parts of our health care system where consumers still pay out-of-pocket, and you shouldn’t be surprised to learn that those are areas – such as cosmetic surgery (or even abortion) – where costs are restrained and quality keeps rising.
[…] Only 11 percent of health care spending in America is directly financed by consumers. The rest is paid for by taxpayers, insurance companies, and other third parties. […]
[…] fair flat tax. That will help bring some rationality to the health insurance market and address the part of the third-party payer crisis caused by indirect government […]
[…] right conclusion, including this piece that should have been an argument for Austrian economics and this piece on health care inefficiency that should have pinned the blame on third-party […]
[…] fair flat tax. That will help bring some rationality to the health insurance market and address the part of the third-party payer crisis caused by indirect government […]
[…] we’ve reached the point where only 12 percent of healthcare costs are paid for directly by the consumer. No wonder the healthcare market doesn’t function very […]
Thanks, Hank, for the info. I didn’t know that employer offered health insurance was a result of Roosevelt’s fascism. I can’t actually say it helps to know that, but I’ve never been hurt by knowing too much.
To Fix High Healthcare Cost: Step 1 – eliminate the Federal tax exemption for health insurance (If taxpayer is employed and pays his health insurance premiums out of his pay before he pays taxes on his pay. This is “pre-tax”.)
The net effect of this is Too Much Insurance = third party payer problem. (Medicare and Medicaid just made this worse – and now ACA compounds things further.)
This distortion of the health care system, which arose as a work around to government wage controls during WWII, must be corrected. Insurance should only be used to hedge against the risk of a contingent, uncertain loss. Day-to-day expenses should remain out-of-pocket to keep costs inline and quality high. (e.g. See “Congress is stealing our (health care) tent” by Marcy L. Zwelling-Aamot, M.D. to explain how third party payers drive health care costs needlessly higher.)
[…] right conclusion, including this piece that should have been an argument for Austrian economics and this piece on health care inefficiency that should have pinned the blame on third-party […]
[…] fair flat tax. That will help bring some rationality to the health insurance market and address the part of the third-party payer crisis caused by indirect government […]
[…] repeatedly written that the only way to fix healthcare is to get rid of the government-created third-party payer […]
[…] serious problem of government-caused third-party payer – including just as few days ago while nit-picking about an otherwise excellent column by Robert Samuelson (and I’ve even used the abortion market to make the point that prices […]
Come 2014 not only will you be insulated from the cost of the pediatrician visit but you will also be insulated from paying the insurance premium itself. All you have to do is become self employed and make sure that you do not contribute more than about ninety thousand dollars per year to America’s GDP. The irreversible transition to a slow growth declining welfare state is near. The path of decline has been set to greatly accelerate in 2014 and beyond. After that look for a few more cycles of further economic distress, more desperation, more help needed from others, more HopNChange care programs.
America, it has been nice to know you as a prosperous nation, but alas you too finally fell for the banana peel of easier, gentler prosperity through mandatory collectivism.
I have to agree with Snorri. “Because insured people use more health services than the uninsured, the ACA (covering an estimated 30 million more) raises spending.” He is clearly making the connection between third-party payers and increasing costs.
OTOH, I think there are other factors, including the most easily fixed; go to a loser-pays system in the courts and medical malpractice insurance will come down dramatically, causing lower prices and increasing supply, which will lower prices even more.
Dick: you’re wrong in claiming there’s no downward pressure in a third party system. Trust me, the third party (in most cases, the employer) has plenty of incentive to keep the cost as low as possible. Employers routinely shop carriers, they argue ratings with their insurers, and they parse the details of the plans looking for any way in which they can deliver health insurance to their employees for the least possible cost.
If anything, your example would suggest that it isn’t the third party that is to blame, but rather the disconnect between the payment of the insurance premium and the using of the services. Someone writing a once-a-month check is (perhaps) more likely to feel that they’ve purchased the equivalent of an all-you-can-eat buffet. Add the buyer’s relative lack of ability to influence the pricing (thanks to community pricing rules, someone who takes care of themselves and doesn’t run to the doctor every week isn’t going to see a commensurate reduction in their premium) there’s even more of an incentive to use as much of the service as they can.
And, just to be argumentative, let me throw out another possible reason for high health care costs: medical advances that make it easier to both know what ails us and to fix us. We no longer have to accept ‘sorry, I don’t know’ or ‘sorry, there’s nothing we can do’…. both of which drive up usage of health care.
I know this doesn’t fit Mitchell’s march to eliminate third-party paid insurance but what the heck…
SteveSturm,
You have some good points about employees paying for health care – they DO pay for a significant amount of their health care through payroll deductions. But the problem is the distance between the payment and the healthcare benefit received, as measured in both the amount of the payment and when it was paid. Because of that distance, we don’t actively evaluate the costs we face or whether there is a less costly option. For a routine doctor’s visit, we “copay” $20 but receive $100 worth of benefit. Who is going to do any cost/benefit analysis in that situation? Who will decide it isn’t worth spending an incremental $20 to receive something worth $100?
There is NO downward pressure on costs in a third-party payer system. There is no systemic incentive – on the part of any player in the system – to keep costs down. Amazingly, costs have been skyrocketing for decades!
Nice job, Dan. We need to have the facts straight if we’re going to win this one. Everything points to a new Obamacare-style reform if the Supreme Court strikes down ACA. We have got to stop that one, but it can’t be done if we have the fundamentals wrong. Keep up the good work!
It seems to me that Samuelson hinted at the problem of third-party payers when he said that “insured people use more health services than the uninsured”.
Anyway this cannot be the whole problem, since it does not explain why in the rest of the world health care is less expensive.
1 – Your claim that “nearly 90 percent… are financed by someone other than the consumer” is NOT supported by a chart which clearly refers to “Out of Pocket Payments”. An out-of-pocket expense is not the only way in which someone pays for the health care they receive.
2 – Would you care to reconcile your claim that health care costs are not paid by employees with the claim made by other economists that the premiums a company pays for its employee health care puts downward pressure on employee compensation?
3 – Or perhaps you’d like to reconcile your claim with the argument that corporate income tax payments are passed on to the company’s customers… if customers pay the taxes, why wouldn’t employees be shouldering the load of health care costs?
4 – Or perhaps you’d like to compare your own limited experience taking your kid to the doctor with the millions of other people’s experience in having to pay higher health care premiums as a result of their company running up higher expenses during a given period? It sure seems like those employees are paying for health care.
5 – Or perhaps you’d like to explain why you’re not committing statistical malpractice by alleging a direct causation between the rise of health care costs and the increase of 3rd party payments, instead of it being a more likely – and statistically provable – case of correlation?