Policy Documents

Why We Spend Too Much on Health Care (executive summary)

January 1, 1992

1. Government policies are responsible for unnecessarily high health care spending in the U.S.

  • Current tax laws increase health care spending by treating employer-paid health insurance premiums as business expenses rather than employee compensation, thereby excluding premiums from all federal and state payroll taxes. This policy dramatically reduces the effective cost of health insurance, encouraging employers to provide employees with low-deductible, low-copayment policies.
  • Low-deductible and low-copayment insurance policies raise health spending because the administrative costs of such policies are very high (it costs as much as $50 to process a $50 claim), and because people covered by such policies have no incentive to weigh the cost of services against the benefits, encouraging over-use and price insensitivity.
  • Medicare regulation, insurance mandates, supply restrictions, price controls, and occupational licensing all increase health care costs. Insurance mandates alone have been estimated to cost insurance buyers $60 billion.

2. Managed competition would not reduce health care spending.

Advocates of "managed competition" contend that the health care marketplace has failed to provide affordable, accessible care. But they confuse "market failure" with government failure, and this mistake leads them to a reform agenda destined to fail. Managed competition does not remove the distortions, waste, and skyrocketing prices caused by past government interventions in the health care industry.

 Moreover, many of the reasons health care spending is higher in the U.S. than in other countries arise from factors beyond the control of the health care industry. These factors would be left unaddressed by managed competition schemes:

  • Suicide, homicide, AIDS, teenage pregnancy, and drug abuse in the U.S. are high by historical standards and compared to other nations.
  • American doctors make a greater commitment to saving premature and at-risk babies and extending the life of the elderly than do doctors in other nations.
  • Americans favor an "aggressive" philosophy of health care, relying on expensive drugs, surgery, and therapies that save lives and speed recoveries.
  • The vast size, low population density, and ethnic and religious diversity of the U.S. make health care more expensive to organize and deliver than in smaller and more homogeneous European countries.

3. National health insurance would have many negative consequences.

Replacing the current system of private health insurance with a tax-funded program extending insurance to every citizen would reduce the quality of health care, destroy as many as 3.5 millions jobs, and increase health care spending.

  • Requiring employers to buy insurance policies for all their full-time employees would force many employers to cut wages or reduce the size of their workforces; the Partnership on Health Care and Employment estimates that national health insurance would cause between 630,000 and 3.5 million workers to lose their jobs.
  •  In other nations, national health insurance has led to politically imposed spending caps, resulting in underinvestment in technology, withholding care from the elderly, and life-threatening queues for medical procedures.
  • People now working at lower wage levels would be most likely to be laid off because employers are unable to pass along the added cost of providing insurance. National health insurance hurts most the very group that needs affordable health insurance the most.
  • Mandatory employer-provided insurance (so-called "play or pay" plans) are not a compromise. They are designed to undermine and destroy the private insurance market by encouraging employers to pay artificially low payroll taxes rather than purchase private health insurance in the market.
  • Canada, which has national health insurance, was less able than the U.S. to control health care spending between 1960 and 1987; per-capita spending rose 4.58 percent per year in Canada vs. 4.38 percent in the U.S.

4. Tax reform, privatization, and deregulation are the answers.

 "The solution," as Louise B. Russell wrote for The Brookings Institution fifteen years ago, "is to reintroduce some mechanisms that will force those who make decisions about medical care to recognize that resources are costly and to weigh the costs against the benefits for any proposed action." The following reforms fit this description:

  • Limit favorable tax treatment to premiums for catastrophic insurance; treat premiums for additional insurance benefits as taxable income. Give individuals tax credits for purchasing their own health insurance or paying medical expenses directly.
  • Allow individuals to open tax-sheltered Medisave Accounts similar to Individual Retirement Accounts (IRAs) into which earned income or tax credits can be deposited and from which medical expenses not covered by insurance can be paid.
  •  Privatize Medicare by allowing private insurers to write insurance policies tailored to the different needs of Medicare beneficiaries, and privatize Medicaid by giving participants vouchers redeemable by hospitals, clinics, and physicians.
  • Create high-risk pools for the genuinely uninsurable, thereby removing them from the small group insurance market.
  • Reform small group health insurance to ensure that insurance for small businesses and their employees is affordable, accessible, and portable.

5. Why such reforms work.

  • Only 5 percent of the population is without insurance for extended periods of time, and only 1 percent is genuinely uninsurable. Making health insurance more affordable and creating high-risk pools for the uninsurable will solve the problem of the uninsured.
  • The price of insurance would fall substantially if people bought high-deductible, high-copayment policies and paid out-of-pocket medical expenses from tax-sheltered Medisave accounts. People will become more careful consumers of health care when they pay medical bills with their own money.
  • Small group reforms ensure that people remain in the insurance system if they lose their connection to an employer or experience health problems. High-risk pools ensure that everyone can find affordable health insurance.

Excerpted from Why We Spend Too Much on Health Care, by Joseph L. Bast, Richard C. Rue, and Stuart A. Wesbury Jr. (second edition, 1993). The full text of the book is available online in Adobe Acrobat's PDF format; click here.