RALEIGH – Americans would benefit if our system for financing health care was more like that of Europe, Japan, or other developed countries.
That is, we’d be better off if we paid out of our own pockets for more of the medical services we consume.
As I’ve previously observed, the health care debate suffers from a skewed understanding of what makes American health care different from that of other countries. While the difference between private insurers and the government is obviously significant, both are third-party payers. There are similarities in how they operate in practice. In some countries, such as the United Kingdom, the government is by far the dominant third-party payer. In others, such as the U.S., private insurers that benefit from tax deductions, regulations, and other government interventions play a major role as third-party payers.
The latter may be somewhat better than the former, but over-reliance on third-party payers of any kind is the fundamental problem. At least for routine check-ups, treatments, and minor medical procedures, it makes little sense for households to prepay, either through premiums or taxes, and then make claims on their “insurance.” These routine, predictable medical expenditures should be made in cash, just as other forms of insurance are designed to pay claims in cases of major, unforeseen loss but not to pay for oil changes or house painting.
While the U.S. system of health-care finance is caricatured by the Left as some kind of cash-on-the-barrelhead dystopia, the reality is that American households pay a lower percentage of their medical expenses out-of-pocket than do households in all but a handful of other industrialized countries.
According to recent data from the Organization for Economic Cooperation and Development, America’s out-of-pocket share was 13 percent. The OECD average was 16 percent, and some countries have much higher shares: 18 percent in Australia, 20 percent in Italy, 21 percent in Belgium, and more than 30 percent in Switzerland. Also, one of the Left’s favorite systems, the single-payer program in Canada, requires higher cost-sharing by households than is typical in the U.S.
In the fantasyland of some liberal activists, American health care costs too much because of greedy insurers reaping massive profits. This is mathematically impossible, as insurer profit margins only average about 4 percent and make up only a tiny share of total health expenditures. In reality, health care costs have been soaring in the U.S. and most other countries for several reasons, including: 1) medical care has actually gotten more valuable over time as new medications and procedures have come on the market; 2) as economies mature, households are able to spend smaller shares of their income on such necessities as food and clothing, allowing them to transfer resources to life-enhancing services such as education and health care; and 3) patients lack both the information and the incentives to consume medical services wisely.
The first two drivers of medical inflation aren’t really problems, and couldn’t be “solved” even if they were without onerous government rationing programs. The third driver can be addressed, however, by reforms that reduce the taxes, subsidies, and regulations limiting competition and promoting over-insurance.
No country has yet stumbled on the magic formula. But some have made more progress than others. And we’ve got to ask a basic question at this point: if Belgium can do it, why can’t we?
Hood is president of the John Locke Foundation.