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Paul Ryan
The State Of Health Care Today
Sep-2011 | Paul Ryan (Bio) (Chairman, House Budget Committee Washington, DC)
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The rising cost of health care in the United States is the fastest-growing burden on families, businesses, governments, and the economy. In 2007, the U.S. spent an estimated $2.1 trillion to provide, administer, and finance health care – nearly twice the amount per capita spent by any other industrialized nation in the world. Moreover, the rapid growth of health care costs – about 7 percent per year – is eroding paychecks for millions of Americans; and skyrocketing insurance costs are overburdening businesses across the U.S., and in 2010, 50 million people – 19 percent of the non-elderly population – will lack access to health insurance at some time during the year.

Even with public health programs such as Medicare and Medicaid, families and individuals face increasingly limited access to care and coverage. State budgets are unable to keep pace with the financial resources these programs demand while the number of physicians and health care practitioners choosing to participate are steadily declining. Failed Federal policies and inadequate reimbursement levels are threatening the existence of these programs for future generations.

The personal realities of this crisis also have a distressing effect on U.S. economic stability. The Federal Government devotes 21.7 percent of its budget to the two major health entitlements, Medicare and Medicaid, which is more than national defense (17.8 percent, including war costs). Overall health care costs are absorbing 15.2 percent of national gross domestic product [GDP]. If the status quo continues, health care costs will consume 20 percent of GDP by 2016.
Rising health care spending also is the major contributor to the unsustainable projected increases in the Federal Government’s two major health programs, Medicare and Medicaid, which are the main contributors to projected chronic Federal budget deficits. The effect of this spending growth is even greater than that of lengthening life-spans and the forthcoming retirement of the baby boomers. “Long-term deficits are driven not only by the aging of the population,” says Dr. Isabel V. Sawhill, senior fellow at the Brookings Institution. “[T]hey are much more driven by increasing health care costs per capita . . . The demographics play a role. But if you look at the numbers carefully you will see that the problem has been health care spending per capita that has been growing 2 to 3 percent faster than per-capita incomes or per-capita GDP.” During the period 1999 through 2008, the monthly premium for seniors who participate in Medicare has risen at nearly the same rate as those in private insurance, from $45.50 to $96.40.

Furthermore, the government health programs rely on the infrastructure of private health care. As noted by the Congressional Budget Office [CBO]: “[M]ost [public] services are furnished by private providers. For example, Medicare and Medicaid beneficiaries receive most of their care from physicians, hospitals, and other providers that deliver services to the general population.” Therefore, inadequacies or inefficiencies in private health care services affect Medicare and Medicaid as well. It is another reason why correcting problems in the government health entitlements also requires addressing inefficiencies in the market.

But if rising private health costs drive the growth of Medicare and Medicaid spending, the converse also is true: Medicare and Medicaid themselves contribute in their own way to medical inflation. These two programs account for roughly 37 percent of all health care spending nationally (including the State share of Medicaid), according to the most recent figures from CBO. Another 10 percent comes from other public programs, including those of State and local health departments, the Department of Veterans Affairs, and workers’ compensation. Such large infusions of government funds inevitably stoke rising medical costs.

Also noteworthy is that real per-capita growth in Medicare and Medicaid spending has outpaced that occurring in the market (see Table 4). This demonstrates that government spending tends to be less efficient than spending in the market. Hence, overall medical costs cannot be tamed without also addressing the structure of the Federal health entitlements.

Failings of Recent Health Care Proposals

The overhaul legislation considered in Congress during the past year failed to correct the fundamental problem in U.S. health care: the distortions of the health care market created by ever-deepening government intrusion. Instead, it sought to expand the government’s role, impose further regulation, as well as job-killing taxes on small businesses. It failed to bend down the medical “cost curve,” meaning more rapid cost increases, resulting in government rationing and price setting. As recently summarized about the legislation under consideration:

[I]ts principles are a reprise of previous reforms – addressing access to health care by expanding government aid to those without adequate insurance, while attempting to control rising costs through centrally administered initiatives. Some of the ideas now on the table may well be sensible in the context of our current system. But fundamentally, the “comprehensive” reform being contemplated merely cements in place the current system – insurance-based, employment-centered, administratively complex. It addresses the underlying causes of our health-care crisis only obliquely, if at all; indeed, by extending the current system to more people, it will likely increase the ultimate cost of true reform.

It also sought to establish a huge new government entitlement, and aimed to drive private insurance out of the market. The proposals were rooted in an ideological view that always sees government as the necessary solution to any significant problem.

The Real Sources of America’s Health Care Problem

The problems in American health care have been caused not by a failure of the health care market, but mainly by distortions imposed on the market from several directions; and the most significant of these are Federal tax subsidies and programs that have created a third-party payment system, which insulates consumers from prices and market forces. As one description puts it:

All of the actors in health care – from doctors to insurers to pharmaceutical companies – work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity, and discourage transparent competition based on price or quality. That result in a generational pyramid scheme rather than sustainable financing. And that – most important – remove consumers from our irreplaceable role as the ultimate ensurer of value.

At the heart of the problem is the Federal tax exclusion for employer-provided health coverage. This policy undermines the health care market by hiding the true cost of insurance from those covered by it, and contributing to more expensive care and more costly insurance. As C. Eugene Steuerle of the Urban Institute describes it:

The exclusion is open-ended. The more insurance we buy, the larger the amount of income we get to exclude from tax and the more the government subsidizes us. The exclusion favors most those of us who have the most generous health insurance policies. Moreover, because more insurance means that we face even less of the cost of what we buy – we and our doctors now bargain over what the plan, not us, will pay – we demand more care and more expensive care. . . . Additionally, the increased demand for health care tends to encourage growth in the health care sector in a less than optimal way. For instance, it tends to encourage suppliers of medical care to increase the quantity of what we get, with less incentive to increase quality.

One reflection of the problem is the dramatic decline in private and personal out-of-pocket spending for health care – even for routine procedures – while government spending has steadily grown:

From 1975 to 2007, the share of total health care spending that was financed privately shrank slightly, dropping from 59 percent to 54 percent, while the share that was financed publicly expanded correspondingly, increasing from 41 percent to 46 percent. During that period, consumers’ out-of-pocket payments fell from 31 percent of total expenditures to 13 percent, and payments by private insurers rose from 25 percent to 37 percent.

The combination has encouraged overuse of health care services. “Because so many Americans rely on an insurance policy or a government program to pay their health care bills, the internal governors that temper the rest of their purchases are turned off,” writes Investors Business Daily. “When a visit to the doctor’s office or a diagnostic test costs them a mere $10 or $20 co-payment out of pocket – or there is no charge at all – cost has little impact on their decision to see a doctor.”

The tax policy that contributed to all this came about not by plan, but as an accident of historical events. During the Second World War, when the Federal Government imposed wage and price controls, employers sought to attract workers from a tight labor pool by offering modest health coverage, and excluding the costs from wages. When these employers sought endorsement of the practice from the Internal Revenue Service [IRS], the IRS approved. After the war, when the IRS tried to rescind this decision, Congress wrote it into law. The exclusion, which this year totals an estimated $155 billion, has made employer-provided coverage the most common form of health insurance.

Although the employer-based tax benefit has been important to the provision of health care, it has evolved into an expensive, inflexible, and unfair subsidy. It also contributes to the insecurities felt by those who have employer-based health insurance, because they fear sacrificing coverage if they lose or change jobs.

The tax provision also has failed to encourage the expansion of health coverage. Since 2000, the percentage of businesses offering health benefits has fallen 69 percent – mainly due to the continued rise in insurance costs. Rising costs also make health coverage unaffordable to many small businesses, self-employed persons, and low-income persons. Indeed, the current tax policy actually increases the number of the uninsured:

As the increased amount of money spent on the exclusion effectively increases the average cost of health care and of health care insurance, the greater the number of individuals in the economy who forego purchasing private health insurance. Not only are low-income people more likely to avoid purchasing health insurance, but many middle-class people and people between jobs decide to take a chance and save the amount of the health insurance premium. Employers, beset by demands from their workers for cash wages, are also more likely to drop health insurance. At times, this happens directly, but more often than not it works its way into the system indirectly. The company with expensive health care insurance reduces the number of its employees, or, if growing, tries to outsource to groups for whom it does not have to pay for insurance. New companies without health insurance displace older ones that carry health insurance.

The third-party insurance arrangement also sharply reduces the options of health coverage packages available. Americans are limited in their choices of health insurance plans based on what their employers can afford – if a health plan is even offered at all. Consequently, Americans are deprived of a diverse health insurance market in which they can find affordable coverage options truly suited to their needs.

Adding to the problem is the lack of transparency in health care price and quality data, which further prevents patients from making the kinds of judgments they do in purchasing other services. For example, in the Milwaukee, WI area a heart bypass operation costs $100,000 at one hospital, while the same procedure costs $48,000 at another. Yet patients, and sometimes even doctors, are unaware of this difference.

Obviously, nearly all patients would rely on third-party coverage for such an event; it is the kind of episode for which consumers most need insurance. But because prices are opaque, patients have no incentive even to consider and compare them – let alone variations in the quality of services – in choosing where to undergo such procedures.


In fiscal year 2009, 67.8 million people were enrolled in Medicaid at some time during the year. Some 34 million of these beneficiaries were children, and 18 million were adults in families with dependent children. The program has provided Americans of limited means access to health care they could not have obtained otherwise.

But Medicaid spending, too, is spiraling out of control: it is growing at a rate of about 7.5 percent per year, and the combined Federal and State costs to run this program in fiscal year 2008 was $353 billion. As a share of total economic resources, Medicaid spending is projected to increase from 3 percent of GDP today to 5 percent by 2035, and 15 percent by 2080. State budgets are overwhelmed with these costs and Federal officials are struggling to meet the growing fiscal needs required to keep this program running. States are trying to shift their Medicaid costs to the Federal Government.

At the same time, Medicaid has fostered a two-tiered hierarchy within the health care marketplace that stigmatizes Medicaid enrollees. Providers are paid based on bureaucratically determined formulas that do not reflect the market. As a result, fewer and fewer providers are willing to participate in the program, meaning longer lines for beneficiaries, fewer operational clinics, and insufficient care.

Patients suffer as a result. With administrators looking to control costs and providers refusing to participate in a system that severely under-reimburses their services, Medicaid beneficiaries ultimately are left navigating an increasingly complex system for even the most basic of procedures.


When President Johnson signed Medicare into law more than 40 years ago, he cited a principal goal of the program that cannot be achieved under its current spending path: “No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out deep moral obligations to their parents, and to their uncles, and their aunts.” Absent reform, the program will end up delivering exactly what it was created to avoid: it will consume the prosperity of today’s younger generation to finance an unsustainable path of spending.

Medicare was created with the worthy mission of providing health coverage for America’s retirees, and for many it has done so. But the program suffers from unsustainably rapid spending increases that continue to drain economic and fiscal resources on its way to insolvency. In short, the program, as currently structured, cannot keep its promises to future generations.

The cost of Medicare has always been higher than expected. For example, in 1965 it was estimated that benefit payments for Medicare’s Hospital Insurance [HI] program would total $8.8 billion in 1990. The actual spending was $65.7 billion. Today, Medicare outlays are growing at a rate of 7.2 percent per year, more than twice the average rate of current real GDP growth. Over the next 25 years, Medicare spending as a share of the economy will nearly triple – from 3 percent of GDP today to 8 percent by 2035. By 2080, it will have grown to 15 percent of GDP.

To rescue Medicare from financial collapse requires transforming the program to make it financially sustainable, and more consistent with the character of medical care in the
21st century.

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