In the 1960s America increasing turned to insurance based health care solutions.
The Federal Government established two insurance based health care programmes, Medicare and Medicaid.
At the same time employer based insurance was developing, because of the tax relief that it had enjoyed since the 1940s. The combination of large-scale publicly funded insurance programmes and extensive private employer provided medical insurance, created in response to the tax subsidy and often ‘gold plated’ in its coverage, provided immense opportunities for private investors in health care.
The private health insurance system covers some 170 million people under the age of 65.
The health insurance industry has revenues of $500 billion. Its profits and management costs absorb between ten and twenty per cent of this. In contrast the Medicare insurance programme run by the Federal Government has administrative expenses of about three per cent. Where insurance cover is provided for Medicare patients by private insurance companies, such as through the Medicare Advantage plans, the cost to the Federal Government is about 13 per cent higher than standard Medicare coverage. A much lower ratio of private insurance is spent on actual provision of care and the cost of providing an appropriate level of care for people under 65 is probably higher than if the same cover were provided through a publicly provided insurance scheme.
Both private insurance and the publicly organised insurance programmes provide huge opportunities for medical providers and hospitals to make profits.
There are few effective constraints on clinicians billing either in terms of the level of charges or the number of tests, treatments and therapies. If anything there are powerful incentives that act as a stimulus to both medical activity and cost. Hospital employed specialist doctors are in a position to prescribe tests and therapies confident that the bill will be met by third parties in the form of either publicly funded insurance or privately financed insurance. The system lacks regulation to check excessive cost and is fuelled by the moral hazards that accompany insurance whether it is social insurance or private insurance and further aggravated by an expensive and highly distorting tax subsidy.
The result is that American health care delivery is dominated by a complex web of business, insurance and hospital and doctor interests that exhibit high degrees of rent seeking.
Normally public policy attempts to curb such behaviour.
In America public policy not only aggravates it but is a significant cause of it.
Arnold Relman invoking the memory of President Eisenhower’s famous television warning about the dangers of an Industrial and Military Complex describes this as the Medical Industry Complex.
America's Exceptional Economic Problem by Warwick Lightfoot will be published by Searching Finance in early 2012.