During discussions about reform of the National Health Service (NHS), reference is often made to the state of US healthcare. Defenders of the UK status quo, who oppose the introduction of market mechanisms, point to the USA as a case study of the undesirable outcomes that result when markets allocate healthcare resources. This view of the US healthcare system permeates across the UK political spectrum, from those who are outright opposed to any challenge to the central place of government-directed resource allocation in UK healthcare to those who are prepared to countenance some degree of patient choice and provider competition.
However, the claim that the undesirable features of the US system are the result of market operation does not stand up to rigorous analysis. Government accounts for almost half of total US healthcare expenditures. By no means can the US healthcare system be considered an example of how a well-designed market-based healthcare system would operate. The oft noted problems of the US system (absence of insurance coverage for about 17% of the population concurrent with the highest per capita healthcare spending) stem from perverse tax and regulatory policies while other important policies are absent. In short, the poor features of the US system result from government failure, not markets. Key instances of government failure are explained below.
Government failure
Tax subsidy for employment-based health insurance
Private health insurance is mostly purchased through the workplace with employer contributions exempt from income tax. This open-ended subsidy is regressive, providing most benefit to those paying income tax at the highest marginal rate. It encourages the purchase of comprehensive healthcare coverage with minimal use of mechanisms to control moral hazard (marginal healthcare expenditures where costs exceed benefits), fuelling demand for healthcare and fostering cost indifference by consumers. The subsidy is both inefficient and inequitable. By promoting healthcare cost inflation, the subsidy renders healthcare coverage unaffordable to lower income groups, and does nothing for those who do not have access to employer-based coverage.
Lack of individual mandate to purchase health insurance
Historically, the purchase of health insurance coverage has been voluntary, with about 17% of the population remaining without cover. For some groups, such as the healthy young, this will be a rational strategy, as free care will invariably be available if needed: public hospitals are obliged to provide care irrespective of a patient’s financial circumstances and not-for-profit institutions provide charity care as a condition of tax-exempt status. For low-income groups, there is the public means-tested programme, Medicaid.
State regulation and federal programmes
Health insurance is regulated at state level. Most states mandate that policies must include various (non-essential) benefits, often the result of lobbying by providers. This increases the cost of coverage, making purchase unattractive. Other desirable regulation to facilitate efficiency in insurance markets or to promote wider population coverage, is often lacking. The presence and design of two big federal government entitlement programmes, Medicaid for low-income families and Medicare for the elderly, influences the design and operation of private sector plans inhibiting market innovation.
In summary, those undesirable features of the US healthcare system which particularly exercise policy commentators, flow from failures of government and are not inherent to market-based approaches to healthcare finance and provision.
Market-based universal coverage
Appropriate goals for a healthcare system are universal coverage for its population, efficiency in the provision of healthcare services, and equitable financing and availability. Whilst a libertarian perspective might argue that individuals should be free not to purchase healthcare insurance, the free-rider problem wherein developed societies invariably provide essential healthcare to all regardless of personal provision, justifies mandatory insurance cover. Hence, one essential function for government in a competitive market-based approach to healthcare is an individual mandate for the purchase of a defined basic benefits package.
Individuals would be free to purchase more comprehensive (un-subsidised) cover, if they so choose. A second essential government function is ensuring the availability of cover to low income and high risk groups, who might otherwise find purchase of cover unaffordable. This can be achieved through a system of income- and health risk-related tax credits or vouchers for the basic benefits package. Public insurance and/or direct government provision of healthcare services is not necessary for the achievement of equity objectives. A third role for government is the implementation of an appropriate regulatory framework for the efficient operation of insurance markets.
Some commentators argue that universal coverage can be achieved more efficiently through a single government monopoly insurer rather than multiple competing private insurers, pointing to lower reported administrative costs for single public insurance programmes. But such analysis ignores sizable hidden overhead costs for public insurers which are not reported in accounting cost systems, especially the dead weight loss (or excess burden) of tax-based financing. An analysis comparing total economic overhead costs of the Canadian (monopoly public insurance) system and US private insurers found that Canadian overhead costs were greater as a proportion of claims paid.
Whilst the package of healthcare system changes encompassed in President Obama’s Patient Protection and Affordable Care Act (PPACA) includes an individual mandate from 2014 to promote universal coverage, the overall thrust of the legislation is in the opposite direction from the market-based approach to healthcare reform outlined above. The legislation significantly increases the extent of federal government regulatory intrusion on healthcare markets. For instance, the scope of cost-increasing mandated benefits is expanded and also extended to previously exempt self-insured company plans. The contractual terms that private insurers can offer is also heavily prescribed. Meanwhile the distortionary income-tax subsidy to employment-based coverage remains intact. In short, the PPACA does not address and arguably increases the shortcomings within the regulatory framework that currently distort the private sector.
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