Understanding the US health care debate (1)

I am not an expert on the US health system, and at best I am remotely trying to follow the latest health care reform issues. So what I would write here will reflect my very basic and overly simplified understanding of the issue. There are some reasons why the current debate on the US health care reform is interesting as well as important to monitor.

First, it will be the biggest domestic policy test for the Obama’s administration. How it goes, and how it ends, will affect the support and legitimacy of the administration, and perhaps determine the fate of it. Second, depends on what version of the bill comes out in the end, it could be one of the biggest changes in a country’s health and insurance system in history. Third, it is a high-profile case on how ideology, pragmatism and day-to-day politics simultaneously affect the outcome of a policy. Some people would like to see this as a fight between the market and government-oriented, Democrat and Republicans. But the truth, it is much more complex than that. Fourth, Indonesians can learn from this process, from the debate, outcome and implementation, including the trade-offs of making one policy choice over another.

There are three major areas of the debate: the problem with the current US health care system, the proposed solutions, and the politics. The order of those three also somewhat reflects the degree of my understanding, from the most to the least.

Part I. The problem

The US health system faces two main problems: 1) a very high percentage of people are not covered by health insurance (with a high proportion of those with insurance are underinsured), 2) high and rising insurance and medical cost. These two are highly related to each other so it is difficult to disentangle what causes what. They also face other challenges: how to solve those two problems with minimal cost (means how not to increase the budget deficit and/or introducing more taxes), and without hampering health and medical innovations.

Coverage

The Economist frequently cited that in 2009 some 47 million US residents (around 15% of the population) are uninsured. This is slightly higher than 46.3 million in 2008 and 45.7 million in 2007. In 2007, 37 million of the insurance are working-age adults, with 27 million working at least part time.

High price is the main reason why they are uninsured. Individuals from low-income households are more likely to be uninsured. But high cost also drives individuals who could afford to buy opt to not purchasing one. The problem is they are the more healthy ones. This lowers the average health among the pool of insured individuals, raising the premium, hence drives the overall cost up.

But many private insurance companies also turn down ‘risky’ applicants; for example, those with pre-existing health problems, risky lifestyle or environment. Some people point this as discrimination, because individuals with risky environment tend to come from minority race, especially Latinos. In fact, more than 30% Latinos are uninsured, compared to 10% of white, non-Latinos.

Of the 85% individuals who have some kind of health insurance, 60% receive it through their employers (or employers of their spouses, partners or other family members). That means many individuals will lose their insurance if they or their family bread-makers lose their jobs. Some 9% purchase health insurance individually.

The government also provide health insurance through several schemes (Medicare, Medicaid, SCHIP, TRICARE, IHS and some state-provided ones). Public health insurance schemes provide coverage to some 28% Americans – there are some overlaps between the public and private coverage.

Cost

By far, the US health care system is the most expensive in the world. In 2007, total health expenditure accounts for 16% of GDP; other developed countries spend no more than 11% of their GDP. In the same year, the US spends $7,400 per person on health care. Around half of the spending goes to hospital care (31%) and physician/clinical service (21%). Ironically, with that level of spending, the US is one of the worst among developed countries in terms of health indicators.

What drives the health care cost? According to Kaiseredu.org, rising costs of medical technology and prescription drugs and high administrative costs (e.g. marketing, billing, which accounts for 7% of total cost) contribute from the supply side. On the one hand, technological progress has made the US health system is perhaps the most innovative and advanced in the world. But it means the consumer needs to bear some of the investment cost. On the other hand, this has also made the industry become more and more supply-driven; they generate demand for more intense and costly services, though not necessarily more effective. Similar story happens with the pharmaceutical industry.

From the demand or consumer’s side, demographic changes that have occurred over the past century have resulted in higher life expectancy, older population but also new, more complex health problems. Prevalence of chronic lifestyle-related illnesses has increased substantially.

Another contributing factor, although the relative contribution is still debatable, the legal process-related costs. According to one estimate, Medical malpractice lawsuit accounts for 5-10% of total medical cost each year. Medical service providers, facing high financial and reputation costs, are then ‘forced’ to perform extra procedures for patients.

There are also arguments pointing out that rising health care costs have been driven by the public insurance scheme (Medicare, Medicaid etc.). They are lack of competition, and the reimbursement system has created perverse incentives for medical care providers (see this or this). The other side of the argument blame more on private insurance companies because they have been overcharging consumers, so a cap on insurance premium needs to be introduced.