The Cost of Health Care

In my debates, I come across quite a few people who are under the impression that more government-controlled health care would save the US money. The reason health care premiums are so high is because greedy CEOs are taking it all in the form of salaries, right? The belief that government-controlled health care would be more efficient is a horrible misconception.

The thing is, the country could save over $200 billion every year just from cleaning out the waste and abuse in Medicare and Medicaid. Barack Obama himself admitted as much. And then government regulation of the private industry adds an additional $300 billion in waste. Elimination of those costs alone could pay for health insurance for 40 million families.

On the other hand, I’ve quite often heard the suggestion that elimination of the for-profit aspect of the health care industry would save enough money to pay for public insurance. What most people don’t seem to realize is that the annual profit margins for private health care insurers hovers around 4%. The total profit of the health insurance industry last year was a mere $13 billion.

Take a minute to let those figures sink in. Private industry costs us $13 billion a year so they can profit, while the federal government costs us $500 billion per year in waste alone. And the solution is to add more wasteful government programs and regulation?

To further drive the point home, let’s take a look at the bigger picture. We are currently spending $2.2 trillion per year on healthcare in this country. $850 billion of that is spent on Medicare and Medicaid to cover 103 million people, and another $184 billion is spent on other government health programs. That means that the government spends 47% of total health costs to cover 34% of the people. Private industry spends 53% of the total costs to cover 51% of the people (pg. 12). Private industry clearly does a far better job of providing efficient health insurance services. And they’d do an even better job (39% of current costs to cover the same 51% chunk of people) if we passed tort reform and cut some of the regulations that raise costs so much.

Why would anyone replace private industry with the inefficient government and expect costs to decrease?


8 Responses to “The Cost of Health Care”

  1. Robert Says:

    Another example would be to compare the US Postal Service to UPS or FedEx. The Postal Service can’t come close to the efficiencies of the private companies.

  2. Marissa Says:

    Your argument makes sense, but what do you propose to do about all the people who are uninsured — not just those who can’t pay high premiums, but who have pre-existing conditions, or are too high risk for private insurance companies to cover?

    I don’t know too much about the efficiencies of other countries with socialized health care, but I can’t imagine they are as outrageous as the US. I can’t believe there is no reasonable way to guarantee decent healthcare to all American citizens.

    • Tristan Brown Says:

      There was a time around the 1950’s when the US was considered the healthiest country in the world. Back then, the vast majority of Americans did not have health insurance. When people had health problems, they paid out of pocket. If those problems were too expensive to pay out of savings, they paid in installments.

      The thing is, you don’t have to have health insurance to pay for every health condition. The purpose of health insurance was originally just to pay for the extreme expenses. Analogously, when you buy home insurance, you don’t expect them to pay for every plumbing problem, every crack in the paint. You expect them to pay when everything is lost due to unforeseeable disaster. Everything else, you pay for yourself.

      Expecting health insurance companies to pay for pre-existing conditions is like crashing your car and then buying auto insurance after the fact, expecting the damage to be covered. That’s not the way insurance is supposed to work.

      As for the uninsurable, they will have an easier time paying for their health services if costs were to decrease. As I mentioned, this will happen if we enact tort reform and dismantle wasteful government programs that force costs onto insurance companies, doctors, and drug companies.

      Another solution for the truly destitute is private donations. I think I made the point in my first post that private donations would be much more effective in solving the financial woes of the downtrodden in a world without so much government interference.

      Other countries with socialized health care have lower costs partially because they drive less, smoke less, eat less, murder less, and have fewer accidental injuries. This alone more than covers the gap in life expectancies between the US and other developed nations. Most of them also have less advanced medical infrastructures requiring less money to maintain. Many of them also control costs using means which would be utterly unacceptable in the US, such as rationing of care. The British NHS is especially infamous for their regulations explaining whether or not saving a life is worth the cost.

  3. Robert Says:

    In addition, the US pays for the R & D for everyone. A typical example of how this affects our costs is that pharmaceutical companies charge more for drugs in the US than they do in Canada. This is enables them to put money into R & D. Canada reaps the benefits of the R & D without having to really support it. Most medical innovations happen here, in the US.

  4. Shawn Says:

    It’s not at all surprising that Medicare and Medicaid spend more per person than private insurance companies. They insure the old and the impoverished, some of the unhealthiest groups in our country with the highest medical costs. If anything I’m impressed that they can cover them for only 33% more than private industry (who get to choose their clients and not cover pre-existing conditions).

    I don’t know if you include it in your figures, but a large amount of government health spending is on emergency room support. In the US, nobody is turned away from the ER, but if they can’t pay the government foots the bill. This also skews the figures because it means that the 15% of uninsured people are also being supported by the government’s health care expenditures.

    • Tristan Brown Says:

      You’re right in that age demographics matter. It costs a private insurer about 4x as much to insure someone above the age of 65 as it does to insure someone at the median age of 38. So, using that figure, let’s calculate what it would cost private insurers to insure the same group of people.

      Of the 103 million people receiving Medicare or Medicaid, a maximum of 39.5 million are over the age of 65 (taking the latest age demographic census figures). So, using the figures above, it costs a private insurer an average of $7,500 to insure each person under 65 each year. That means it take an average of about $30,000 to insure each person over 65 each year. Taking those numbers directly, it would cost a private insurer $1.66 trillion to insure the same group of people that the government insures for a little more than $1.03 trillion.

      However, there’s a hidden cost that the government programs incur on private insurers. Medicare requires that health care and drug providers provide discounts averaging around 20-30% with programs like this:
      The penalties for noncompliance by providers are massive fines and taxes, meant to make it more worth it to them to comply.

      Now, when Medicare gets a discount, who do you think pays for it? Clearly, it’s those who pay privately. So, since our original figures were determined under an effective 40-60% difference due to the 20-30% discount (or rather, transfer of costs), we can take about 25% off the costs of the private insurers and add that 25% to the government’s costs in a world without Medicare. That brings private costs down to about $1.24 billion, and the government’s costs up to $1.37 trillion.

      So, that’s only a small advantage, but if you then again figure in the $300 billion cost of the wasteful regulations that the government imposes, then the private insurer cost gets down to $940 billion compared to the government’s $1.37 trillion. That means the government still incurs upwards of 40% more costs than the private insurers.

      So there you have it. Taking into account demographics doesn’t make the government programs more efficient if you also take into account the costs the government incurs on the private industry in order to control Medicare and Medicaid costs.

  5. Shawn Says:

    Your post seems to be considering a complete take over of health insurance by the government, but nobody is actually considering this in Washington.

    What do you think about the public option, which appears to be the most liberal (i.e. big government) option on the table. It seems to me that if government run health care would be so inefficient, the public option would not be competitive and so people would choose to use private insurance. What do you think?

    • Tristan Brown Says:

      The public option would be a takeover of health insurance by the government, because it would compete unfairly. Throughout all of the different health care bills on the table, I’ve seen at least two ways to do this:

      First, there’s the extension of Medicare discounts to the public option. As I discussed in my last reply, this would shove 20-30% of the public option’s costs (under penalty of fines) off onto private insurers, giving the public option a severe advantage which would soon disappear as private insurers went out of business, making medical costs skyrocket.

      Second, there are proposals to allocate tax money to the public option. This can be accomplished either by directly taxing certain transactions (cigarettes, gas, fatty foods) and allocating this money to the public option, or it can be accomplished simply by letting the public option raid the General Fund. This would give the public option a severe advantage because it would mean that we’re all already being forced to pay for the insurance plan, even if we don’t accept the services.

      I have not seen a single version of the public option which doesn’t have at least one of those two options in some form. I mean, how could it not have alternate funding schemes like these? If it didn’t, costs would eventually get out of control the way they are for Medicare and Medicaid. So the public option most definitely would be a takeover of the health insurance system in the short run and a hike in the costs of insurance in the long run.

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