October 31, 2021

By Steve Stofka

In the past 70 years, America has escalated its health care spending from 5% of GDP to 18% of GDP. Stack up all the money Americans spend on housing, cars, fuel, utilities and food and its less than what we spend on health care. Despite all this spending we have the worst rates of infant mortality and preventable death among developed countries. If we exclude the growth of health care spending in the past few decades, the U.S. economy has been stuck in the same rut that has trapped Japan. In that time, China’s economy has erupted from $.5T to $15T and is now the second largest economy, just $7T less than the U.S. We have averaged 2.4% annual real growth in the past three decades, less than the 3% growth of the post WW2 period. How do we get out of the rut?

Thirty years ago, William Clinton emerged the winner of a three man race for the Presidency. Responding to public concern over rising health care costs, he proposed a universal health care plan that received a hostile reception. Republican groups mounted an effective advertising campaign against a “takeover” of health care by government. Republicans rode that momentum to win control of the House in 1994, ending forty years of continuous Democratic control.

In the fall of that year, two economists proposed a Major Risk Insurance Plan that they estimated would lower health care spending by 20% (Feldstein & Gruber, 1994). However, the market continued to adopt HMOs as the dominant model to reduce costs. Today, the US spends far more than other developed countries and has worse health outcomes. Martin Feldstein was President of the NBER, the nation’s premier economic research institute. Jonathan Gruber was a former researcher with the NBER, an MIT professor with a lot of expertise in the economics of health care. Both had a lot of influence, but their proposal did not win converts.

Their study was based on earlier work by Feldstein and a data sample of six thousand respondents collected in 1987 that provided insight into the choices and value that people place on health care. Feldstein and Gruber concluded that the government could insure people under 65 against major health risks for a mere $150 per person, about $300 in current dollars.

Under their proposal people would be insured for half of their annual medical expenses until they spent 10% of their after-tax income, their maximum OOP, or out-of-pocket expense. This would eliminate or reduce the wastefulness of people being over-insured. Those with small copayments or “first dollar coverage” use more health care because it costs them little to nothing except their time. Many younger workers with employer provided health insurance have far more insurance than they use. Thinking that insurance is a “free” benefit, workers don’t realize that they are paying the insurance premium in the form of lower wages.

The proposal aimed for greater efficiency, more patient involvement and wider coverage. Jonathan Gruber would become instrumental in developing Romneycare and Obamacare, nursing both plans through the political butchery and swollen egos that all major legislation endures. The 10% OOP is a progressive feature that empowers and enables the poorest people to access the full benefits of the health care system after spending a small amount. Those with higher incomes pay more into the system. Because everyone has some skin in the game, they use the system more judiciously. However, sensible proposals are not sensational. They don’t dance and sparkle.

The health care and insurance industry relies on misinformation and the inefficiency in the American system for its profits. The burden of that inefficiency has become a ball and chain on the American economy.  Each generation comes to maturity thinking that it will solve the persistent problems that have bedeviled earlier generations. Those who efficiently rake in the profits protect those inefficiencies. Any system that favors the powerful few resists change. In a sense of frustration, people turn to a populist leader who claims that they can fix it because they know how the system really works. We are drawn to our myth builders like moths to the light of a flame.

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Photo by Derek Finch on Unsplash

Feldstein, M., & Gruber, J. (1994, September 01). A Major Risk Approach to Health Insurance Reform. Retrieved October 31, 2021, from https://www.nber.org/papers/w4852. A bio of Martin Feldstein https://scholar.harvard.edu/feldstein/biocv.