JANUARY 2008: ECONOMIX
Do we really have a health-care crisis?
BY ERIC
FRUITS
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“One of the foremost family economic problems of the day
is the cost of health care. This fact is recognized by both
those who pay for and those who provide health care
services.”
John Edwards campaigning in the 2008 primaries? Nope. Hillary
Clinton? Nope. Barack Obama? Nope. Those are the words of the
Health Insurance Association of America. In 1960.
It’s easy to fall into the trap of thinking that all of
today’s crises are new. In fact, the U.S. has had a
health-care “crisis” since before Barack Obama was
born.
One part of the crisis has been the rising cost of health care
and health insurance. For years, the cost of health care has
outpaced inflation. In turn, the costs of health insurance have
risen rapidly, taking a toll on businesses and their employees.
Another part of the crisis is the number of uninsured. Last
year, Oregon’s governor tried to sell voters a huge
tobacco tax increase by pointing to an estimated 117,000
uninsured children in Oregon. These parts of the crisis are
related and were born out of the growth of the third-party
payer system of covering health and medical costs.
The third-party payer system grew out of World War II wage and
price controls. During the war, the War Labor Board froze
wages. Soon after that, heavy industries began losing
employees. In order to attract and retain labor in these
war-essential industries, the board excluded health insurance
for workers from the wage freeze and allowed businesses to
claim the payment of workers’ health insurance as a
tax-deductible business expense.
For workers, the choice was a no-brainer: Tax-free,
employer-paid insurance was cheaper than buying their own
insurance with after-tax income. Between 1941 and 1956, the
number of people with medical insurance grew 14-fold.
Third-party health insurance grew popular for the same sort of
reasons buffets are popular. When you walk into the buffet, you
pay up front, grab a tray and get eating. You only finish when
you are full. Same with health insurance. Your employer pays
your tab — or at least part of it — and you visit
the doctor with every sneeze. That increases the demand for
medical services.
Basic economics tells us that an increase in demand results in
an increase in price. Thus, the generous benefits offered by
many insurance plans are part of the reason that health-care
costs are so high.
Oregon health insurance is especially expensive because of
regulations mandating that insurers cover specific conditions,
procedures or treatments. Last year, Oregon began requiring
insurers to pay for mental health and chemical dependency
treatment, as well as birth control pills. Consumers cannot opt
out of the mandated coverage. It is as if the state mandated
more and more items be placed on the buffet table. Bigger
buffets charge higher prices, and bigger benefits lead to
higher premiums.
Advances in medical technology are also to blame for rising
health-care costs. Every year introduces new technology that
improves the quality of medical services. The new technology
often represents years of research, development and testing.
Even though the incremental costs of actually using the
technology can be trivial, the up-front costs can be
astronomical. The only way such technology pays for itself is
by intensive use that can be billed to insurance.
The proliferation of expensive technology has been driven in
part by the third-party payer system. Consumers never see the
full bill for the service and treat the service as if it were
free or almost free. Doctors are reasonably certain that
insurance will pay for the service.
They also know that additional tests reduce their chances of
being sued for malpractice. Insurers pass on additional costs
through increased premiums.
Surely the relatively high cost of health insurance has a lot
to do with the number of uninsured. But cost does not explain
it all. Approximately 60% of Oregon’s uninsured children
qualify for taxpayer-funded health care through Medicaid and
SCHIP. Why don’t they sign up, even though it is
free?
A simple answer is that most children do not get sick. Even
among children with insurance, approximately one out of six
children do not visit a doctor at all in a year. If someone
believes they do not or will not need health care, then they
are less likely to sign up for health insurance.
Another reason why qualified children go uninsured is because
their parents are uninsured. Adults who do not have health
insurance tend not to get it for their children. That is true
of employer-based programs as well as taxpayer-funded programs.
If a parent does not qualify for Medicaid, then the children
will not get signed up, even if the children qualify.
Last year, the state of Oregon set up the seven-member Oregon
Health Fund Board to design a plan for a health insurance pool.
Next month, the board will issue an interim report. The board
will be challenged to come up with a plan that has not already
been tried, tested and discarded in the previous 50 years of
our ongoing health-care “crisis.”
Eric Fruits is a
contributing columnist to Oregon Business and a senior economist at ECONorthwest.
He also is an adjunct professor at Portland State
University.
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