The Ripon Forum

Volume 51, No. 1

February 2017

Getting a Better Return on Our Health Dollars

By on February 13, 2017


Troy official Hudson photo (4)The U.S. spends more on health care than any other developed country – 50 percent more per capita than the next highest OECD country. The average American pays over $9,000 for health care each year – more than twice the average of other developed nations – and yet the life expectancy of the average American ranks 42nd in the world.

For all of our health spending, the average American can expect a shorter lifespan than the average Frenchman, Swiss, or Swede.  Over 17.5 percent of our GDP goes to health care, up from only about 5 percent of GDP devoted to health in 1960.  We are clearly spending a great deal on health care and not getting the results we should, particularly given the enormous size of our investment.

In addition to the lack of sufficient return on our health care spending, there is also the fact that we are spending at an unsustainable rate.  Consider the following: In 2025, Medicaid costs are expected to surpass $1 trillion per year, and the worker to retiree ratio will dip below 3:1.  In 2029, all of the baby boomers will have reached the standard retirement age of 65.  And in 2030, the Medicare Hospital Insurance trust fund is scheduled to be depleted. Clearly, fixing our health care spending situation is not just an issue of getting better results, but also essential for our economic security.

The average American pays over $9,000 for health care each year – more than twice the average of other developed nations – and yet the life expectancy of the average American ranks 42nd in the world.

With the recent election of a Republican president, along with a GOP House and Senate, Republicans have a chance to change this trajectory. Doing so will not only help generate much-needed better health outcomes, but could also stave off a looming fiscal crisis based on our enormous and unsustainable health care spending.  Addressing this problem will take a multi-pronged strategic approach.

First, we need to address the problem of waste in our health care system.  Medicare waste is estimated to be around $60 billion per year.  The Obama administration claimed to go after “waste, fraud, and abuse” as part of the Affordable Care Act, but in reality clamped down on Medicare Advantage, a popular program that gives choice to seniors.  What we really need is a more aggressive anti-fraud effort by the new Trump Administration that uses tools like biometric screening of recipients and secret shoppers to root out rampant fraud.

Second, the replacement of Obamacare with a more consumer-friendly system will go a long way towards reducing costs and bringing down overall health care spending.  The Obamacare approach was to increase costs for all, make insurance mandatory, and provide costly subsidies for a select few.  A better way is to try to reduce costs across the system, and thereby incentivize individuals to purchase coverage on their own.  Elements of such a plan include: expanding access to consumer-directed health arrangements like health savings accounts; allowing the purchase of tax-preferred health insurance through mechanisms other than just through one’s employer; tort reform to cut back on excessive lawsuits and defensive medicine;  enabling the purchase of insurance across state lines; and, replacing Obamacare’s exchange subsidies with a refundable tax credit or some other tax benefit to help lower-income Americans afford health insurance.  A Congressional Budget Office analysis of a plan along these lines found that it would have the effect of reducing the average cost of health care premiums.

Over 17.5 percent of our GDP goes to health care, up from only about 5 percent of GDP devoted to health in 1960.

Third, we should maintain the employer-based system and be wary of the recent trend of moving away from employer-sponsored care and toward more government-provided insurance.  Employers cover 177 million people.  In doing so, they take pressure off the government-based parts of the system.  Employers have proven themselves to be very good at getting people covered, in contrast to government-sponsored programs, which struggle in that regard.  Furthermore, the cost per covered life is greater for people in government-sponsored coverage than those in employer-sponsored care.  Obviously, government programs tend to cover higher cost populations.  But to the extent that we can limit the movement of individuals away from employer-sponsored care and towards government-sponsored care, it will save taxpayers money.  Keeping employers in the health care game is vital to this effort, which means that public policy should both maintain the current tax preferred treatment for employer-sponsored care, as well as the ERISA preemption that allows employers to provide multi-state plans without running afoul of a crazy quilt of different state regulations.

The fourth plank is more long-term, but no less important.  We need to think about significant reforms to our costly Medicare system to make it more efficient and more sustainable.  President Trump has said he does not want to change Medicare, so it’s unlikely to be an early administration priority.  But we cannot push off the problem forever.  Speaker Paul Ryan has put forward a serious proposal for Medicare reform based on the premium support concept.  This plan, which has bipartisan origins, does not appear to be on the front burner right now.  But it could start a needed conversation on Medicare reform later on, perhaps after the midterm election.

None of these steps will be easy.  If they were, someone would have done them already.  But if we as a society want to start getting more out of our health care dollars, this four-part plan is the place to start.  Otherwise, we will continue to get poor returns on our health care investment, and face a serious chance of a long-term health care-driven fiscal calamity.

Tevi Troy is the CEO of the American Health Policy Institute and a former Deputy Secretary of Health and Human Services.  His latest book is “Shall We Wake the President? Two Centuries of Disaster Management from the Oval Office.”

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