Why Aren't We Living to 120?

Co-authored by Greg Morrison and Sam Necrason

In 2012, the U.S. Supreme Court affirmed the constitutionality of the Patient Protection and Affordable Care Act (ACA)--the healthcare law better known as Obamacare. Currently, the Supreme Court is considering a narrower, but equally important, challenge to the law in King v. Burrell regarding eligibility for federal tax subsidies.

The plaintiffs' charge is that only individuals who purchase health care on state exchanges can receive federal tax subsidies to defray the cost. But 34 mostly Republican states refused to create state exchanges, leaving residents to purchase insurance on a federal exchange, making them technically, though not practically, ineligible for the subsidy. Since the ACA mandates the purchase of insurance as part of its three-legged stool design--insurers can't deny coverage for pre-existing conditions, mandates to purchase insurance, and subsidies for those who require financial assistance to buy insurance--many individuals who would no longer qualify for the subsidy will be unable to afford coverage. Sawing off this leg will cause the ACA to become ineffective, which is the true aim of the lawsuit.

These legal challenges expose a deep schism regarding Americans' attitude towards government and healthcare. But, from an economic perspective, this opposition is not only misguided, but also counterproductive to achieving a more efficient and equitable health economy.

The United States spends 50% more on healthcare than any other advanced nation, yet has the worst health outcomes in virtually every category. This means we should be spending less or experiencing improved outcomes. But we see neither. Why?

Healthcare doesn't always behave like other commodities. More spending does not necessarily translate to better healthcare provision or improved health outcomes. Our research finds that the United States spends 1 out of every 6 dollars on healthcare--approximately the same we spend on public education. To illustrate the absurdity of this spending, consider that Chileans live as long as Americans (79 years) yet only spend 1 out of every 14 dollars on healthcare. Canada spends about half as much as the United States on health care, but our neighbors to the north are living two years longer. If we extrapolated this relationship between healthcare spending and life expectancy, Americans should live to 120.

This is an exaggeration, but it proves our point. As a nation allocates more of its spending to healthcare, health outcomes generally improve. Of course, both the human physique and technology have limitations, so there are diminishing returns from health spending. It may be unreasonable to think that we should live to 120, so the more appropriate and important question is why are we spending so much on healthcare?

On the supply side, exceptionally high barriers to entry and licensing requirements reduce the supply of doctors, raising their salaries and the overall cost of care. A fragmented, decentralized insurance system generates wasteful administrative costs. Doctors are paid according to the quantity of services and procedures they provide, not the quality of outcomes, leading to overdiagnosis and overtreatment. There exist conflicts of interest in ownership of health service providers, allowing the profit incentive to trump improvements in outcomes.

Pharmaceutical companies are given a government-guaranteed monopoly on their products in the form of patent protection, raising costs by a factor of 1,000 relative to unpatented, generic equivalents. In an obvious bow to Big Pharma, Maine recently struck down a law which allowed people to purchase prescription drugs from Canadian suppliers. Pharmaceutical companies merge not to improve operations and capitalize on economies of scale, but rather to consolidate their power and raise prices. This is precisely the type of cost-raising, inefficiency-enhancing protectionism that policymakers and economists abhor.

With respect to the demand side, patients are unable to comprehensively compare the costs of procedures and coverage across different providers and insurers due to substantial information asymmetries. Insurers and doctors know much more about what services cost and can use this information advantage to overcharge and overtreat patients, who lack the resources to effectively weigh the costs and benefits. When was the last time you saw a menu of services and prices in a doctor's office, or an hourly rate for their services? Similarly, patients, who rarely pay for the full cost of healthcare, are extremely insensitive to changes in price

Considering these issues, why is the inefficient and overpriced U.S. healthcare system often considered to be one of the best in the world? To a certain extent, it is--if you can afford it. For many specialty procedures, U.S. healthcare is peerless in delivering quality, but at a cost that few can bear. However, basic preventative education and treatment for some of the nation's largest health issues--high blood pressure, obesity, diabetes--are considerably less affordable than the rest of the world.

It seems as if the current U.S. healthcare system is designed to be inefficient and maximize the returns to special interest groups, while ignoring the possible gains from free trade and globalization. How can policymakers fix the U.S. system so that it can deliver low-cost, high-quality care to everyone?

Allowing the ACA to operate as designed is a first step. Although the ACA is far from perfect and creates a windfall for insurance companies, it has, in only a few years, successfully lowered healthcare costs and decreased the number of uninsured individuals. Globalizing healthcare and creating a system of medical tourism could further lower costs as nations compete for patients based on their comparative advantage.

But why stop there? Why not look to other nations who have succeeded in lowering costs and improving health outcomes for a model? These nations have more government involvement in the health economy. Moving to single-payer system, like every other advanced economy, would further lower costs because the government could use its buying power to negotiate lower costs from hospitals and pharmaceutical companies, and ensure that medical providers are compensated based on the quality--not the quantity--of care they provide.

Single-payer countries have built healthcare systems on their specific needs and existing programs. The U.S. experience would be no different; we could simply extend Medicare to all citizens, which is more efficient than private insurance because of lower administrative costs, more bargaining power to negotiate lower prices, and quality-based compensation. Coverage would be financed through higher taxes, but still raise after-tax incomes since individuals wouldn't have to spend exorbitant out-of-pocket sums for basic procedures.

Just because certain policymakers detest the ACA does not entitle them to further raise costs to and reduce the well-being of the rest of society. Healthcare is a human right and public good, and should be treated as such. In fact, medical expenses are the main cause of personal bankruptcy. Attempts to litigate the ACA to death are more than just irresponsible--they are unfounded, malicious, and counterproductive.