Health Care Subsidies, Regulation and Market Failure

The United States devotes nearly 20% of its economy to health care but is widely regarded as getting less for its money than most other countries with advanced economies. What is driving costs so high? The Wall Street Journal suggests some answers, which totally vindicate Bacon’s Rebellion’s analysis in every regard. The Journal’s bottom line:

Americans aren’t buying more health care overall than other countries. But what they’re buying is increasingly expensive. Among the reasons is the troublesome fact that few people in health care, from consumers to doctors to hospitals to insurers, know the trust cost of what they are buying and selling. In some cases, costs are largely secret. Providers, manufacturers and middlemen operate in an opaque market that can mask their role and their cut of the revenue. Mergers give some players more heft to enlarge their piece of the pie.

Percentage of consumer expenditure devoted to health care. Source: Wall Street Journal

This chart shows how health care is hogging an ever-increasing share of consumer expenditures on health care. Notice where most of the growth is coming from — health insurance. Consumers are spending less out of their own pockets and more, indirectly, through Medicare, Medicaid, and private insurance. Explains the Journal:

Contributions to employer-sponsored health coverage aren’t taxed, which makes it less expensive for companies to pay workers with health benefits than wages. Generous benefits lead to higher spending, according to many economists, because employees can consume as much health care as they want without having to pay significantly more out of their own pockets.

The tax benefit is the country’s biggest single income-tax break, amounting to an $854 billion subsidy.

Source: WSJ

Meanwhile, thanks largely to state and local regulatory policies, the hospital industry is consolidating and health care systems are exercising greater power in the medical marketplace than ever before. Inflation in hospital prices, along with inflation in pharmaceutical prices, are driving health care cost increases far more than charges for physician and clinical services, as can be seen above.

Source: WSJ

Research shows that competition does matter. In markets with less competition, consumers pay more for common procedures, as seen in the chart to the left. The revenue of health care companies represented nearly 16% of the total revenues of firms in the S&P 500 last year, up from about 4% in 1984, states the Journal. (Presumably, that does not include revenues of nonprofit healthcare companies. They, too have, soared.)

Here in Virginia, profitability of healthcare companies is extremely healthy. While a handful of rural hospitals are losing money, the big hospital chains and healthcare systems are immensely profitable — regardless of whether they are for-profit or nonprofit.

How have hospitals done it? In part  by working the political system to rig the rules in their favor — whether through Certificate of Public Need (COPN) regulations at the state level or inserting rules in the Affordable Care Act that effectively banned physicians from competing with hospitals by restricting outpatient clinics. Health care companies have more than doubled their lobbying spending (adjusted for inflation) since 1998. They also have increased their share of total lobbying expenditures by all industries.

Source: WSJ

These numbers are all national in scope, and they undoubtedly reflect significant variation by state. But they are entirely consistent with what I have seen and blogged about in Virginia. Where the data allows and I have time, I will try to document trends for the Old Dominion.

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14 responses to “Health Care Subsidies, Regulation and Market Failure”

  1. LarrytheG Avatar

    It’s important to recognize that in all other industrialized countries – people DO pay taxes that provides universal health care to all.. they all pay and they all are entitled to health care. In most of these countries, if you want more/better than what is provided to all – you are more than welcome to pay more to get more than what is the basic level that is provided to all.

    Yes.. you hear the cry of long wait times and “rationing” but it’s totally a phony thing because 1. people live longer in all those other countries and 2. – ALL insurance “rations” – there is no insurance that says “we cover everything no matter what”.

    Some of us continue to say that the US is “different” and that if we do it right – the “free market” will meet both demand and price and it will – just like it does right now in other countries that are 3rd world and developing world that allow insurance companies to deny coverage to anyone that the deem a “risk”. The “free market” folks in this country just totally live in a dreamworld apparently where “pre-existing” does not really exist or… “free market” means all companies have to cover “pre-existing” or ..for some Conservative types – “pre-existing” means “tough luck, if you are old or sick the free market does not want you.

    And to point out once again – employer-provided insurance does cover pre-existing conditions NOT because of some agreement between the company and their insurance provider but because of US Law that requires such coverage.

    That same law REQUIRES insurance companys to charge the same premium to all covered employees regardless of age or health status.

    Finally – EP insurance is not taxed. Not Federal. Not State. And not FICA. For most folk that boils down to close to a 45% discount – that folks without EP do not get when the try to buy in the “free market”.

    The biggest problem that we have is that many folks don’t want to know the facts and reality… they say they want a “free market” but a REAL free market would function much like it does in most 3rd world countries where the Govt is out of the insurance business except for charity clinics.

    Just look at hour own situation. Those of you that have gotten older and/or have a health condition or someone in your family does. In a true free market – you won’t have insurance. That’s the simple fact and we then want the government to “help” – only for our problem.. not all those other freeloaders!

  2. Steve Haner Avatar
    Steve Haner

    Let’s mention a couple of things that need further exploration. Advertising of prescription drugs. Of course it drives up demand and of course the cost of the ads gets baked into what we pay, but there is often zero health benefit.

    Bribery. When the drug reps are around with the free food and the subsidies for attending “conferences” at luxury resorts and the fees for “research” – hell, these are just bribes to docs and nurses to steer patients away from generic drugs to very expensive brand versions, again with dubious impact on the outcome.

    And the third rail – end of life care. Don’t touch that issue.

    But basically I agree the big problem is lack of transparency, patients who do not know what they are spending or realize that the bill does ultimately come back to them, they do have an economic stake in being careful. But it is hard to see buried in the noise.

  3. LarrytheG Avatar

    The average person in the US has no clue how health insurance really “works”. Most hope to get a job “with benefits” – then they take whatever insurance is offered and blithely continue on… unless or until something happens that forces them to interact with the insurance – when they visit the doctor, need to have an x-ray, or get a prescription drug – or the premiums go up.

    It’s not like if you get your insurance from your employer that you can “shop” for the best deal and it’s the lack of transparency that prevents you!

    Our mindset about health insurance – especially for Employer-Provided is totally messed up. If we treated our car or home insurance the same way, we’d expect the auto insurance to pay for tires, oil changes, etc and the homeowners to pay for new appliances or replacing the Heat Pump!

    Of course if you don’t have EP – you then have to “shop” and opponents can blather all they want but ObamaCare DOES provide quite a bit of transparency including tools to help you know which ones cover drugs you need… and until the POTUS and Congress severely damaged it – you did have choices about how much out of pocket verses how big a premium. Now, you’re lucky if there is just a single plan available … and many are now managed care companies like Kaiser.

    But again – most folks simply don’t know and don’t care – unless or until they have problem..then they do.

    1. TooManyTaxes Avatar

      Larry – Health insurance is an employment benefit just like vacation, 401k plans, stock ownership, free parking and transit and various other items. The law office with which I’m affiliated gets a suite for a Nats game every year. It’s a lot of fun. Benefits, like salary, help companies attract and keep high quality employees. Successful companies tend to have more benefits than start-ups or companies not doing well financially. Good health insurance is one of big attractions of working for the federal government.

      So what’s wrong with having health insurance be a factor in helping employers attract and keep good workers? IMO, absolutely nothing.

      1. LarrytheG Avatar

        TMT – it’s NOT given to you by your employer. The taxes are not levied by LAW – NOT because of an agreement between employer and insurer.

        Further – coverage of pre-existing conditions – likewise is NOT an “agreement” between employer and insurer as a benefit to employers – it’s MANDATED by Federal Law UNLIKE your Nats Tickets.

        If the income you used to buy health insurance was fully taxed like your other income then you’d pay a lot more for your insurance. That’s totally due to the fact that Federal Law waives the taxes on EP but NOT on people who have jobs who have to buy their own on the market.

        That’s a two-tier system where the Feds provide benefits to one type of employee but not to other types of employees.

        Similarly – it’s the Feds who REQUIRE your health insurance to cover you for the same price as others – no matter your age or health status – something that is not true for people who have to purchase insurance on the open market.

        In other words -your health insurance is not a “benefit” given to you by your employer – it’s a benefit you get because of the Govt that mandates your insurance cover you no matter what … AND the govt is the one that waives the taxes on the income used to buy that insurance. It’s Govt that gives you that – not your employer.

        All I ask is that you recognize that you are actually receiving these tax and guaranteed coverage “benefits” because of the Govt – not your employer and others who also work for a living – do not get such benefits when they have to buy insurance themselves. That’s a double standard with the govt favoring one type of employment over other types – arbitrarily discriminating against people for no good reason other than they work in industries that typically do not offer health insurance.

        This is one of the reasons our health care system is so screwed up. In no other industrialized country on the planet does the govt arbitrarily provide access to health insurance to one select group of citizens and not all of them – just the US.

        Consider what would happen to you if the govt got out of employer-provided insurance all together and you were in the same boat as others who did not get employer-provided.

        It’s NOT a “benefit” from your employer – it’s a “benefit” from the Federal Govt.

        1. djrippert Avatar

          I don’t understand your argument. First, employers are not required to offer health insurance as a benefit (at least, as far as I know). so, how is that government mandated? Second, there are a lot of benefits provided by employers that are not taxed to the employee. Personal office space within a block of the White House was one benefit I received once upon a time. Training is another. Conference attendance. Employer based 401(k) contributions are eventually taxed but I get the use of that money for decades before I pay the tax. If I were self-employed I’d have to pay for all of those things. Why is EP health care any different?

          As far as people in Europe living longer … I don’t think that has anything to do with nationalized health care. I think it has everything to do with obesity rates. Look at this:

          If fat people in the United States want to tax my earnings for their health insurance they can damn well show up at the local high school at 6am each morning to run around the track.

          1. LarrytheG Avatar

            The Govt DOES MANDATE the rules IF an employer elects to provide it.

            IF the employer does elect to offer it:

            1. – they must offer it to ALL employees for the same premium price regardless of their age or health status

            2 .- they cannot be denied coverage

            3. – The Feds then mandate that money used to buy it is not taxed – not Federal and not State and NOT FICA.

            These “benefits” and tax subsidies are NOT mandated for insurance that people who do not have EP have to buy themselves on the open market.

            That’s the point.

            There is a double standard on what the govt does. It mandates protections and subsidies for those on EP but not for those who purchase their own.

        2. TooManyTaxes Avatar

          My wife has health insurance that covers both of us under the Federal Employee Plan. It’s a fringe benefit for which we pay part of the premium. Earlier in my career I had health insurance from a company where I worked for 20 plus years. It was a fringe benefit.

          Yes, health insurance is regulated by the feds and the states. But it is not a government-provided benefit. It’s part of a worker’s compensation. And good coverage is designed to attract and keep good employees. It’s just like vacation or disability coverage. It’s earned and not a gift from the federal government.

          You are, of course, correct in that the value of the employer’s contribution is not taxed. The federal government decided to do this during WW2 to give workers something when their wages were under control. The tax-free status was attractive to workers just as the tax deductibility was attractive to employers. Taking away the tax-free status would likely be met with a voter revolt.

          And DJR is correct. A lot of other benefits are not taxed either. When I go to the office, I park for free. If I worked somewhere else, I might have to pay for parking. Or an employer might give free parking only to select employees.

  4. Jane Twitmyer Avatar
    Jane Twitmyer

    I don’t dispute any of the insurance/financial issues you have brought up, although I think insurance might work better if it was not employer supplied. My problem with the high cost and low results of today’s medicine is what has happened to treatment. As the scientific knowledge has gotten more and more complicated, the solutions rely more and more on drugs to alleviate the symptoms and surgical fixes that see the body through a mechanical, fixing parts in isolation and not viewing what they see as a biological creation with networked interactive pieces.

    Last January I had a failed hip replacement operation, done by a corporation, not a Dr. with a practice he was intimately concerned with. I was sent home after 2 nights in the hospital with a morphine soaked leg … the corporation frowns on inpatient rehab which they have contracts to pay for it … with what turned out to be a fractured femur. When I called within 2 days I was urged to go to a different hospital for a problem I knew I did not have. I figure that way the corporation wouldn’t find out what had happened and the DR would not have had to wave his finger in my face saying I would cost him $30,000. Since the average take home of his specialty is $750,000, I figure he can afford to pay for his mistake.

    There is more to this horror story, like getting addicted to opioids over 4 months when there are other ways, ways like CBD oil, acupuncture and mindfulness, but Big Pharma denigrates and blocks them. So what I would really like to do is put in a plug for ‘functional medicine’ as a cure for the out of line costs of our system. Unlike the physics of a pool table and our old medicine, the functional medicine movement is physicians who look for and address causes, not just symptoms. They say that biology is about interconnections, not silver bullets.

    One of the early promoters is an MD who was recruited by, and is now at, the Cleveland Clinic, one of the best hospitals in the country. One ‘it’s a network’ solution he gave voice to 20years ago was the real potential to cure type 2 diabetes. Enough studies had been done for the solutions to be taken seriously, some in Europe, but the medical industry had too many dollars at stake to allow such nonsense to take hold.

    Another example is the approach to PTSD. Psychiatrists would simply diagnose and prescribe, sometimes both talk and pills, but pills were, and still are, the staple to control the mind. What the ‘decade of the Brain’ told us was that the mind and the body are totally interconnected and physic trauma is a physical issue as well as a mental one.

    So if trying to find a solution to cost has a wide enough perspective, maybe some real good will come of it.

    1. TooManyTaxes Avatar

      If employer-provided health care insurance was eliminated, it is very likely that many workers will not see an equivalent increase in their pay. Say the average payment by an employer for insurance was $15 K (just making up a number). I doubt that even a majority of employees would see a $15 K increase in pay.

      Moreover, to stay even, the $15 K would have to be grossed up to account for the taxes, federal, state and FICA/Medicare. Let’s make up a number – say 40% or $6 K. My example suggests the employer would have to pay its employee $21 K to hold the employee losing her/his health insurance harmless. That is not going to happen. You can play with the numbers but the end result will be the same — the middle and working class Americans will suffer.

      Moving to single payer or some other form of heavier federal government involvement in health insurance will screw the typical American royally.

      1. Jane Twitmyer Avatar
        Jane Twitmyer

        It has been quite a few years since I paid attention. Stats now say … About 60% of population get insurance from employer … Government covers 1/3 of all people … 15% with Medicare, mostly elderly … plus VA and Tri Care … and Medicaid – state based with minimal federal guidelines … covers only people with children, so 5 million adults have no coverage. Now my functional medicine peeps have begun offering insurance that covers a variety of protocols and sounds a lot less bureaucratic.

        An article from Forbes from 2015 has some good information. “Rick Lindquist, president of Zane Benefits, which specializes in individual health insurance reimbursement for small businesses, says: Not only could it happen; it’s happening already”. A WSJ article from last year says the movement away from providing old line health insurance continues. “Cost Of Employer-Provided Health Insurance Rises Toward $19,000 a Year … and the share of firms that offer coverage continued to decline in 2017.”

        Lindquist and Paul Zane Pilzer’s book The End of Employer-Provided Health Insurance argue “Why It’s Good for You, Your Family and Your Company”. “They are promoting a ‘defined-contribution reimbursement’ system. In that model, employees are given a flat amount of cash from their employers — say $500 a month — told to buy a health care plan with it and that their firms will cover their medical costs.” The book says employers aren’t stopping offering insurance benefits …”They’re just changing they way they deliver them and replacing them with defined-contribution plans. It could save millions of dollars for employees and employers.”

        “A few years ago, some big companies [Verizon and AT&T] leaked documents saying they were evaluating dropping health insurance plans. Some big companies will drop their plans and that will have a snowball effect. We project that 90% of all businesses will drop offering health insurance plans in the next 10 years.”

        “Since the early 2000s, health care costs for businesses have been growing faster than any other employee cost. And they’ve shifted the cost to employees over the last 15 years with higher deductibles, higher co-pays and higher premiums.” The key to defined contribution is that the employees can have whatever they want when they shop on the individual market, and now they’re required to be an educated consumer.

        The authors say that in every situation, it makes employees equal or better off than before. The policies can cost 20 to 60% less, depending on your age and location — up to 80% less if you’re a low-wage worker and your income is less than 400% of the poverty line. And the choices are yours.

        1. TooManyTaxes Avatar

          Interesting information, Jane. It makes sense that smaller companies might try a defined contribution plan and larger ones will continue to look for ways to cut costs. But I don’t believe the conclusion that employees with good insurance will be held harmless or even be better off with other approaches. It doesn’t fit with my experiences.

          Larry is correct in his argument that eliminating employer provided health insurance will weaken employee ties to their employers. That will have positive and negative impacts. Some turnover is good for a business but the high cost for recruiting and training new employees may be greater than the cost of providing good fringe benefits.

  5. Jane Twitmyer Avatar
    Jane Twitmyer

    Please remove the unedited first post You clicked out before the edit was finished

  6. LarrytheG Avatar

    re: ” Yes, health insurance is regulated by the feds and the states. But it is not a government-provided benefit. ”

    Clearly if you read the law – it IS. What the Govt DOES provide is this:

    If an employer DOESoffer EP – the Govt MANDATES that insurance must cover everyone no matter pre-existing or health or age – something the govt does NOT mandate for other health insurance sold on the open market – and bought by those who need it and their employer does not provide it.

    Not only that – if the employer offers it – the Govt prohibits the insurance company from charging different premiums according to age or health, UNLIKE insurance sold on the open market which can and does. TMT – you can check your wifes insurance and verify this. She pays no more or less for insurance than everyone else who has self or family – no matter their age or their health status UNLIKE health insurance sold on the open market.

    Finally, not only is EP insurance not taxed Federal or State but not FICA either. And once again – if you buy health insurance yourself – you do not get to get a refund of Fed, State and FICA taxes.. check the tax code. The only folks who can do that are self-employed and all they can do is deduct the cost of the insurance – not get a refund on taxes paid on the money that bought it.

    Here’s the thing. We cannot have an honest discussion about the issue if people refuse to accept the actual facts at the start point and continue to “believe” what they wish to believe and claim it is an employer “benefit” and at the same time – oppose efforts to provide others who have to buy their own – with the same benefits, protections and tax subsidies.

    So we have people who get Employer-Provided – who then OPPOSE things like Obamacare which does provide a subsidy – roughly equivalent to what those with EP receive… and does protect the same way against pre-existing conditions.

    All of us – SHOULD want a level playing field for something as important as health insurance but when folks refuse to accept the facts and realities at the start – what can I say other than – please check the actual facts if you are going to hold an opinion.

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