The US health system is a mess

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By Leith van Onselen

The Australian’s Judith Sloan has written an interesting article today describing the sorry state of the US health system, which despite its massive cost, achieves relatively poor health outcomes:

Viewed from a distance, the US system of healthcare looks like a very expensive mess. Consuming 18 per cent of gross domestic product – the figure for Australia is closer to 9 per cent – there are examples in the US of the best and worst healthcare in the world…

At any one time, however, a reasonable proportion of the population (about 16 per cent) is not covered by any form of health insurance…

Without doubt, there are significant problems besetting healthcare and its funding in the US. The proportion of GDP devoted to health has risen strongly across time – it was 9 per cent in 1980 – without proportionate gains to life expectancy or other measures of morbidity. Health inflation continues substantially to outpace the rise of consumer prices. And while the uninsured may have access to emergency care, they are often deprived of useful primary care. Health costs are the most commonly cited reason for personal bankruptcy…

Sloan then goes on to attack Obamacare: President Obama’s attempt to implement universal health care by ensuring all individuals have health insurance (although the poor will be heavily subsidised), with the goal of lowering overall premiums via enhanced competition and improving health outcomes.

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Sloan believes that Obamacare will not achieve its desired result. Instead, the overall proportion of GDP devoted to healthcare in the US will continue to rise, meanwhile some members of the population will continue to have inadequate healthcare.

The inherent issue with all universal private healthcare systems (including Australia’s) is that they can only remain solvent if enough young and healthy people (the so-called “invincibles”) agree to sign-up. They are the ones who are likely to pay more into the system than they take out. And in the absence of risk-based pricing (absent from Obamacare and Australia’s private system), the only incentive for the invincibles to sign up is to avoid penalty (the medicare and the lifetime health cover surcharges in Australia’s case).

But as Peter Schiff pointed out last year, the penalties in the US are far too low to actually compel behaviour. Another issue is that the youngest and healthiest Americans are under 26 and are able to stay on their parents’ plans. Hence, this group will add nothing to the pool of premiums, but will continue to use services. Meanwhile, those individuals and families earning between 1.38 and 4 times the Federal poverty level will qualify for a subsidy, which covers almost the entire premium for those near the bottom of that spectrum.

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Ultimately, the incentives for the young and healthy to drop out, and for the sick, old and the heavily subsidised to opt in will mean that health premiums under Obamacare will likely continue to rise, rather than fall as promised. This problem is also compounded by the ageing of the US population, which will skew the health pool towards the elderly.

All of this doesn’t mean that Obamacare will be a total waste, however. A recent survey by Bloomberg ranking countries based on three criteria: life expectancy; relative per capita cost of health care (percentage of GDP per capita); and the absolute per capita cost of health care, showed the US to have one of the most expensive and worst systems in the world (see below table):

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It’s hard to imagine the system getting any worse, and Obamacare could at least provide modest improvements, particularly for the most disadvantaged segments of the community.

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The situation in the US also shows just how difficult it is to fix a system that is so inherently flawed and beset by vested interests and powerful lobby groups. Like Australia’s housing market, it’s better to not let the situation grow out of control in the first instance.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.