Unlocked Repost: Curing U.S. Health Care, Part I

America doesn’t have to be like this

Content on this Substack is free 6 days a week; the Sunday primers, which are an immense amount of work, are the only exceptions. But I will make some primers free with a lag, starting with the first installment of my health care series.

In 2008, much to their own surprise, leading Democrats unified around a program of major health care reform. Policy wonks had spent years developing the concepts behind what eventually became Obamacare; big Democratic victories in the 2006 midterms and the prospect of controlling both Congress and the presidency made it possible to imagine turning those ideas into reality. During the Democratic primary, Hillary Clinton and Barack Obama advocated similar plans, based on those ideas, for expanding insurance coverage.

And it happened! The Affordable Care Act was enacted in 2010. When it was fully implemented in 2014, millions of Americans got health insurance:

Impressive as the raw numbers are, they don’t tell the whole story. Before the ACA, even upper-middle-class Americans often found it impossible to get health insurance if they had pre-existing medical conditions. Many Americans were trapped in jobs they wanted to leave but couldn’t for fear of losing their employment-based coverage. Meanwhile, dire predictions from the usual suspects about runaway costs proved wrong. In fact, overall U.S. medical spending has grown much more slowly since the ACA was enacted than before.

But the U.S., alone among advanced nations, still falls far short of providing universal health care. As you can see from the chart above, 8 percent of the population was still uninsured in 2024, a number that is set to rise over the next two years as a result of Republican policies. True, many of the uninsured in 2024 were undocumented immigrants, who we don’t try to cover. But there are still a lot of uninsured. Moreover, a significant number of Americans who have health insurance are in fact underinsured. As a result, they are at risk of incurring devastating healthcare costs and are sometimes forced to forgo needed care. This number is set to rise sharply in the next two years as a result of Republican policies adopted under Donald Trump.

And not only is the U.S. unique among advanced countries in its under-provision of health care coverage, it also incurs by far the world’s highest healthcare costs per capita.

So now may well be a good time to get behind a new push for major health reform — an effort, if you like, to finish the job begun under Obama.

Today’s primer is devoted to the economics of health reform. During his failed effort to repeal the Affordable Care Act, Donald Trump famously complained, “Nobody knew healthcare could be so complicated.” Actually, we did know — and it’s not that complicated. Health economists understand the principles very well. And because health policy varies greatly among advanced nations, we know a lot about what works and what doesn’t.

This will be the first in a series about health reform. Beyond the paywall I’ll address the following:

1. Why markets can’t be trusted to deliver healthcare

2. Routes to universal healthcare

3. What works?

In a follow-up post I’ll discuss the pros and cons of different approaches, and possible paths forward for the United States.

Why markets can’t be trusted to deliver healthcare

No modern nation leaves the delivery of healthcare up to free markets. Granted, the U.S. healthcare system is more privatized than that of any other high-income nation. Yet even in America, government accounts for 48 percent of healthcare spending, while private insurers — who paid only a third of the bills — are both heavily regulated and extensively subsidized.

Why don’t we leave healthcare up to the market? Because while markets can be extremely effective at organizing economic activity, they are effective only under certain conditions. A classic 1963 analysis by Kenneth Arrow, a future Nobel laureate, showed that healthcare meets none of those conditions. Arrow pointed out that, unlike markets for regular goods and services, the delivery of healthcare is beset by problems of risk and “asymmetric” information, in which some players know more than others — which can be a market-killer.

Crucially, in any given year most health outlays are spent on a relatively small number of people — people who have serious conditions that require expensive treatment. No one knows in advance whether they will be one of those high-cost people. And only the very wealthy can afford to pay for expensive healthcare out of pocket.

As a result, modern medicine is available to the vast majority of Americans only thanks to health insurance. But private health insurance — that is, health insurance provided by for-profit insurance companies — is riddled with problems.

First, private insurers face the constant risk that those who choose to buy insurance are more likely to need expensive care than those who forgo buying insurance. To offset that risk, private insurers must do one of two things. They can charge very high premiums. But this drives away healthier people and makes the pool of those who want to buy insurance even worse — the so-called “death spiral.” Alternatively, private insurers can deny coverage to anyone with pre-existing conditions – in other words, deny coverage to those who need healthcare the most.

Furthermore, private insurers have every incentive to avoid paying for care whenever they can, notably by rejecting payment for treatment they claim is unnecessary. One could say, like Tessio in The Godfather, that this is “only business” — after all, a private company serves the interests of its shareholders. But the cold logic of profit maximization strikes harder when it involves matters of life or death. Thus Luigi Mangione, who is accused of killing the CEO of United Healthcare because of his grievances over denied claims, has become something of a folk hero.

Finally, we are a country in which it is widely believed that the types of people that private insurers don’t want to cover — the elderly, people with pre-existing conditions, and the like — should have access to healthcare. After all, they didn’t choose to get sick or grow old. Many people, even if they have relatively conservative views about economic policy, feel that basic healthcare should be available to all a nation’s citizens. Here’s what polling from Pew shows:

Is it the federal government’s responsibility to make sure all Americans have health care coverage (%)?

Source

Note that even 41 percent of Republicans say yes.

There is, then, powerful logic — economic, emotional, and political — that militates against leaving healthcare up to the vagaries of the marketplace. And consistent with that view, the U.S. federal government plays a huge role in paying for healthcare through Medicare (healthcare coverage for those 65 and over) and Medicaid (healthcare coverage for low-income Americans). It also shapes how the private healthcare insurance market operates.

But unlike other advanced countries, we do not have universal guaranteed healthcare. Too many Americans are still uninsured or under-insured, and the numbers are growing. Why?

In the never-ending debates over healthcare policy in the United States, Republicans continue to argue that universal coverage is unworkable or unaffordable. Which is flatly contradicted by the facts: all other advanced countries provide it. Furthermore, there are three well-established ways to achieve universal coverage.

Routes to delivering universal healthcare

When setting up a healthcare system, a country faces two big choices.

First, who pays? Most healthcare must be paid for by insurance. Will the insurance be provided by a government insurance program like Medicare that is funded through taxation or by private insurers that charge premiums?

Second, who delivers the care? Will it be a system of public provision, in which the government runs the hospitals and clinics, with doctors and nurses as public employees? Or will it be a system of private provision, in which private hospitals and clinics deliver the care?

I have categorized these choices with a matrix that contains some international examples of each system. An asterisk indicates that the system isn’t a pure example; in practice national healthcare systems are often hybrids, with a mix of public and private roles:

Source: Commonwealth Fund

The lower left box is empty because there are no real world examples of countries in which private insurers fund government-run hospitals. There are, however, many examples of the three viable systems (see the Commonwealth Fund’s survey for a wider sample). Notably, within the United States there are examples of all three of the viable systems. Let’s look at each one of these in slightly more detail.

Public funding, public providers: There is a long tradition in the United States of decrying “socialized medicine.” But in reality there are numerous examples of the government directly providing of a service to its citizens. Consider primary and secondary education: 90 percent of U.S. children attend free public schools, and most of the rest go to religious schools. Why is healthcare that different? If people want to have healthcare, why not just give them healthcare?

The most famous example of a system in which the government both pays for and delivers healthcare is Britain’s National Health Service, which directly operates most hospitals and many clinics. Sweden and New Zealand have broadly similar systems. The U.S. Veterans Administration is yet another example: it operates its own hospitals and clinics while serving more than 9 million people — comparable to the population of Sweden and larger than that of New Zealand.

Public funding, private providers: A system of public funding of healthcare is often called a “single payer” system by policymakers. And that “single payer” is the government, which pays for healthcare from tax revenues.

People sometimes confuse “single-payer” systems with government-run healthcare systems like the British NHS. Under single payer, however, the government pays the bills but doesn’t operate the hospitals or directly pay the doctors and nurses. Care is provided by private hospitals and clinics, which are sometimes nonprofit, sometimes for-profit.

Most Americans are familiar with single-payer healthcare, whether they realize this or not. (According to surveys, many Medicare recipients don’t believe that they receive any government benefits.) The U.S. actually has two single-payer systems. Medicare covers most medical expenses for every citizen 65 or older. Medicaid is a “means-tested” program that in most states covers Americans whose incomes are less than 133 percent of the poverty line.

These are large programs. Combined, they cover 128 million Americans, more than a third of the population, while paying a significantly larger share of total U.S. health expenses (43 percent) than private insurers (33 percent). However, not everyone is eligible, and the majority of Americans with insurance are covered by private insurers.

Other countries have universal single-payer systems (with, as always, complicating details.) Canada and Australia both have single-payer systems (named Medicare in both countries). Taiwan is an interesting case to contrast with the United States. Its system was created in 2005, when U.S. progressives were formulating Obamacare. America created a complex system that basically added onto its existing government and private market institutions. But Taiwan, which was effectively able to start from scratch, followed the advice of healthcare experts and implemented a straightforward single-payer system.

Private funding, private providers: Private health insurance works badly without government intervention. It is, however, possible to achieve universal coverage via private insurers with a combination of regulation and subsidies.

The classic approach involves a “three-legged stool” of government policies:

· Insurers are required to accept all applicants, and prohibited from charging higher premiums to individuals based on their medical history

· Individual purchase of health insurance is mandatory

· The government provides subsidizes the premiums of lower-income households

The first requirement prevents private insurers from discriminating against the elderly and those with pre-existing conditions. The second requirement prevents healthier individuals from refusing to buy insurance and thereby causing a “death spiral”. And the third requirement makes healthcare coverage affordable for all.

The Netherlands introduced a system along these lines in 2006, replacing its previous patchwork of public and private insurance. Germany and Switzerland have conceptually similar systems. And the three-legged stool was at the core of the ideas behind Obamacare, although one leg — mandatory purchase of insurance — was sawed off in 2019, during Trump I.

What works?

Healthcare policy is an area in which advocates of reform don’t need to speculate about the feasibility of their plans, because all major routes to universal coverage have already been tried in multiple countries. So of the three alternative routes to universal coverage — “socialized medicine,” single-payer, and regulated/subsidized private insurance — which works? That is, which can deliver health care for all at acceptable cost?

All of them.

Britain’s NHS, long the exemplar of direct government provision of healthcare, is currently in a crisis brought on by bad management and years of underinvestment. But it performed very well for many years. And our own Veterans Administration, a once-despised agency that experienced a rebirth after it was reformed in the 1990s, continues to deliver a high standard of care.

The Commonwealth Fund ranks Australia’s single-payer system highest among the ten nations it studied. Canada is less highly rated, but Canadians are nonetheless much more satisfied with their system than we are with our far more expensive healthcare.

Yet relying on private insurance can also be successful. The Dutch system rivals Australia’s success on the Commonwealth Fund’s metrics.

Furthermore, all three approaches deliver universal coverage while costing much less per person than the U.S. system.

So we know that we can do much better. Not only is the path to a better healthcare system well trodden, three different paths are well trodden,

But can we go down one of those paths? The next post in this series will look at what makes universal health coverage work, and the possibilities for U.S. reform.