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Why Reform Health Care

How Health Care Reform Affects the Economy

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Why Reform Health Care

Health care reform was needed to allow millions to afford preventative care.

Photo: Joe Raedle / Getty Images

The U.S. health care system contributes $2.5 trillion, or nearly 18%, to GDP, the highest percentage in the developed world. It is also twice as much per person as any other developed country. Why is it so high? First, most of the cost comes from the first 10 days and last 10 days of life. A lot of progress has been made on medical procedures that can save premature babies and extend the life of seriously ill elders. However, those innovative procedures are very expensive.

Another reason is the rise of malpractice lawsuits. As a result, doctors are more likely to overtest, ordering $1,000 MRIs and $1,500 colonoscopies, (even if they don't really think they're needed) rather than risk getting sued because they didn't.

A third reason for high health care costs is that there is less price competition than in other industries, such as consumer electronics. That's because most people don't pay cash for health care. The costs are hidden, because they only pay a set fee (co-pay) and the insurance company pays the rest. As a result, patients often don't price-shop for doctors, lab tests or procedures as they would for computers.

For example, the average emergency room visit was $1,265. If you got cancer, the average cost of chemotherapy was $7,000, but could run as high as $30,000. These costs could wipe out your savings or cause you to lose your home. Even worse, many people would have to forgo treatment because they simply couldn't afford it.

A Quick Review of Health Care Insurance

Because health care can be so expensive, most people would rather have insurance to make sure they can pay for a potentially life-saving procedure. That's why most discussions about health care reform are really about making health care insurance available to more people. Insurance operates by demanding a monthly fee in exchange for a guarantee the insurer will pay out if a catastrophe occurs.

Group health insurance companies are profitable when more money is received in premiums than is paid out in claims. Most people in the U.S. receive group health insurance from their employer, who also pays part of the premium. That's because companies can offer health insurance as an untaxed benefit. In a way, Federal tax policies subsidize the employer-provided group insurance system. Those who don't have an employer-sponsored plan must purchase individual health insurance, which is expensive and traditionally could deny you coverage if you had a pre-existing disease or condition. You could affiliate yourself with a group, such as AARP or COSTCO, which have lower rates because they have a pool of relatively healthy people.

The Federal government also subsidizes health care for those over 65 (Medicare) or below a certain income level (Medicaid). Part of Medicare, the Part A Hospital Insurance program, pays for itself from payroll taxes. Medicare Part B (the Supplementary Medical Insurance program) and Part D (Prescription Drug program) are only partially covered by premium payments. In total, Medicare payroll taxes and premiums cover only 57% of current benefits. The remaining 43% is financed from general revenues. Medicaid is jointly funded by Federal and State general revenues, therefore adding to both Federal and State costs.

Why Reform Health Care?

Health care reform is needed for four reasons. First, health care costs are skyrocketing. In 2011, the average cost for family of four increased 7.3%, to $19,393. That's nearly double the cost just nine years ago. By 2030, payroll taxes will only cover 38% of Medicare costs. The rest will contribute to the Federal budget deficit.

Second, health care reform is needed to improve the quality of care, which is the worst in the developed world. Chronic diseases cause 70% of all U.S. deaths, and affect 45% of all Americans. As the the population ages, the incidence of these diseases will grow rapidly. By 2023, cancer and diabetes will increase 50%, heart disease will rise 40%, hypertension and lung disease will be up by 30% and strokes will occur 25% more often. Each year, the cost of treatment totals $1.7 trillion, representing 75% of all healthcare dollars spent. This cost can be lowered through disease prevention and wellness programs.(Source: Partnership to Fight Chronic Disease)

Third, health care reform is needed because 25% of Americans have little or no health insurance to cover their costs. Over 101,000 Americans die each year simply because they didn't have insurance. Not only is this bad for them, it's also bad for the economy. For example, half of all bankruptcies result from medical costs.

Fourth, health care reform is needed to stem the economic costs of health care fraud. Between 3-10% ($60-$200 billion) is lost to fraud each year. If those same percentages are applied to the $436 billion Medicare program, the cost of Medicare fraud is $14-$30 billion.

Obama and Health Care Reform

Even before becoming President, Barack Obama campaigned to reform health care and make insurance more readily available to those who couldn't get employer-sponsored insurance. His "public option" sought to expand a Medicare-like program to anyone who needed it. This would lower the government's cost by including younger, healthier people who paid a modest premium. However, concerns about "socialized medicine" revised the final plan to a state-run health insurance exchange. Furthermore, the final act precludes illegal immigrants from getting government funds to pay for health care insurance. However, it doesn't require people to prove citizenship before getting health care services and doesn't provide for enforcement.

In 2010, the Patient Protection and Affordable Care Act became law, and starting phasing in new health care benefits and costs that year. It began extending coverage to those with pre-existing conditions, children, and those who were laid off. It gave subsidies to small businesses, seniors with high prescription drug costs, and funding to ease the shortage of doctors and nurses. The costs will be offset with higher payroll taxes, higher fees to prescription drug companies, and lower payments to hospitals. For more detail, see How Health Care Reform Affects the Budget.

Impact of Health Care Reform on the Economy

As early as 2011, it appeared the Affordable Care Act was working. As of May, more than 600,000 new young people became insured, taking advantage of the Act's provision that children up to age 26 could be covered by their parents' insurance. This increases profits for the insurance companies, which should translate to lower premiums, since the new insurees pay into the system but require fewer health services. In fact, health insurance companies reported record profits for the first quarter of 2011.

Second, 46% more small businesses than in 2010 offered health care benefits, according to a Kaiser survey. More insured small business employees fewer bankruptcies, better credit scores and higher consumer demand. This allows them to spend more, boosting economic growth. In fact, there were fewer bankruptcies in August 2011 than the prior year.

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