Healthcare Profits, Not Benefits, Are the Problem


To understand the profound shift in American politics over the last 40 years, it is useful to understand some practical facts: For half a century after 1935, when the Social Security Act was passed over intense Republican opposition, the political “third rail” was Social Security and, eventually, its attendant programs such as Medicare. Since that time – dating, that is, from the Reagan administration – the social safety net for the neediest Americans has been shredded by “reforms,” and the third rail has become raising taxes, especially to patch the net.

While federal spending on social programs has increased dramatically, the assistance to those at the bottom, particularly young, single mothers, has pretty much bottomed out since the Clinton-era changes that “ended welfare as we knew it.” The saving to the taxpayer has been considerable, and there was, at least temporarily, an increase in employment, but lifting people out of poverty just didn’t happen.

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People who call themselves conservative love this disastrous turn of events. Liberals haven’t learned to accept it. Liberals are upset at the destruction of the welfare state, and conservatives are unhappy that the job is incomplete.

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Chart based on CBO data via The Center on Budget and Policy Priorities
Chart based on CBO data
via The Center on Budget and Policy Priorities

According to the Congressional Budget Office, the growth in the federal deficit over the last decade or so, before it took a plunge under President Obama, was caused chiefly by military spending and the Bush-era tax cuts that mostly benefited wealthy Americans. Still, while liberals don’t like to talk about it, the biggest part of the federal budget, and the fastest-growing part as well, is what we call entitlements – payments from the government that people have earned and are, therefore, entitled to. While conservatives don’t like to admit it, what they mean by “entitlement reform” is screwing people who receive these benefits. They’re always going to “save” the programs by decimating or destroying them. It’s been a heavy lift to turn this effort from political poison into a winning formula.

So: what if we just turned the whole thing around and, rather than looking at how to pay all these exorbitant costs, examined instead how to hold the costs down? It is, after all, the ridiculous and rising cost of medical treatment that drives the problem. About 22 per cent of the federal budget, or $772 billion, went to Medicare, Medicaid, and the Children’s Health Insurance Program, or CHIP, in 2013. This, of course, leaves out military and veterans’ health-care spending. In all, the government spent about $1 trillion on health care, and a quarter that amount in tax breaks for health-care interests.

To give President Obama credit, he recognizes this set of facts, and his Patient Protection and Affordable Care Act is making a few, modest inroads. In fact, last year was the first in many during which the cost of America’s health care actually dropped as a proportion of the overall economy. Analysts are grudging about admitting that Obamacare had anything to do with that, but it certainly didn’t hurt.

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Still, we’re at about 17 per cent of GDP in healthcare spending. That is dangerous, by most economic reckoning, and it hurts consumers and taxpayers – and it is an important fact that these two groups are pretty much the same people.

So: what drives healthcare cost increases at a rate nearing 4 per cent per year? Physicians, who admittedly are often paid obscene amounts of money, are not chiefly to blame. Most analysts say it’s proliferating technology and administrative costs.

Whoa, there. Aren’t we missing something? It’s profits – profits defined loosely, so that the word includes the profits made by nonprofits, which for accounting and tax purposes they call surpluses. It’s not that people have missed this point before; it’s that they usually fail to combine the two, and accuse people of “conflating” them – now a pejorative term for combining things that shouldn’t be – when they do. Really: when the difference between profits and surpluses is academic, purely for reasons of tax avoidance, these things should be conflated. Shouldn’t they?

Healthcare CEO Compensation
Health Insurance Company CEO Compensation / via
(Click to enlarge.)

Frankly, it is impossible to calculate what the profit motive costs Americans in the healthcare system. All those fast-rising “administrative costs” in the hospitals and insurance companies are not profits. They are, however, there to insure that those companies and institutions wring the last nickel of profit out of the consumer/taxpayer. Same with the for-profit insurance business, which point out, accurately, that their profit margin is not high, at about 3 per cent. But their advertising costs and their administrative costs, all aimed at making a profit, are high, indeed. By the way, they pay their executives a bit more than anybody in a government job.

What is clear, however, is that profits cost consumers a very great deal, and that a system run for the purpose of profit cannot be asked to deliver the same quality of service to a nonpaying customer as to a cash customer or a well-insured one.

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So here’s the conclusion: if we wish to regard health care as a right, then we cannot leave it to the vagaries of the market, any more than we can do that with education or national defense. If we want costs to come down, even to the average of healthcare spending in the developed world, we’ll have to cut them by more than half. That means a good many things, probably, but it certainly means we have to take profit out of the system. When 17 cents of ever American dollar goes for health care, and we’re only average in most outcomes, were not getting our money’s worth.

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Is this an argument, then, for nationalizing – socializing, if you will – the nation’s healthcare system? It certainly is.

Will that happen? Not until taxpayers realize they are also consumers, and that a bit more in taxes can save a lot more in insurance premiums, co-payments and bankrupting debt. This is not a matter of political ideology, except to extremists. It’s just a matter of choosing to be smart or be dumb with money.

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