Why do we need healthcare reform? (10/2013)

Russell Baruffi Jr.
13 min readDec 31, 2020


(republishing this here so I can take down my old Wordpress site)

My Dad played for me a radio clip the other day of a right-wing radio host interviewing a surgeon who claimed to have attended a closed-door meeting at the US Department of Health and Human Services, in which it was officially decided that Obamacare would no longer treat aneurisms for patients over the age of 70. “Are you hearing this? Is this true?” The short answer is that, since Obamacare itself is not an insurance plan, but a law and set of policies to get more people into existing insurance programs, this is not true. My Dad then asked, well, if Obamacare is not a health insurance plan, what does it do? I am starting to learn that while many level-headed people are inclined to stay quiet and wait for the smart people to do the talking, it turns out that all the crazy people keep making more noise, and the more people like my Dad hear the noise, the more they start believing it or feeling confused. So although this has been explained more than adequately by many competent sources, I am adding my voice to the mix.

Last week, Jimmy Kimmel found a dozen people who strongly asserted that they liked the Affordable Care Act better than Obamacare, because Obamacare was “socialism”. Well the Affordable Care Act is “Obamacare” (I won’t continue using “scare quotes” here because they are downright annoying to read, but this is not the real name and was originally intended to be pejorative), and it is markedly different from health insurance systems that are considered “socialized medicine”, let alone full-blown “socialism”. When I relayed that story to my mom this morning, she said, “Well I don’t want to wait in long lines for my healthcare or have the government tell me whether I deserve treatment” but she didn’t know why she thought that she would. So I want to clear some things up for my parents and break this down.

I think people are confused because a lot of the dialogue is so black and white: Obamacare is hyperbolically described as either a great salvation or a socialist apocalypse. While good-guy-bad-guy stories sell more TV ads and movie tickets and can get out the vote, they are never very accurate portrayals of a complex reality, so I want to take a different tack. I don’t want to body-slam the law or put it on a pedestal — I want to be logical, level-headed, specific, and solutions-oriented. So before we evaluate Obamacare, let’s consider the landscape of the healthcare challenge overall. This is coming in two parts: Part 1: What is wrong or not so wrong with the US health insurance system (empirical facts, inferences, ethics) and, coming in a few days, Part 2: What Obamacare does and does not do and the alternatives (solutions).

EMPIRICAL DATA. First, let’s start with the observable, measurable facts that everyone pretty much agrees on. In 2011, just over half of the 307 million people in the US got health insurance coverage through a private insurance policy, the vast majority through their employer. About 30% were covered through a public insurance policy, the majority of which was Medicare (for people over 65 years old) and the remainder of which is primarily Medicaid (for the poor). About 16%, or 48.6 million individuals, were uninsured. I created this graph from Kaiser Family Foundation data:

From this, it’s easy to see that America’s health care system is highly reliant on employer-based healthcare for those that have care, and almost half the population either has government supported care or none at all. The next thing to think about is the cost and benefits of the health care coverage system, which are also well established and agreed upon.

Price. Healthcare costs, and health insurance prices are relatively high and keep going up. So much so that the US spends more per person on healthcare than any other country, and has one of the highest real growth rates in health care spending in the world. The share of the economy that the US spent on healthcare went from 9% of GDP in 1980 to 17.4% in 2009, one of the largest increases among all developed countries (the OECD).

This high rate of increase showed no sign of slowing down (until just this year — the causes to be considered in Part 2), and the fact that its outpacing comparable countries, suggests something might be wrong. There is no debate about this, and the political parties generally agree that rising health costs are a problem, because if you spend more money on that, you spend less on putting your kid through college or paying for your mortgage. The graph below shows that by 2008, we were pissing away twice as much money per capita on healthcare as France

Well fine, we are spending a lot, but health is expensive and perhaps we are investing more into making people healthy, and that is a good thing, right? Maybe our high health spending means we are are kicking France’s ass in health. That is not what is happening though.

Value. On some metrics, the US is excelling and on others it is behind relative to its peers.

  • The US leads the world in several respects. Health research and cancer treatment — particularly for breast cancer and colorectal cancer — are the best in the world, and for insured patients, we have a short average wait time to get an appointment. Our network of high quality universities as well as the speed with which the FDA can approve new drugs make the US capable of rolling out cutting edge drugs and treatments much faster than its peers and capable of training the best health practitioners in the world. We also have outstanding acute care, demonstrated by low in-hospital case fatality on certain emergency metrics.
  • American health overall is decent but definitely not the best compared to our peers. American life expectancy is 1 year shorter than the 80-year OECD average, despite being 1.5 years above average in 1960. Our infant mortality rate of 5.9 ranks us between Croatia and Hungary, worse than almost all of the developed world. On some metrics, the US has fallen behind where it once boasted excellence — we have less practicing physicians and hospital beds per capita than developed peers, and we are super fat: 35.9% of adults are obese, more than TWICE the OECD average.
  • Inadequate Primary Care. For many Americans, primary care is not doing a good job of keeping them healthy, leading to expensive emergency treatments later. We know this because our hospital admission rates for problems that should generally just be dealt with by a primary care physician (asthma and chronic obstructive pulmonary disease) are also TWICE the OECD average.
  • A lot of Americans can’t cover their medical expenses. 48.6 million Americans are totally uninsured, and research estimates that 25 million Americans do not have sufficient insurance to cover their medical needs (many medical bankruptcies come from people who are insured). When these people get sick, they often skip care or go to the ER, and don’t get the proper care that they need, or they get the care and then go bankrupt. In one survey, 37% of American adults skipped medications or a doctor’s visit because they could not afford it in the past year — that is a lot more than the sample sets of any other country surveyed — only 8% of people in the UK skipped care. Prior to the 2009 Patient’s Bill of Rights (part of Obamacare), those most in need of healthcare attention sometimes could not get insurance they could afford on account of pre-existing conditions, or hit lifetime maximums that left them without coverage.

From these basic facts, it’s easy to see that America’s health care system, when compared to other developed countries, is expensive, has mixed quality results, and leaves a lot of people exposed to health and financial risk. These items should not be controversial. If you are like me, you bristle at the fact that we spend so much more than everyone else and and are not the best.

INFERENCES. Moving away from basic facts and getting into some inferences and causal relationships that are harder to establish with complete certainty, here are a few trends and dynamics that have been observed generally about the system:

The challenge of finding healthcare inhibits American competitiveness. It can be tough to find affordable healthcare outside of your existing job, and that keeps people from starting new businesses and taking professional risks. Economists have long considered America’s fluid private labor market as key to our broader economic success, something that sets American private industry apart from the Federal bureaucracy, or businesses in France and Germany, where it is expensive and difficult fire unproductive employees. “Job lock” — when workers stay in a job that they don’t want to be in — is bad for our economy as a whole, because it keeps people in jobs where they are less productive, and keeps people from taking risks and starting new businesses. However, the difficulty of finding affordable care outside of the employer-based system does exactly that — it keeps people locked in jobs where they are less economically productive, and it keeps people from starting businesses. Though we fancy ourselves a nation of entrepreneurs, we are not exceptionally entrepreneurial compared to countries with universal coverage. By one measure (employer enterprise birth rate 2007–2009), our start-up rate is the second lowest in the OECD. Other data suggests we are about average in terms of entrepreneurship rate, but are increasingly outpaced by our competitors in this realm. How much this job lock and inhibited entrepreneurship is caused by our health insurance policies is unclear, but we do know that Americans with an alternative source of health insurance, such as a spouse’s coverage, are much more likely to be self-employed. This suggests that the lack of easy, affordable coverage options inhibits entrepreneurship.

High numbers of uninsured people raise costs for everyone else. When the uninsured and underinsured get sick, they cause problems that affect the overall system, like over-reliance on emergent care facilities — both because conditions are not treated preventatively first and because the uninsured have few other outlets so they clog up emergency rooms that should be dealing with actual emergencies. They also experience high rates of bankruptcy resulting from unpaid medical bills. Unpaid healthcare bills are the #1 cause for US bankruptcies in 2007, leading to loan defaults that have rippling economic consequences such as higher borrowing costs. Further, bankrupt families have their credit ruined at the same time they are financially stripped and sick, often leaving them stuck in cycles of poverty, which keep them being healthy self-supporting citizens. The uninsured also get less preventative care or services for major health conditions and chronic disease, exacerbating health problems that could be addressed sooner for cheaper, delaying but ultimately increasing those costs. These factors contribute to the high price of healthcare. Also, they die. An estimated 26,100 premature deaths occurred in 2010 due to inadequate coverage — that is years of public education and health investment gone to waste. The last way that uninsured people cause high costs for insured people is through what economists call adverse selection. It works like this: with any insurance, the insurance company has to pay claims to low cost customers and high cost customers, sets rates somewhere between the two to make a profit. You can pay car insurance for years without a single accident and your premiums largely go to pay for the damage for accidents that other people in your insurance group experienced. By not getting into accidents, you bring the average cost down. Health insurance works the same way.

Consider a super simple world that consists of only one private $1000/year health insurance plan, young healthy people, and old sick people. For example, Becky is young and healthy and Becky’s Grandmom is old and sick. Both are looking at the health insurance policy. Becky expects to spend $1000 or so on healthcare this year anyway, so she is indifferent and opts in. Grandmom knows she might break a hip for $100,000, so she opts in. In this super simple world, Becky and Grandmom both consider a $1000 plan a good deal and sign up. Becky effectively subsidizes Grandmom’s hip replacements, while also guarding herself against an expensive ACL tear.

Here’s the rub: when health costs continue to drive up each year, the insurance company has to raises rates. When the insurnace costs $3000, Becky looks at her estimated health expenses and decides she should just opt out. Grandmom stays in. As more Beckys leave, the risk pool becomes weighted towards more and more Grandmoms: premiums must themselves rise to keep up with the changing risk pool. Since they can do better without coverage, the healthy people flee the group while the less healthy stay. Higher costs > Higher premiums > Lower cost people drop out > Higher costs > Higher premiums > More people drop > Higher costs > Higher premiums > and on and on. The cycle continues until no one, not even the sickest, can afford the policy. While this is a super simple model, the reality follows this pattern and it drives costs up. If you have started noodling on how to fix this thorny problem, you may have already come to the conclusion that covering everyone is one potential solution to having the healthy contributors opt out. Seen from this perspective, universal coverage is not just about values or fairness, but an economic imperative for keeping costs down.

Healthcare does not follow market economy rules, so across-the-board “keep the government out” arguments are flawed. Market economies are the bedrock of capitalism, and are a remarkably efficient and effective way of allocating scarce resources through price signals. But markets only work in certain scenarios, and many the foundational “rules” that are required for market economies to function do not apply in healthcare: cost competition, price signals, consumer mobility and information access are each hampered to some degree in healthcare. Unlike functional markets, there are few incentives for providers to reduce costs (and in many cases there are perverse incentives for providers to over-prescribe procedures and medications). Unlike functional markets, there is almost no price-signaling to consumers — if you have ever had non-elective surgery or an MRI, you know it is almost impossible to find out how much the procedure will cost you before you have it done. Unlike functional markets, there are high “sticking” costs preventing us from changing suppliers (i.e. practitioners and hospitals), and because health can be life or death, our alternative to not getting that MRI or that lump removed can be death. Lastly, the marketplace for healthcare plans is also very difficult for consumers to navigate because the complexity of each plan’s coverage details makes comparison difficult, and also because until very recently, suppliers have had the right to screen out applicants by health risk through pre-existing conditions. This reduces consumer power and information access. Market failure is the justification for government intervention in many contexts: shared fire and police forces (excludability) and pollution controls (no externalities) and regulation of public utility monopolies (market power) because, when basic rules of the free market are not in place, the resulting market failure is inefficient or even value-destroying. For this reason, “keep the government out” arguments are harder to justify from an economist’s vantage point.

We end up treating people — it is just a matter of when, how effectively, and who pays. The Emergency Medical Treatment and Active Labor Act of 1986 requires emergency rooms to admit and treat people’s acute conditions, regardless of their ability to pay. This activity has a cost that is borne by those that can pay, but some argue that society should not bear these costs and we should let those people die. What happens when an uninsured diabetic shows up at the ER for removal of her gangrenous foot on account of her untreated diabetes? Do we 1) allow the gangrene to creep up her leg and kill her in her home or the street if that is where she lives, or do we 2) remove her foot, at a cost that is greater than the cost of diabetes treatment in the mid-stage, and exponentially greater than preventative primary care at the earliest stage? We dislike the cost implications of option 2, but the implications of living in a society where option 1 is the norm is that people will literally die on the streets without insurance, and that is a profound departure from many of our expectations and certain ethical principles we hold dear. If we do not want to live in a society that allows the destitute to die in the streets, the question does becomes 1) what kind of help we give the diabetic, and 2) how and 3) when in the process we give it.

ETHICS. Even though values are really a part of everything, I separate this out from inferences, because it is not a logical conversation about what is, but a normative conversation about what should be. Many argue that in addition to the systemic problems that raise costs for everyone, it is just basically unfair to leave fellow Americans vulnerable to the devastating health and economic risks that a major medical problems can bring. This argument sees healthcare as a basic right. Every economically developed nation’s public policy towards health insurance is in sync with this sentiment, but that does not necessarily mean that its what is right for the US. Likewise, some argue that its unethical for the government to take resources from one group of citizens to support another, so funding care for those who cannot afford it has its ethical challengers as well.

SOLUTIONS. How do we stop the spiraling problem of increasing prices and more uninsured citizens? How to we create a system that is more cost-effective and functions like a market economy? How do we get people preventative care and stop the uninsured from driving costs up through emergent care? How do we do all of this while hewing to the ethical principles that underpin our society and make us proud to be American? Is no action maybe the best policy here? Noodle on it. Please send me your ideas and feedback and personal experiences to work into my NEXT POST, where I’ll consider Obamacare, and its proposed alternatives.





Russell Baruffi Jr.

electric power, business, environmental economics, climate policy