Government Health Care Inc : The Chart Which Explains The Whole Medical Mess

Our crony-capitalist driven health care system is devouring the American economy, and the data which proves that baleful trend  could not be more dispositive. In 1960, national health expenditures amounted to $150 per capita and hardly 5% of GDP. By the year 2000, these figures had grown to $5,000 per capita and 13.8% of GDP. Today health care devours nearly $9,000 per capita and more than 18% of GDP.

Needless to say, America did not turn into a giant sick bay during the last 55 years. Instead, the health care delivery system was virtually stripped of any semblance of market prices, consumer choice and economic discipline and efficiency. As a practical matter, out-of-pocket payments for health care---unlike almost all other consumption goods----virtually disappeared from the system.

As a consequence, health care has been essentially transformed into a free good at the point of use. In turn, this has spawned massive over-utilization, gross inefficiency and economic rent extraction by the cartels which dominate the system-----hospital chains, insurance companies, HMOs, Big Pharma, medical equipment and prosthetic vendors, etc.

The chart below explains how this breakdown happened. In a word, the massive expansion of government financed health care after 1965 in the form of Medicaid, Medicare and related programs induced a huge expansion of price-insensitive demand that drove medical prices skyward. In response, both government recipients and employer plan beneficiaries demanded to be shielded from rampant medical cost inflation via more comprehensive coverages and a relentless reduction of out-of-pocket costs for deductibles and co-pays at the point of service.

In the chart below, it is the blue line which is the culprit. Over the last half-century, out-of-pocket spending for health care has dropped from 50% of total outlays to barely 10% today. Stated differently, relative to average health spending of $9,000 per capita only $900 annually comes directly out of an average consumer's wallet or bank account. As for the rest, its all a big average cost pool---an outing to a giant restaurant where all the patrons split the bill evenly at the end of the evening, regardless of who ordered the champagne and truffles.

There is a huge irony in this. America is allegedly the greatest assemblage of shoppers on the planet, and the rise of low-cost shopping meccas like Wal-Mart, its kindred big-box and specialty retailers, and now Amazon, is striking evidence of this societal competence in consumer choice. But with this tremendous resource for efficiency and cost-containment largely banished from the health care system, we end up with an uneven battle between the cost containment regulations issued by bureaucrats and third-party payors and the plunder of the cartels which dominate the delivery machinery.

The destruction of consumer choice and the shopping prowess of Americans in the health care delivery system was made in Washington----not because people are not competent enough to choose among doctors, treatments, and vendors. Specifically, it started with the IRS' WWII determination that employer health plans were not taxable income---a fraught policy decision that inherently created a bias towards tax-excludable insurance coverage versus after-tax out-of-pocket payments.

By the 1960s, employer health coverage was already creating an inflationary bias in the system, and a perceived inequity in terms of access to health care by the aged and poor who by definition weren't part of the employer covered population. That resulted in LBJ's landmark Medicare and Medicaid legislation, and before long a second prong of price-insensitive health care spending was off to the races.

The post-enactment explosion of costs for these programs is well-known, but the actual figures nevertheless powerfully reinforce the point. By the time these programs were up and running in 1970, combined Medicare and Medicaid costs (including state matching) amounted to $15 billion and 1% of GDP. Thirty years later the costs had escalated to $375 billion and 5% of GDP. Today they cost $1.2 trillion and with WIC and related child health programs, the total is $1.4 trillion. Finally, even conservative projections which embody far less than the worst case for Obamacare, show that government health spending will reach $2.4 trillion annually or 10% of GDP by  2022.

It goes without saying that the health care needs of the poor and elderly did not rise from 1% of GDP to a prospective 10% of GDP over the course of 50 years.  What actually happened was that Washington created an enormous insurance pool for an uninsurable service, and then invited the medical professions to morph into the beltway's greatest crony capitalist lobby.

The American Medical Association, for instance, fell on its sword in opposition to LBJ's original legislation. Yet by 2010, it sold its soul in support of Obamacare in exchange for a more doc-friendly regime, the very thing which will cause the cost of Obamacare to balloon in the years ahead.

That costs, prices and utilization rates exploded in the face of soaring demand and no market discipline---as dramatized in the chart above---is readily evident in the track of long-term inflation. During the last half-century, the consumer price index has risen by 8X; average nominal wages have grown by 10X; and hospital costs per day by 40X. And the massively outsized inflation in physicians charges, drugs, lab tests and most other health services have been only slightly less dramatic.

In short, the health care delivery system has been reduced to a vicious circle. Each new increment of price-insensitive  third-party demand---whether employer or government financed---has caused health inflation to soar, and then induced one constituency after another to seek even more third-party coverage in order to shield their wallets at the point of use. That's how we got Medicare and Medicaid, and ultimately, Obamacare-----purportedly the answer to people who have been priced out of the system by the opened-ended payment capacity of existing employer and government programs.

Unfortunately, the compounding effect of more third-party payment pools and less consumer choice, and more payor controls and regulations and fewer market prices, results in a debilitating downward spiral.  The aggregate fiscal costs eventually become insuperable, and result in direct and indirect utilization controls and rationing. At the same time, crony capitalism becomes even more embedded in the system as the health care cartels wage endless battles in Washington to protect their access to third party financed demand at the highest possible prices.

There is an alternative called free market capitalism, consumer sovereignty and an efficient price-based regime of health care resource allocation and delivery. Go to a Wal-Mart. What goes on there proves that consumers could do the job---if they got their health dollars back and the third-party payment system was taken off its government life-support from Medicare-Medicaid and tax expenditure subsidies.

And, no, that would not leave the elderly and poor high and dry.  Give them cash or vouchers, not medical entitlements to scooter chairs, and let them shop, too.  In no time they would figure out the angles or find service providers who would help them efficiently navigate the system.

The alternative is more Government Health Care Inc. And how is that working?



Federal, state and local governments will spend a total of $1.4 trillion on health care this year, which will account for a record-high 46% of the nation's total health care tab, according to spending data released by the Centers for Medicare and Medicaid Services.

That's up from the government's 39% share just a decade ago, and the share is expected to hit 48% by 2023, as government programs continue to grow faster than the overall health care economy, the report found.

If this trend continues, government will pay for more than half of the nation's health costs by 2028.

ObamaCare is fueling some of this spending surge. This year, federal spending on health care is expected to climb an eye-opening 14.7%. And its growth rate will exceed that of private spending for at least the next 10 years, the data show.

CMS also expects Medicaid spending to shoot up 18.4% this year, thanks largely to 28 states' expansion of the Medicaid program under ObamaCare.

New Ideas Needed

To Douglas Holtz-Eakin, former head of the Congressional Budget Office and now president of the American Action Forum, this trend is troubling.

"You are basically saying, we want to put a lot of the health sector's future innovation in the hands of government programs," he said, adding that the government doesn't have a good track record when it comes to innovation.

ObamaCare is also likely behind the $1 billion drop in out-of-pocket spending this year — something that happened only three times before since 1960.

Out-of-pocket costs as a share of health spending have been dropping steadily for decades. In 1960, consumers paid 48% of the nation's health care costs out of pocket; this year, it will be 11%.

But ObamaCare will accelerate this trend by driving more spending through insurance companies and government programs. By 2023, as a result, direct spending will account for less than 10% of the nation's health tab....

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