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The Myth of Efficient Government Health Care

by Sally Pipes
June 01, 2009

In August 2008, the prestigious British medical journal Lancet Oncology published the results of an extraordinary study. The study found that America is much better at treating cancer than Europe or Canada.

As it turns out, Americans have a better survival rate for 13 of the 16 most common cancers. Among men, an American is 40 percent more likely to live for five years after being diagnosed with cancer than his European counterpart. American women are 12 percent more likely to live for five years after a cancer diagnosis than their European counterparts.

Perhaps that’s one reason why tens of thousands of foreigners come to the United States every year for medical treatment. They’re usually seeking advanced and sophisticated procedures that are simply unavailable—or rationed—in their home countries.

Surprised? That’s because every time you pick up a newspaper or turn on the nightly news, someone is calling for the government to fix our health care system by creating a national, government-run program similar to the systems of Britain, Canada, or France. Many prominent pundits and lawmakers believe that only the government is big enough and powerful enough to fix our health care problems and provide affordable, accessible, quality care for all Americans.

Alas, these advocates of “universal care” have fallen victim to one of the most pervasive myths in America today—that government-run health care is effective and efficient. Nothing could be further from the truth.

Does the IRS Make Paying Your Taxes Simpler?

Critics of America’s health care system often cite the “cost of the middleman” when making their case. This simplistic line of reasoning goes as follows: The more middlemen that stand between the producer of a service and the ultimate consumer, the more expensive that service will be, because each intermediary adds his own profit to the chain. Accordingly, it would be more rational—and cheaper—to have a single producer move services directly to consumers, eliminating the middleman.

Who would be that producer? The government of course. Advocates of nationalized health care contend that the government could simplify the production of health care goods and services, provide more efficient coverage, and lower costs.

It’s easy to see how such an argument could take hold. It seems right. It seems logical. But is it true?

Think about it. Does the IRS make paying your taxes simpler? Do government-run schools provide the best K–12 education? In fact, do current state and federal regulations make our health care better and more efficient?

The answer, obviously, is “no.” Almost without exception, wherever government intervenes to solve a major social problem—despite good intentions—the affected process becomes enormously more complicated and much more expensive for society as a whole. And health care and K–12 education are the two sectors in America that have more government involvement than any other, and they both suffer from serious quality problems.


The Thicket of Government “Middlemen”

There is ample evidence that government itself is the middleman.

Over the last few decades, state and federal lawmakers have instituted a confusing patchwork of restrictions and regulations in an attempt to drive down costs. However, these moves actually have increased health care costs and made it impossible for private enterprise to work effectively. Empowerment—putting doctors and patients in charge of their health care—would be far more efficient.

Consider insurance. Today, insurers who want to make health care policies available to the public have to be registered and reviewed by 50 different state insurance administrations. Consumers are barred from purchasing policies across state lines, making it impossible for individuals and families to get the type of insurance plan that best meets their needs in terms of coverage and cost.

And most states force residents to buy one-size-fits-all insurance packages that include all sorts of services that only a small slice of the population needs. The average state imposes 38 mandates on an individual health insurance policy. In 2007, there were 1,901 different mandates nationwide. These extraneous mandates increase the price of basic insurance by as much as 50 percent.

Insurers also have to deal with overlapping federal regulations. Indeed, insurance companies are so hobbled by government regulations that they have to hire legions of lawyers just to keep up.


Real Costs Pushed onto the Private Sector

Critics of the U.S. system often argue that Medicare and other government programs have lower administrative costs than private health insurance. According to the most recent Medicare Trustees Report, administrative costs for Medicare are only 1.5 percent of total expenditures. For private health care, that number is said to be as high as 25 percent.

Walk into any hospital or doctor’s office and you will see why these estimates are misleading and inaccurate. According to a recent study by the Council for Affordable Health Insurance, the administrative costs of Medicare actually total around 5.2 percent. Meanwhile, the administrative costs of private sector health care total about 8.9 percent. A similar study by PricewaterhouseCoopers found that only 6 percent of private health care premiums go to administrative costs and a full 86 percent of premiums go to providing actual medical care. The reason that official estimates were so far off was that they didn’t account for Medicare’s hidden costs.

For instance, the Medicare Trustees report doesn’t include things like the salaries of managers and administrators or the marketing costs associated with advertising new policies like the Medicare Part D drug benefit. Private health care providers, on the other hand, include all of these expenses in their estimates of administrative costs.

On top of that, Medicare passes off a great deal of its costs to private payers. A recent study showed that, in Washington state alone, $738 million in charges were shifted to private payers to make up for underpayments by Medicare and Medicaid in 2004. That same year in California, private payers and hospitals paid an extra $45 billion to compensate for unpaid Medicare costs.

Indeed, even though proponents of government health care insist that the uninsured represent a “hidden tax”—that is, those with health insurance pay a hidden tax to subsidize the care of those without health insurance—the reality is that the “uninsured” add only about 1 percent in hidden costs to the price of the insured’s insurance plan. A far greater hidden tax is caused by government Medicare and Medicaid programs’ low reimbursement rates, which add as much as 10 percent in hidden costs, or subsidies, to those paying for private health insurance.


Would a Single-Payer System Lower Prices?

Advocates of socialized medicine often claim that when the government—as single payer to all providers—runs the till, it can negotiate lower prices up and down the line. If economic history has taught us anything, however, it’s that government price controls have been an unmitigated disaster every time they have been applied.

During World War II, federal lawmakers instituted price controls on a wide range of goods and services. But the government needed an enormous amount of muscle to enforce the new rules, so it created an independent Office of Price Administration—and granted the agency the authority to place price ceilings on everything except agricultural commodities and to ration anything that was scarce. At its height, the agency had nearly 65,000 employees on its payroll, and another 100,000 volunteer “price watchers” across the country. By war’s end, it had filed nearly 260,000 lawsuits to enforce the price ceilings.

Nonetheless, a lucrative black market emerged for everything from cars to underwear. Businesses that didn’t go underground cut costs by lowering the quality of their products. A 1943 study from Consumer Reports, for instance, tested 20 candy bars and found that 19 had shrunk in size from four years earlier.

Put simply, those price controls resulted in a number of unintended consequences. And they were just temporary. In the Soviet Union, where state control of the economy was a permanent fixture, consumers were forced to stand in long lines for the barest necessities.

Price controls are, however, quite effective in limiting innovation. For health care, this would be disastrous.

Just take pharmaceuticals. Behind each pill’s price tag is time and money that went toward research and development. R&D is a huge investment. On average, it now takes about $1.3 billion to bring a single drug to the market.

The market price for drugs reflects these risky investments and provides an incentive for researchers to keep coming up with new cures. Government-mandated prices do not. Quite literally, the difference is a matter of life and death.

Researchers at the University of Connecticut Center for Healthcare and Insurance Studies recently found that government interference in drug pricing has caused $188 billion in lost R&D spending since 1960. That money would have gone to develop new, perhaps life-saving, medicines. These “lost” medicines could have saved 140 million life years.


Government Health Care—It’s Already Here

In 1965, two massive government health care programs were launched—Medicare and its late entrant, Medicaid. This federal intrusion into the health care system has distorted the entire market ever since, and yet politicians keep calling for expanding these “excellent” programs to cover all Americans—“Medicare for all” as Senator Ted Kennedy (D-Mass.) likes to call it.

Medicare, the primary insurance program for Americans over the age of 65, is funded entirely by the federal government, i.e. taxpayers. In fiscal year 2007, Medicare spent $427 billion, accounting for 16 percent of the federal budget. This year, Medicare will spend more than it collects from payroll taxes, and by 2017, it will spend $884 billion. It will take a payroll tax of 6.4 percent just to keep the program afloat.


Wasting Away

We’ve already seen how Medicare passes much of its costs off to private payers. But it also wastes an enormous amount of money. Studies show that Medicare officials waste as much as $1 out of every $3 the program spends. That’s hardly a system worth expanding.

Medicaid, the insurance program for poor Americans, is administered at the state level and receives between 50 percent and 70 percent of its funding from the federal government. It, too, is a model of inefficiency. And there’s an enormous amount of fraud. The total federal/state cost of Medicaid in 2007 was $338 billion and is projected to be $717 billion in 2017.

In the state of New York alone, a retired chief fraud investigator estimates that as much as 40 percent of the state’s Medicaid claims are fraudulent. This costs the state about $18 billion a year. Examples of fraud abound. In 2003, for example, Dr. Dolly Rosen billed Medicaid for 991 procedures each day, costing taxpayers more than $1 million.

Both Medicare and Medicaid also impose price controls by setting low reimbursement rates to doctors and hospitals. This has caused an enormous amount of hardship, as an increasing number of doctors are refusing to see patients if the government is footing the bill. Nearly one in three seniors in search of a new doctor is struggling to do so, according to the Medicare Payment Advisory Commission. “When I moved down here, I thought the only difficulty would be in finding good ones,” reported a newly enrolled Medicare patient about finding a doctor in Raleigh, North Carolina. “But it turned out that I would call a place and say, ‘I have Med—’ and they wouldn’t even let me finish.”

The government may efficiently control the costs at which doctors are reimbursed. This does not, however, account for the pain and suffering people endure waiting for care or the value of their time spent searching for a doctor. The government sets the fees paid to doctors according to a schedule of codes for 8,000 procedures. The cost is $60 billion.

According to a recent report from the Center for the Study of Health System Change, just about half of all doctors said they had stopped seeing or limited the number of new Medicaid patients.


Expansion Continues

Despite these realities, the expansion of government health care continues.

In 1997, the State Children’s Health Insurance Program (SCHIP) was established with the noble goal of providing health insurance to children in low-income households that nonetheless exceed Medicaid eligibility. Today, SCHIP covers about 6 million children.

The program’s funding formula, however, gave states an incentive to add middle-income children and even adults to their SCHIP rolls. So in many places, the program spiraled out of control. In 14 states, adults are enrolled in SCHIP; nationwide, about 600,000 adults are covered by the program. In six states, more SCHIP money is spent on adults than on kids. Meanwhile, the program has still failed to enroll almost 2 million children who qualify.

Instead of focusing on getting these kids to enroll, lawmakers attempted to expand the program in 2007—seeking to offer SCHIP to families earning up to 300 percent of the federal poverty level. President George W. Bush vetoed the measure.

The Department of Veterans Affairs (VA) also runs a government health care program. Like Medicare, Medicaid, and SCHIP, it too is sometimes trotted out as evidence that government-run health care can actually work.

But thus far, the VA has proved inadequate for the many wounded veterans who have returned home from Iraq and Afghanistan. Better suited to the needs of much older veterans from World War II, Korea, and Vietnam, the VA is simply unable to react with the speed and efficacy needed to deal with the injuries of modern warfare.

A claim now takes between 127 and 177 days to process—well above the private industry average, which is 89.5. An appeal takes a staggering 657 days. In House testimony last year, the Government Accountability Office reported that the VA is near the breaking point.


The 60-Ton Nail

Back in the days of total state economic planning in the Communist countries of Eastern Europe, there was a widely circulated anecdote. The government wanted to produce more nails and set a nail quota for each factory. One factory was ordered to produce 60 tons of nails. At the end of the year, the factory made its quota. It rolled out one 60-ton nail!

Silly, of course. But the joke circulated because it captured so well the essence of how top-down planning is routinely manipulated and distorted to the point of economic insanity. The reality behind stories like this one is the reason the Communist system collapsed. Too few real nails ever made it to consumers.

Ms. Pipes is president of the Pacific Research Institute, a free market think tank based in San Francisco, California. This article is adapted from a chapter from her book The Top Ten Myths of American Health Care: A Citizen’s Guide, © 2008 by Pacific Research Institute.

Sidebar: Government Health Care Ties Doctors Hands

After four years of providing care to military personnel, their families, and retirees, I’ve had it. The hassles of working with the Tricare program that covers health care for these people got the better of me. I’ve taken care of about 80 Tricare patients. But I won’t be seeing them anymore. …Early on I began to understand what a tough job treating Tricare patients was going to be. One woman needed a colorectal surgeon …. The specialized surgeons in our region weren’t in the network, and the closest Tricare doctors who could help her were in Indiana. She traveled out of state to get her problem fixed. When she had complications following her operation, I ended up managing her surgical skin infection because the surgeon was three hours away. Everything about her case required special arrangements – emails to Tricare, faxes to Tricare, and my nurse holding on the phone to Tricare. … I felt isolated and ineffective navigating the roadblocks in the Tricare system just to get basic care … for my patients. It seemed too often that I was doctoring with one hand tied behind my back.

—Benjamin Brewer, “Hassles Force a Retreat from Military Families,” The Wall Street Journal, May 8, 2008. http://online.wsj.com/article/SB121019218456174647.html?mod=WSJBlog


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