A crash course on US healthcare economics and policy for healthcare outsiders

Have 15 minutes? Want to get the big picture of healthcare in the US?

Executive summary

The US healthcare system works by taking money out of workers’ paychecks, sending that money to an administrator, and having that administrator pay hospitals, doctors, and pharmacies. This is normally called socialized medicine, but in the US, we don’t call it that.

The US’s form of socialized medicine has lots of extra administrators and is therefore extra wasteful in its spending. American workers are taxed ~$10,000 more than necessary every year for healthcare (~$13,000 more for family coverage; ~$6,000 more for individual coverage). Lots of people in healthcare get rich off this tax money. This ~$10,000/year pay cut is the largest economic issue faced by the American middle class. 

Most health policy proposals are irrelevant. Only drastic reform (single payer, etc.) can return the ~$10,000/year to the American workers who’ve earned it.

The basic state of the healthcare industry

In the US, we pay more and get less

1. The healthcare industry in the US is a huge business:

   1. About $4.1T per year, or $12,530 per person.

   2. That’s 20% of the US economy; 1 in every 5 dollars is consumed by the healthcare industry.

   3. ~80% of funding comes from workers’ paychecks, a burden of ~$20k per worker.

2. It’s a much bigger business in the US than other countries:

   1. In most other first-world countries it’s 9% of GDP.

3. This is because we pay our hospitals, doctors, and drug companies more, not because they do more stuff / better stuff:

   1. This was pointed out in 2003.

   2. It’s still true now.

4. The US doesn’t get better outcomes by paying more:

   1. Life expectancy is below other nations. Americans can expect to live about 3.5 years less than people in other countries.

5. The big components of healthcare expenditures are hospitals (31%), doctors (20%), and drugs (10%).

The fundamental economic structure of the industry

It’s socialized medicine, but with lots of extra tax collectors / administrators

1. US healthcare is not a rational “system” - it was not designed by anyone and does not represent any coherent plan.

   1. It evolved over time through a patchwork of legislation and regulation.

   2. When learning about the US healthcare industry, do not try to “make sense” of it. It is literally nonsensical.

2. The U.S. healthcare industry does not reflect anyone’s political principles. It is not a free-market alternative to socialized medicine - it’s a form of socialized medicine.

   1. In a market system, you keep your own money and pay for the stuff you’re willing to buy. On the other hand, in a socialized system, the money is taken from your (and other people’s) paychecks, and that pool of money is used by a bureaucrat/administrator to pay for the stuff you (and other people) get.

   2. In US healthcare, money is taken from your (and other people’s) paychecks, and that pool of money is used by a bureaucrat/administrator to pay for the stuff you (and other people) get. That’s why US healthcare is a socialized system.

   3. In an actual market system, hospitals, doctors, and drug companies would compete on price (advertised directly to the consumer) and quality (as judged by the consumer), and consumers would be the judge of how much they’d be willing to pay for a provider’s services. Money would not be taken out of anyone’s paychecks and commingled with money from other people.

3. The difference between the US’s socialized medicine system and other socialized medicine systems is that the US has more tax collectors / administrators, and some of those tax collectors / administrators are private corporations.

   1. Whereas many other nations have 1 tax collector / administrator (“single payer”), the US has about 1,000 tax collectors / administrators (euphemistically called “health insurers”), each of which can offer hundreds of health plans.

   2. Aetna, Humana, UnitedHealthcare all perform the same function that Medicaid and Medicare perform and are funded the same way: by taking money from employees’ paychecks. “Premiums” are just taxes by another name.

4. The fundamental structure of the US healthcare system – this 1,000-payer socialized medicine system – inevitably leads to paying more for the same stuff.

   1. Since we have 1,000 different bureaucratic administrators running our entitlement programs, they can’t negotiate good prices with hospitals, doctors, and drug companies. That’s why prices are high (see point #3 in the first section).

   2. There is no way to make a 1,000-payer socialized medicine system work efficiently. That is why administrative costs are high.

The healthcare industry’s impact on the rest of America

Healthcare is easily the #1 economic issue for median-income Americans but isn’t recognized as such

1. Healthcare’s main impact on Americans is keeping their paychecks low:

   1. For the typical American worker, healthcare-related premiums/taxes aren’t just “big.” They’re bigger than all non-healthcare-related income/payroll taxes combined. Healthcare is THE thing impacting take-home pay.

   2. If we call employer-sponsored health insurance what it is – a tax – then about 70% of taxes taken from the paychecks of a typical American worker with family coverage go to healthcare. If the worker has individual coverage, that number is about 51%.

   3. In hard dollars, the healthcare industry takes about $26,000 from the total compensation of a worker with family coverage whose salary is $50,000 (whose total compensation is actually about $70,000).

   4. Because the US healthcare system is structured to overpay by 2x, this typical worker is overtaxed by about $13,000.

2. Healthcare is also the most common cause of economic crisis:

   1. Hospitals and doctors are the leading cause of bankruptcy.

   2. More than half of debt in collections is from hospitals and doctors.

   3. Despite receiving much more attention, the total impact of these economic crises is actually far less than the total impact of the regular drain on all employees’ income.

3. The structure and branding of healthcare financing (having the employer pay the bulk of it, and calling it a "premium" instead of a "tax”) leads the typical American to grossly underestimate 1) their healthcare costs and 2) their total taxes.

The policy options to improve the industry

Most policy discussion is irrelevant; only getting rid of the extra tax collectors / bureaucratic administrators will fix it

1. The sole meaningful change to US healthcare is to eliminate the extra ~999 tax collectors / bureaucratic administrators:

   1. Consolidating the administrators saves money in two ways: 

      • A consolidated administrator can prevent hospitals, doctors, and drug companies from charging whatever they want.

      • A consolidated administrator generates less administrative waste.

   2. Without administrative consolidation, hospitals, doctors, and drug companies will continue to charge whatever they want, and administrative waste will remain high.

   3. Consolidating the administrators can bring America’s healthcare spending in line with other countries. Every American could have ~$10,000 extra in their paychecks every year and get the same healthcare.

2. Most healthcare policy discussions focus on complicated but ultimately inconsequential topics - in other words, rearrangements of the deck chairs on the Titanic. 

   1. Concepts/proposals like value-based care, price transparency, high-deductible health plans, health savings accounts, digital health, surprise billing legislation, drug pricing legislation, defending the ACA, and repealing the ACA are all relatively meaningless. 

   2. If you get rid of the ~999 extra tax collectors, you can lower healthcare taxes by ~$10,000 per worker. If you don’t, you can’t.

The political impediments to policy change

The branding of the healthcare system falsely implies it isn’t socialized medicine, and the people getting rich off of it don’t want to change

1. The current system does not reflect the ideals of either Democrats or Republicans. However, Republican voters are told that it reflects their values.

   1. Since there are lots of companies involved, and since many of them are privately run, the American system looks like a market-based alternative to a socialized system instead of a weird form of it.

   2. Consolidating the administrators has been labeled “socialist” despite it resulting in reducing the number of tax collectors and potentially leaving an additional ~$10,000/year in the hands of individual American employees.

2. The terminology we use to describe the industry implies that it’s an alternative to socialized medicine.

   1. “Health plans” should really be called “healthcare entitlement programs.”

      • “Insurance” is something that kicks in when something significant and unexpected happens. Geico does not create a network of gas stations where you can get in-network rates on gasoline; Geico covers the cost of a wreck.

   2. “Premiums” should be called taxes.

   3. “Private health insurance companies” should really be called “private tax collectors” or “private healthcare entitlement program administrators.”

3. Since hospitals, doctors, and drug companies can charge twice as much money under the current system, they’re highly resistant to change. They lobby aggressively against any reductions to the dollars they take from Americans’ paychecks.

   1. Physicians make an average of $343,600 per year in the US (about twice as much as in other countries) and are the most common occupation in the top 1% of income (as of 2014, the last time this analysis was done).

   2. Drug companies charge Americans 2.5x what they charge in other countries. 

Other good overviews/primers

• https://www.brookings.edu/research/a-dozen-facts-about-the-economics-of-the-u-s-health-care-system/ 

• https://www.healthsystemtracker.org/brief/what-drives-health-spending-in-the-u-s-compared-to-other-countries/