Europe and the US: Whose Health Care is More Socialist?

Whenever reform of health care is discussed in America, the argument that “America rejects socialized medicine” is heard in many quarters.

Superficially, the facts suggest that the private sector has always accounted for the majority of healthcare expenditure in the United States (approximately 55 percent of total expenditures since the early 1990s1) and that private individuals’ costs of health care has risen rapidly in real dollar terms in recent years. These facts lend credence to the view that the United States retains a private-sector oriented healthcare system.

However, a closer look at the historical trends among the sources of healthcare funding raises some doubt about such a conclusion. Take, for example, the generalization of a basic dichotomy at work: that US healthcare expenditure can be either public or private, with Medicaid/Medicare expenditure comprising the vast majority of the former. Meanwhile private healthcare expenditure can itself be separated into two principal subcategories;2

  1. Private Health Insurance; Expenditure on health incurred by private insurance funds (both private social insurance and all other private insurance funds); and
  2. Household Out-of-Pocket Expenditures: These comprise cost-sharing,3 self-medication4 and other expenditures paid directly by private households, irrespective of whether the contact with the healthcare system was established on referral or at the patient’s initiative.

Simplified, private health insurance expenditures constitute the share of private health insurance costs paid by companies, while out-of-pocket expenditures make up the share paid directly by individuals, including all copayments, co-insurance costs and deductibles.

In 2007, US employers spent a total of $480 billion directly on their employees’ healthcare, double their expenses of $241 billion just a decade earlier in 1997.5 Historically, however, US firms have—since the beginning of large-scale employer-provided health care in America in the years before and during World War II—enjoyed tax-preferred status. Indeed, this exemption of employer healthcare contributions and expenses was a key reason for their rapid adoption by many businesses and was formally enshrined in the US tax code in 1954.6 So, as the costs to US businesses of their health care have rapidly risen over time, so have the costs to the US government of providing the tax breaks for it.

Current US law stipulates that the value of employer provided health insurance is excluded from income taxation, as well as from the FICA wage base for both employers and employees. The Joint Committee for Taxation in 2008 estimated that the tax-preferred status bestowed upon employer-provided healthcare provides a total subsidy worth $245 billion in 2007 alone.7 A large share of private employer healthcare costs—perhaps as much as half based on a back-of-the-envelope estimate (the equivalent of a $245 billion subsidy out of $480 billion in direct costs in 2007)—are thus in reality funded by the US taxpayer. Another way of thinking about this tax subsidy is that the costs are already socialized.

The crucial point, though, is that from the perspective affecting individual behavior, it does not matter whether healthcare costs are covered directly by the government or by private employers. What matters is that healthcare costs are paid by someone else, a third party, and not paid directly by consumers themselves. As such, the only part of healthcare spending that individuals see, and that matters directly to them and affects their behavior, is the out-of-pocket share of healthcare expenditures. This is the only share of total healthcare expenditures where “market forces” and the “price mechanism” are brought to bear upon consumption of health care.

In other words, avoiding a system of “socialized medicine,” in which costs are paid by the government, would in theory imply an increase in the share of healthcare expenditures paid out-of-pocket. Yet, in America in the last 50 years, the exact opposite has happened.

Figure 1 US household out-of-pocket healthcare expenditure, percent of total, 1960–2006

figure 1

Page 1 of 3 | Next page