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
- Private Health Insurance; Expenditure on health incurred by private insurance funds (both private social insurance and all other private insurance funds); and
- 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
Source: OECD Healthcare Database 2008; CBO The Long-Term Outlook for Health Care Spending, November 2007.
Figure 1 shows how since 1960, the share of total healthcare expenditures that are out-of-pocket for Americans has declined from nearly half to just 12.8 percent—a nearly 75 percent drop. Because either the government or US employers with a tax subsidy have increasingly picked up the tab, it should be beyond dispute to state that US health care has increasingly become “socialized.”
Despite this dramatic three-quarters decline in the share of out-of-pocket expenses, it is important to note the absolute real dollar value of Americans’ out-of-pocket healthcare expenses over this period. These increased from $441 in 1970 to $735 in 2006.8 The reason is obvious: US healthcare costs have risen faster than the rate of growth of out-of-pocket payments.
But surely, one might ask: Isn’t America’s hard-nosed private sector–oriented healthcare system of HMOs, rising copayments, and deductibles still more market-oriented than the system that coddles those welfare-addicted European socialists? Largely wrong, as can be seen in figure 2.
Figure 2 Household out-of-pocket healthcare expenditures, percent of total, 2006
Source: OECD Healthcare Database, available at www.sourceoecd.org. Data from 2005.
Empirically, the share of total healthcare expenses that Americans pay out-of-pocket is lower than in the vast majority of European and other OECD countries for which recent comparable data are available. Americans are therefore generally more likely to ask someone else to pay for their health care than people in other OECD countries. In reality America’s healthcare system is already more “socialized” than in most European and other developed countries.
Certainly, it is the case that Americans pay a higher absolute dollar amount in out-of-pocket expenses than almost anywhere else in the OECD (only Switzerland is higher). Yet that is solely because health care in America is so much more expensive than anywhere else and demonstratively not due to Americans being relatively more exposed to the “true costs of healthcare” than people elsewhere, let alone in countries practicing so-called “socialized medicine.”
The simple fact remains that Americans are relatively less exposed to market forces and “the price mechanism” in health care than most people elsewhere, which is certain to be one more reason why Americans end up having to pay so much more for their healthcare.
1. Source: CBO The Long-Term Outlook for Health Care Spending, November 2007, p. 6.
3. “Cost-sharing” includes provisions of health insurance or third-party payers for beneficiaries to cover part of the medical cost via a fixed amount per service (copayment) or a set share of the price tagged to services (coinsurance) or a fixed amount to be borne before the third party gets involved (deductible).
4. “Self-medication” includes informal payments extracted by medical care providers above the conventional fees, to over-the-counter prescriptions and to medical services not included in a third-party payer formulary or nomenclature of reimbursable services.
5. Includes health insurance premiums, Medicare HI Trust Fund contributions, workers’ compensation and temporary disability insurance, and industrial in-plant health services. Source: EBRI Databook, chapter 34, available at http://www.ebri.org/pdf/publications/books/databook/DB.Chapter%2034.pdf [pdf].
6. See Paul Frostin “The Tax Treatment of Health Insurance and Employment-Based Health Benefits,” EBRI Issue Brief 294, June 2006. Available at http://www.ebri.org/pdf/briefspdf/EBRI_IB_06-20061.pdf [pdf]. See also Jacob Hacker “The Divided Welfare State,” Cambridge University Press (2002).
7. See Joint Committee on Taxation “Tax Expenditures for Healthcare,” July 31, 2008 (JCX-66-08). These estimates are the costs of “tax expenditures,” which are defined as “revenue losses attributable to provisions in the Federal tax laws which allow a special exclusion, exception or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of liability.” They are revenue lost to the government from these provisions, and do not constitute the likely revenues raised by the government in the case of a repeal of a given provision, due to the behavioral consequences hereof.