Sizing Up the U.S. Health Care Challenge

by Gail Fosler

7|7|11

Amid the political fury over health care, it is easy to forget the size and scope of the challenge that U.S. health care poses. As Gene Steuerle notes in this week’s Featured article, the debate over health reform enacted last year and the budget decisions we face this year involve decisions on how to manage almost one-fifth of the U.S. economy.

If we were to set aside the specific topic of “health care” and consider total government regulation and management or, alternatively, complete private market decision-making with no government regulation for 20 percent of the U.S. economy, we would conclude that both extremes were not only impractical but likely to yield inefficiencies, huge misallocations of resources, sharply rising prices, random personal responsibility and liability, and rapid increases in out-of-pocket spending on the part of individual Americans. Welcome to the U.S. health care sector!

Another and equally provocative way to look at the scale of the health care problem is to consider that health care in America constitutes a reasonably good-sized economy all by itself. As the Chart of the Week shows, U.S. health care spending (which is almost equally divided between private and public spending) equals roughly $2.3 trillion. Managing an economy of that size through a labyrinth of public and private price controls, restrictions of coverage and reimbursement, and publically managed market systems is like applying planned economy techniques to an economy the size of France or the United Kingdom. Indeed, the U.S. health care economy is more than 50 percent larger than the size of the Russian economy — and we know that their planned economy approach ended badly.

 

On the other hand, U.S. health care is about one third larger than the total value added of the U.S. manufacturing sector. Applying market-based consumer theory without providing the competitive dynamics — free flow of labor and free choices in how labor and technology are applied, including eliminating barriers to entry in labor and service markets — is unlikely to provide the consumer welfare, in terms of choice, cost and quality, that the U.S. industrial sector provides. Moreover, consumers can look to consumer liability protections and food and other product safety regulations to guide and protect them in their purchases. In other words, these goods markets are regulated at the same time that they provide wide freedoms of choice for both producers and consumers.

Neither extreme applies to the U.S. health care system. Nevertheless, it is clear that individuals need to self-organize within a much more transparent system and to take on greater personal responsibility. It is also clear the government is, itself, creating substantial distortions in incentives in the health care system that are leading to an environment of excess and inefficiency. 

These are complex problems, as the very size of the health care “economy” suggests. Concentrating on the perimeters in terms of who gets paid and for what and/or providing “block grants” to individuals to weigh into what is now almost a completely nonmarket system and expecting market results will not get us the balance between affordability and quality to which we aspire.

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