ObamaCare: What’s The Story?

Friday, 28 August 2009 11:33

Letter from America

The American political scene has been a bit more cantankerous than usual these past few months. In fact, it’s been downright hostile, with congressmen and senators being shouted down by angry constituents in their town hall meetings and the President himself – quite incredibly – being accused of sanctioning state-sponsored “death panels.”

by Charles Lewis Sizemore, CFA
Chief Investment Officer

The source of all of this controversy is, of course, the Obama plan for health reform. To Britons and Canadians, the health care question has already been answered. In order to make health care universal, both countries opted for socialisation, as have many continental European countries. But the American response has been considerably more muddled, reflecting certain paradoxes in the American ethos. Americans have a historical mistrust of the federal government and of large federal projects, preferring instead to keep most power at the level of the individual states. Large, centrally controlled programmes are seen as going against the American tradition of limited government and personal freedom and responsibility.

But this same country, which claims to fear government meddling in the free market, has the two largest public health schemes in the world in Medicare and Medicaid – both of which got a lot bigger under the presidency of George W. Bush, who was at least nominally an advocate of market solutions. Mr. Bush’s addition of Medicare Part D, the prescription drug scheme for seniors, was the biggest expansion of the federal government’s role in the health care industry since Lyndon Baines Johnson’s original creation of Medicare and Medicaid - that is, until ObamaCare.
This month, we’re going to take a look at the President’s plan and at the various arguments for and against it. We’ll cut through the propaganda of both sides and will do our best to present the issue fairly.

Obama’s Rationale

Many Americans fear that the President’s plan will push the country into a government-controlled, socialised medical system. But what few seem to realise is that we are essentially already there, at least by some measures.

The governments of Canada and the United Kingdom spend 7.0% and 7.3% of their respective GDPs on health care (See Chart 1). The United States, via Medicare, Medicaid and other smaller programs, also spends 7% of GDP – 7% of a considerably larger GDP at that, it should be remembered.

Chart 1: Healthcare Spending as a % of GDP

So, as a percentage of the overall economy, the United States government already spends as much on health care as the UK and Canada. The difference is that while the UK and Canada manage to afford universal coverage on that budget, the United States covers only the elderly and the poor. Meanwhile, the rest of the country relies on private insurance or, in the case of roughly 20% of Americans, on no health insurance at all.

Referring again to Chart 1, private spending, paid by patients and insurance companies, more than doubles the total amount of health spending in the United States to a combined 15.3% of GDP – vastly more expensive than anywhere else in the world. And as both statistical measures and casual observation attest, the average American is not any healthier than the average European or Japanese citizen. (We find it almost mind-boggling that Japan — despite its enormous population of elderly citizens — spends barely half what the United States does relative to GDP.)

So, it is understandable why Mr. Obama considers health reform a priority. The current system is absolutely indefensible. There is no justifiable reason for the American health system to be roughly twice as expensive as the UK’s while simultaneously leaving a large minority of the country uninsured or underinsured. The question, of course, becomes whether Mr. Obama’s plan is the best way forward. It is our view that it is not because it doesn’t address the root causes of the country’s out-of-control health care costs. In the end, it promises to add considerable cost to the existing system without fixing the problems it was designed to fix.

What Exactly is ObamaCare?

Despite all of the hype surrounding the President’s plan, it is surprisingly hard to get a coherent answer about what it actually is and what it proposes to do. At time of writing there are competing versions of the bill working their way through congress. Most versions, however, share a core set of points.
The Wall Street Journal summarises the basic features of the various ObamaCare proposals, and we have relayed them below. ObamaCare will:

Create federal subsidies to buy insurance
Establish a public health insurance option to compete with private plans
Require that Americans have health insurance under penalty of fine
Prohibit insurers from rejecting customers over pre-existing conditions
Establish an “exchange” where people can comparison-shop
Cap out-of-pocket expenses
Expand Medicaid
Raise taxes on higher-income earners (and perhaps the middle class too) in order to pay for all of this

The first point is essentially another welfare programme, of which this country has several. We will not comment on the pros and cons of welfare; that is best left for another article. But we will comment on the unintended consequences of a subsidy. A federal subsidy will increase demand for health care (because more people will have access – which is, of course, not a bad thing), but it will do nothing to lower costs. More people will have insurance but we will all continue to pay outrageous prices.

The second point is the most contentious because many believe it is a back door to fully socialised medicine, and there is some truth to this argument. A state-funded insurance scheme would have an enormous advantage in pricing over private sector competitors, as it would have no shareholders to be accountable to. The end result would be that most or all private insurance providers would leave the market – leaving the state as the only viable insurance provider. When combined with the third point – requiring Americans to purchase insurance, in this case from the state – you have, in effect, socialised medicine. This is something that most Americans oppose at this time, and the political winds appear to be blowing against points two and three as a result. If we were to handicap the odds of success we would bet that the health bill, when it finally reaches the President’s desk, will be absent these two components.

The remaining points are far less controversial. Laws vary from state to state on insuring new patients with pre-existing conditions, and while we oppose government meddling in private industry, we see this point as relatively benign compared to points one and two. Similarly, the exchange for comparison shopping is really a non-factor barely worth mentioning. Expansion of Medicaid – the state-funded health scheme for low-income Americans – is always a contentious issue, as are all welfare programs in the United States. We would oppose any expansion of Medicare on the grounds of cost, but we would view this as “nothing new under the sun.”   And finally, the increase in taxes on high-income earners was always a priority of the Obama Administration. With or without health reform this was, unfortunately, a virtual certainty.

ObamaCare: The Prognosis

It remains to be seen what, if any, bill emerges from the current negotiations. But it is our view that all of the proposals on the table will ultimately fail because they do not address the real underlying problems that make American health care so expensive. Yes, more people would have coverage. But we’re all still paying far too much!

If Mr. Obama were truly interested in making health care affordable and accessible, he would start with addressing the way that doctors are compensated. Doctors are not paid for “results;” they are instead compensated based on a fee-for-service model in which they are incentivised to order every redundant and unnecessary procedure under the sun.   If doctors were paid based on results or even based on the conditions treated, they could take a more holistic – and cost effective – approach. (Private insurers often use Medicare’s pricing as the basis for their own; reforming Medicare is thus the first step to making health insurance more affordable.)

Fear of malpractice lawsuits adds fuel to this fire. Doctors would rather err on the side of providing too many services as a way of “proving” that they left no stone uncovered. Writing for the Financial Times, Mort Zuckerman succinctly sums up the issue: “The cheapest malpractice insurance for a physician seems to be ordering multiple tests or CAT scans. We have volume without value.”

This means that health reform, if it is to be effective, must also involve tort reform – something that is anathema to the Democrats and one of their major supporters: the legal lobby.

The patient, unless he is paying cash, is usually unaware of the true expense of the medical services received, as the tab is paid by his insurance company or Medicare. The cost is then “socialised” across the country in the form of higher insurance premiums and taxes for all.

Many libertarian-leaning think tanks have proposed “consumer directed health care” as a possible remedy in the belief that patients would be more conscious of the cost of their care if properly incentivised. Former President George W. Bush, despite his serial incompetence while in office, managed to stumble on to a good idea with Health Savings Accounts (”HSAs”) coupled to high-deductible policies. The high deductibles and tax-advantaged savings accounts gave patients every incentive to ration the medical services provided. These plans were a major step in the right direction, though for them to be effective in lowering costs at the national level they would have to be used by a much larger share of the population.

The former president also proposed making employer-provided insurance “taxable” (though with an offsetting tax credit) in order to make Americans better realise the true cash value of the benefits that they have come to view as “free.” We view this as another major step in the right direction. The model of employer-provided health insurance is a relic of World War II wage controls (companies began offering health insurance because they were not permitted to raise wages during the war), and it serves little purpose today. In fact, it is harmful to America’s competitive position. US companies are burdened with enormous benefits expenses that many of their foreign rivals are not; this was a contributing factor to the demise of General Motors and Chrysler.

President Obama’s health proposals, in contrast, do little more than make the woefully inefficient status quo more available and, alas, more expensive. This is not true reform by any stretch of the imagination.

In the end, the United States has a choice of three possible options. We can keep the current system, which is neither a free market system nor a socialised system but rather a Frankenstein’s monster pieced together with the worst aspects of both – this is by far the worst option. We could also choose to go the route of the UK and Canada and opt for full socialisation. Given the embarrassingly inefficient way in which Medicare and Medicaid are managed, this too is a bad option for the United States.

This leaves the final option – eliminating the fee-for-service model and employer-provided insurance and replacing them with an expanded version of the HSA scheme. To appease Democrats concerned about the plight of the poor and uninsured, a modest subsidy could be incorporated into the plan for lower-income earners.   This should result in greater responsibility by doctors and patients alike, and unlike ObamaCare it wouldn’t run the risk of bankrupting the country and saddling future generations with unpayable debts.