Friday, March 25, 2011

The third party payer problem

Pete DuPont gets to the heart of what is wrong with health care in the US:
Health-care payments in America have changed over time. In the past 40 years people's out-of-pocket spending has fallen from 50% of medical expenditures to 10%, while the portion picked up by private insurance companies has increased from 25% to 40%. The portion paid by Medicare and Medicaid -- that is, by taxpayers -- has increased from 25% to 50%. Medicare expenditures averaged $8,300 per beneficiary in 2006 and increased to $11,743 in 2009.
The chief reason behind surging health care inflation is no mystery: the less skin people have in the game, the less incentive they have to care about costs. This is not the offspring of a free market in health care, but rather government subsidization of employer-provided insurance through the tax code (a nonsensical linkage which reduces labor flexibility) as well as government insurance programs (indeed, the public sector accounts for 45-56.1 percent of total US health care spending).

The first step towards genuine health care reform is reducing the role played by private insurance and Medicare/aid. Secondary reforms should address the role of regulatory barriers that restrict the supply of doctors, procedures other medical professionals are allowed to perform and licensure restrictions (professionals licensed in one state must frequently become relicensed in another state, often no easy task).

Other areas deserving of attention are the lack of a national market in health insurance and the role played by the FDA, whose incentive structure is biased in favor of lengthy, costly reviews.

Unfortunately, ObamaCare only further solidifies the role of insurance while addressing none of the other areas. This will not end well.

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