[University affiliation]
The article “Will it get better?” explains the health care sector in the USA. This issue is very relevant and very sensitive to the American society. One of the most richest and powerful countries in the world has the worst healthcare sector possible. The non-affordability to the low-income and elder population and inefficient provision characterizes the healthcare sector, in accordance with market-based insurance system. The key idea of the article lies in the claim that the USA expenditures on the healthcare are tremendous, and on average 18% of American GDP are directed to cover health care costs. Developed countries offer universal coverage, alongside with majority of developing countries. Nevertheless, in the USA 1/7 people are uninsured. Expansion of Medicaid under Obamacare is restricted by the state authorities, by people themselves and by the opposing power, the Republicans. Cheap insurances leave insurance companies bankrupt. Encouraging all individuals to buy insurance merely helps to improve the situation. People are still without insurances, and cannot get the healthcare they need. The performance-based pay discourages doctors to cure Medicaid and Medicare eligible patients due to the low return. If the costs continue to rise by 2022 it will take up 20% of GDP. The effective health care reform is essential, in order to contain costs and promote equity and fair social distribution.
This issue requires understanding of related constructs, such as welfare state, public goods and asymmetric information. If we consider the notion of the welfare state, then it is doubtful whether this concept can be applicable to the USA. Objective of the welfare-state is to reach macro-efficiency, which means that state budget needs to be allocated cost-efficiently. In the case of the USA, distortions of healthcare lead to cost explosions. The USA spends on healthcare much more than any other European country. Again we see that healthcare costs dominate other forms of social expenditures in the USA, such as pensions to the old age and survivors, income support to the working age population and other social services (Barr, 2012, p.10). Market-based insurance system does not reduce inequality; on the contrary it does to a significant extent decrease standard of living. In addition, healthcare reforms do not simply mean improving average health of the citizen, but implies on implementing policies that ensure an efficient division of the resources to the public. Government fails to meet expectations of its citizens. No risk-sharing is observed and to some level financial protection is in place. The financial protection, however, does not promote equity. Despite the moral ambitions of Medicaid and Medicare, they do not offer universal coverage for the targeted group. If the sustainable reform in healthcare is not implemented, the costs will soar in the future. Spending is projected to increase by 5 percentage points of GDP over the next 20 years (Soto, Shang and Coady, 2012, p. 37)
Health care in the USA is not a public good. To be characterized as a public good, a good needs to be non-rival and non-excludable at the same time. A good is characterized as non-rival, when consumption by one person prevents others from simultaneous consumption of that good. While preserving the characteristic of being non-rival, it cannot be referred to as being non-excludable. Non-excludability means no price charge can exclude consumer from the market, thus restricting access to consumption of a particular good. If you do not have sufficient funds, you will not be able to buy insurance. If you do not have insurance, it means that the health services will be denied.
In the case of the USA we are dealing with market failure, as when unrestricted private market inefficiently allocates resources to the society and undermines social justice. To trace back to the history, this event became common starting from 1960s: decisions about total production and decisions on individual consumption were purely private. Since that time costs on both government sponsored Medicare and Medicaid rose sharply, alongside with expenditures of private spending. Government policies such as managed regulation, diagnosis-related groups and use of incentives, such as prospective payment (Barr, 2012, p.255) proved little to contain costs.
Nicholas Barr assessed health care sectors in various countries upon four criteria: cost containment, access, waiting lists and consumer choice (2012, p. 255-256). He claimed that the USA spending is inefficient, and private market is imperfect in providing healthcare services. The spending per head in the USA is on average 6714 US dollars in 2006 (Barr, 2012, p.251). This amount was twice than spending in the Germany and France. The costs associated are not related to high infant mortality, health demand and life expectancy; it is clearly arises from market failure. Access to healthcare is also quite questionable. In 2012, more than 50 million of people were uninsured (Barr, 2012, p.256). Not only people cannot afford insurances, but even if they have, it is doubtful whether they are able to have a high-quality service. According to Barr (2012, p.256) there is no problem with waiting lists and consumer choice, as the market is highly competitive and there are lots of providers of the service.
Asymmetric information arises when one party to a transaction knows something that is relevant to the value of transaction and that is unknown to the other party or parties. Asymmetric information has two types: moral hazard and adverse selection. Adverse selection occurs when one of the parties knows more than the other party about some characteristics of transaction. The insurance market in the USA faces exactly the problem of adverse selection. The insurance providers are sometimes unable to distinguish between high-risk and low-risk customers, because they do not have relevant information about the medical history of the customer’s family. Given the lack of perfect information, health insurance companies only want to insure healthy people to avoid risks and high costs. On the other side, people are turned down of insurance for purely cost-minimizing and risk avoidance strategies of the companies. Another type of asymmetric information is moral hazard — the behavior of one party is unobservable by the other party after the transaction or contract occurs. In insurance market moral hazard takes place, because the insurance provider cannot be sure whether the “insured party” exercises due care. This means that insurance may reduce the individual’s incentives to behave in a cautious way. For that particular reason, some insurance providers do not offer full coverage for their customers. The more complete the coverage, the less careful the insured person and a more likely a bad event may occur. The asymmetric information presence in the market brings the inefficient allocation of services and further complicates the insurance market in the USA. Thus, taking into consideration the imperfect information, the policies implemented by the government must be designed in the way to minimize adverse selection and moral hazard problem, alongside with cost containment.
The above-mentioned concepts clearly depict the nature of the healthcare problem that the US citizens face today. It is important to reform the health care sector, by offering more efficient measures. Most of the industrialized countries, such as Canada, the UK and Germany provide health care services as means of public good. Why can’t the USA do exactly the same? The problem is more than real; however, does the government have the capacity to alter the business oriented behavior of insurance companies? If the health care could be a public good, then the budget could be planned in advance. The costs would have been decreased sharply as no additional expenditures are considered. Countries that have publicly provided health care services usually do not have problems with high costs. The incentive used by US government such as prospective payment is relatively good; however it has a back-side effect known as overtreatment. Doctors working on a prospective pay basis, tend to prescribe more services that the patient requires, because each additional service results in more income for the doctor, thus leading to private consumption costs. Experiences from the foreign developed countries should be taken into account. The reform in healthcare shall include the point of restricting the number of suppliers. This policy was successfully implemented in Canada. By restricting the suppliers it is easier to manage and regulate the prices. Cost-containment strategy from Finland can be considered too. The government put all municipal hospitals under the ownership and management of 21 health care districts in order to improve coordination within districts and reduce the duplication of services (Tyson and Karpowicz, 2012, p.184). UK National Health Service has many advantages. The health care is publicly financed and publicly delivered. It is successful because it complies with the efficiency arguments and is motivated by equity principle. Nevertheless, it is important to note that tinkering may not work, because the USA is the unique example. In its policies the USA government should closely focus on further promoting the notion of welfare state on both macro and micro level. Affordable healthcare must not be only on government’s agenda, social justice and equity principles should be imposed on profit oriented insurance companies.
References
Barr, N., 2012. Economics of the welfare state. 5th edition. Oxford: Oxford University Press
Coady, D., Shang, B. and Soto, M., 2012. New projections of public health spending, 2010-2050. ln: B. Clements, D. Coady, S. Gupta, 2012. The economics of public health care reform in advanced and emerging economies. Washington D.C.: International Monetary Fund. Ch. 3. pp. 37-52.
The Economist, 2013. Will it get better? [online] Available at: <http://www.economist.com/news/briefing/21587216-centrepiece-barack-obamas-health-reforms-opened-business-week-its-success> [Accessed 28 February 2014]
Karpowicz, I. and Tyson J., 2012. Public health expenditure reforms in Canada, Finland, Italy, the Netherlands, Sweden, the United Kingdom, and the United States. ln: B. Clements, D. Coady, S. Gupta, 2012. The economics of public health care reform in advanced and emerging economies. Washington D.C.: International Monetary Fund. Ch. 10. pp. 177-207.
