The Hyper-weird Economics of Health Care in the US: Markets Fail Again!

In my new book manuscript, The Great Capitalist Restoration: Seeds of a Catastrophic Depression, I have a brief section on health care, which I reproduce below. Following that discussion, I have some extracts from a recent Busness Week, article saying that health care accounts for all of the growth in private sector jobs since 2001. In effect then, the inefficiency of the health care system is needed to create job, which are destroyed by the inefficiency of the health care system.

Perhaps no sector of the economy illustrates how badly markets work than health care. The United States has the most advanced health care in the world. Unfortunately, such health care is beyond the means of the majority of society. Rising costs are making even barely adequate health care unaffordable for an increasing share of the population. Again, I will concentrate on the economic effects of health care rather than questions of social justice.

By the 1980s, rising health care costs were putting U.S. manufacturers at a serious competitive disadvantage with the rest of the world. More than a decade ago, Chrysler reported that its health care costs in its U.S. factories were already $700 per vehicle, compared to $233 in Canada, where the government provides health care (Wise 1989, p. 6). By 2005, General Motors saw its health care cost per vehicle in the U.S. more than double to $1500 (Murray 2005).

By 1999, Ford’s costs for pharmaceuticals alone reached nearly $2,800 annually for each active hourly worker (Bradsher 2004, p. 90). GM, Ford and the DaimlerChrysler AG’s Chrysler Group estimate that they spent $9.9 billion in 2003 to provide health care to nearly 2 million workers, retirees, and dependents (McCracken 2004). By 2005, the pressure of promised health care and pension costs drove the credit ratings of Ford and General Motors below the threshold for junk bonds.

Already, by the late 1980s, corporate leaders in the United States began calling for the government to step in to contain health care costs (Gordon 1991). Conservative ideologues disagreed, insisting that market forces were better suited to solve the health care problem.

The newly‑elected president, Bill Clinton, promised to deliver an effective health care plan as the centerpiece of his administration, but strong industry pressure coupled with an aggressive public relations campaign derailed his plan. To meet some of the objections that conservatives raised, Clinton compromised his proposal. In the end, he offered a clumsy bureaucratic mish‑mash that pleased no one. Long after the inevitable defeat of the Clinton plan, it remained a powerful symbol of the supposed bureaucratic mess that any government health care plan would inevitably unleash.

Conservatives proposed that efficient corporate health providers could deliver substantial savings by monitoring health care to eliminate unnecessary expenditures. On its face, the idea made some sense. In fact, the Health Maintenance Organizations initially did manage to hold down medical costs, but not for long.

The conservatives’ brand of health care had a fatal flaw: any company whose profits largely depended on keeping medical costs in check also had an incentive to deny as much care as possible ‑‑ even when it is absolutely medically necessary. This emphasis on rationing had three dimensions: first, whenever possible providers would try to avoid responsibility of taking on people most likely to need care; second, they would try to deny needed care to those in need; finally, they would try to minimize the time spent with individual patients. In so far as this last strategy is concerned, Health Maintenance Organizations turned to consultants who recommended that they apply techniques modeled on the Toyota assembly line (Head 2003, p. 125). Patients had little reason to rejoice that doctors were expected to work at a pace comparable to a harried assembly line worker.

Unfortunately, one expense dissipated much or all of these savings from stinting on health care. Once a corporation takes charge of a huge medical insurance fund, nothing can stop the managers from appropriating big chunks of money for themselves in the form of bloated salaries and benefits and payouts for shareholders. Eventually, the excesses of management together with the monopoly profits from pharmaceutical corporations more than ate up the savings from the denial of medical services: health care costs soared once again, saddling the public with both higher costs and less care.

So in the end, commercial interests have trumped health concerns. Today, huge Health Maintenance Organizations work to minimize available health care while siphoning off a shocking 31.0 percent of health care expenditures for administrative costs. In contrast, Canada’s national health insurance program has an overhead of 1.3 percent. The U.S. health care industry continues to devote more and more of its energies to administrative tasks, despite the fact that computers have been reducing the need for tedious paper work. In fact, between 1969 and 1999, the share of administrative workers in the health care labor force grew from 18.2 percent to 27.3 percent (Woolhandler, Campbell, and Himmelstein 2003).

Excessive overhead and bloated corporate salaries do little to improve the delivery of health care. An editorial in the prestigious New England Journal of Medicine sums up the problem of the U.S. health care system:

The American health care system is at once the most expensive and the most inadequate system in the developed world, and it is uniquely complicated. In 1997 we spent about $4,000 per person on health care, as compared with the next most expensive country, Switzerland, which spent some $2,500. Yet 16 percent of our population has no health insurance at all, and many of the rest have only very limited coverage. [Angell 1999]

The corporations that led the movement for market‑driven health care had little reason to cheer. After interviewing the head of General Motors, Alan Murray, a columnist for the Wall Street Journal, expressed their exasperation:

The U.S. spends a fortune on health care ‑‑ 15% of its total output, compared with 10% in Germany and 8% in Japan. But it gets a lousy return on that money. Forty‑five million Americans lack health insurance. And errors are frequent: Recent studies show adults who visit a doctor or a hospital get what experts recommend as the best treatment only about half the time. [Murray 2005]

In the case of the automobile industries, ideology rather rather than commercial interests are trumping common sense.

Even within the United States healthcare system, nonprofit institutions are far more efficient than their commercial counterparts. For‑profit hospitals spend 23 percent more on administration than do comparable private not‑for‑profit hospitals and 34 percent more than public institutions (Woolhandler and Himmelstein 1997).

Despite the fact that the United States lacks a government‑run health care system, the government still pays for more than half of all medical expenditures. Per capita government spending on health care in the United States actually exceeds total health spending (government plus private) in every other country except Switzerland. In effect then, the people of the United States pay the cost of a national health care system without the opportunity to take advantage of its benefits (Woolhandler and Himmelstein 2001).

So, despite the promise of market efficiencies, the inefficient health care system still leaves U.S. corporations at a serious competitive disadvantage when they have to pay for their workers’ health care. The corporate response to the escalating costs of health care problem has been to shift more and more of the burden onto the underfunded government programs or onto the backs of workers through higher premium costs and co‑payments or, even worse, by the elimination of health care benefits altogether. By 2005, 45 million people in the United States lacked health care insurance. This problem is getting more serious by the day.

The proportion of Americans under age 65 covered by employer‑sponsored insurance fell dramatically from 67 percent to 63 percent in the short period between 2001 and 2003. The cost of these policies for both employer and employee generally increased while the coverage narrowed (Strunk and Reschovsky 2004).

The escalating cost of health care spills out into the rest of the economy. Employers attempt to pass their health care costs onto the rest of the public through higher costs.


Here are the extracts:

Mandel, Michael. 2006. “What’s Really Propping Up The Economy.” Business Week (25 September).

“Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago.”

“… housing has been a bonanza for homebuilders, real estate agents, and mortgage brokers. Together they have added more than 900,000 jobs since 2001. But the pressures of globalization and new technology have wreaked havoc on the rest of the labor market: Factories are still closing, retailers are shrinking, and the finance and insurance sector, outside of real estate lending and health insurers, has generated few additional jobs. Perhaps most surprising, information technology, the great electronic promise of the 1990s, has turned into one of the biggest job-growth disappointments of all time. Despite the splashy success of companies such as Google and Yahoo!, businesses at the core of the information economy — software, semiconductors, telecom, and the whole gamut of Web companies — have lost more than 1.1 million jobs in the past five years. Those businesses employ fewer Americans today than they did in 1998, when the Internet frenzy kicked into high gear.”

“Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured.”

“If current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in health care.”


3 comments so far

  1. steve heeren on

    having been a prof myself i feel i am entitled to a small pedantry: the word is “weird” not “wierd”.

  2. steve heeren on

    or did you mean “wired”?

  3. mperelman on

    Pedantry is better than sloppiness. Weird, it is.

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