Devouring the US Economy

A pretty face
Don't make no pretty heart
I learned that buddy
Right from the start
--Robert Palmer

To conclude our thread on the history of health insurance in the US, we focus on recent events beginning in the 1960s. By this time, the flawed private health care financing system was firmly in place. To make problems considerably worse, government entered the market with public healthcare programs called Medicare and Medicaid. Interestingly enough, both doctors and hospitals opposed this attempt at socialized medicine. Consequently, bureaucrats structured both programs to resemble Blue Cross and Blue Shield in order to assure providers that the status quo would not be upset.

Of course, when they realized that Medicare and Medicaid were a actually financial bonanza for them, healthcare providers quickly turned their hats around and become champions of these programs--a position that endures to this day. Subsequently, the incomes of medical professionals soared, roughly doubling in the 1960s and increasing many multiples since then.

An important consequence of these programs was the power that they gave state governments over hospitals. Because they became the largest source of funds for nearly every major hospital in the country, state governments could throw their weight around to influence hospital policy decisions. Not surprisingly, operating decisions began to assume political rather economic rationale. For example, closing surplus hospitals or converting them into more specialized operations became much more difficult. Although local neighborhoods and hospital workers unions gained from these decisions, society as a whole did not.

Finally came the explosion in medical malpractice litigation. For every malpractice suit filed in 1969, 300 were filed in 1990. Naturally, because lawsuits drive up the cost of malpractice insurance, these costs are passed onto patients and their insurance companies. Today, a neurosurgeon with an excellent record can expect to pay as much as $300,000/yr in coverage. Doctors in less lawsuit-prone specialties also pay higher premiums and are forced to order batteries of unnecessary tests and perform unnecessary procedures to avoid being second-guessed in court.

Like night follows day, it follows that medical costs have risen far above and beyond general prices, population growth, and medical productivity advances. As a fraction of GDP, the trend in healthcare spending looks like this:

1930  3.5%
1950  4.5%
1970  7.3%
1990 12.2%
2010 15.0%

Yes, medical advances have saved millions of lives and average life expectancy is much higher today than a century ago. But productivity improvements are generally supposed to lower costs rather than raise them.

Unfortunately, hampered US medical markets generate inefficiencies and costs that are devouring the American economy.