Socialized Medicine? Get Real, It’s Already Here

On another topic, Rock Hackshaw asked my opinion of government-funded healthcare, ie. "socialized medicine."  I responded by sending him an essay on health care finance I wrote a few years back during the recession, and he said I should post it here.  It’s long, but he seems to think it’s worth the read.

A spreadsheet backing up my assertions, produced some years ago, is attached.  The government share of health care spending is surely higher today.  Note also that when I make the case that, directly or indirectly, the federal state and local governments are already paying for most healthcare in any event, I included the share of private insurance that is purchased on behalf of public employees, but not the share purchased on behalf of public employee retirees, which I have no way to measure.  Add another few percent to the share of healthcare already funded by tax dollars, even as many are uninsured and get nothing despite paying taxes.

The essay follows:

These are tough times for anyone who has health problems, who might have health problems in the future, or who has a family member with health problems.  The share of private-sector workers with employer-provided health insurance, just 50 percent in 2000 at the height of the boom, continues to ratchet down.  Those who continue to have health insurance are being forced to pay a rising share of the premiums.  Those who are laid off and cannot afford to pay for health premiums on their own, if they or a family member has a chronic illness, face bankruptcy and possibly the loss of their homes, and thus their neighborhood, community and friends.

Do you think that all this is the downside of a privatized health care system?  Think again.  In the year 2000, the federal, state and local governments were already paying, directly or indirectly, for nearly three-quarters of the third party (not out of pocket) health care expenditures in the United States.  Excluding non-vital services such as dental care, chiropractors, podiatry, optometrists, physical therapists and naturopaths, that figure is over 80 percent.  And this share is going higher, even as more and more people have no health insurance at all.  More and more public money is being used to benefit fewer and fewer people, even as those who get nothing, who are often poorer than the beneficiaries, are forced to pay taxes to fund those benefits.

The Numbers

Where do these figures come from?  They are summarized in a table at the end of this essay.  For starters, according to U.S. Census Bureau’s 2002 Statistical Abstract of the Untied States, of the $1,130 billion in U.S. personal health care expenditures in 2000, $194 million was paid for out of pocket while $936 billion was covered by third party payments.  The government accounted for 52 percent of these third party payments ($489 billion).  Excluding dental care and non-physician professional services, the government accounted for 61 percent of third party payments.  This should be no surprise.  The Veterans Administration is the largest health care entity in the United States.  The old and disabled at the heaviest users of health care, and most of their care is paid for by Medicare and Medicaid.  Medicaid and public hospitals finance health care for the otherwise uninsured poor.  As the population ages, and fewer and fewer low-paid workers receive private health insurance from their employers, the share of health care expenditures directly financed by the government is going nowhere but up.

Then there are indirect government expenditures.  Private health insurers paid for $391 billion in health care in 2000, but while just 50 percent of private sector workers received health insurance from their employers, 86 percent of civilian public employees did.  Government workers thus accounted for an estimated 26 percent of those with private health insurance.  So even assuming that public employee health insurance paid no more per employee than private employee health insurance (not likely true), the government also paid, indirectly, for 26 percent of the health care financed by private insurers.  The government also subsidizes part of the private insurance paid for by private sector employers.  According to Table 464 in the 2001 Statistical Abstract, the exclusion from taxable income of employer contributions to health insurance premiums cost the federal treasury $77 billion in 2000.  Federal tax breaks, therefore, indirectly financed 22 percent of all private insurance premiums in 2000, or 8 percent of all third party healthcare expenditures.

Adding these indirect expenditures together, and eliminating double counting (public employees also benefit from the tax break), one finds that the federal, state and local governments are indirectly paying for or subsidizing an additional 20 percent of all third party health care expenditures in the country, in addition to the 52 or 61 percent they pay for directly.  Just including these factors alone, the federal, state and local governments were already funding, directly or indirectly, for 73 percent of all third party healthcare expenditures, 81 percent if non-vital services are excluded.

And that isn’t all.  The exclusion from income of employer contributions to health insurance premiums affects state and local income taxes as well as federal income taxes.  Since state and local income tax collections were 11 percent of federal income tax collections in 2000, this deduction cost state and local treasuries an estimated $8.4 billion.  Some of the care of the uninsured is funded by charities; this is subsidized by the deductibility of contributions to health care charities, at a cost of an additional $2.9 billion at the federal level and more at the state and local level.  Finally, many hospitals, nursing homes and clinics are operated by non-profit organizations.  These are exempt from local property taxes.  Given these additions, and others, the statement that the government was paying, directly or indirectly, for three-quarters of the third-party health care spending in the country – four-fifths excluding non-vital services – is conservative.

The Winners

If that 75 to 80 percent was only used to pay for a basic level of health care, at fair prices, then universal health care could probably be achieved without the expenditure of a single additional dollar of public money.  Instead, public funds and subsidies are used to pay for, or to subsidize, the most advanced, costly, high technology health care in the world, for those fortunate enough to benefit from it.   Organ transplants.  Artificial bones and hips.  Advanced, non-generic drugs.  Personal health aides.  Viagara, Levitra, and Claritan.  Fertility treatment.  Orthodontic treatment.  In some cases, even plastic surgery.

Americans no longer expect the health care system to merely preserve their life to the extent practical, but also to make it perfect, free from disability, disappointment, aches and pains.  And there is nothing wrong with that, if they are willing and able to pay, but many are not willing to pay for others to have the care they expect themselves.  And meanwhile, working people who do not receive employer-financed health insurance, and cannot afford to purchase health insurance themselves, pay taxes for health care but get nothing.  Until a health emergency bankrupts them, and they qualify for Medicaid.

The current system benefits today’s elderly, whose retirement income is exempt from the payroll taxes used to pay for their care under Medicare.  The cost falls on others, and as divorce and mobility break down extended family ties, those others are less and less likely to be the objects of concern in many families.  Indeed, the 1980s elderly uprising, after the Congress had the nerve to pass an additional Medicare benefit for seniors financed by taxes on the seniors themselves, is the stuff of political legend.  It was quickly repealed.

Those affluent or fortunate enough to have employer-provided health insurance are also winners, thanks to the tax deduction.  Employer-provided, government subsidized health insurance is most secure for those with seniority in unionized companies and industries; of these, public employees are the best off, with the most generous coverage and the lowest chance of losing their jobs.  No wonder the unions, especially the public employee unions, were so firmly behind Al Gore and against Bill Bradley in the 2000 Democratic presidential primary.  Bradley had proposed universal health insurance, and Al Gore had criticized the cost of it. Why would union members want to pay taxes for others to get something that they were already getting, in part at someone else’s expense, themselves? 

The distribution of cash income has become more unequal in recent decades, with the new working class earning less relative to those in the top 20 percent.  But the distribution of benefits such as health insurance has become more unequal as well.  Even if one has employer-provided health insurance, the value of the tax benefit is greater the more you earn.  And unlike other tax breaks, the exclusion of health insurance from income comes right off the top, does not phase out at higher incomes, and is not affected by the alternative minimum tax.  Billionaires get the subsidy; burger flippers do not.

The health care industries are themselves winners, since the mishmash health insurance system allows them to milk the public treasury without appearing to do so.  No wonder they opposed Bill Clinton’s universal health care plan in 1993.  Separated from the customer by blame-absorbing intermediaries, the health care industry continues to provide more and more expensive care to fewer and fewer people, with an ever present threat of providing nothing at all unless funding is increased further.  Nowhere in the United States is the health care industry more powerful, and greedier, than in New York.  Despite using its political muscle to push through a Medicaid program that pays twice as much as the national average per recipient, the state’s hospital industry is forever on the brink of bankruptcy, threatening to cut off care unless even more public money is provided.  Taxes are raised, and other services cut, to make up the difference.

The Losers

The losers?  Start with today’s real working class – not those with seniority in high-paid, unionized industries.  The real working class consists of Blacks, Latinos, Asians, immigrants, “rednecks,” and others working in the low paid, no-benefit small business sector.  If faced with a serious family health crisis, these families would eventually receive health care under Medicaid, but only after their own resources were exhausted.  This is a disincentive to work and save, since – given the extraordinary “rack rate” charges for health care – those savings would probably be lost someday.

Then there are tomorrow’s elderly, the young people of today.  With U.S. fiscal policy now similar to Argentina under Peron, it is clear that 20 years from now high taxes will be going to pay the interest on today’s debts, not for health care for tomorrow’s senior citizens.  Perhaps it is an exaggeration to say that instead of Medicare those now under age 50 will be offered medical marijuana followed by legal assisted suicide.  Then again, it isn’t hard to find people under 50 who doubt they will do even that well.

Self-employed, college-educated “freelancers,” a rising share of the workforce, are also losers.  Employers increasingly hire “freelancers” rather than employees just to provide lower compensation – no health care, no retirement plan – to the next generation of workers, while maintaining tax-advantaged benefits for those already on the payroll, and for management.

Some have claimed that being uninsured is a “lifecycle” issue – that the young could afford, but choose not to purchase, health insurance because they are unlikely to become ill and have few assets to lose if they become ill while uninsured.  Twenty years ago, however, one might have said the same thing about defined-benefit pension plans:  that the young were choosing to forego jobs with pensions, but would pursue them as they aged and retirement approached.  It turns out, however, that the absence of defined benefit pensions was a generational shift, not a lifecycle stage, and today only 19 percent of private sector workers (but 90 percent of public employees), have such pensions, and most of these are older workers near retirement.  In fact, half of all private sector workers have no retirement plan at all, other than social security, and many employers stopped contributing to 401K plans in the recent recession.  There is every reason to believe that the loss of private health insurance is also a generational shift, not merely a lifecycle stage.  It is yet another way older generations are better off than younger generations.

Among the self-employed there is a-sub group of very valuable, but politically under-represented people – entrepreneurs who hope to become major employers themselves someday.  A burst of entrepreneurship could turn the economy around, replacing older businesses and types of businesses that are declining and consolidating.  Would-be entrepreneurs, however, have a big disincentive to start new companies.  They are inhibited by the high cost of individual health coverage, and potential financial ruin if they choose, or are forced, to remain uninsured while starting a company.

And it isn’t just healthy young people who could become entrepreneurs – those over age 50, who have accumulated assets, contacts and knowledge over a lifetime, also start businesses.  And it isn’t just entrepreneurs who are penalized by America’s health care finance system.  Those who choose to become artists, to become missionaries, even to run for public office, lose out as well.  Even if they can afford individual health insurance today, they are likely to face drastically higher premiums, under the “re-underwriting” trend, if they ever become ill, just as drivers face higher auto insurance premiums if they get into an accident.


Loss of Economic Flexibility, and Freedom

A reduction in entrepreneurship is just one of the ways that the existing health care finance system reduces economic flexibility, diminishes economic opportunity, and reduces economic growth.  Anyone with both employer-provided health insurance and a chronic condition, or with a family member who has a chronic condition, is inhibited from changing jobs, since the new employer’s health insurance plan many not cover their “pre-existing” condition.  The employment relationship, therefore, is no longer voluntary – the employee is more like a slave, unable to sell their services in the free market.  The employer, as well, is inhibited from laying him or her off by the possibility of a lawsuit that the employee would almost certainly be desperate enough to file.

Small and medium sized companies that still offer health insurance are inhibited from hiring potential employees who have, or who (based on their genetic history) may develop, expensive chronic health problems.   For small businesses, the insurance payments for a single unhealthy employee may be enough to bring on a devastating premium increase.  As a result, genetic testing may make some potentially valuable workers increasingly unemployable.

Those over age 50 are, in fact, virtually unemployable today – until they reach age 65 and qualify to Medicare.  No wonder the employment rate for men age 50 to 65 is falling, even as it rises for men age 65 and up.  The result is lost economic potential for the economy, and hardship for the individual.  In fact, the entire employer-provided health insurance system is in a state of slow motion collapse.  The only question is whether to continue to tax the uninsured to subsidize it further, or to break free to a new system that makes more sense for the economy.

More and More for Fewer and Fewer

One might think that the needs of the uninsured, and the potentially uninsured threatened by layoffs or their company’s bankruptcy, would be the number one political issue in the United States.  After all, the number of uninsured Americans is now over 44 million, and that number is rising.  They would come first based on need, but not based on power.

Instead, more and more public money is going to more and more health care at higher and higher prices for fewer and fewer people.  The elderly, who already receive the lion’s share of government health care spending, have added a prescription drug benefit to their winnings.  This benefit will be paid for not with taxes but with debt, a cost passed onto future generations who will almost certainly receive diminished public health benefits after 2015, when Medicare is forecast to go bust.  It is certainly reasonable to be concerned about the burden rising drug costs place on seniors.  But given that seniors already receive extensive government-funded health care, was if fair to make that the number one priority for spending the money we don’t have?

And every time the cost of private health insurance rises, the cost of the tax-based government subsidy the insured receive rises as well.  According to the 2003 Statistical Abstract, the exclusion of employer-provided health insurance from taxable income is projected to cost the federal treasury $120 billion in fiscal 2004, nearly a $44 billion increase since 2000, or nearly $1,000 for every uninsured American.  Meanwhile, the cost of health care benefits for public employees has soared in the four years from 2000 to 2004, another increase in benefit for existing beneficiaries.

Despite this surge in spending on those who already receive substantial public subsidies – perhaps a total of perhaps $130 billion per year from now on – the Democrats once again failed to back a candidate for President who favored a universal health care insurance program in 2004.  Too much money, they decided, while expressing their concern that those who already benefit from government and tax-subsidized health insurance are being forced to pay too much out of pocket.  The Republicans have barely addressed the issue.  After spending the 1990s demonizing the less well off, based on an objection to the government forcibly redistributing income downward, they seem unconcerned that existing government health care finance policies are in fact redistributing income upward.

This is morally offensive and economically inefficient.  It is socialized medicine without a social conscience, more like the corrupt and decaying socialism of the late stage Soviet Union than the national healthcare system most other developed countries have.  When the federal government maintains, or even expands, this hodgepodge system, the inequities and inefficiencies can only grow.  Yet it continues to do so, and not because the people of the United States are opposed to “socialized medicine.”  With the government already covering 75 to 80 percent of personal health care expenditures today, and certain to cover a higher share in the future, socialized medicine is already here.

The health care finance system stays as it is because selfish, organized interests with power benefit from it, at other the expense of other people and future generations.  These interests have lock on both the Democratic and Republican parties.  Democratic and Republican politicians, addicted to perpetual incumbency (perhaps, in part, because they are unwilling to risk the loss of their own publicly-financed health insurance) are unwilling to do anything that takes anything away from them.

What is needed is a single, simplified public healthcare finance system, perhaps based on Medicare and/or Medicare managed care, to provide for the basic health care needs of everyone.  Individuals could then be permitted to purchase more high-tech, more extensive, less essential, or higher amenity care on their own, by adding their own funds, without tax breaks or subsidy.  Inequities present in society are unfortunate; inequities generated by public policy are immoral.  If our elected officials are unwilling to provide equity, someone should at least force them to admit the truth.

Lawrence D. Littlefield