What Is the Governme nt’s Role in U.S. He althcare?

Healthcare will grab ever more headlines in the U.S. in the coming months, says Jim Heskett. Any service that is on track to consume 40 percent of the gross national product of the world’s largest economy by the year 2050 will be hard to ignore. But are we addressing healthcare cost issues with the creativity they deserve? What do you think?


This month’s exchange of ideas regarding U.S. healthcare reform ranged far and wide. Some of us were interested primarily in the issue of cost escalation and how to contain it. Others addressed issues of quality. For still others, it was a matter of inequality of treatment. If this is a microcosm of current concerns and suggested solutions, does it bode well for the formation of a consensus, political or otherwise, leading to progress? But a number of respondents raised the question of whether the most feasible solution may lie primarily in the free market, with perhaps some help from government.

Suggestions of causes of the current challenge of rapidly rising costs in relation to quality of outcomes, at least by the imperfect measure of life expectancy, included waste in the system (Julie Maire, Edward Hare, and Jack Flanagan) as well as fraud (Kate McClelland), risk avoidance on the part of physicians, a litigious society, and inadequate protection from it for physicians (Rowland Freeman), “defensive” medicine leading to unnecessary tests and treatments, an insurance system that is costly and inadequate for those who really need it (Amar Sahay and David Albert Newman), the high cost of new technology, artificial restrictions on the supply of drugs (Sergey Mirkiin) and healthcare providers (David Stahl and Michael Robbins), the size and complexity of the problem itself (James Sullivan), government involvement (Paul Jackson), and uninformed or unnecessarily needy consumers (Hakan Hillerstrom).

In addition to these issues, Elizabeth Benbrooks reminds us that (healthcare) “comes freighted with a host of fundamental moral, ethical, and emotional issues that simply don’t exist for other industries.” Perhaps this is why Hakeem Yesufu asserted, “I am an ardent free-market capitalist who realizes capitalism has no place in healthcare provision.” But Tery Tennant asks what is perhaps the ultimate philosophical question: “… when did an individual’s medical needs become an inalienable right that the government has to insure?”

A number of responses suggested various free market mechanisms for addressing these issues. Where to start? Paul Jackson suggests that “The only thing the government should be involved with is controlling the drug, insurance, and medical industry advertising spending which would bring down costs.” On the other hand, Wayne Baldwin argued that “Containing costs will come at the expense of something … technological advances, profit, access to certain services, and patient choice are likely candidates ….” One line of thinking would make both talent and drugs more competitive. Sergey Merkin asks, “Why not open the country to foreign medications?” In citing the need for more doctors and nurses, David Stahl comments that “it could be a way to help open immigration in this country.” Michael Robbins adds, “Healthcare has been a closed guild.” David Othmer cited “the maze of regulations that keep, for example, nurses from using all their skills” in providing basic healthcare. And Hakan Hillerstrom implied that consumer education and choice may be an important response to many of these challenges.

In spite of the issues’ complexity, Richard Fallis offered the observation that “Reform is coming … because Wal-Mart and GM want it.” He thinks it could come in the form of a “Two Percent Solution” in which everyone would pay 2 percent of their income to be held by the Government for their healthcare, with “competition … maintained through private providers” and the bills of those unable to contribute paid by the Government. Keith Butler believes that it could come in the form of a two-tiered system of private treatment at personal expense layered on a service free to all with protections for healthcare givers and the elimination of third party insurance. Are these the free market answers we’ve been waiting for? What do you think?


Healthcare will grab more and more headlines in the U.S. in the coming months. Any service that is on track to consume 40 percent of the gross national product of the world’s largest economy by the year 2050 will be hard to ignore. Business management already feels the effects of healthcare costs more acutely than most consumers. Several recent studies and proposals shed light on the problem and possible solutions. They leave us with questions, too.

To put things in perspective, U.S. healthcare currently costs about $2 trillion per year. Of this, more than $600 billion (31 percent) is never seen by recipients. It goes for administration. On a per capita basis, it is roughly $280 billion more than is spent for administration in the other twenty-one countries whose life expectancies exceed those in the U.S., all of whom have some form of taxpayer-financed, single-payer system, the kind that used to be referred to by detractors as “socialized medicine.” Worse yet, the current system leaves more than 40 million Americans without health insurance. Because many are not employed or have very low incomes, programs that provide incentives through employers and tax relief don’t help them. With this much room for possible improvement, the incentives should be sufficient to foster changes in behavior.

A recent McKinsey study estimates that more than half of the $98 billion of excess administrative costs it identified goes for insurance company marketing and underwriting. Its estimate does not include the costs of sorting out acceptable applicants or denying payments under existing policies, another substantial amount. And it does not include the costs that doctors and hospitals incur in denying applications for payment, often in the form of payments to consultants who specialize in this kind of responsibility-shifting activity. By contrast, McKinsey estimates that it would cost “only” $77 billion per year (or about $1,900 per person) to provide healthcare to all of America’s uninsured. If made available along with consumer education, others have suggested that all of this amount could be recouped eventually through the elimination of healthcare expenses incurred by those unable to pay now.

Now comes Robert Frank, a Cornell economist, who has proposed ways of overcoming opposition to some kind of government- (and therefore taxpayer-) funded solution to the problem. He has put his finger on the two main obstacles to major change in the current system, insurance company opposition and higher taxes. He suggests that insurance companies, who have acted in good faith to respond to incentives provided by the market, could be subsidized for their losses while their managements shift their health insurance strategies, perhaps to provide only supplemental private coverage. A portion of the $280 billion in annual savings suggested above could be used for this purpose. He proposes that the other obstacle, higher taxes, could be overcome through an effort to educate the public about the long-term economic benefits of such a move. How his proposal would fare in the face of previous failures is a real question.

Given their magnitude, failure to solve these problems in the U.S. could have global economic impact. But are we addressing them with the creativity they deserve? For example, to combat opposition to a tax increase, could tax credits for later use (when savings kick in) be issued to individuals and businesses in the amounts by which their taxes are increased? To provide universal insurance, could the government provide vouchers (along with consumer-oriented education) to all uninsured to be used at their discretion for their own care? In other words, could a consumer-driven solution be combined with a single-payer system? What can the U.S. learn from other countries in the delivery of high-quality healthcare? What is the government’s role in U.S. healthcare? What do you think?


Robert H. Frank, “A Health Care Plan So Simple, Even Stephen Colbert Couldn’t Simplify It,” The New York Times, February 18, 2007, p. C3. He is the author of a book, The Economic Naturalist, to be published this spring.

McKinsey & Co., “Accounting for the Cost of Health Care in the United States,” January 2007.http://www.mckinsey.com/mgi/rp/healthcare/accounting_cost_healthcare.asp


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