Health care reform has been the subject of much debate in political, academic and economic circles. Why is there such contention about reforming this industry? One reason is that health care is a very large part of our economy and our daily lives. It is estimated that Americans will spend $2.5 trillion on health care goods and services in 2009. One trillion is almost an incomprehensible number, even for number-hardened economists. A second is a very short unit of time – but one trillion seconds equates to over 31,600 years. If we travel one trillion seconds back in time, it is long before the recorded history of humankind. Clearly, one trillion is a very large number; it is a hard stretch to visualize that Americans consume 2.5 trillion dollars in health care goods and services every year. This is approximately $8,100 per citizen per year. In relation to our total production (GDP), the US spends much more on health care than other industrialized countries. Despite these large expenditures, and unlike many other industrialized countries, our nation does not make available health insurance for all citizens. Roughly 80% of our population was covered by health insurance for an entire year, approximately 8% have coverage for part of the year and 10% have no coverage at all. Of those 10% without coverage for an entire year or more, some are uninsured by choice and some cannot find or obtain affordable coverage.
Health care is also contentious because it impacts every stratum of our society; it impacts the elderly in particular because they consume more health care services. Medicare, a government program, is an important player in ensuring the elderly have access to insurance for medical needs. Medicare covers 45 million Americans and constitutes 22% of total health care spending. Of all federal dollars spent throughout the year, 14% of those expenditures are for Medicare disbursements. This percentage will grow significantly as Americans live longer, as more baby boomers reach the age of 65, and as more workers retire. The program does not cover nursing home expenses except under very strict and detailed circumstances.
Economists are divided on how to analyze health care, which also contributes to the confusion of reform issues. Economists utilize models to study the markets where goods and services are traded. There is disagreement in the economic community if health services can be effectively examined using traditional methods. In some ways, health care is not like other goods and services that we buy. The economic model of supply and demand assumes the consumer has extensive knowledge about the products he or she is purchasing. With health care goods and services, the patient is often ignorant of the products, options, cost and quality of health services. Patients frequently see a doctor not knowing what services they need; these consumers do not have the “extensive knowledge” that is assumed in many economic models.
Some traditional economists consider health care as a typical consumer good. Under this framework, the individual is responsible for analyzing his or her insurance needs and the individual is responsible for his or her health care expenses. Other economists study the industry by using the framework of institutional economics. The proponents of this method assert that individuals face forces that impact their ability to afford health care, and many of these forces are out of their control, such as low wages, unemployment and poverty. Institutional economists point out that lack of good health care impacts not only workers, but businesses and society. Therefore, providing health care is a social responsibility. Economists who follow traditional views tend to advocate actions that shift costs to the individual, while institutional proponents tend to advocate policies that share costs between different elements of society and government. Normative economic analysis incorporates morals, judgments and values. If an economist is speaking about what “should be done”, this is a clear indicator that he or she is engaging in normative analysis. This type of analysis cannot be proven or disproven by facts alone because it involves value judgments. This is one of the reasons why the debate about health care is so contentious. We see these opposing viewpoints mirrored in the discussion about traditional versus institutional economics. The debate about health care reform contains differing theories of the role of government and differing theories of the role of the individual.
Robert Bartelli, CPA, is an Assistant Professor of Economics and Financial Services at Labette Community College. In October he will be giving a series of lectures about health care as part of the University of Kansas Osher Lifelong Learning Institute. These lectures will be on LCC’s campus in Parsons. Registration is required. Please contact Sara Harris at 620-820-1255 for more information.