Health Reform in the United States

Abstract

Health care has figured prominently on the public agenda of the United States in recent years. In addition to the well publicized I993-4 health care reform effort, the failure of the President and the Congress to reach a budget agreement in January I996 was partly attributable to differences with respect to the Medicare and Medicaid programmes. In this paper I first describe some key facts about the American health care sector and then appraise recent trends. The health care sector is prominent not only on the public agenda but also in the economy. In I994 Americans spent $949 billion, or I3'7% percent of GDP, on health care, values that exceed those of any other developed country.' Moreover, the sector has been growing fairly steadily at approximately 4 % per year per person in real terms for over 50 years (Table I). The uptick in the I960s was most likely attributable to the implementation of the Medicare and Medicaid legislation in I966. In popular discussions this factor-of-ten real cost growth over half a century is often seen as abuse and blamed on some combination of physicians exploiting fee-for-service reimbursement, as well as rents arising from largely passive third party insurance (i.e. excessive fees). At a theoretical level economists would presume that, apart from time, pain and other non-pecuniary costs, fully or nearly fully insured consumers will demand health services until the marginal product is near zero. Furthermore, fees paid by insurers (private or public) are likely to be above marginal cost, because fees below marginal cost would not elicit production and the traditional insurance coverage, as explained below, provides little basis for price competition. Thus, fees could contain rents, but in any event will be sufficiently high that physicians will be willing to satisfy consumer demands. Furthermore, if consumers are not fully insured, any rents might tempt physicians to induce additional demand.2 In fact, evidence of moral hazard in American health care is reasonably strong. Fully insured consumers in a randomized experiment spent about 40 % more than those with a large deductible, but for the average person there was little or no measurable effect on health.3 The degree of cost sharing under traditional indemnity insurance, however, was less than the large deductible