Op/Ed: On Health Care, The Numbers Just Don't Add Up

Many individuals believe that since government agencies do not seek profits, they can provide higher quality services at a lower cost to the public. However, removing the profit motive opens the door to waste and inefficiency. Nowhere is this lesson more important than during the current debate on health care reform.

President Barack Obama’s proposed changes to the health care system are reminiscent of those made in 1965. After Lyndon Johnson signed Medicare into law he stated, “No longer will older Americans be denied the healing miracle of modern medicine.” The only cost of this would be “a small amount each payday for hospital insurance protection.” Johnson admitted that the program had a few defects, but believed that these would be quickly remedied. The track record of government provision of health insurance has shown this is not the case.

Without the profit motive, there are limited incentives to combat inefficiency. Waste is rampant in the Medicare program. Medicare paid 18,000 dead physicians 478,500 claims totaling $92 million from 2000 to 2007. It is conservatively estimated that the cost to the American taxpayers from deceptive billing was $10.8 billion in 2005. The government spends less than 2 cents of every dollar of the approximately $500 billion annual budget combating fraud, waste and abuse. It is doubtful that a private insurance company would be so lax in protecting its shareholders.

The government attempts to control costs by imposing price controls. The reimbursement rate paid to hospitals and physicians is below the actual cost of providing services. This has resulted in 30 percent of physicians not accepting new Medicare patients, denying treatment to those without private insurance. President Obama’s plan to cut $200 billion from the program will only aggravate this situation.

Medicaid fares no better under examination. The Government Accounting Office estimates Medicaid fraud at $33 billion. Only about half of doctors surveyed will accept new Medicaid patients due to the low reimbursement rates.

Inefficient government provisions might be tolerable if there were not an efficient private market in the provision health insurance. This is not the case.

According to a recent Census Bureau study, 85 percent of U.S. residents were privately insured or enrolled in government heath care programs. Approximately 18 million of the uninsured lived in households with incomes above $50,000 and could likely afford health insurance. Close to 14 million uninsured adults and children qualified for government programs but had not enrolled. Seventy percent of the uninsured could easily obtained coverage but have chosen to forego this option.

In total, 95 percent of United States residents either have health coverage or access to it. This number increases if only United States citizens are considered, since foreign-born residents account for 27 percent of the uninsured. Additionally, many of those who lack insurance are uninsured for a short period of time. The Congressional Budget Office estimates that for all of those who are uninsured today, less than half will be uninsured 12 months from now.

There is an alternative to the President Obama’s plan. One of the truisms of economics is that competition always leads to efficiency. The McCarran-Ferguson Act, which allows states to set their own requirements for coverage, had lead to more than 1,900 state mandates across the United States. For example, about 25 percent of states require health insurance to cover acupuncture and marriage counseling, and seven states require coverage for hairpieces. These mandates drive up the cost of health insurance. For example, a family purchasing a health insurance policy in Wisconsin would pay about $3,000. A similar policy would cost $10,000 in New Jersey, $12,000 in New York and $17,000 in Massachusetts. The repeal of this act would drastically reduce the cost of private insurance, giving more firms the incentive to provide this benefit to their employees. Allowing employers to pick the most efficient provider of a quality service would be wiser than the $1 trillion plan currently being debated.

It has often been said that those who do not study history are doomed to repeat it. Not having the discipline of a profit motive, the government does not have an incentive to provide services in an efficient manner. It will be no different with the current health care proposal.

Gotwalt is an assistant professor of economics at Sweet Briar College and chairman of the department. He wrote this commentary for The News & Advance.