Kristian Niemietz Blog

A new word has recently entered the English language: Obamacare. It does not yet appear in any dictionary, probably because nobody yet knows its precise meaning. But judging from the proposals debated in Congress so far, all signs point towards a much enhanced role for the state in American healthcare.

For European opponents of healthcare liberalisation, the American system is a blessing. It seems to confirm all their prejudices. With 47 million uninsured, healthcare in the US is highly inequitable. And it is not particularly cost-efficient: last year, more than 16% of US GDP was spent on healthcare. Proponents of socialised healthcare see this as proof that laisser-faire healthcare not only fails the poor, but nearly everybody. The profit motive is alleged to drive up costs and encourage unnecessary spending through means such as advertising.

Undoubtedly, US healthcare needs a serious overhaul. But does it really suffer from “excessive” liberalism? It’s true that more than half of US healthcare spending comes from private sources, compared with less than a fifth in the UK. But private spending does not in itself make a market.

First of all, while we hear a lot about the American health insurance market, such a thing does not exist. Each US state regulates its health insurance industry differently and requires its citizens to purchase health insurance in their state of residence. This peculiar form of internal protectionism artificially fragments the market and suppresses competition. It has been estimated that the number of uninsured would drop substantially if a national health insurance market was allowed to develop.

Secondly, the purchase of health insurance is tied to employment. Employers usually arrange group contracts for their entire workforce. If you are unsatisfied with your health insurer, you may need to change your job. Opting out of workplace-provided insurance is not prohibited, but usually unwise: employment-related health insurance is tax-deductible; individually (or otherwise) purchased health insurance is not. Apart from dulling competition in the insurance market, this provision has a pernicious side-effect: when people lose their job, they automatically lose their health coverage with it. Of those lacking coverage, 45% are uninsured for six months or less, so these are most likely people who are between jobs. Providing a general tax allowance for the purchase of health insurance, employer-sponsored or otherwise, could go a long way in tackling this problem. Those on very low incomes or with pre-existing conditions could be given a health insurance voucher.

Then there is the medical tort system which makes dubious malpractice lawsuits lucrative. This drives up costs in two ways: firstly, physicians’ liability insurance premiums are sky-high, and of course it is ultimately the patient who pays them. Secondly, it incentivises physicians to provide expensive services not out of medical but out of legal considerations, as a means to hedge their bets.

Costs are also affected by the high entry barriers to the medical professions. Relative to population size, the US has fewer physicians and medical graduates than any Western European nation. Accordingly, their remuneration is higher relative to GDP per capita.

There can be no doubt that US healthcare is seriously flawed. But before being too enthusiastic about making their healthcare system “more Canadian” or “more European”, maybe Americans should first consider making their healthcare system more genuinely American.