Why Is Fixing American Health Care So Difficult?

Oct. 13, 2006 — -- The Health Care Blog

Almost all the problems with the American health care system boil down to two questions. How do we create a system that ensures that all citizens, and perhaps residents, have access to health insurance? And how do we contain the huge cost increases?

Of course, behind these questions lies the question of how to reform the nation's largest industry that serves and richly rewards many powerful interests.

Reforming Insurance?

The insurance question is problematic for two main reasons. First, only a small percentage of the population is sick and almost all the health care dollars get spent on it. So, in order to pay for the health care of all those sick people -- and the costs are well beyond the means of the individuals concerned or those of their families -- there has to be some transfer of money from the healthier and wealthier.

The only effective way to make this transfer is to forcibly place everybody in the same insurance pool, and then fund that pool by some type of tax or quasi-compulsory premium contributions. Otherwise, any attempt to provide insurance to people who are sick means, by definition, that people who are well are going to pay more for their insurance than they'll need or use.So, by definition, voluntary health insurance pools are very unstable, as healthy people will leave for cheaper alternatives. Insurers know this, and they exclude sick people from pools using a method called medical underwriting.

For most of the last 60 years, we have dealt partially with this problem by letting employers act as natural insurance groups, and have papered over some of the cracks by letting the government take care of those more likely to get sick -- the elderly (via the Medicare program) and some of the poor (via Medicaid).

However, over the last few decades, employers have found that the cost of health care has become a significant drain on their profits. Meanwhile, the share of total employee compensation required to provide health insurance, especially for the lower paid, is so great that employers have essentially stopped providing it.

For example, the cost of family premiums in some states is close to the income of minimum wage workers. Most employers are highly unlikely to want to double their labor costs by offering health benefits, and most employees, of course, can't afford it.