Getting Better Health Care For Much Less Money

Replacing the ACA offers a genuine opportunity for Congress to fix a lot of the problems with health care markets—problems that begin with government policy favoring comprehensive health insurance over all other methods of financing health care expenses.

According to a recent statistical analysis, medical care determines only about 11 percent of health—far less than individual behavior (38 percent), social circumstances (23 percent), and genetics and biology (21 percent). The preponderance of evidence demonstratesthat much of what we spend on health care does not translate into better health outcomes and that collectively we don’t receive nearly enough benefit to justify the costs in higher taxes, higher premiums and lower wages.

As Congress and the incoming Trump administration consider how to replace the Affordable Care Act (ACA), they should focus on the drivers of excessive spending, the primary one of which is comprehensive health insurance. By doing so, President-elect Trump can best attempt to deliver on his promise of “great health care for much less money.”

The expense from comprehensive health insurance—nearly total coverage for health care related charges—is enormous. The expense, however, is mostly invisible. People largely don’t see the foregone wages for employer coverage or the taxes needed to finance health care spending. Comprehensive coverage produces moral hazard, leading many people to receive care that costs much more than the corresponding expected marginal benefit.

The central problem of many with the ACA is its requirement for comprehensive coverage. With limited exception, all employer and individual market plans must now meet a large number of new requirements. Comprehensive health insurance also carries large administrative costs from insurers serving as the middlemen between providers and consumers. As a result of the ACA, premiums, particularly for individual market coverage, have risen sharply.

Most of the people who gained coverage were added to the Medicaid program, which provides a comprehensive set of benefits. The Medicaid expansion has produced enormous additional amounts of health care spending that likely provide enrollees with relatively low benefit. As evidence, the per enrolleecost of the Medicaid expansion is nearly 50% above estimates while economists at MIT, Harvard, and Dartmouth estimate that Medicaid expansion enrollees obtain just 20 to 40 cents of value for each $1 of Medicaid spending on their behalf.

Since the benefits of the ACA are not worth the costs of higher premiums, higher taxes, reduced choices, and a dysfunctional individual insurance market, the ACA should be repealed. An ideal replacement for the ACA could markedly improve health care and put significant downward pressure on prices if it chips away at policies that favor comprehensive health insurance over other financing arrangements. In a 2009 Atlantic essay entitled “How American Health Care Killed My Father,” David Goldhill put it this way:

"The most important single step we can take toward truly reforming our system is to move away from comprehensive health insurance as the single model for financing care. And a guiding principle of any reform should be to put the consumer, not the insurer or the government, at the center of the system.

A more consumer-centered health-care system would not rely on a single form of financing for health-care purchases; it would make use of different sorts of financing for different elements of care—with routine care funded largely out of our incomes; major, predictable expenses (including much end-of-life care) funded by savings and credit; and massive, unpredictable expenses funded by insurance."

Through Medicare, Medicaid, the ACA, and the tax exclusion for employer-sponsored insurance, the federal government is providing more than $1 trillion of subsidies for comprehensive health insurance each year. The subsidies tend to be delivered directly to insurance companies or hospitals. Outcomes would undoubtedly be far better if financial assistance was provided directly to consumers and market forces—producers attempting to satisfy consumer desires and consumers looking for the best deals—were allowed to flourish.

Changing a status quo that benefits established and politically powerful actors like hospitals and insurers will be difficult. Replacing the ACA, however, offers a genuine opportunity for Congress to fix a lot of the problems with health care markets—problems that begin with government policy favoring comprehensive health insurance over all other methods of financing health care expenses.