Over the past half century, healthcare expenditures
relative to GDP in the United States rose more than threefold, from 5 percent in 1960 to 18 percent today — the highest in the world. The next closet country spends one-third less.
During this time period, an unprecedented demand for healthcare services took root, evidenced by massive increases in the quantity of services rendered and higher prices. Healthcare expenditures rose more than 100-fold, from $27 billion in 1960 to $2.7 trillion, according to the Center for Medicare & Medicaid Services.
The principal reasons for this increased demand were tax policy and opaque third-party insurance pricing mechanisms.
During World War II, price and wage controls were established to accommodate the war effort. Corporations were able to attract labor by offering generous fringe benefits, such as healthcare. These benefits were tax deductible to the company and the employee and excluded from these controls.
Today, the combined payroll, federal, state and local marginal tax savings could easily total more than 75 percent of the employee's salary.
More insidious is the lack of transparent pricing available to healthcare providers and consumers by insurance companies, as suggested by Dr. Kavita Patel, a Brookings Institute fellow. When physicians and consumers lack sufficient knowledge about the cost-competitiveness of treatment options, expenditures tend to rise rapidly. In addition, insurance companies generally cover services without regard to outcome (fee-for-service).
Moreover, physicians sometimes have vested financial interests in the facilities to which they refer their patients. Ill-informed nutritional recommendations by physicians may have increased the incidence of obesity and related medical conditions, which permitted expensive symptom management in lieu of prevention.
Annual insurance premiums assume the inflated healthcare expenditures from the previous year will continue into the future, thereby creating a structural impediment to lowering expenditures and prices.
Healthcare expenditures will decline only if we create effective incentives to be more cost vigilant.
Transparent pricing would empower consumers to negotiate more affordable and higher quality care. Healthcare savings accounts that permit tax deductible savings, which can be kept tax free if not spent — approximately $5,000 per individual and $15,000 per family annually — would also provide the necessary impetus.
The current healthcare plan has not addressed these issues adequately and it has cost us dearly.
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