Repost: Health care and the budget deficit in the US. Joint blog John Menadue and Ian McAuley

Dec 26, 2013

Repost for holiday reading.

The political obstacles to these two major problems for President Obama are real and confusing. But the arithmetic is quite clear.

If the US had a health service like those in countries without heavy reliance on private insurance, such as Australia, it could solve its budget deficit problem.

Let us explain the arithmetic. US health care expenditure is already 18% of GDP – and on present trends will reach over 20% of GDP by 2020.  It is by far the highest in the world: most developed countries contain their health care expenditure at around 10% of GDP.  (Australia’s health care expenditure is 9% of GDP, of which about 6% is spent by our governments.)

Of that 18% of GDP in the US, half is spent by government, while almost all of the other half is through private insurance. In rough figures, the USA is now committing as much public expenditure on health care as those countries – UK and the Nordic countries – which for the same public expenditure have comprehensive government-funded single payer systems and with only a marginal role for private insurance.

The contrast between the experience of America and those countries with single government payers demonstrates clearly how private health insurance causes health care costs to run out of control, and eventually forces up public expenditure as the government is forced to pay prices set in a distorted market where private insurers pass through costs set by powerful providers, called by some the “health care complex” – a reference to the similarly insatiable “military-industrial complex”.

Imagine if Obama, who has often referred to the “public option”, could convince Congress to put good fiscal management and the provision of affordable health care ahead of the interests of private health insurers and health care corporations.

The government could simply take over all health insurance and use its strong purchasing power to control prices and usage, as in those countries with single payer systems. That would bring the total cost of health care down 9% of GDP, in line with those countries, and would cost no more in public expenditure.

The other 9%, presently passing through private health insurance, would be collected as public revenue – in other words a tax increase. Americans would be trading health insurance outlays for a tax increase. They would be substituting an official tax for what is essentially a privatized tax, for most Americans, who are fortunate enough to have good jobs, have little personal choice about health insurance, that choice being made by their employers who essentially deduct it from their pay just as they deduct official tax payments to the Internal Revenue Service.

With another 9% of GDP in taxation revenue there would be a turnaround in the federal budget, which is presently running a deficit of 7% of GDP. The 2% surplus could be directed to paying down debt or investing in much-needed public investment.

Are there flaws in our argument?  We have ignored the political hurdles, the difficulty of rolling back entrenched corporate privilege, and the irrational way in which people have become blind to the cost of private health insurance, which trades on the notion that because it is “private” it has some intrinsic virtue.

It’s a lesson for those in Australia who naively believe that shifting health care expenditure off-budget will save public expenditure.  Beware any in Australia who suggest we go down the route of expanded private health insurance. In the short term there may be some budgetary savings and possibly some tax reductions, but those tax reductions would be more than cancelled by health insurance premiums – we would be paying “taxes” to Bupa, Medibank Private and the other private insurers. In the long term, as is happening in the USA, even public expenditures would rise – we would be paying more taxes to the ATO and to the private insurers. The US disaster in health care is a warning of what not to do.

John Menadue and guest blogger, Ian McAuley.




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