Expanding health insurance won’t lower health care costs

By Byron Schlomach 
Goldwater Institute
President Obama and Senator Max Baucus are proposing a radical expansion of health insurance, but selling it as health care reform. Unfortunately, expanded insurance coverage is likely to worsen the real problem in health care: the high and rising prices of care.

Since World War II, Americans have become increasingly dependent on others to pay their medical bills. These third-party payers include Medicaid and Medicare, and employer-provided pre-paid health plans (what we call insurance). In 1954 federal tax law codified standard practice at the time and exempted benefits from taxation. This allows employers to avoid payroll taxes while employees avoid income taxes.

The last 50 years have shown us that neither patients nor providers are particularly frugal when others are paying the bill. In 1960 patients directly paid half the total health bill and medical prices were relatively the same as in 1935. By 2006 patients paid an eighth of the health care bill and medical prices had more than doubled in relative terms.

In this country, where health providers price as if cost is no object (and for patients with insurance, it mostly isn’t), a heart bypass might cost $140,000. Travel overseas and you can get the same procedure for $24,000. It makes a difference when providers compete on the basis of price.

The goal in health care reform should be to find the least painful way to transition back to having patients be responsible for their own health care bills. Good policy would: 1) Put all health expenditures on an equal income tax footing, 2) Encourage people to save for health eventualities through expanded health savings accounts that allow for truly catastrophic health insurance policies, 3) Allow a nationwide insurance market without mandated coverage, and 4) Require posting of medical service prices so consumers can know the price of the services and procedures they want to buy before making the purchase.

To truly address this nation’s health care cost crisis, we have to get at the root of the problem. These policy changes would help bring costs down by reversing the price is no object mentality and encouraging providers to compete for business.
Byron Schlomach, Ph.D, is director of economic policy at the Goldwater Institute.


  1. Byron, you wrote: “To truly address this nation’s health care cost crisis, we have to get at the root of the problem.”

    And the root of the problem is?????

  2. The root of the problem is the focus on acute care rather than long-term and preventative health care. Acute care not only comes at a greater cost, but is generally less effective (for patients) for matters that can be addressed through long-term or preventative measures. I’d like to add that my impression is that Obama is trying to shift this focus to long-term care, and that this shift should be supported and encouraged.

  3. GOP Boomer Gal says

    It’s right there in the article; third parties paying for health care; thereby hiding the cost from the patient.

  4. Hi Boomer –

    I’d say it depends on the incentives of the third parties. If the payers have incentives to keep costs down (such as self-insured companies), they’ll negotiate aggressively with healthcare providers to lower costs (and attempt to offer less expensive alternative to their insureds). If those third parties essentially have a blank check from the government, but no responsibility as such (see e.g. Medicare), they’ll spend much more freely. (In fact Medicare claims adjusters are essentially prohibited from reviewing the necessity of a procedure). My impression is that any health care reform will have to bring decision-making back together with fiscal responsibility, whether that comes under government or personal auspices. For simple bargaining efficiency, I’d want the government to handle it, but I’m sure I could be persuaded either way.

  5. GOP Boomer Gal says

    Which government program ever costs less than the projected amount?

    Plus it gives the feds way too much power over every aspect of our lives.

  6. It is true. You can go overseas to other countries and get high quality health care for less. These countries typically have some form of universal socialized medicine. Too bad that type of plan is off the table.

  7. Basil St. John says

    Does anyone think that maybe advances in healthcare might be driving up the costs? Before World War II, medical practice was pretty limited in scope compared to what’s available today. Everyone who wants to give up those advances to return to 1940s prices, please raise your hand.

  8. Gal,

    Are third party payers the problem because the people who provide the services think there is a bottomless pit of money?

    Are third party payers the problem because the people who use the services think there is a bottomless pit of money?

  9. Iris Lynch says

    Supply and demand. Supply of medical personnel continues to drop, while demand continues to rise. Both will accelerate with the Obama plan. There will be no need to determine who will die. Simple neglect will take care of many problems.

  10. Iris, comments about neglect are neither truthful nor helpful. What is true is that as “baby boomers” retire they will simultaneously leave health care professions and go onto Medicare, a highly successful “socialized medicine” program. We need to attract young people to become primary care physicians for the purpose of demographics alone, not to mention the influx of previously uninsured.

    Boomer Gal, third party payers and all that entails are not a problem to those without insurance, they are irrelevant.

    If the Republican party had anything to offer on this issue why didn’t they do something during the six years of the Bush II administration when they ran DC? I guess the needs of real Americans didn’t match the K Street agenda?

  11. Oh, Kenny, didn’t you know that health savings accounts are the answer as we make the painful transition back to people paying for their own healthcare?
    Yes, save what you can out of your crappy little call center job in an HSA and you will one day have enough to pay for your brain tumor or your heart attack or your diabetes or whatever.
    Save, save, save, that is the answer. The GOP will make sure everyone gets a job because wealth will trickle down as long as we cut, cut, cut the taxes on the superwealthy.

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