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Affordable Health Care

By James H. Nolt

The Republican Party recently came out with their replacement for the Affordable Care Act, also known as Obamacare. It has stirred massive discussion, but some key points are missing from the debate. Analysis using political economy can help cut through the polarized rhetoric on both sides of the health-care debate in America. Most of the rest of the world must be looking at this debate feeling somewhat confused since most wealthy countries provide free or heavily subsidized health care to all residents and consider access to health care a right.

Of course, economists are fond of saying there is no free lunch (or free medical care). This is true from the standpoint of society as a whole. Free health care is possible only because most people are taxed to pay the cost. According to economic textbook orthodoxy, health care should be cheaper when the free market provides these services rather than the government. Republicans depend on this claim of market efficiency to contend that their plan will lower costs. If it does not lower costs significantly, then its main result will be lowering taxes on the rich while leaving tens of millions without health insurance. This is the main thrust of the counterarguments by Democrats.

What few Democrats and few in the media are discussing is why the Republican faith in free market solutions is misplaced. Democrats want to spend more government funds to subsidize insurance for more people, but they are not effectively countering the Republican claim that the free market will do a better job of lowering costs. The Democrats’ political strategy is thus weaker than it might be because it relies on empathy with the millions who will lose under the Republican plan, but most voters who will retain insurance under the Republican plan are at least promised lower taxes, if not lower health costs. The Republican plan will pit insured taxpayers against the poor and uninsured, which could actually be a winning political strategy.

The only way to make health care more affordable is to reduce the costs of providing it. If you do not reduce costs, then either the taxpayers or citizens seeking health care will pay more. 

The Republican plan is not only unfair—it is also inefficient. It will result in increased health-care costs for nearly everyone. Yet, Obamacare was also not very effective at cutting medical costs, which is why so many voters were convinced to reject it. Lowering costs significantly depends on understanding why health-care costs are so high in the U.S. to begin with, about double those of most other developed countries.

There are two main reasons American health-care costs are so high: first, the administrative complexity of providing care, and second, the monopoly pricing power of pharmaceutical and medical device manufacturing companies. Most other countries have enormous savings in these two areas compared with the U.S.

Republicans and conservatives generally understand only half of the issue of administrative complexity. They understand only the part that occurs within government, especially the federal government. They do not perceive the bigger issue of the administrative costs of private corporations. The direct providers of medical care and equipment cost only a fraction of the health bill. A vast portion of the cost is added by layers of administration, marketing, and other overhead costs. Republicans would solve this by removing regulations. But this would not solve the problem entirely, because much of existing administration is dedicated to the objective of maximizing profits for all the many corporate players in the health-care system, rather than delivering health care efficiently.

When I grew up in small-town America, many things were different. Consider just three: First, most hospitals were owned by municipalities (as in my home town) or religious charities and were administered locally and not for profit; second, most drugs and medical devices were generic, not patented; and third, advertising prescription drugs was banned. The technologies were not as advanced as today, but health care was also more affordable, even without insurance.

Since then, health-care outcomes have improved somewhat, but costs have surged much faster than this improvement. Probably the greatest boost in health-care outcomes over the decades has resulted from much-reduced rates of smoking, so not all of it is the result of better health care or improved drugs and technology. In recent decades, health care has gotten vastly more expensive but only marginally more effective.

The great increases in cost occurred because of the reversal of the three points above that kept health care local and efficient when I was young. Since then, most hospitals were privatized. Their primary concern became maximizing profits rather than health outcomes. Expensive treatments that were more profitable were substituted for cheaper ones that were more cost effective. In a true free market, the rising costs of such health care might have made such a business strategy fail, but it worked because most people were insulated from the true cost of their treatments because insurance companies paid most of the bill. Furthermore, the administration of hospitals focused more on the provision of services demanded by the rich, such as plastic surgery, and less on common but less profitable treatments for ordinary people. I saw some of this change myself when I worked part time as a data scientist for the health-care consulting division of a major insurance company.

During the Reagan deregulations of the 1980s, aggressive marketing of prescription drugs to both doctors and consumers was permitted to the point where advertisements of patented medicines now dominate many prime-time TV slots. Pharmaceutical companies transformed from primarily manufacturers to primarily marketers of profitable, patented medicines. Of course, this is great if the new drug is a miracle cure, but many of the most profitable treat marginal problems at great cost or are minor improvements on vastly cheaper generic drugs, yet if consumers can be trained to ask for patented medicines or doctors to prescribe them, profits will jump for pharmaceutical companies, but so will the insurance costs for all of us.

The greatest weakness of Obamacare is that it lacks sufficient incentives to lower the costs of drugs by avoiding the marketing overhead costs and monopoly pricing power. Most other countries have a national health service that can bargain directly with drug companies to lower monopoly prices. This is not interference with the “free market” since monopolized markets are not free markets.

The cost-curbing conceit of the current Republican health-care bill is that allowing insurance companies to cross state lines (i.e., to bypass state regulations) will provide more competition. However, having more insurance companies offering plans does nothing to reduce the monopoly power of pharmaceutical companies, unless an insurance company offers a “bare-bones” policy that does not cover patented drugs, which is unlikely. Furthermore, whenever the incentive is private profit, companies will focus especially on the most lucrative high-paying customers rather than those too poor to matter. Certainly, we can expect a variety of plans for wealthy consumers. Those with less means will likely need to understand the fine print in their insurance policies to realize (often too late) the many things that are not covered and the many ways they can be denied care. When votes are cast by dollars rather than by ballots, health care is sure to be skewed toward the whims of the rich rather than the needs of the majority.

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James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.

[Photo courtesy of Espoo Museum of Modern Art]

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Anonymous's picture
While pharma is a great


While pharma is a great influence on where things go, this too, should be changed. The amount of clients I have where I work who are less than 30 years old and pulling down 200k because they work in "research" pharma is ridiculous. No drug that people can get in Canada for 20 should be costing a self-paying patient 1000. I do not like that you have not said that the ACA is not efficient either in your effort to dis what the GOP is or isn't doing. This bill was passed by democrats and Nancy Pelosi has conveniently forgotten that she said we needed to pass the bill to find out what's in it. There was plenty of deceit under Obama because many of us who were already responsible got booted off our current plans, and nope. I did not get to keep my doctor. Not to mention the fact that my new cost went from 6k per year to 31k this year before anything gets covered. Smart people opt out because its more than a mortgage payment. The greatest weakness of Obamacare? It was meant to cast the net to single payer. Period. Access and quality are affected and the number of doctors leaving medicine is going up because they feel hog-tied by all the defensive medicine they must practice in order for where they work to receive govt money. And the fraud? Who is checking that? 4 billion dollars this year paid for people who were not eligible to receive care and yet, they did. If I reached into your pocket every week and took the money and put it in the govt pot, and then just handed it out, how mad do you think you react? I also note that in that bill, the government overreach for many things that are none of their business, they gained access to. Why do you suppose they can get away with stopping our citizens from leaving the country for a $20 unpaid tax bill or ticket?What did student loans or building parks have to do with health care. Yes. I read the bill. None of that belonged in those 20k pages. You keep talking about the conceit of the GOP. But owning the mistakes and the costs we have now-- have NOT insured more people! There are 18 million of us who would rather self-pay and there are 8 million sucking off the hard-earned money of others until they're made better without even contributing. The eight million who got insurance were eligible for medicaid anyway. WE need: 1. Tort Reform 2. Competition is always the key and across states is a good thing. 3. The drug approval process is too long and should be streamlined.

Anonymous's picture
One More Factor


This is a really good summary of the history and current state of health care delivery in the US. What is often not discussed is the increased incidence of chronic illnesses in the general population related to lifestyle choices. Obesity, Diabetes, Hypertension, Osteoarthritis and so on. This trend shows no sign of decreasing and it is extremely expensive to manage. Somehow, some way there has to be an incentive for more people to take better care of themselves.
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