The Economics of U.S. Health Care: Costs, Medicare, and Market Failures

Introduction

The healthcare system in the United States has been referred to as a Ponzi scheme, and its underlying economics are, at best, deeply unsound. The United States is the only industrialized nation in the world that fails to provide universal access to basic health care. According to Kilchevsky (2004), "the absence of universal health coverage has been called 'one of the great unsolved problems facing the United States at the onset of the 21st century'" (p. 1). This paper examines the economics of health care in the United States, exploring national expenditure data, the structural problems with Medicare, and the market forces driving ever-rising costs.

The Department of Health and Human Services (HHS) reports that national health expenditures for 2009 totaled $2.5 trillion, or approximately $8,086 per person (Berdine, 2011, p. 1). The estimated total for health expenditures in 2008 was $7,846 per person, or more than $31,000 for a family of four — reported as "the minimal cost of a fully homogenized national health-insurance policy where everything is covered, everyone is covered, and there are no preexisting conditions" (Berdine, 2011, p. 1).

The Facts: National Health Expenditure Data

Berdine (2011) notes that this amount is "fairly close to what an individual pays for good commercial insurance if one does not belong to a large insurance pool" (p. 1). According to the Census Bureau, "the average household size was 2.63 in 2008. The average household share of national health expenditure was therefore $20,632" (Berdine, 2011, p. 1). Berdine further reports that the Census estimated 18.6% of households "had an income less than $20,000 in 2008. So almost one-fifth of U.S. households earn less income than their share of national health expenditure" (2011, p. 1).

The Bureau of Labor Statistics reports that in 2008, "a typical U.S. consumer unit of 2.5 persons made $63,563 in pretax income, and paid $13,077 in taxes, $6,443 for food expenses, $17,109 for housing expenses, $1,801 for clothing expenses, and $8,604 for transportation expenses, with $16,529 left over. Their 'share' of national health expenditure was $19,612" (Berdine, 2011, p. 1). The typical U.S. household cannot possibly afford a healthcare product targeted to the entire U.S. population. According to Berdine, no amount of redistribution will solve this shortfall — it has been financed, at least prior to September 2008, by foreign credit.

Berdine (2011) reports that healthcare providers "make decisions based not on consumer preferences but rather on what the government will pay for," and that the U.S. healthcare system is a "classic credit-induced bubble of malinvestment where notions of profit and loss have been hopelessly distorted by government decisions" (p. 1). Berdine argues that Medicare is "largely responsible for the completely distorted view of health insurance" that many people hold. A common misconception is that Medicare is a healthcare provider; in reality, Medicare does not provide a single cent of healthcare but instead guarantees payment for certain services under specific restrictions. Should payment rates be too low or restrictions too burdensome, elder healthcare services will become obsolete.

Medicare is often believed to be a health insurance plan for the elderly, but according to Berdine it is not insurance at all. Instead, Medicare is "a scheme to socialize the healthcare costs of the elderly to the much larger group of working people" — an economically unsound scheme focused on the socialization of elderly healthcare costs. In other words, it functions as a "Ponzi scheme" (Berdine, 2011, p. 1). The U.S. Securities and Exchange Commission defines a Ponzi scheme as follows:

Medicare: A Ponzi Scheme?

"A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity." (Berdine, 2011, p. 1)

Ponzi schemes collapse because there are little to no legitimate earnings and because they require "a consistent flow of money from new investors to continue" (Berdine, 2011, p. 1). They tend to collapse "when it becomes too difficult to recruit new investors or when a large number of investors ask to cash out" (2011, p. 1). In the case of healthcare, Berdine identifies the "new investors" as new workers entering the labor force who are promised healthcare returns when they reach age 65. However, rather than funding a defined-benefit pension plan, the monies are spent immediately for elderly beneficiaries and any remainder is lumped together with general revenue (2011, p. 1). The healthcare Ponzi scheme is now collapsing as large numbers of baby boomers turn 65 and "cash in" on their promised healthcare.

Boyapeti (2010) argues that one of the primary factors "animating the libertarian rejection of public policy in general is the recognition that any state action must ultimately resort to the use or threat of aggression" (p. 1). He invokes Ludwig von Mises:

"It is important to remember that government interference always means either violent action or the threat of such action. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning." (Boyapeti, 2010, p. 1)

Boyapeti states that libertarians "who value justice and recognize that the use of aggression cannot be logically justified must reject all state action in principle — this includes the use of aggression in implementing healthcare policy" (2010, p. 1). A common argument in favor of greater government intervention in the U.S. healthcare market is "that a large and growing fraction of the gross domestic product is spent on healthcare, while the results, such as average life expectancy, do not compare favorably to the Western nations that have adopted some form of universal healthcare" (Boyapeti, 2010, p. 1). Boyapeti contends this argument fails for two reasons:

(1) A growing fraction of GDP spent on healthcare is not a problem in itself. In the early half of the twentieth century, the fraction of GDP spent on healthcare grew significantly as new treatments, medical technology, and drugs became available. Growth in spending of this nature is desirable if it satisfies consumer preferences.