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Why ‘Berniecare’ will not work

Jun 06,2016 - Last updated at Jun 06,2016

You cannot get better healthcare anywhere in the world than in the United States — that is, if you can afford it. And, faced with what is by far the most expensive healthcare system in the world, affording it is no small feat.

Indeed, US healthcare spending, half of which is private, will reach $10,651 per capita this year alone, the equivalent of 18.4 per cent of the gross domestic product.

Despite the progress that President Barack Obama’s Affordable Care Act — so-called “Obamacare” — has made in expanding health insurance coverage, many Americans still lack sufficient access to modern diagnostics and treatment.

Bernie Sanders, the Vermont senator, made this a central plank of his campaign for the US presidency, and seems certain to keep pushing the idea on Hillary Clinton, now the Democratic Party’s likely nominee.

Unfortunately, while the appeal of his proposal for universal mandatory health insurance — or “Medicare for all” — is certainly understandable, his plan is not economically convincing.

In all modern countries, the provision and financing of basic healthcare are, to some extent, excluded from private market mechanisms.

After all, if medical services are allocated via private markets, their provision will be based on a patient’s economic capacity, not his or her medical needs.

That conflicts with globally accepted fundamental ideas of justice.

But in the US, that market exemption is very limited. Indeed, the US stands out among its developed country peers in the extent to which the quality of healthcare depends on a patient’s personal financial solvency.

That is what Sanders wants to change, by introducing a single, compulsory, and tax-funded insurance plan that would provide all US residents with the same access to basic healthcare.

In terms of health economics, Sanders’ proposal makes sense. But beyond the reality of broad political resistance to a single-payer health system in the US, Sanders’ scheme has not been reliably cost accounted.

All the assumptions underpinning his claim that the reform is financially viable are dubious.

For example, the plan assumes an average annual growth rate of more than 5 per cent over the next 10 years — far higher than the 2 per cent predicted by the politically impartial Congressional Budget Office.

Sanders also expects a substantial increase in the average wage and a halving of the poverty rate.

At the same time, to limit the costs of the programme, Sanders argues that the government would be able to negotiate deep discounts from the pharmaceutical industry, securing the lower drug prices found in other countries.

Medical personnel would also be paid less than they are from the private insurance scheme.

Even if Sanders’ fanciful economic projections were realised, and the cost-cutting measures worked out, the programme would be too expensive to cover at the current tax rate.

That is why Sanders advocates a substantial increase in the top marginal income tax rate and the introduction of a tax on financial transactions.

But if those revenues went towards financing universal healthcare, how would Sanders pay for his promised ambitious education reform, infrastructure-modernisation programme or efforts to combat climate change?

Yet, the problems with Sanders’ healthcare proposal run deeper than funding.

In his effort to eliminate the injustices of a market-based healthcare system, the proposal eliminates all competition, much like the United Kingdom has done with its National Health Service.

The result would be a slow and inefficient system that delivers a lower standard of care.

The problem is that Sanders seems to conflate competition with the market. But they are not the same. On the contrary, competition — a control mechanism that maximises economic efficiency — is universal and works outside profit-oriented markets.

The reality is that if any health system is to provide cost-effective, high-quality medical services efficiently, competition is vital.

Fortunately, Germany and a few other Western European countries provide a useful example of how a tripartite competitive model can enable countries to deliver such services to all.

Under this model, political bodies define the list of services to be provided by not-for-profit health insurers, which cover their costs with income-based or flat rate contributions — irrespective of individual payers’ risk of illness — as well as government subsidies.

In price and quality negotiations with doctors, pharmaceutical companies and hospitals, the insurance companies represent their clients.

The risk of losing clients to competitors gives the insurers substantial motivation to secure the best possible terms.

The option to enter into individual agreements with healthcare providers and to experiment with different service and remuneration models augment that motivation.

And to mitigate insurers’ temptation to compete for low-risk clients, such as young people, a risk-adjustment scheme, which largely compensates for the differences in the financial burdens resulting from an unequal allocation of the risks of illness, has been introduced.

Sanders is right about one thing: All people, not just the wealthy, deserve access to quality healthcare. But a single-payer system will not give it to them.

A system based on competition among health insurers, which are funded through risk-independent contributions and tax subsidies, would be more patient-friendly, more efficient and, most important, it would deliver a higher standard of care.

 

 

The writer is a former chairman of the German Council of Economic Experts and a former professor of economics at the Darmstadt University of Technology. He is currently president of the Handelsblatt Research Institute. ©Project Syndicate, 2016. www.project-syndicate.org

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