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| Source: http://www.cnn.com/2012/06/27/politics/btn-health-care/ |
The World's Ranking of America's Health Care in the World
No doubt the United States is the most powerful nation on earth.
Generally speaking, America loves to be number one. America is the number one
largest economy in the world. America is number one when it comes to her total
mighty military spending. America is number one in the movie industry, that is,
the Hollywood movies generate billions of dollars at the box office. America
also claims to be a leading country in promoting democracy and human rights in
other countries. Well, the lists can go on and on. Despite having said that,
when it comes to healthcare, America is nowhere near the number one spot in the
world. That is according to the World Health Organization (WHO). Surprisingly,
WHO ranked American healthcare system at number 37 in its 2000’s World Health
Report. (http://www.who.int/whr/2000/en/). France’s health system was proudly
ranked at number one. Another 2014 report of The Commonwealth Fund titled “Mirror,
Mirror on the Wall, 2014 Update: How the U.S. Health Care System Compares
Internationally” shows that American health system is ranked last among
other 11 industrialized nations. You can find the latest report through this
link. (http://www.commonwealthfund.org/~/media/files/publications/fund-report/2014/jun/1755_davis_mirror_mirror_2014.pdf)
Despite being on the number 37 spot in WHO’s world health system ranking
and last in the latest 2014 The Commonwealth Fund’s report, as a matter of
fact, Uncle Sam is spending a lot more on healthcare as a percentage of the GDP
than any other industrialized countries in the United Europe. In fact, the U.S. spent 17.9% as a percentage of its GDP on healthcare
in 2012, that is, almost 1 in 5 dollars in income is spent on the cost of health care.(http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS) It leaves us perplexed to learn that the most powerful nation is not number one in
healthcare or at least in the top ten list.
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| Source: http://www.lean.org/images/shook_hcchart.gif |
The Rising Cost of Health Care
According to the U.S. Census Bureau, 48 million Americans did not
have health insurance coverage in 2012. To put the number in context, 15.4%
of Americans were uninsured, that is, about 2 in 10 Americans were
not covered by health insurance. (http://www.census.gov/hhes/www/hlthins/data/incpovhlth/2012/highlights.html). As a result, overwhelming health care
spending on tests and hospitalization has been a leading cause of personal
bankruptcies and homelessness in America. That is at least according to the
National Health Care for the Homeless Council (NHCHC). In 2008 NHCHC estimated
that health problems were responsible for 50% of personal bankruptcies in
America. (http://www.nationalhomeless.org/factsheets/health.html) It is indeed a very concerning data for
the 48 million uninsured Americans.
The cost of health insurance has also surged gradually over the past decades.
In fact, the 2014 Employer Health Benefits Survey conducted by the Kaiser
Family Foundation and the Health Research & Education Trust (HRET) found
that “the average annual premiums for employer-sponsored health insurance
are $6,025 for single coverage and $16,834 for family coverage.” (http://kff.org/report-section/ehbs-2014-summary-of-findings/)
Imagine a person who earn $2,000 per month and could he pay this kind of health
insurance premium? This is why it is crucial to have a job in America so that
you can be covered by the health insurance. As health insurance is getting more
expensive along with the growing cost of health service, more and more people
are unable to buy a health insurance plan. Young and healthy people also
hesitate to purchase health insurance given its cost and perceived benefits.
Market Failure of the Health Insurance Sector
A large proportion of Americans receive their health insurance plans paid
by their employers which is one of the means to attract talented individuals to
work for their companies. Although some people are able to afford a health insurance plan, it
does not necessarily guarantee that your health insurance application will be
approved by the insurance company. To be more specific, some people are not
qualified for health insurance given their pre-existing conditions. In other
words, say for example John (a make-up name) has been diagnosed with kidney
problems. To insure himself against future health hazards, he decides to obtain
a health insurance policy from an insurance company called XYZ. Imagine if you were
the one who run the insurance company XYZ, would you provide health insurance to John who has kidney failure, although you somewhat know that John has a high chance
of getting sick at anytime? The insurance company might be generous and it is
willing to help their clients, because the clients and the companies should
grow together. That sounds good right? Insurance companies, however, are
undeniably profit-oriented and there is a high probability that they would make
a loss in the future if they decide to cover John. So is that a good business
decision? Unsurprisingly, that is one of the many reasons why many people dislike
insurance companies and labeled them as bloodsuckers and immoral. But that is
what businesses do and how they operate to minimize cost and maximize profit.
Are their behaviours right or wrong? There is no clear cut answer here. The answer
lies in the gray area.
In addition to those who are not approved to be covered by health
insurance, there is another market failure identified by economists in the
health insurance market, caused by asymmetric information or in other
words, the situation in which someone holds more information than another
person. In the health insurance market, the buyer of the health insurance more
often than not understands more about his own body and health condition better
than the insurance companies. To avoid paying high premium for his health
insurance coverage, the buyer could obscure his real health condition. Let’s
say prone-to-illness people would be more inclined to buy a health insurance
than healthy and young people. Because of asymmetric information in this
insurance product's transaction, the insurance companies risk making a loss due to
covering the cost of the opportunistic and unhealthy people. The insurance
companies, consequently, would mitigate such risks by raising the premiums of
the health insurance coverage. This increase in health insurance premium would
ensure that insurance companies can make a profit in light of these kinds of uncertainty. In
turn, more healthy people would stop paying the health insurance premium due to
its increased cost, which drives the insurance companies again to raise the
premium. This vicious cycle is a market failure in the economy or what
economists specifically call the Lemons Problem or the Market of Lemons.
That is the reason why insurance companies may choose to deny coverage of the
buyers with pre-existing condition or even refuse to renew the coverage if he
is found seriously sick.
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| Source: http://insideops.com/wp-content/uploads/2014/06/used_car_lemon.png |
There is another group of uninsured people. They certainly want to be
insured in the case of any personal calamity, but the problem is they simply
cannot afford to pay the health insurance premiums. They are the people who are
living under the U.S. government’s poverty line. To be more specific, the
poverty threshold in 2013 on average for a family of four is $23,834, according
to the U.S. Census Bureau. (https://www.census.gov/hhes/www/poverty/data/threshld/)
The bottom line is that due to asymmetric information, health insurance premiums have gradually increase which make it not affordable for many American and cause healthy people to stop buying the insurance coverage. On top of that, insurance companies also deny health insurance coverage to those who have pre-existing conditions or stop renewing the health coverage once the policyholder get sick. That is why there are close to 50 million Americans who were living without health insurance in 2012. These are some of the problems to manifest the fact that there is a
market failure in the health care system in the U.S. The explanations also
justifies the role of the government to intervene in the healthcare insurance
industry. So how would the government fix this problem? I planned to discuss
Obamacare in this article, but it appears that this article is unexpectedly
long already. For this reason, I decide to keep the discussion on Obamacare for
the next article. Thanks for spending time reading this long article Stay warm
everyone!
- The article is for educational purpose. (No copyright infringement intended)
- The article does not represent the view of any institution or organization.
You may also want to go to MIT's OpenCourseWare from which I learn a lot about American health insurance market.
Gruber, Jonathan. 14.01SC Principles of Microeconomics, Fall 2011.
(MIT OpenCourseWare: Massachusetts Institute of Technology), http://ocw.mit.edu/courses/economics/14-01sc-principles-of-microeconomics-fall-2011 (Accessed 17 Nov, 2014). License:
Creative Commons BY-NC-SA
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