US health care reform: Why there are no easy fixes

When Donald Trump assumed the presidency eight years ago, one of his legislative priorities was to repeal the Affordable Care Act. The Senate, however, failed to pass a new bill when John McCain voted with his thumb down. ObamaCare was subsequently placed on the back burner as Trump famously declared, “Nobody knew health care could be so complicated.” 

Health care is back in the news again in the wake of a shooting of a health insurance executive in New York City, which spawned a public outcry against the industry. While attention has been focused on the manner in which insurance companies handle claims, the broader issue is how the U.S. health system should be improved to serve the public interest. 

The standard criteria in assessing health systems are how effective they are in providing access, affordability and quality care to the populace. The U.S. system typically falls short of many others in terms of access and affordability. One of the main challenges it faces is balancing the need to provide affordable insurance to a growing number of people while containing the rapid growth of medical costs. 

Data released by the Centers for Medicare and Medicaid Services show that health care spending in 2023 grew by 7.5 percent and reached nearly $5 trillion, or 17.6 percent of the U.S. economy. The three largest components — hospital care, physicians’ services and prescription drugs — account for 60 percent of the total, and each rose at a faster rate than consumer prices. 

This continues a long trend in which medical costs in the U.S. exceed overall inflation and are considerably higher than medical costs abroad. In 2023, the U.S. spent $14,750 per person on health care — almost twice the average of other wealthy countries according to the Peter G. Peterson Foundation.   

Why is this so? 

Part of the explanation is that the American health care system is like no other. It is an amalgam in which insurance coverage is provided by employers, individuals and the government at the federal and state levels. Unlike most advanced countries, there is no universal coverage.   

Economist David Dranove of Northwestern University traced the many attempts to “fix” the system in his book “Code Red,” published in 2008. 

Prior to World War II, only about 10 million Americans were covered by private health plans. The expansion in coverage through corporations took off in the 1950s, as companies could pool risks and thereby lessen adverse selection. At the same time, employers were allowed to deduct premiums from paychecks, which reduced administrative costs. 

The federal government’s involvement increased in the mid-1960s, when Medicare and Medicaid were created as part of the Great Society initiative. These programs helped to shrink the number of elderly and poor who did not receive any insurance coverage. 

However, it soon became apparent that medical costs were advancing more rapidly than overall inflation. The main reason is the programs increased the demand for health care as the federal government subsidized a large portion of the overall bill. 

The U.S. government subsequently passed the HMO Act in 1973 to give people a choice as to the type of medical delivery system they could use. The goals were to bring greater organizational efficiency to the system and to provide greater cost control. 

Over time, businesses made managed care programs part of the plans employees could select, and HMOs initially appeared to be effective at containing costs. However, as many switched their status from being nonprofit organizations to ones that were profit-oriented, increases in health insurance premiums far outstripped wage and price inflation beginning in the 1990s.  

The principal attempt to gain universal health care coverage occurred in the early 1990s, when President Clinton urged Congress to enact the Health Security Act that would protect 37 million Americans who lacked any coverage. 

The rationale for adopting it was that the single-payer model would help reduce administrative costs while also increasing the government’s bargaining power with pharmaceutical companies. The bill, however, encountered stiff opposition from the health insurance industry, and it failed to be enacted even though Democrats controlled both houses of Congress.  

Thereafter, President Obama took up the call to expand insurance coverage to millions of Americans, and the Affordable Care Act (ACA) was enacted in 2010. The ACA created health insurance exchanges to help people and small businesses buy affordable health insurance. 

While Republicans sought to repeal it during Trump’s first term on grounds that the system was failing, the ACA has expanded health coverage to 45 million Americans. According to the Kaiser Family Foundation poll tracking, it has become increasingly popular with about 60 percent of respondents giving it a favorable rating. 

Still, as Bloomberg’s Editorial Board points out, millions of Americans who get their coverage through ACA could face significant increases in premiums if Congress does not extend subsidies enacted during the COVID-19 pandemic. They resulted in enrollment surging to 21 million from 12 million in three years, with more than 90 percent of enrollees qualifying for subsidies. 

Putting the ACA on sounder footing will require a political compromise. Democrats need to recognize that generous subsidies to participants cannot be sustained indefinitely, while Republicans should acknowledge that allowing subsidies to expire will create hardships for those who cannot otherwise afford the program. 

So, what is the status of health care reform today? The answer, unfortunately, is there is no solution in sight. 

The relevant issue in my view is the direction in which the U.S. health care system is headed. The trend is toward greater government involvement to cover basic needs through an expansion of Medicare, with private insurers covering supplemental needs.  

But this also means the federal government has to decide who ultimately pays for the health care subsidies that increase demand for medical services. 

Nicholas Sargen, Ph.D., is an economic consultant with Fort Washington Investment Advisors and is also affiliated with the University of Virginia’s Darden School of Business. He has authored three books including "Investing in the Trump Era: How Economic Policies Impact Financial Markets."