Structural Spending Reform, Part 4

Health care is one of America’s most contentious policy issues. While Democrats keep pushing for more government involvement, Republicans have presented a good reform to move in the opposite direction. It remains to be seen which way Congress ultimately goes on this issue; with the budget deficit essentially out of control and the two political parties deadlocked in a mad fight over ideology and a highly contested election, it is unlikely we will see sound reform efforts any time soon.

That said, if the Democrats recognize the voter message in their loss of seats in the House of Representatives and that they probably will not gain control over the Senate; if they replace Nancy Pelosi with an ideologically more moderate Speaker, there is a chance for reform efforts across the aisle. That, in turn, could become a moderating force in the event a radical Biden administration were to take office in January.

America is in dire need of bipartisanship on major, structural entitlement reform. If we continue in the opposite direction; if we see more monetization of deficits; we are destined for uncontrollable deficits, hyperinflation and eventually economic implosion.

Too many people still shake their heads at this prospect, thinking it cannot happen in America. They are foolishly ignorant.

Fortunately, there are reforms out there that could appeal to a bipartisan coalition of common sense in Congress. I will discuss three of those reforms, starting today with health insurance.

To work, structural spending reforms must meet three criteria:

  1. Part with the algorithm that grows government spending. The modern American welfare state is built around the principle that entitlement spending should grow annually as the economy becomes more prosperous. We must redesign the welfare state in line with socially conservative principles, where it provides a basic safety net and an institutional framework.
  2. Protect the weakest among us. It is essential that a structural reform does not make life worse for those who are unable to provide for themselves and who live on the very edge of destitution. If they end up worse as a result of a market-based structural reform, then the reform has morally failed. This demographic depends critically on the welfare state because government has essentially marginalized the private sector in providing for the poor and the vulnerable; when we roll back the welfare state, we therefore have to prioritize the weakest demographic and secure their path to a better life before anyone else benefits from the reform.
  3. Stimulate economic growth based on free-market principles. No economic system is better at combining efficiency with quality than free-market capitalism. It rewards him who finds a way to do more with less and thereby drives resources to where they can steadily improve quality and affordability.

We will discuss these three criteria in the context of Social Security and welfare reform. First, though, we will take a look at how we can reform our health-insurance market with these criteria in mind.

The Republican Study Committee reform plan is important in this context, but there is an even more interesting example, namely the Dutch health insurance reform. It gives us a context from a political environment that generally favors government involvement in the economy, yet the reform took a few important steps in the opposite direction.

In 2006 the Netherlands reformed its health-insurance system, from one that primarily relied on taxpayers to one where private insurance became the norm. The shift was dramatic, literally flipping the proportions of tax-paid and private insurance funding:

Figure 1

Sources of raw data: Eurostat, OECD

The reform did not happen abruptly, but followed logically after the country moved in the direction of “managed competition” in 2000. That reform, in turn, came on the heels of a long struggle to contain costs in what was essentially a system with Medicaid for the masses and private insurance for the privileged few. From Health Affairs, 2008:

By the end of the 1960s the Dutch government became worried about the seemingly uncontrollable growth of health care spending. The reason for this was twofold. First, rising health care spending could jeopardize the goal of universal access to basic care. Second, the government feared that rising health care costs would result in higher labor costs, which would raise unemployment and harm the Dutch open economy, which relies heavily on exports. The growing pressure to contain medical spending led to increasing supply and price regulation beginning in the mid-1970s.

When they realized that more government involvement did not solve the underlying problems of runaway costs for an inefficient health-care system, they tried a different approach:

From the early 1980s top-down rationing policies were subjected to growing criticism, focused particularly on the lack of incentives for efficiency and innovation within the prevailing system of health care finance and delivery. This led to broad support for incentive-based reforms and a reconsideration of the role of competition. In 1987 the government-appointed Dekker Committee advised a market-oriented health care reform and a national health insurance system. The Health Insurance Act (2006) and the current regulatory regime are based on these proposals.

The reform was centered around a market for private insurance. It was not a complete market-based reform: there are price controls that give price signals a moderate scope for transmitting supply and demand signals through the market. There is also a coverage mandate, which is controversial from an American viewpoint but understandable if you transition from a Medicaid-for-the-Masses model into a predominantly private system.

One of the best accounts of the Dutch health-insurance reform is from 2008 and was actually written at Lehigh University by an undergraduate student, Rachel Stewart (confirming that a wide assortment of PhD’s fall victim to the sea squirt theorem). Titled “Dutch Health Insurance Reform: An Evolving Effort to Transform Healthcare”, the report highlights the introduction of competitive elements in what was previously an over-regulated system. For example:

Although the basic policy’s coverage is prescribed, insurers can establish their own contracts with healthcare providers. This was not the case in the old system, where insurers were required to contract with all healthcare providers in their respective region.

Government mandates a basic package of benefits to be covered by every insurance plan, but the system is open-ended in terms of supplementary insurance plans.

Institutionally, the funding model is designed to allow for more room for market-based premiums, but there is also a “risk equalization fund” that essentially fills the function of U.S. high-risk pools. Stewart reports:

The new system’s elimination of risk selection by requiring insurers to accept all applicants is an important feature; it provides everyone with the opportunity to purchase health insurance, but it poses a financial problem for insurers. Because there is a strong incentive to select against higher health risks, and because forbidding the practice creates a potential for an unequal distribution of risks between insurers, the Risk Equalization Fund (REF) compensates insurers for bearing uneven cost burdens.

This is, again, an institutional feature characteristic of a reform that goes from Medicaid for the Masses to a generally private model. While better solutions are available, it fits within the framework of a reform that seeks broad political support for the introduction of market-based mechanisms to combine efficiency with quality.

In this respect, the reform appears to have worked. It was designed to create incentives for both patients and providers to be efficient with resources and mindful of quality. In this regard, the reform appears to have worked, as visible in Eurostat and OECD health-care data.

  • Cost containment has worked: in the seven years prior to the reform, total national health-care costs in the Netherlands increased by 7.4 percent per year; in the seven years immediately after the reform, the annual cost increase was less than 4.7 percent.
  • In the same pre-reform period, the number of hospital employees decreased at -0.35 percent per year; after the reform staffing increased by almost two percent per year.
  • In 1999-2005, medical doctors accounted for 18.7 percent of hospital employees; in 2006-2012 that share increased to 21.2 percent, on average. This increase was visible in annual growth rates: pre reform, hospitals added 1.7 percent medical doctors per year; post reform the annual growth rate was 4.1 percent.

Overall, the Dutch health insurance reform brought key features of the free market into a system that for decades had been dominated by government. While not directly informative for an American reform model, it shows how a reform effort in an ideologically charged political environment can be honed in on the three criteria listed above:

  1. The spending-growth algorithm. While the Dutch model does not confine government strictly to a last-resort provider role, it does reduce government funding to a secondary function. Its focus is on subsidies that indirectly benefit low-income earners more than others. Unlike the Obamacare model, which seeks to simply redistribute insurance coverage, the Dutch reform designed subsidies to guarantee access to basic care. This is a more socially conservative approach than a traditional socialist model.
  2. By scaling back government participation to a secondary function, the reform can better guarantee protection for the poorest citizens. This role is not perfected in the Dutch reform, but it is highlighted. When government parts with the socialist ambition to provide a benefit to everyone – when the Medicaid-for-All idea is tossed out – it can limit its burden on taxpayers while moving closer to fiscal sustainability.
  3. Putting market mechanisms in the front seat means that both health-insurance plans, health-care providers and patients have incentives to do more with less. Competition and consumer choice are prioritized. To be clear, the Dutch reform is by no means perfect in this regard, but available quality data suggests that the reform has worked in this respect. Cost increases have tapered off while patients have better access to doctors than before the reform.

The Dutch reform is relevant from an American viewpoint more for its design features than for its actual performance. What matters is the thinking behind the reform; to move our system in the right direction, and away from increasingly costly government involvement, we need a somewhat different focus. Again, the Republican Study Committee has given us a very good idea of what that means.

Click here to learn about how we can reform Social Security.

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Covid-19 and Medicaid for All: Part 2

This the second part of my article on the recent epidemic and government-run health care takes a look at the health care systems in Europe. In most countries over there, government is the main payer – in many cases the only meaningful funding source – for medical services. This has put the health care systems across Europe under stress in a way that we have not experienced here in America.

At the heart of the problem is, as I explained in Part 1:

-The advancement in medical skills and technology that come from research and innovation; and

-The decoupling of that cost increase from the free market that is necessary under a government-run system.

Under a free-market system the cost increases from advancements in technology and skills are mitigated by medical providers who learn to do more with less. He who excels at that will be more successful. By contrast, a government-run system has no limitations on cost hikes. Since government does not spend its own money it does not have any incentives to do more with less. Therefore, it maxes out what its taxpayers can afford – and then some – whereupon it has to turn to health-care rationing.

This is precisely what we have seen in Europe. Countries like Italy, Spain, Greece and Cyprus are frightful examples of what happens when government can no longer deliver on its health-care promises.

More on that in a moment. First, let us see what happened when European health systems were confronted with Covid-19.

Government only has one method for containing costs: rationing. Also known as “waiting lists”, health-care rationing is unavoidable under a Medicaid-for-All style system. To use Sweden as an example – a very popular country among the American left – their health care system costs every working adult 14 percent of their pre-tax income.[1] This is just the direct tax; there are services provided by local governments and there are subsidies from the central government that add up on top of this tax.

In total, the cost for hospitals, clinics, as well as ambulatory, elderly and rehabilitative care, amounts to about 12.5 percent of the Swedish GDP. To cover this entire bill, In other words, the 14-percent health care tax on personal income does not cover the full cost. Health districts – regions or landsting as they used to be called – also get substantial funding from the central government. All in all, Swedish taxpayers surrender about 20 percent of their personal income to government, solely for the funding of their health care system.

What do they get for the money? To begin with, patients have to dole out a substantial amount of money out of pocket. Based on OECD and Eurostat health expenditures data, out-of-pocket costs – we know them as deductibles and copays – account for 16 percent of the total funding of Swedish health care. This is money that patients have to pony up after government has imposed its heavy taxes on their incomes.

Swedish health care is also rationed. The Swedish government tries to conceal aspects of this problem; to take one example, Sweden does not report the staffing structure of its health care system to the EU statistics agency Eurostat. Other countries do this; in Greece, 24 percent of all hospital employees are medical doctors; about as many are nurses or midwives; just below 30 percent are other medical professionals or employees; and the rest are administrators.

We are going to review the staffing structure later. It is important to do so, as the staffing structure conveys important information on the quality of the health care a patient can expect. Put simply, the more medical doctors there are, and the more medical doctors there are per capita, the higher the presumed quality of care.

Likewise, one can measure access to health care by the staff-to-population ratio. All other things equal, the more health care staff there are per capita, the more accessible health care will be. Again, no such profile is reported by the Swedish government, [2] but Eurostat and the OECD publish valuable data for other European countries.

First, though, we turn our attention to another metric with useful information on health care quality: hospital beds. Figure 1 reports an interesting trend in the number of hospital beds per 1,000 residents. The trend is prevalent across Europe:

Figure 1: Hospital beds per 1,000 residents

Source: OECD

The density of hospital beds has declined across the board, with more health-care procedures shifting from in-patient to out-patient. However, there is a distinct outlier in Figure 1, and – again – that is Sweden. This hard-line single-payer system, which has a practically universal ban on private hospitals and – again – relies almost entirely on government for its funding, underwent a catastrophic rationing reform during the 1990s. Today, Sweden ranks at the bottom among its European peers in terms of hospital-bed supply.

It is important to note the Swedish hospital massacre. It happened during a very serious fiscal crisis, one that I covered in detail in my book Industrial Poverty. To mitigate heavy losses in tax revenue, government resorted to drastic tax hikes; at one point the tax-to-GDP ratio topped 60 percent. Yet despite bone-crushing increases in taxes in the midst of an economic crisis, government still could not balance its budget. Gasping for air in the chokehold of fiscal panic, the Swedish government coupled its confiscatory tax hikes with a long series of very hard spending cuts.

One of its many cost-slashing measures was to dramatically “reform” the health care system. The plunge in hospital bed supply was part of that “reform”. Another was to fire a lot of administrators at hospitals, forcing medical professionals to take over administrative duties and thus spend less time with patients. This, of course, only exacerbated the rationing of medical services.

It is here that the coronavirus epidemic brings together Medicaid for All, our current budget deficit and the challenges that come with a health-care epidemic. So long as the health care system can provide treatment on an out-patient basis, the decline in beds is of no consequence. The problems start piling up when a public-health epidemic breaks out and its treatment requires widespread in-patient treatment, i.e., hospitalizations.

The coronavirus outbreak provides an excellent test case for how responsive a health-care system is, or is not, to such an event. Behold Table 1 below, which compares hospital-bed supply to Covid-19 mortality rates as reported in May 2020 at the height of the epidemic by the Johns Hopkins University Covid-19 database.[3]

Interestingly, countries with a bed count above four per 1,000 residents have a visibly lower mortality rate than countries with a bed ratio below four:

  • In the left column in Table 1 are the countries with a bed count above four (average 5.85); their mortality rate is 6.27 percent;
  • In the right column in Table 1 are the countries with a bed count below four (average 2.94); their mortality rate is 8.52 percent.

Of the 15 countries in the higher-bed-count group, only three had a mortality rate above ten percent, while more than half had a mortality rate below five percent. By contrast, in the low-bed-count group five out of 12 countries experienced more than ten percent deaths, while only four saw mortality below five percent:

Table 1: Hospital beds and Covid-19 mortality

 BedsMort. BedsMort.
Sources of raw data: OECD (beds); Johns Hopkins University (mortality)

The numbers reported here are experimental, of course. They are based on two important premises:

  1. The hospital bed count, which is from 2017, is assumed to be representative of the bed-count number for 2020. This is an imperfect assumption, but with the exception of chainsaw-like reductions in hospital funding as in Sweden in the 1990s, the supply of beds only changes slowly over time.
  2. The bed count includes all hospitals, in other words psychiatric ones as well as those for general-admission purposes. This could be challenged as too blunt of a bed count, but there has also been anecdotal evidence in European media during the epidemic that beds in specialized facilities have been converted for the purposes of treating Covid-19 patients. Therefore, using the totality of hospital beds is a reasonable measure of the epidemic-response capacity limit of a nation’s hospital system.

Despite the experimental status of this comparison, it does suggest that health-care systems that are starved for hospital beds tend toward higher mortality rates.

Table 2 compares the same bed count, in the same two groups, with the coronavirus infection rate, or the number of confirmed cases per million residents. The average rate of coronavirus cases in the higher-bed-count group is 1,772 per million residents, with five of the 15 countries above 2,000 and eight below 1,000. Among the lower-bed-count countries, nine out of 12 exceeded 2,000 cases per million residents. Not one of these countries had an infection rate below 1,000, making for an average of 3,013:

Table 2: Hospital beds and ratio of Covid-19 cases

 BedsCases BedsCases
Switzerland4.533,571United States2.774,344
Germany8.002,111United Kingdom2.543,571
Sources of raw data: OECD (beds); Johns Hopkins University (cases)

Again, countries with a more generous hospital system are better prepared to deal with a public-health threatening epidemic than those with a more stingy health care system.

The next question is how the staffing and funding structure itself affects a health care system. More on that in Part 3.


[1] It is technically known as a municipal income tax, but a portion of the 30+ percent tax charged by municipalities is dedicated to the health care districts.

[2] They do report their numbers to the World Health Organization, but since their database suffers from other incompletion problems, it does not help in determining the structure of Swedish health-care staff.

[3] Please see: https://coronavirus.jhu.edu/map.html. Numbers were retrieved on May 16, 2020. The reason for choosing the month of May is to capture the readiness of a health-care system at the very onset of a crisis. More recent data would obfuscate the role of the institutional structure of the health care system itself.

Covid-19 and Medicaid for All, Part 1

The Covid-19 epidemic has given the world a good opportunity to study the quality of health care systems. We often hear from proponents of single-payer systems that we would get so much better health care if we just handed it all over to government.

Experience from this epidemic says otherwise. On the contrary, Europe, which is saturated with government-run health care systems, has struggled quite a bit with the epidemic. At the forefront of their problems has been a shortage of hospital beds.

Before we get there, though, we first need to take a quick look at the U.S. system. Thankfully, we don’t have a Medicaid-for-All system, but politically we are closer to it than most people realize. We are in fact hanging on the precipice of it, which makes the recent European experiences so much more important. There are few people remaining on the right side of the political aisle who are willing to fight back against the Medicaid-for-All movement. Outside of the Republican Study Committee, whose report last year presented a great plan for strengthening free-market health care, there is not too much happening among conservatives and libertarians.

This is strange and tragic. A Medicaid-for-All system is the crown jewel of the socialist welfare state, and since the libertarian movement has essentially surrendered on the welfare state in general, it lacks the ideological prowess to fight back on the Medicaid-for-All issue.

The lack of interest in fighting socialism in practice – the welfare state – is clearly noticeable across the libertarian movement. Their own party and presidential candidate barely even pay token interest to the welfare state. Worse still, America’s leading libertarian think tanks only use about ten percent of their resources to the fight against socialism in practice:

  • The Cato Institute reports 67 experts on their website; six of those can be said to be working with issues even tangentially related to the welfare state and its systemic impact on the U.S. economy;
  • American Institute for Economic Research, with its 63 experts, has four or five that touch the welfare state in their work (depending on how thin you want to stretch the definition);
  • The Reason Foundation, proudly libertarian since 1968, boasts no more than three welfare-state interested individuals among its 32-strong expert crew;
  • The Mercatus Center, the think tank at George Mason University, has practically enrolled the entire economics-department faculty among its 60 scholars, yet they still cannot find more than five whose research interests even affiliate with the welfare state.

The Heritage Foundation is the strongest institution in this respect. They have the Grover Hermann Center, which is dedicated to the study of the federal budget. In total, spread across all their departments, the Heritage Foundation has 12 welfare-state oriented experts, out of 96. Still spending only a small minority of their resources on the most critical problem of our time, Heritage nevertheless leads the libertarian movement in that regard.

With this scant attention to the practice of socialism in general, there is very little in the libertarian movement that can stop a Medicaid-for-All program. This leaves the field essentially open to the neoconservatives within the Republican party (who want a single-payer system because Irving Kristol said so) and the socialist left. Our hope lies with the aforementioned RSC report and its appeal to more conservatively minded Republicans.

Hopefully, they can find some strength in the numbers presented below. It looks increasingly as if private health-care funding is instrumental in protecting public health. This is not surprising, given that government-run health care systems suffer from two deficiencies, the first of which is its reliance on taxes for funding. By virtue of advancements in medical skills and health-care technology, the cost of providing health care goes up over time. In other words, just to keep health care quality intact, medical professionals need to raise prices over time.

This tendency, in turn, is countered by market forces. He who does more with less will always win over less productive competitors. Only a market-based health care system can strike a proper balance between the rise in costs due to quality advancements and the competition-driven decline in prices.

As an example of what this means, the health-care share of our economy (our GDP) has increased over time: looking at medical technology alone – disregarding for now all other components of health care expenditures – it was 1.3 percent of our GDP in 1980. In 2017, the latest year for which the Department of Health and Human Services publishes comprehensive data, that share is more than twice as high at 2.9 percent.

How would a single-payer system handle this? Since it lacks a countervailing force to the cost drive from quality advancements, and since health-care costs evolve independently of what taxpayers can afford, the only choices for a single-payer government are to raise taxes constantly, or ration health care access.

If we had operated a Medicaid-for-All single payer system, and if Congress had been wise enough not to raise taxes, we would have been forced to keep the med-tech share of our health care costs constant. We would therefore have had to forfeit advances in medical technology – or raise taxes.

But what is a tiny share of our economy like this one to quarrel about? As a general point, this is a valid question, of course. As share of GDP, spending on medical technology looks like chump change. However, looking at it as a market within the economy, medical technology actually translates into significant numbers. In 2017 we spent a total of $569 billion on medical technology. This includes durable technical instruments, non-durable instruments, prescription drugs, health-care facilities and the medical equipment needed for them to be operational.

If we had kept the med-tech share of GDP constant, from 1980 to 2017 we as a nation would have been limited to spending only $267.4 billion on medical technology. This would have meant a loss of more than $301 billion worth of instruments, equipment, clinics, hospitals and pharmaceutical products.

Such rationing would have had serious consequences for health care access. For every $1 million we reduce spending on medical technology, we have to make proportionate reductions in staffing. Over time, this kind of rationing has serious cumulative effects: as a thought experiment, consider what the effects would be if we removed 53 percent of all health-care spending in our country.

Another key question is, of course, what incentives entrepreneurs would have had to develop new technology for our health care system. To stick with the time horizon from 1980 and on, where would our health care have been today in terms of quality and ability to cure and heal?

Proponents of health care socialism often bring up administration as the holy grail of cost reductions. What they forget is that the decisions being made by administrators in today’s systems also must be made under a single-payer system. Hospitals and clinics still need to file claims for every procedure; someone needs to evaluate every claim; someone needs to process every claim; someone needs to cut the checks and send them out to the health care provider.

Someone still needs to keep track of supplies, order supplies, pay for them, make sure deliveries were according to specifications, distribute the supplies within the hospital… Human resources staff still need to make sure there are enough doctors, nurses, midwives, cleaning staff, procurement staff, computer experts and other employees throughout the health care system.

And someone still needs to evaluate the health care procedures to make sure that resources are not being wasted. For a glimpse of what this means under a government-run system, see the chapter on fiscal eugenics in my book The Rise of Big Government.

Table 1 explains the components of health-care costs (billions of dollars) in 2017, for the nation’s entire health care system.

Health Care Cost BreakdownUS$ billion
National Health Care Expenditures       3,492.1
Of which:
Hospital operations       1,142.6
Physician and clinical expenditures          694.3
Dental services          129.1
Other health-care professionals            96.6
Home health care            97.0
Non-durable medical products            64.1
Prescription drugs          333.4
Durable medical products            54.4
Nursing, continuing care          166.3
Other health care          183.1
Administration, net insurance costs          274.5
Public health activity            88.9
Research            50.7
Structures and equipment          116.9
Source: U.S. Department of Health and Human Services

Administration costs amount to less than eight percent of total health-care expenditures. Of this, 83.6 percent is the net cost for insurance. In other words, even if the entire insurance administration cost was eliminated it would only save the health care system 6.6 percent of its total costs.

This would, again, be possible if and only if there would be no need for any administration in a single-payer system. As mentioned earlier, that kind of administration is always going to be needed. Government doesn’t just funnel money out to hospitals, clinics and other health-care providers without any kind of information on what is being done, when, how, why and for how much money.

On the contrary, a single-payer system would come under intense cost scrutiny, given the very high taxes it would require. If anything, administration would increase to minimize waste, fraud and abuse. It is simply a pipe dream to think that elimination of administrative overhead would have paid for the $301 billion in med-tech advancements that we would have had to give up in order to not raise health care taxes from 1980 for our hypothetical Medicaid-for-All system.

But that’s not all. A single-payer system requires another layer of administration: central planning of all resources. It would require National Medicaid-for-All Agency that would micro manage the appropriations for every hospital bed, every medical procedure, every drug prescription and every other transaction within the entire American health care system.

That takes a lot of people, and a lot of people cost a lot of money.

Once the single-payer system is in place, government will freeze its costs in parity with the tax base. This means making health-care rationing a standard operating procedure for the allocation of health care resources, meaning in practice that access and quality are made scarce.

In Part 2 I explain what this means in practice and what it meant during the Covid-19 epidemic. In the meantime, listen to our podcast that talks about this very same issue.