Why health care reform is hard

“You’re going to have such great health care, at a tiny fraction of the cost — and it’s going to be so easy.” — Donald Trump, 2016

“Nobody knew that health care could be so complicated.” — Donald Trump, 2017

The Affordable Care Act is collapsing in real time, but not for lack of good intentions. The plan simply fails to address fundamental economic realities. Meanwhile, after seven years of opposition, House Republicans voted to partially repeal the ACA and replace it with their own equally fanciful American Health Care Act. Prospects for passage of that bill without changes in the U.S. Senate are near zero. But the exercise serves as an illustration of how complex the subject is and how both sides have failed to comprehend the underlying dynamics of the American health care system.

Consider how we got here.

Half of all Americans today depend upon private sector insurance provided by or through an employer. This arrangement is unique in the developed world and is actually a historical accident. Prior to World War II, a few industrial employers such as steel mills and coal mines employed company doctors or established clinics to treat workplace injuries, but most people paid for medical care out of pocket.

During World War II, competition for production workers led many manufacturers to offer inexpensive BlueCross plans as an incentive. In an effort to stem wartime inflation, Congress passed the Stabilization Act in 1942, imposing wage and price controls but exempting insurance benefits. In the absence of raises, basic employerprovided medical insurance proliferated.

In 1943, the IRS ruled such non-financial compensation to be exempt from income taxation. By the 1960s, employer coverage was the norm. This tax break remains the single largest middle class entitlement, costing $140 billion in lost revenue annually to the federal fiscal.

To address the lack of coverage among retirees and the poor, President Johnson signed the bill creating Medicare and Medicaid in 1965. Most Democrats and nearly half of all Republicans in Congress voted in favor, and Medicare became one of the most popular government programs in history.

Complicating the picture, health care costs exploded since the war as miraculous advances in medical science have dramatically increased life expectancy and general welfare. Medicine at the dawn of the 20th century was primitive, and the average American spent just $100 per year on health care in today’s dollars. By 2015, health care spending averaged nearly $10,000 per person and constituted 18 percent of the U.S. economy.

Finally, consider the substantial market distortions unique to care. Most of us are willing to accept the judgment of the free market in allocating scarce resources elsewhere in the economy. If an uninsured young man crashes into a pole, we do not expect society to repair his car. But if the same young man is wheeled into the emergency room with a broken arm, we are unwilling to turn him away without treatment. Americans are generally compassionate and won’t allow Adam Smith’s Invisible Hand to wave off cancer patients or heart attack victims who cannot pay for life-saving care. In this way, unlike auto repair, cheeseburgers or smartphones, medical care is not strictly a market good, which is why many of the assumptions regarding the AHCA’s competitive incentives are unrealistic.

Healthcare is indeed complicated, and any serious effort to repair our broken system necessarily means going back to the drawing board. And like Medicare, successful reform of the American health care colossus will require substantial participation by both parties in good faith if it is to stand the test of time.

Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnettt & Co. Investment Counsel in Chattanooga.