FEBRUARY 28, 2010 9:13PM

The case against the U.S. health care system

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As seen at the recent Health Care Summit, the United States is not out of the woods about reforming the manner in which health care is delivered for all its citizens. The political parties are, as expected, at opposing ends of the ideological spectrums on this issue. Throughout these discussions, one point that President Obama was trying to hammer in was about ensuring that every citizen should be covered by medical insurance, which is in his words the "moral thing to do." A point he reiterated in his latest weekly radio address on Saturday. Despite this important premise, there are many (e.g., mainly members of the GOP and people on the right) who believe that providing everybody with medical insurance would significantly increase health care costs.  As documented elsewhere, the U.S. currently has the most expensive health care system in the world on a per capita basis. Yet, the health care system is ranked at the bottom of the list amid the top industrialized countries for health care delivery. According to some experts, the U.S. health care system is actually on the verge of bankruptcy.

A few months ago, I wrote a post about the concept linked to spreading the risk in health care. This concept is used in such diverse businesses as the insurance industry and casinos. It assures that as the number of people in a given group or pool gets larger, a company or governmental agency can more easily manage the risk (that would be the risk of a payout) among the pool of participants. They can therefore better estimate the average cost (or payout) per person in the event that one or even several members of the group are victims of a catastrophic event (e.g., cancer or severe injury), hence minimizing losses (and costs). The characteristics behind risk sharing are in fact more complicated than what I described above, but we'll leave that matter for another day. Let's not forget that this concept is the primary force behind the single-payer health care system.

Recently, I was discussing this topic with a blogger on another news website. This person was arguing that spreading the risk, hence the single-payer system, in fact increases costs because of what we referred to as a "third party payment." We can already assume that this person doesn't believe in the "moral thing to do" motto. In essence, the blogger was claiming that it is cheaper, on a per capita basis, when everyone pays from his or her own pocket. In theory, this statement cannot be disputed. Third party payments may include the services provided by a bank or insurance company. In truth, not using a third party payment works well for small expenses, but is certainly not applicable for large expenses, such as buying a property (house), a car or paying for cancer treatments from your own pocket. A good example can be seen here, where a significant fund raising activity is currently under way to help someone pay for treating a rare form of cancer. As a matter of fact, the society asks that its people get insurance for certain activities in order to reduce third party losses, confirming that not everyone can pay for their own expenses. This is not to say that some very rich dude may not be able to pay for the items listed above in cash, but most of us can't.

Following my discussion with this blogger, I decided to perform one of my interesting and enlightening analyses for your benefit. The hypothetical example below will also help demonstrate why the single-payer system, or a variation thereof, is the way to go.

The plans proposed by both parties, especially the one from the GOP, can therefore go into the trash tin.

The characteristics of the proposed example are as follows:

  • The society has a population equal to 1,000,000 people (1 million).
  • There is a 1% chance of being struck by cancer and if it does, the medical cost is $50 000 per person. Without the treatment, the cancer is assumed to be fatal, whereas with the treatment, the person is assumed to have survived the bout with this serious illness.
  • To replicate the health care system in the U.S., we'll have 10,000 (private) insurance companies each insuring a pool of 100 people. This is to show that even when everyone is initially covered via a medical insurance plan, things can go wrong. We'll touch on this one again further below. I know this seems a little bit extreme, but this is not that far from reality, given the fact some health insurance companies have pools varying between 5,000 and 10,000 people. Remember that the U.S. is populated by more than 300 million people.
  • Finally, we'll also assume an initial overhead cost equal to 10%, aka as a third party payment.

I'll present this hypothetical example using various steps:

1. When we have a pool with 100 people, it is expected that 1 person will be hit by cancer for a total cost equal to $55,000 ($50,000 x 1.1). This means that each person within the pool needs to shell out $550 to cover the medical expense for that single person.

2. Now, under a single-payer system, we have a single pool equal to 1,000,000 people. With this, it is expected that 10,000 (or 1%) will have cancer for a total cost equal to $550,000,000 (including the 10% overhead). As expected, the cost per capita is $550, the same as for the 10,000 pools.

3. Let's assume that the risk for getting cancer was found to be equal to 1.1% rather than 1%. This means that 11,000 people are expected to be stricken by cancer out of 1 million people.

5. Still with me? Let's assume that we randomly distribute these 1,000 extra people among the 10,000 pools: 1 more person for 1,000 pools. For these 1,000 pools, the cost per person actually doubles to $1,100 (2 x 50,000 x 1.1 / 100)! In other words, each person in the thousand pools needs to shell out $1,100 instead of $550 to cover two people who have cancer. As a side note, I'm wondering how many people would be happy to see their premiums double in this manner.

6. Then, it is estimated that every time the premiums increase above $1,000, at least 15% of the people cannot pay their full premiums (we do not know who, a priori). In this case, two scenarios are possible:

Scenario 1: the people who cannot pay more than $1,000 are still allowed to stay within the pool. If this happens, the overhead cost should increase to account for additional expenses (correspondence, legal fees, etc.) to handle the folks who can't pay the full premium; this also means that 85 people out of the 100 now need to pay $1,117.67 rather than $1,100. A more important question: would the participants who pay their dues agree to cover the costs for those who don't? I think we already know the answer to that question (why would President Obama reminds us about the moral thing to do, eh?), which leads us to the second scenario. It should be noted that smaller insurance pools always have higher overhead costs, as documented here (see also footnote 1).

Scenario 2: the people who cannot pay are kicked out of the pools (or are not allowed in the next year), a more likely scenario. They may be asked to pay back any treatment the insurance paid for if they were hit by cancer. This administrative process should also increase the overhead costs beyond the 10%. Under this scenario, this means that 15,000 among 100,000 people (100 x 1,000 pools) no longer have medical insurance. From those, it is expected that 150 will be struck by cancer and won't be able pay for their treatment (it is still above $1,000 after all), hence leading to their deaths (unless each one has a special money raising campaign, but we'll leave this aside; those kinds of activities are only found in the U.S., BTW).

Because they were kicked out, we also need to include the societal cost associated with their preventable death (by providing medical insurance). What is the value you may ask? Well, according to these nifty links here and here (the latter one for people who passed away from cancer), a preventable death is estimated to be around $4.0 million (an official average value used by several U.S. and private agencies for cost-benefit analyzes). This means that leaving 150 people to die from cancer will cost this society $600 million! In other words, we need to add another $600 for each member of that society.

5. Let's now go to the larger pool. Skipping all the steps, it can be shown that the cost per capita is equal to $605. Under a single-payer system, everybody is able to pay their premiums, hence keeping the overhead cost at 10%. In addition, all 11,000 people are able to be treated for cancer (and assumed to be fully recovered).

6. Now, imagine if the actual risk is not 1.1%, but found to be 1.5%. How many more insurance companies will need to increase their premiums and/or let go of people because folks cannot pay (5,000 more people with cancer than the original estimate)? At that level, we need to add societal costs associated with health insurance companies going belly up (or into liquidation), as documented in real life cases here, here, here, and here. Even at 1.5%, the cost per capita for the single-payer system is $907, still below the $1,000 threshold and everyone is still insured!

I understand the example above is somewhat simplistic, but I'm sure everyone gets the point. In the hypothetical example, by including everyone into a single pool, you not only managed the risk by minimizing the payout when your initial estimate is wrong, but you also saved the society $600 million by providing insurance to everybody. On the other hand, this is not to say that having medical insurance will automatically save you from getting sick or injured and being able to fully recuperate, but it will at least give you a better chance of survival and improved health than being without any coverage (see footnote 2). Let's not forget that the latest estimate about the number of annual deaths attributed to uninsured people in the U.S. stands at 45,000, which costs the American society in excess of $180 billion (per year) or 4 times the entire budget the U.S. Department of Transportation devotes to the transportation network.

To conclude, implementing a system that is based on private medical insurances (with smaller pools) is still possible. Many other industrialized countries have a dual private/public health care system. In France, their citizens have access to both, but when a catastrophic event occurs, such as being struck by cancer or becoming paralyzed, the public system automatically kicks in. This was the system I proposed for the U.S. in a previous post. In Holland, on the other hand, health care insurance is provided via private companies. However, the federal government fixes the premiums for the entire country and spreads the risk by subsidizing companies for high risk patients. Hence, the companies compete against each other based on the services they can provide for the same cost. I believe the Swiss and German systems work in a similar manner or very close.

Given the current political climate, we can already forget about having a health care system that covers everyone, especially when many so people erroneously believe that it will increase direct, indirect or societal costs. I invite the readers to read my post on out-of-pocket health care costs that also counters this view.


1 This explains why my car insurance premium is more expensive where I currently live than when I was living in Montreal. In Quebec, motor vehicle insurance associated with occupant injuries is managed by the government, a system similar to the Universal health care. There, private insurance companies cover for vehicle theft and damages as well as third party losses. Interestingly, I had to buy extra insurance in case someone who does not carry one hits me after I moved to the U.S. I was told at the time that many drivers in this part of the world don't have car insurance, even though it is mandatory (similar to everywhere else). I wonder why?

2 Canada's Health System Compared with Health Systems of Other Industrial Democracies by Dr. Marilyn Bowman from SFU:

In the specific comparisons with US health status, the data show that across virtually all the major indicators of health, Canadians are considerably better off. In a 1997 international comparison by The Economist Intelligence Unit, Canada ranked 4th in general health among 27 developed countries, compared to 13th for the US.  Canadians have better physical and mental health than Americans (Kessler, Frank et al. 1997), and in particular, poor Canadians have better health than poor Americans (Ross, Wolfson et al. 2000).

Significantly, in Canada mortality is not correlated with income inequalities as it is in the U.S. (Wolfson, Kaplan et al. 1999), and cancer survival rates are correlated with income in the U.S. but not in Canada (Gorey, Holowary et al. 1997). The better health of Canadians relates to the significant national Canada's Health System Compared with Health Systems of Other Industrial Democracies difference: the use of taxes for universal health care, which has been in effect since 1970.

Some readers may be interested in the very well-written OS article:

Market competition is not going to fix US health care

Thanks to Rat4Cat for his input. 

Update (April 5, 2010)

Some of you may have been surprised that a preventable death is equal to $4.2 million per person (again, an average value). Here's a CNN article published today that discusses the societal costs associated with infant deaths:

"If most new moms would breastfeed their babies for the first six months of life, it would save nearly 1,000 lives and billions of dollars each year, according to a new study published Monday in the journal Pediatrics.

The United States incurs $13 billion in excess costs annually and suffers 911 preventable deaths per year because our breastfeeding rates fall far below medical recommendations," the report said.


Bartick calculates $10.56 million for each of the estimated 911 children's deaths. Researchers also included the direct costs of health care and parent's time missed from work. They did not include the cost of formula, which is another added cost for moms who don't breastfeed.


Update (Nov. 6, 2010)

I recently found the following newspaper article titled "GMs Healthcare Double Standard: Bad ideology trumps good business" published five years ago that is highly relevant to what I discussed above. Highlights are:

"Yet just across the Detroit River in Ontario, the company's subsidiary-like the subsidiaries of Ford, DaimlerChrysler and other U.S. firms----strongly endorses Canada's national health system.

"The Canadian plan has been a significant advantage for investing in Canada," says GM Canada spokesman David Patterson, noting that in the United States, GM spends $1,400 per car on health benefits. Indeed, with the provinces sharing 75 percent of the cost of Canadian healthcare, it's no surprise that GM, Ford and Chrysler have all been shifting car production across the border at such a rate that the name "Motor City" should belong to Windsor, not Detroit.

Just two years ago, GM Canada's CEO Michael Grimaldi sent a letter co-signed by Canadian Autoworkers Union president Buzz Hargrave to a Crown Commission considering reforms of Canada's 35-year-old national health program that said, "The public healthcare system significantly reduces total labour costs for automobile manufacturing firms, compared to their cost of equivalent private insurance services purchased by U.S.-based automakers." "

Update (Dec 19, 2010)

I found this interesting study, which may be of interest to some people:

How Does the Quality of U.S. Health Care Compare Internationally?


"It does not provide support for the oft-repeated claim that the "U.S. health care is the best in the world." In fact, there is no hard evidence that identifies particular areas in which U.S. health care quality is truly exceptional.

Many Americans would be surprised by the findings from studies showing that U.S. health care is not clearly superior to that received by Canadians, and that in some respects Canadian care has been shown to be of higher quality.

The main ways in which the United States differs from other developed countries are in the very high costs of its health care and the share of its population that is uninsured.

On the basis of this review it is safe to say that U.S. health care is not pre-eminent on quality."

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I don't want to get too ideologically wonky on this issue, but I have to interject a few observations on any ideological debate on the merits or demerits of adopting a national health care system to the way every other civilized country in the world operates on; -- however:

The first thing that conservatives point to when they make their arguments are the free, unfettered animal spirits of the marketplace. Given this, a tremendously conservative case can be made by none other than Martin Feldstein, the renowned medical economist who states simply that the most efficient delivery for medical services for a country is a monopoly run (more or less) by the state.

In other words, allowing smaller, greedier, more profit oriented private firms into the medical markeplace introduces inefficient cost mechanisms that raise the price of medical care above and beyond inflation on a consistent historical basis. And in fact, this is what this country has been operating under for some time, and the results show to everyone. I don't feel the need to explain this point, you merely need to look at the historical percentage of GNP that is required annually for health care costs. Look it up in the book.

Secondly, the ultimate mechanism for reducing the defecit, lowering taxes, and balancing the budget can be found in a massive reduction of our defense expenditures. A true fiscal conservative would be shouting for immediate demobilization of our entire armed forces in an attempt to meet these worthy set of goals.

You did a very well researched and professional presented performance. Thank you very much.
ONL: Thank you very much! I'll check out Martin Feldstein's work when I have the chance. Your comment is a very good addition to the post. Well done to you too!
This is an excellent case study type of approach, a sort of Insurance 101 approach that highlights inescapable outcomes that occur when large risk pools are subdivided. Following the logic you pose, we can see how "cherry-picking" on the part of insurance companies distorts the entire market. Given that, the Feldstein conclusion that Old Lefty introduces makes perfect sense in so far as it pertains to a monopoly insurance pool run by the state or a state-regulated nonprofit. The costs of catastrophic care need to be borne by the widest group of participants possible to keep costs down for each. The U.S. system relies on corralling the youngest, healthiest participants while excluding the most vulnerable. You could say the market is doing what it is "supposed" to do, to perverse effect. Rated.
Thanks, Steve! I'll definitely look at Fieldstein.
Was the “public option” every really a serious proposal, or was it a bargaining chip, a throwaway boondoggle to be tossed into the chipper. Many believe it would never have worked; becoming the plan for those with no other options; the sick, the aged, the 55+ baby boomers with high cholesterol and bad knees and hearing loss from listening to ZZ Top at full volume. We need to let the public option go. As it stands, the Senate Bill promises to reduce fraud and waste, prevent insurance companies from dropping those with pre-existing conditions, fixes some problems with the cost of pharmaceuticals, and other good stuff (link). Well, who can argue with that?

Meanwhile, private insurance cost has risen at three times the rate of salaries, medical costs are the top cause of personal bankruptcy and employer provided coverage has crippled our business community's ability to compete with manufacturers in every other nation, where employee health costs are already covered.

As in Canada , the way to a comprehensive healthcare system is more likely to happen via the States. The Canadian healthcare system was built province-by-province. In 1947, Saskatchewan became the first province to institute a publicly financed healthcare plan, and other provinces soon followed. By 1971, a provincial-federal partnership plan providing universal healthcare was in place. Some provincial differences existed then, and many remain to this day. The administration of the universal healthcare plan (called “Medicare”) falls under the realm of Canada ’s provinces and territories. The federal government provides regulation, oversight, and some federal tax money to provincial governments.

A few US States have enacted healthcare bills. Since 1974, Hawaii has required all employers to provide relatively generous health care benefits to any employee who works 20 hours a week or more. But perhaps the most intriguing lesson from Hawaii has to do with costs. This is a state where regular milk sells for $8 a gallon, gasoline costs $3.60 a gallon and the median price of a home in 2008 was $624,000 — the second-highest in the nation. Despite this, Hawaii ’s health insurance premiums are nearly tied with North Dakota for the lowest in the country, and Medicare costs per beneficiary are the nation’s lowest. Why is that? Possibly because requiring employers to offer healthcare increases the pool and thereby decreases the overall cost. Also, living in paradise has its health benefits. People who swim and surf instead of watching soap operas and eating crème puffs are less of a strain on the medical insurers.


Still, some ten percent of Hawaiians have no coverage. The unemployed and part-time workers are not covered.

Cost control is the key to the survival of any public plan. Massachusetts and Maine have public option systems, but their costs are rising.

California has a bill in the works, Senate Bill 810, which may be the answer to our dreams. The Bill proposes a single payer government run system paid for through a health tax which would less than what people currently pay for health insurance. The plan involves NO NEW SPENDING from the State budget.

When you pay the health tax, the benefits you get are better than any existing health insurance plan and there are no exclusions for "pre-existing conditions" or any other health problems. Dental care, mental health parity, long term care, alternative and complementary care, durable medical equipment and full prescription drug coverage are included without co-pays.

Here’s the big catch: This plan ends all private health insurance. Personally, I have no problem with this. But it will raise the ire and wrath of the free market proponents. Is this too socialistic for the average Californian? I can see the ads on TV now; big brother in Sacramento tells you what to do, how to live, or die, ….as if private insurance companies do not do this already. At least it will be cheaper, and if you really need plastic surgery for your fat ass or you need a heart transplant that isn’t available through your insurance because you are too old, you can always pay for it (hey, that’s a novel idea for Republicans.). Is CA Senate Bill 810 too extreme, too socialistic, will it fail under the attack of the AMA, Blue Shield, and Wall Street …Maybe.

Under this plan, everyone can choose their doctors and other providers, health care delivery is in the private sector. What about Kaiser? Yes, it will still exist, it just won’t sell policies.



Wow = I really hope California puts that plan in place. It's the most populous state (right?), and if it does this it will show the way for the rest of the states.
Anthony: Thanks for dropping by. I get the sense the text was cut and pasted from one of the websites at the bottom of your comment.

Myriad: I agree. It would be a very good start. I hope the Olympics were not disruptive where you are. It must have been quite a party on Sunday!
Very nice analysis.

Another important point is that each additional insurance company increases overhead operating costs for the total system. Every company has its own headquarters, personnel office, computerized claims system, and so on. In addition, rather than having contracts with a few insurance companies hospitals and clinics have to have contracts with many insurance companies.

Going back to your example, if we had 100 insurance companies with a total overhead of 10%, by the time we hit 10,000 companies, the total overhead might be more like 30%, just because of the sheer number of insurance companies, as you have higher overhead costs for the same number of people insured.
Mishima666: Thank you! You’re absolutely right about the higher overhead cost associated with multiple insurance companies. One of the links above describes in more details the issues you discussed.