Healthcare in the US is unbelievably complex. To shed some light onto the industry, I've decided to write a mini-series on healthcare to better understand what's really going on.
First, some high level statistics. Healthcare expenditures in the US were nearly $2.6 trillion in 2010, or an average of $8,400 per person. To put that into perspective, that makes the US healthcare sector larger than the entire GDP of any country outside of the five largest nations. The share of our economy devoted to healthcare has increased from 7.2% in 1970 to 17.9% in 2010. Rising healthcare costs have been a huge damper on our economy and so naturally the topic is always at the forefront of political debates.
So how exactly does our system work? In the United States, we have a hybrid system where not everyone is covered, and some healthcare services are paid for by the public government while others are paid for by private employers and consumers (with insurance companies playing middleman). The general process works as follows. Consumers pay monthly insurance premiums to insurance companies in order to make sure that they will be covered when they need care. Insurance companies cover thousands or millions of lives and negotiate with providers to create a network of coverage for consumers with better rates. Care is ultimately provided by non-profit hospitals, for-profit hospitals, government hospitals, as well as a variety of independent physicians, HMOs, and other provider groups.
So how did we end up with this system? Take a look at the timeline below for some historical context.
As you can see in the above graphic, the American Medical Association (AMA) formed in the early 1900s at a time when our country didn't have health insurance. The AMA lobbied against health insurance several times throughout the 1900s to protect their interests since they feared that "socialized medicine" would be detrimental to doctors. Several presidents tried to push healthcare insurance legislation or universal healthcare legislation through but were thwarted for one reason or another. During the second World War, wage controls were placed on employers and so they started providing health benefits as a way to compete for workers (and this paradigm has persisted to the present). Years later in 1965, Johnson would create Medicare and Medicaid. Medicare is a federal health insurance program typically for people age 65 or older. It's an "entitlement benefit" similar to Social Security in that most citizens earn the right to enroll in it after paying taxes for a minimum required period. Medicaid is similar but targeted towards families and individuals with low income and limited resources.
The following decades would see a massive consolidation of corporations in all areas of healthcare - hospital networks, insurance carriers, pharmaceutical companies, and medical device manufacturers. Hospital systems began minting money and could spend incredible amounts on the latest and greatest drugs and medical devices. Naturally, pharmaceutical and device companies were also minting money. Additionally, due to the "fee for service" model in the US, where payments are based on quantity of care rather than quality of care, providers were given an incentive to provide more treatments regardless of costs. Exorbitant bills would be paid for by insurance companies, but those costs are essentially passed on to employers (or the government if Medicare/Medicaid). However, with costs so astronomically high, people with no insurance or poor quality insurance started getting priced out of the market and were essentially screwed if they ever needed serious treatment.
There are MANY other factors that have contributed to our current healthcare system and rising healthcare costs but the aforementioned highlight some of the basic points. The aim of healthcare systems is to maintain a healthy population. Insurance, whether private or public, is an important part of this. Since half of healthcare spending is used to treat just 5% of the population, it's important to make sure people are getting preventative care and staying healthy. The strategy on how to make this happen has hotly debated for decades.
In future posts, I will talk about the Affordable Care Act (ACA) and look more closely at how different players in the healthcare system all interact.