Economics and Health Care Reform

While most media attention on the new Obama administration has been, rightfully, on its response to the extraordinary U.S. (and now global) financial crisis, largely overlooked during these eventful times is the renewed effort to reform health care in America.  Several proposals have been unveiled by the President, members of Congress, and private entities (which consist mainly of former members of Congress and individuals from previous administrations).  While there is more general agreement on the need for reform than existed in the early 1990s, when President Clinton unsuccessfully attempted to introduce significant change to the U.S. health care system, it remains to be seen how, and if, such change will take place.  The legislative—and political—process is just getting started.

One of the basic lessons of economics is that societies face tradeoffs, which results from the relative scarcity of resources available to provide all of the goods and services desired to be consumed.  In the context of health care, I present to my students the essential tradeoffs involved with this sector of the economy, in the form of what I call the “iron triangle”:  cost, access, and quality.  In short, the triangle represents the immense challenge of any health care system to achieve what most people would want:  low cost, easy access, and high quality.  A tour of the world’s different health care systems tends to reveal that, at best, only two of the three desired outcomes can be achieved simultaneously.

Currently, the U.S. health care system is viewed as lagging, relative to the rest of the world, in terms of cost and accessibility.  While in this country we spend, on average, $7,500 per person annually (in 2007) on health care services, which is twice as much as the next highest country, we rank rather poorly in terms of health status.  Many attribute our poor health status to the fact that so many Americans—about 40 percent of non-elderly adults (ages 19-64)—are either uninsured or under-insured.  Indeed, the U.S. stands alone among the industrialized nations in not having some form of universal health insurance.  On the other hand, the quality of care found in the U.S., which not only takes into consideration the availability of advanced treatments for serious conditions, such as heart disease and cancer, but also the quality of basic amenities, promptness of attention, and choice of providers, is considered the best (World Health Organization, 2000).

As we once again debate reform, it should be of interest to consider the results of a 2007 worldwide survey conducted by the Commonwealth Fund, a private foundation, on citizens’ views of their own health care systems.  While in the U.S., 82 percent of respondents supported either “fundamental reform” or “complete rebuilding” of the U.S. health care system, results in other countries, particularly those countries whose systems are often cited as favorable contrasts to the U.S., were not dramatically different.  In both Canada, which has universal health insurance, and the United Kingdom, which has nationalized health care (the National Health Service), 72 percent of respondents in those countries indicated they would support either “fundamental reform” or “complete rebuilding” of their respective systems.

Thus, as with other aspects of life, when it comes to one’s health care system, “the grass may seem greener” elsewhere.  What these survey results likely reflect, though, is the difficult challenge of any type of health care system to achieve superior outcomes for the three points of the “iron triangle” (cost, access, quality).  Consequently, and while there are certainly ways the U.S. health care system could, and should, be improved, policymakers should also be mindful of the inherent tradeoffs that will be associated with any reform proposal.  

Richard Smith, Ph.D.,  Assistant Professor, Economics