It turns out that the wealth of nations may have more to do with the health of nations than Adam Smith could ever have imagined. Americans consider healthcare a key issue in this presidential election, but most really don't know the half of it.
Middle class families worry because rising under-employment means more people are losing their health insurance. Exorbitant hospital bills are the leading cause of personal bankruptcy in the States, so the sense of insecurity is rational. What Americans mostly do not realise is that they are being robbed. The health economy is not delivering for them competitively.
US health costs are at least twice as high as in countries like France, Britain and Germany with better systems. (Many Americans have an unshakeable belief that these systems are inferior, but no data on longevity or success in handling major diseases supports that prejudice.).
The massive cost disadvantage is a major drag on economic competitiveness.
At the firm level, because large, unionised employers pay for healthcare, it explains part of the Detroit car manufacturers' difficulty in competing with Japanese and South Korean companies. At the macro level, some of America's job losses to low-cost countries would not have occurred if her health costs were in line.
Since health expenditure accounts for more than 15 per cent of US gross domestic product, it represents a huge portion of the economy. If America had a sensible health system, the savings of seven or eight per cent of GDP would be enormous – likely enough to solve the looming retirement crisis or to completely rebuild the nation's infrastructure for energy efficiency. Another way of looking at it: although American GDP per head makes the country look quite rich, eight per cent of that GDP is not making Americans any better off.
Emerging economies that are still developing their health system architecture would do well to stay as far away from the American model as possible. The main sources of America's health cost problem are threefold. First, administrative overhead is a huge deadweight. Second, prices for drugs, surgeries, physician time and hospital stays are all much higher than elsewhere: providers are being overpaid. Third, some Americans with good coverage are being over-treated: getting health services that offer little or no benefit in terms of quality or additional years of life.
Unfortunately for Americans, each of these flaws is hard to fix, especially since no politician wants to talk about them.
Vague ideas – "Medicare for all" from the Democrats, and "choice through health savings accounts" from the Republicans – duck the three sources of the cost problem.
Something like a quarter of what Americans spend for health care goes on administration and bureaucracy. A group called Physicians for a National Health Programme estimates overhead to be as much as 31 per cent of total health spending. By contrast, if everyone is covered under the same scheme, like in Britain's National Health Service, administrative cost is very low. In single-payer systems, there is no need to check that a patient has coverage, nor to collect premiums and send bills back and forth.
There is also no question of trying to exclude people with pre-existing illnesses from insurance, nor of charging some people and small businesses cripplingly high premiums because a family member or employee has had a disease. These activities keep US insurance companies busy and cost money. All other advanced countries shun them, designing their health systems to help people who need it, not to exclude them. In the US, insurance firms also compete to sell their health plans to employers and employees, running up marketing expenses that, of course, contribute nothing to preventing or curing any patient's illness.
The insurance companies have created, among other things, a claims paperwork nightmare for patients, doctors, labs and hospitals that simply does not exist in a single-payer, universal health care system.
In a typical doctor's office in the US there seem to be more clerks than nurses.
Even a routine check-up with a blood test and an X-ray sparks a flurry of claims letters to the patient from providers and the insurance carrier. It often takes an angry telephone call or three to sort out who really owes what to whom. Any serious illness creates a stream of billing correspondence and a reimbursement tangle that seems to have no end. Each insurer has a different price tariff negotiated with doctors, and plans are constantly adding and dropping doctors and laboratories from the list that they agree to reimburse. Doctors and hospitals in the US also play a game against the payers, whereby they try to "code" every service they perform for patients in the highest possible category, in order to charge the highest prices. Insurers fight back with audits, and the game adds to expenses on both sides, while demoralising doctors who went into the profession for the right reasons.
It would be hard to design a system less fit for purpose. It is almost a parody of the failings of market competition.
When customers are not paying with their own money and don't have any bargaining power with insurers or providers, markets simply don't work. Yet health insurers are well-entrenched interests, spending fortunes on Washington lobbyists and political advertising to maintain the status quo.
Republicans are entirely captive to them, handing them another tranche of profits for administering a new drug program for the elderly just four years ago. Democrats appear afraid to take on the insurers and eliminate this huge component of the cost burden.
The second source of the US health cost problem is high prices. A recent article in the Economist compares US prices for a collection of surgery procedures with prices of hospitals in low-cost countries that market to 'medical tourists'. The latter undercut American hospitals by around 50 per cent, even after patients pay to travel around the world for operations. American surgeons make far more money than their counterparts elsewhere and hospital prices are also excessive, partly to cover excess capacity of beds and facilities. Despite the vaunted free market, there is no mechanism to make providers compete on price.
Drugs are also priced higher in the US than elsewhere, which is why pharmaceutical companies have to lobby so hard to prevent imports of identical drugs from Canada.
In a single-payer system, by contrast, the buyer of health services and drugs has pricing power. That is why the American Medical Association, the doctors' trade group, yells "socialism" when anyone proposes it. Of course, single-payer systems have to be judicious in not driving down doctors' incomes so far that professionals have no incentive to remain in or to enter the field. But cardiac surgeons do not need to make millions of dollars per year, as they do in the US, to ensure a supply of qualified heart specialists.
The final source of America's cost disadvantage is over-use of services.
Some 47 million uninsured Americans can only get inadequate emergency care in facilities for the indigent. But many of the rest have coverage that will pay for just about anything a doctor prescribes, once the paperwork hassles have been sorted out. The result is that Americans have far more births by caesarean section, more hysterectomies and more chemotherapy than people in other advanced countries. Obstetricians and oncologists make better money under the US system if they push these interventions, even when not medically necessary or helpful. Patients have more CAT scans and MRIs – expensive diagnostic images – and laboratory tests than they would in other countries. This is partly because physicians have incentives to over-use, partly it is defensive medicine, to avoid medical malpractice lawsuits, and partly patients demand more technology than their cases require. Prevention tends to get short shrift in the US system because nobody will pay doctors enough for screenings and patient education. A tradition of fees for procedures puts the focus on treatment disease rather than heading it off at the pass.