As Republicans struggle to repeal and replace Obamacare, they can find useful ideas in unexpected places: countries that have adopted socialized medicine. While the U.K.’s National Health Service and other health bureaucracies may seem to be the wrong place to seek guidance for a private-market plan, they offer approaches to cost-effectiveness that Republicans will need to embrace if they hope to implement a new health care reform without getting hammered in 2018.
The core problem for Republicans is that progressives have won the philosophical debate by persuading the public that health care is a right. Polls show that an overwhelming majority of Americans believe the government should ensure universal access to health care. Although conservatives and libertarians make the point that so-called positive rights, like a right to health care, can only be provided through some form of compulsion, this argument no longer resonates. A system that fails to guarantee access to essential care regardless of ability to pay is no longer politically feasible.
Once we recognize that Americans have bought into a fundamentally socialistic idea, the fiscally responsible approach is to fund universal service in the most cost-effective way. Relative to other advanced nations, the United Kingdom offers an especially inexpensive model for providing health care. In 2015, health care spending in the U.K. was only $4,003 per person, less than half the $9,451 per person we spend in the U.S. Despite its sharply lower spending, the U.K. enjoys higher life expectancy at birth than the U.S. — 81.4 years versus 78.8 years here. While violent crime, accidents, poor nutrition and lack of exercise contribute to relatively low life expectancy in the U.S., it is hard to believe that we would significantly outperform the U.K. even if these factors were somehow equalized.
To understand why the U.K. gets better results (at least in terms of longevity), we need to take a brief detour into budgeting theory. Governments use two methods to spend money: appropriations and entitlements. In the U.S., most federal agencies are funded through appropriations, meaning Congress assigns them a fixed budget each fiscal year. Agency leaders must then manage within their budgets, implementing cost-saving measures during the year if they are at risk of running out of money. But most medical care is funded through entitlements. Under Medicare and Medicaid, health providers can be reimbursed for whatever services they provide, with no predetermined limit (although there are some exceptions). Because entitlements are unmanaged, they are more subject to escalating costs. As reimbursement rules change, providers find ways to maximize their revenue, while program administrators have no incentive to push back.
In the U.K., most medical care is provided by the National Health Service through appropriations. Due to budgetary pressure, health authorities make trade-offs that are now unthinkable in America, but that don’t greatly impact broadly measured health outcomes. Mammograms are generally not available to women under 50 because the benefits of earlier testing usually do not justify the risks of undergoing the procedure. The NHS also does not offer routine colonoscopies, and provides far fewer circumcisions for newborn boys.
The NHS and other large health care bureaucracies engage in a practice economists call non-price rationing: doling out a scarce resource through government mandate rather than by a market process. While this approach is normally maligned by free-market economists, it is preferable to the alternative we have here in the U.S., which is basically no rationing whatsoever.
Perhaps the worst manifestation of U.K. rationing is the long waits for surgical procedures. Although the NHS officially limits waiting times for elective surgery to 18 weeks, patients often must wait far longer. That said, the U.K. does provide a couple of mechanisms that limit this problem. First, the media and opposition political figures have the freedom and the incentive to embarrass the government into improving patient outcomes. Patients suffering or dying due to long waits can become the focus of news stories and at Prime Minister’s Questions in Parliament.
Also, Britain has a robust private health care system that can take some of the weight off of the NHS. About 10 percent of U.K. residents have private health insurance — paid directly or through an employer — that provides access to consultations and procedures over and above what they can get through the NHS. Although progressives might complain that allowing a private market results in a two-tier system, they should realize that total health care equality is a pipe dream.
Non-price rationing produces some bad outcomes, but it has little impact on the U.K.’s overall results because a lot of the medical procedures are unnecessary. Research shows that, beyond a certain basic level, additional care provides little or no benefit. Indeed, research on doctor strikes show that death rates either remain the same or fall when physicians deny access to their services.
Tight NHS budgeting is also associated with lower drug prices, more modest salaries for doctors and more deliveries of babies at home by midwives. By contrast, the combination of pervasive third-party payment arrangements and limited cost controls in the U.S. enriches health providers and encourages waste. TV commercials encourage patients to demand brand-name prescription drugs for conditions that could be treated by generic or over-the-counter medications — if they require pharmaceutical intervention at all.
Twenty years ago, a case of heartburn might have been handled by rest or a few Tums; now, it’s diagnosed as Gastroesophageal Reflux Disease and treated with prescription Nexium. While a one-month supply of Nexium retails for $250, a similar quantity of generic Omeprazole can be had for $17 and over-the-counter Prilosec costs only $18. The main reason doctors prescribe and patients demand the branded prescription drug is that third-party payers cover most of the bill — often with government subsidies.
Hospitals also benefit from generous third-party payments. Sutter Health, a not-for-profit hospital chain in Northern California, paid its CEO $7.5 million in 2015. Eighteen other executives received compensation in excess of $1 million each, yet Sutter still reported net income of $81 million. About 60 percent of the organization’s revenue came from state and federal sources. In other words, California and U.S. taxpayers helped the hospital chain and its executives make millions.
Congress can fund universal care without breaking the federal budget by squeezing drug companies, hospitals and other health care providers. House Speaker Paul Ryan’s plan to introduce block grants for Medicaid, which will effectively oblige states to implement non-price rationing, may be the first step in this direction.
The block grant approach could be extended to individuals now receiving large subsidies on Obamacare exchanges and those with costly-to-insure pre-existing conditions. States could respond by giving hospitals fixed annual grants for attending to patients not carrying private insurance, thereby compelling these providers to economize. States could also negotiate lower prices with drug providers and/or migrate patients to generic and over-the-counter remedies. While lobbyists make it difficult for legislators to implement such policies, transitioning away from the entitlement model to one based on appropriations is the way forward.