Govt Spends Record 46% of Health Care Dollars: Why That's Not Good

Over at Investor's Business Daily (IBD), John Merline has put together a disturbing chart. It turns out that

Federal, state and local governments will spend a total of $1.4 trillion on health care this year, which will account for a record-high 46% of the nation's total health care tab, according to spending data released by the Centers for Medicare and Medicaid Services.

That's up from the government's 39% share just a decade ago, and the share is expected to hit 48% by 2023, as government programs continue to grow faster than the overall health care economy, the report found.

If current trends continue, government at all levels will account for more than half of health-care spending around 2028, says Merline. Obamacare is part of the reason for the increase, especially via the Medicaid expansion that 28 states have signed on to.

As important, out-of-pocket spending by individuals will drop to just 11 percent of total spending on health care.

Why is this disturbing? After all, who doesn't want to pay less out of their own wallets for anything, whether it's health care or groceries or cable TV? Because these sorts of developments muffle or completely destroy the connection between costs and benefits by de-linking prices and services. If you can buy a dollar's worth of goods or services for just 54 cents, you're more likely to buy more of something whether you really need it or not. This is "Groupon Government" on steroids. Between 2009 and 2013, for instance, the federal government borrowed 33 cents of every dollar it spent. That masks the actual cost of government and surely leads to demand for services that people wouldn't bother buying if they were paying the full cost.

So it is with health care. If we think that we're paying just 10 cents out of pocket or just 54 cents overall for every dollar of health care we're getting, of course we're more likely to purchase more.

The price system isn't incidental to transactions. It's central to them as it conveys information about what things actually cost to produce and deliver. We mess with it at our peril and it's no coincidence that as more and more of costs get shifted away from the actual purchaser, demand goes up and all sorts of ineffeciences and misallocations creep into the system. It's no secret that fully or heavily socialized health-care systems ultimately ration health care; that's how countries reduce the amount of money they spend on health care. Witness Canada's long wait times for treatments that are taken for granted in the United States (and systems that have been compared to a Corolla versus a Mercedes Benz).

And there's this to consider: One of the main arguments for health-care reform was that the United States spends "too much" of its GDP on health care compared to other developed countries. Let's leave aside the important question as to whether that's a meaningful value judgement.  The New York Times reports that by 2023, spending on health care will be 19.3 percent of GDP. That's "two percentage points more than last year." Over the next decade, Medicare spending—the agreed-upon major driver of future federal deficits—is expected to increase by between 3 percent and 8 percent each and every year. But not to worry, says the Times, because "the growth in spending would be moderated by cutbacks in payments to private Medicare Advantage plans." So after Obamacare, which was passed in part to help bend the "cost curve" down, we'll be spending more than ever on health care. Great.

If we want to reduce the cost of health care relative to other things or to control its price increases over time, the best way to do so is precisely to inject more market signals rather than fewer. That's also true of things such as education, another area of commerce that is mostly run by the government at virtually all levels (and, not coincidentally, another area where annual increases outstrip general inflation rates on a regular basis). With health care, there are ways to move to a market-based system while maintaining a basic safety net for those who can't afford to pay. That's going to be the future of health care either because we smartly move in that direction or we turn to it after Medicare blows up federal spending in such a way that we eventually bow down to basic economic and demographic realities.