US Suffers Pain from Rising Health Care Costs

Recently, a report from the U.S.-based Kaiser Family Foundation revealed that in 2012, annual premiums for employer-sponsored health insurance, which covers about 1.49 billion people, has risen four percent, to an average of $15,745 dollars. While lower than the nine percent increase in 2011, it still outpaced growth in workers’ wages (1.7 percent) and general inflation (2.3 percent). The report also expects that, in 2013, premium growth will be seven percent.

The premiums for employer-sponsored health care are part of companies’ labor cost. Thus, the increase in employer-sponsored health insurance premiums can be considered as employee income with specified use and thereby, the corrected income growth rate should be 5.7 percent, but since the pricing of medical services in the U.S. is mainly oriented by commercial insurance institutions, employees cannot have a say in the cost of medical services, which means the employer, in order to cope with the rising cost of medical insurance, must issue part of the employees’ salary in the form of premium expenditure, thereby reducing the employees’ discretionary income.

Currently, rising health care costs in the U.S. are again pushing Obama’s health care reform bill into the eye of the storm. According to the most recent poll, voters are most concerned with the increasing cost of medical services and health care plans for the elderly. Americans are increasingly worried that once the health care reform bill is formally implemented in 2014, medical costs will be pushed even higher. After all, relevant data shows that the new medical reform will augment the national budget deficit by $5.68 trillion dollars. With $14.3 trillion dollars national debt already there, the even larger deficit would mean residents and businesses in the United States will need to pay more tax to fill the fiscal gap created by the new health care reform.

Frankly speaking, the U.S. health care system is the most expensive one in the world. U.S. annual total expenditure on health care accounted for 17 percent of its GDP, about $2.4 trillion dollars, of which government health expenditures make up 46.2 percent; also, PwC [PricewaterhouseCoopers] claims that unnecessary medical service fees and price fraud account for half of the total national medical expenditure, approximately $1.2 trillion dollars. This situation originated from the increasingly serious lemon phenomenon* in the American medical market. Since the United States adopted a voluntary, instead of mandatory, health insurance system, insurance companies, based on self-interest considerations, are unwilling to provide insurance for the elderly over 65 years old, as well as for those people with poor health. However, since the young and healthy are reluctant to join insurance plans due to the high premiums, the lemon phenomenon* of the U.S. insurance market is thereby further aggravated.

Obama’s new medical reform has encountered strong opposition. One reason for such opposition is that, though the United States has an uninsured population of 32 million, these people are not the poor or the elderly who have no insurance plan, but those who neither qualify for state assistance nor are earning enough income, as well as those who think they won’t get sick and those who are reluctant to be insured because of the high premiums.

The second reason is that, though the health care reform requires review of insurance premiums, as well as a mandatory health insurance policy which aims to curb insurance company practices such as refusing to provide insurance for people in poor health and forcing young people to be insured, the health care reform can hardly alleviate the lemon phenomenon in the U.S. insurance market effectively. For instance, though the new health care reform requires insurance companies not to refuse to insure people with poor health, commercial insurance companies can still increase the difficulty for those people to get insured by means such as delaying approval. Meanwhile, insurance companies can adopt various preferential measures to attract young people, thereby absorbing a large number of them while forcing unhealthy people to buy medical insurance through the government. Obviously, this will make the government assume most of the medical expenses and will in turn push health care costs even higher and make the fiscal deficit larger. Such considerations trigger Americans’ worry about the new health care reform.

Health care costs in the U.S. continue to rise, increasing the burden for American businesses and residents. It is foreseeable that after the presidential election this year, no matter who assumes office, the new president will have to renovate measures required by the health care reform, or modify the health care reform bill, to reduce the constantly rising medical costs.

*Editor’s Note: Lemon phenomenon is an economic term referring to adverse selection by sellers (here, the insurance companies) and information asymmetry between sellers and buyers, where insurance companies have an advantage in discriminating against the ill while making up new rules or policies to attract the young and healthy, regardless of how the reform is carried out.