The Ticking Economic Time Bomb

A number of hot potatoes are going to find their way onto the desk of the next president of the United States when he/she enters the White House on Friday, Jan. 20, 2017 — from the rising tide of racism to the wave of shootings involving police officers to the pressures of responding to worldwide terror. Yet, while those topics garner headlines on a weekly basis, under the surface lurks a giant economic time bomb, and nobody has any idea how it will be defused.

I'm talking of course about what Barack Obama sees as his main legacy — the great reform of the health care system, otherwise known as “Obamacare.” American liberals tend to view it as the flagship reform of the Democratic administration — an expansion of health insurance coverage to include every American, regardless of income or medical history; conservatives, meanwhile, see the reform as just another means of increasing government interference in the economy and in the lives of citizens, although the majority of said critics offer no alternative plan of action.

Both sides of the American political arena prefer not to tackle the real problem in the reform and in the American health care system, but rather to suppress it. The health care system is the most bloated, distorted, expensive and perhaps also the most corrupt in the Western world: legalized corruption, of course, of the sort widely accepted in the United States.

The positive and publicized side of “Obamacare” is that it ostensibly puts an end to the situation in which 30 million Americans found themselves without any insurance coverage, while 50 million others had only limited coverage. That's easy to understand. The negative side, which most of the reform's supporters blithely ignore, is that the program does not tackle most of the system's deficiencies. “Obamacare” was built on the basis of the American private system and was formulated via a series of compromises in which the government signed off with the five most powerful interest groups in the system: the pharmaceutical and medical equipment companies, insurance companies, hospitals and doctors' unions.

In the last decade, those groups invested billions of dollars in lobbying and in donations to all politicians indiscriminate of their party persuasion. Hundreds of senior members of Congress and the Senate abandoned their posts in order to represent those interest groups, sometimes for a salary tenfold that they earned while in office. “Obamacare” was eventually approved — not because of the general, dispersed public, the poor and the sick, but rather only because leaders in the business, insurance and medical worlds became convinced that the reform would work in their favor and ultimately enrich them.

And they weren't wrong. The shares of most health insurance companies have soared in recent years. So have executive bonuses. So have the revenues, profits and above all the salaries of senior managers in the pharmaceutical, medical equipment and hospital industries. What happened to the salaries of specialist doctors in the U.S. during the last three years, to salaries that were already the highest in the world, even before “Obamacare”? The answer is that they continued to climb at a much higher rate than inflation and certainly higher than the wage of the average American.

Without attacking the roots of the waste, distortions and structural corruption in the American health care system, the reform in its current form will not hold water. In the last year, insurance companies in many U.S. states have begun raising premiums sharply. In Texas, for instance, the largest insurance company in the state announced its intention to raise premiums by up to 60 percent. Other states have seen insurance companies make the awkward discovery that there are too many sick and elderly people they now have to receive because of the reform. Instead of raising premiums, they adopted a quite different strategy, with a similar outcome — they announced that they would withdraw from those states.

This “historic reform” doesn't really take on the powerful interest groups, and threatens to blow up in the hands of consumers and taxpayers. The speed with which it reached this stage after its inception should be a warning signal on which every citizen, politician, taxpayer, academic and expert should focus their attention whenever a politician declares reforms or economic initiatives that benefit the public. The conclusion is simple: When a politician declares a reform that was not preceded by a serious, expensive, painful and usually violent struggle with a strong interest group, there is a good chance that particular reform is devoid of real substance. Those footing the future bill will be the weak and dispersed taxpaying public.

Here in Israel, when a reform or program from the treasury or any other department is executed via an announcement to the press or by waving a check, the chance that the reform will significantly benefit citizens is small. Somebody will foot the bill at some stage, and in the majority of cases, that somebody will be the wider public, simply because private sector interest groups, by definition, know how to look after themselves.

Obama's surrender to interest groups within the health care system should serve as a red flag to anybody who, like us, fears for the structure of the health care system in Israel, and primarily who fears that insurance companies — in cahoots with senior doctors and managers of the major health entities — will seek to adopt the American system. The greatest danger in that system is not just a rise in inequality and waste, but rather the prospective creation of huge private economic forces that could take effective control of the political system. In the last decade, we have seen a similar phenomenon take place in the Israeli capital market, and were it not for the Business Concentration Law and the campaign to break the hold of the tycoons, Israel might have found itself deteriorating toward an oligarchical structure that characterizes ever-larger segments of the American political administration.

Medical insurance companies take pains to keep a low media profile, and so do the hundreds of senior doctors in Israel who have reaped the benefits of creeping privatization in the health care system over the last decade. They didn't follow in the footsteps of a few of the Israeli tycoons who wanted to both extract high dues from the public, and make sure the public saw them doing it, feared them, and applauded them at the same time. However, personal economic interests in the health care system are not always so very different from those prevailing in the capital market or in the food and media monopolies.

The statistics read as follows: The average income of the 100 highest-paid doctors in 2013 totaled 3.4 million shekels (about $900,000) — in other words, 285,000 shekels per month ($7,500 per month), 40 times greater than the external Israeli wage. On average, around 83 percent of the income of those 100 doctors springs from private clinics rather than from the public system.

For many people, whether a doctor earns a high or low salary is perceived as something decided by fate — part of the price we pay for participating in a global and competitive economy, in which the market rewards the best at the expense of the worst. That perception characterizes the thinking of many within the health sector, simply because they don't understand that in every market, resource allocation is determined not just by supply and demand, but by the rules of the game decided by the government. In the case of the health care system, the government determines, whether directly or indirectly, by default or by intervention, the rules of the game. And at the top of the list is how many doctors are allowed to enter the market each year.

How can we best see the enormous influence these government rules have on the market? By examining the development of doctors' salaries over the years. Between 2003 and 2013, during a time when the government allowed creeping privatization to take place and the scope of private health insurance services grew dramatically, the salaries of the most senior doctors rose by 146 percent in real terms. The increase stemmed predominantly from their income via their private occupations, which saw a rise of 230 percent. Their salaries in the public sector rose by only 23 percent in real terms during that same period.

Senior doctors in Israel are a relatively young group, with most having decades of active work left in them. The average age of this group is 58 years old, and their most common specialties are plastic surgery, gynecology, eye medicine and orthopedics.

What might one find when checking the income tax figures for senior medics? It's anyone's guess. A private banking manager in one of the biggest foreign banks in Israel reports that in the last decade, an ever-larger portion of the new customers of foreign banks are doctors whose net worth has become high enough for them to seek other ways of distributing their risk, and they have begun transferring a few million shekels — and sometimes dollars — to the United States, Zurich and London.