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May 24, 2002

Health Care System Controls Disease Better Than Costs

Most of us associate the year 1776 with the birth of our country. But during that summer, the yellow fever epidemic in Philadelphia was so bad that the entire fledgling government dispersed to the countryside. The notion of public health as we know it today was unknown then, and those who could not afford to move away in times of epidemic sometimes paid a terrible price.

Millions of lives have been saved since that time by the control of pests and bacteria that spread disease. The overriding interest of society in eliminating epidemics has produced laws that force us all to treat our sewage, cook our food and drain our rainwater. With the potential for disease transmitted though the air, the water supply, and other carriers, we all share the risks of unsafe practices by any one of us.

In the modern post-war economy a new means of transmitting illness between people has come of age, at least in a financial sense. That is the public funding, subsidization, and regulation of health care. Because we are a compassionate society, we have created a health care system that gives many access to a higher quality and quantity of health care services than they could otherwise afford. But because that system largely removes the connection between individual costs and individual benefits, your neighbor's chronic illness will typically cost you money.

In this country, employers bear the majority of costs for private health insurance. That might not have been the case had the Federal government not encouraged the practice during World War II when it allowed business to deduct health care premiums. With wartime wages frozen by law, companies jumped to offer health insurance as part of compensation to attract and retain their employees, as many continue to this day.

But like any cure, this one comes with side effects. Some of them may surprise you.

Consider, for example, the plight of Delaware County. As one of the handful of counties that actually lost population during the last full decade, the out-migration of younger people has produced in Delaware County a workforce that is about 4 years older than the statewide average. That means that per-employee health care costs are higher in Muncie, which, since they are paid out of company pockets, hurts it companies when they compete against other who do not pay these additional costs.

If you're feeling good because you don't live in Delaware County, think about this. Indiana, relative to the whole nation, is in much the same shape, workforce-wise, as Delaware County. Indeed, the data show that citizens of our state are more likely to smoke, more likely to be overweight, and get less exercise than national norms. Since those behaviors put us at higher risk, our employers pay higher health care premiums for the privilege of locating their facilities here.

Beyond issues of competitiveness, the financial interdependence caused by the pooling of health care costs turns us all into prying neighbors when it comes to how we take care of our own bodies. Given the fact that 20 percent of beneficiaries in most plans account for 80 percent of total costs, and with premiums projected to rise at a 15-20 percent per year rate for the foreseeable future, such close scrutiny is inevitable.

The fix to the system advocated by some economists -- moving health care costs back to the individual customer -- is usually dismissed as unrealistic. Perhaps that is true. But in the meantime, the unpopular efforts of large employers and other benefits administrators to squeeze cost reductions out of the pooled system will likely produce a steadily smaller stream of savings. When those run out, perhaps market-based alternatives will look more attractive.

Link to this commentary: https://commentaries.cberdata.org/421/health-care-system-controls-disease-better-than-costs

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About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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