How we got where we are with health care

The federal government began meddling with the health care system even before there was a health care system.

During World War II, America’s mobilization to fight a global war gave aggregate demand a hotfoot and jolted it out of its Depression lethargy. Concerned about inflation, policy makers in Washington, D.C., installed a system of price and wage controls, along with a rationing system for some consumer goods.

Businesses needed workers, though, and found a way to compete for them: offering free medical and dental insurance, which was not covered by the wage freeze in place at the time. The federal government ignored this “work-around” solution by businesses, probably believing that it was insignificant and would disappear after the war was over.

They were at least half-right. Employer-paid health care was an insignificant part of the U.S. economy and would remain so for some time. It very definitely did not disappear after the war, though. Instead, with insurance and technology as magic beans, health care became a system that grew, and grew, and grew. It now represents more than sixth of our economic activity

By the time someone in government noticed that health care was an economic beanstalk it was too late to do anything about it, politically. It had become a traditional part of employment contracts in all but the smallest businesses.

The result of the federal government’s decision to remain a spectator, kind of meddling from behind, was a health care system in which the bulk of the cost was initially paid by third parties (insurance companies) and underwritten as a tax-deductible expense by employers. By contrast, the health care that this system replaced did not rely on third parties, but was paid for by the patients themselves or, if they could not, by family, friends, charitable organizations, or absorbed and redistributed to some degree by the doctors and hospitals that provided the care.

Under the Internal Revenue Service code that supported the incredible growth of our health care system, employer-paid health insurance was a deductible expense for the businesses — and in that sense, subsidized — but patient-paid treatment was not, unless it reached budget-busting amounts in a single year.

What fueled the need for changing the health care system was not its performance but its exploding cost. There was no reliable incentive for cost-cutting.

The macrostructure of our health care system and how it got that way are both important keys to understanding how Obamacare is changing the system’s economic alignment and its resolution of the economic forces involved.

Like many government programs, the Affordable Care Act, known as Obamacare, is the product of many hands. One result is that it often seems to contain conflicting goals and cannot make up its own mind about what it wants to be. The other result is that it, too, lacks a reliable incentive for cutting costs.

The most visible of the internal conflicts occurs between Obamacare’s wanting to control the existing health care system and wanting to abandon it in favor of something new. Running a close second, at the operational level, is the conflict between wanting to control the newly restructured Medicaid program and wanting to dish off much of its expense to the individual states.

The internal conflicts of Obamacare explain some of its unevenly distributed effects since its wobbly lift-off seven months ago. The remarkable reduction in emergency room visits by uninsured patients recently reported by Harborview Medical Center, for example, is a major victory for hospital efficiency and revenue. Needed health care can be delivered at far less cost by general practice physician facilities than in an emergency room fully staffed and equipped to handle multiple medical crises.

Whether it turns out to be more efficient, of course, depends a lot on how well the Obamacare structure can substitute its edicts for a genuine self-interest in cost control. Unfortunately, the Medicare, Medicaid and insurance company accounting systems involved combine to form a trackless dismal swamp where accurate data loses heart and only guesses can survive. In short, we may never know and that will make it very difficult to evaluate the system or correct its faults.

One thing we do know about Obamacare as it currently stands: It is not the Veterans Administration writ large. It is not a single-payer system like the VA and does not run its own hospital system. It is a conflicted mass of control systems for the key elements of our health care system, from individuals and health care providers to insurance companies, and hospitals.

There is one other significant difference. The VA system doesn’t work, but it can be fixed. Obamacare needs to be fixed, too, but it is not certain that it can be.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.