A Study of Health Care: The Largest Component of the American Economy

Health care is one of the largest components of the American economy. Currently, 14 percent of our national wealth is spent on it each year. While consumer prices rise about 2 percent annually, health care costs are going up three times faster, at an annual rate of 6 percent. Compare that figure with the rates in countries where health care is financed centrally out of government budgets. In England and Canada, for example, the real rate of increase above consumer inflation has been only about 1 percent during the last 20 years. Consequently, these countries spend less on health care as a percentage of gross domestic products than does the United States. Two factors are driving spending ever higher. First, there is an aging population that is better educated and has expectations for high-quality care to prolong their life span. And second, an astounding period of biomedical research and development has brought technological innovation undreamed of a decade ago.

“A consensus is emerging that any increase greater than two times the rate of consumer prices is just too much, yet in light of those two factors driving spending, how are we going to slow costs down?” asks Battistella, a professor of health care policy and management in the Sloan Program in Health Services Administration. “This is the question that bedevils every intelligent man and woman in public life.” Individuals know are free to shop around and choose any health plan they like. If they want more protection, they can pay the extra cost from their own pocket. If they want less protection, the money saved on the premium can be used to buy other types of coverage such as for drugs or dental care. From the employer’s point of view, medical savings accounts (MSAs) are more complicated because the company still chooses its employees’ health plan. The big difference is cost and coverage. MSAs are comparatively inexpensive (about half the cost) because they substitute catastrophic coverage for routine major medical coverage. Insurance only kicks in once expenditures top $3,000 for an individual and $5,000 for families.
In MSAs employers pass on some portion of the money they save in premium costs to their employees–a lump sum of approximately $1,500 per year. They can either spend this on health care or save it. What’s saved accumulates and compounds in a tax-free account. Over a 40-year working life, such an account could amount to $400,000 or more if interest rates averaged 8 percent. And it belongs to the employee. Because of the size of an employer’s annual contribution, the maximum out-of-pocket expense before catastrophic insurance kicks in is $1,500 for an individual. “Moving to defined contribution plans accomplishes two important things at the same time,” Battistella says. “You’ve created a means for increasing the national savings rate while reconnecting people to the economic consequences of their utilization decisions. They become partners in cost savings because they get to share what they’ve saved.”

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