How is US healthcare reform going to work?

I've heard the arguments from both sides; the Republicans claiming that Obama's socialisation of American healthcare will cause the USA healthcare system to resemble Cuba's, and the Democrats claiming that the Affordable Care Act will allow everyone in America to have good healthcare and stick the bill for it to the "rich". But just how will this reform work? I thought I'd have a play with the numbers.

It seems fairly clear that the major problems with current American healthcare include:

  1. Treatment costs are very expensive compared with the same treatments in other Western countries;
  2. In practice, most working people are economically forced to obtain insurance via their employer's insurance plan (if they have one);
  3. Sick people have a very strong incentive to stay in their current employment because treatment for their current illness is unlikely to be covered if they change jobs;
  4. Once you are sick and out of an insurance plan, existing conditions exclusion means that you are screwed;
  5. There seems to be nowhere to obtain high-deductible catastrophic insurance plans (the only kind which really are "insurance") as all existing plans have lots of standard visits and treatments covered and are therefore expensive.
  6. Public assistance for the poor (Medicaid) is regionally very variable and depends on the availability of and demand for public hospital treatment in your area.
There are also the political complications: once you're over 65, you get Medicare, which effectively costs you nothing for most treatments so you are incentivised to obtain the most expensive treatment possible as long as it is even 1% better than the second option at half price, but no politician has been able to make reforms to this stick because over-65s are politically organised and very active when it comes to Medicare reform.

I'm fascinated to know how any healthcare reform will address the above. So let's take a claim that we are going to provide cover to the uninsured. Without cost reforms, this is going to cost an arm and a leg - say, 50mm people in the 300mm population USA do not have health insurance. We decide to cover their costs. A (highly optimistic) assumption that health insurance costs a healthy family of 4 $6000 annually means that you'll have to stump up $75bn annually. We'll use that as a proxy for actual cost of treatments for now. Where are you going to find that from federal taxes? Given 140mm tax filings of which say 60% had federal tax liability that gives 84mm people; spread the burden evenly and that's an extra $892 apiece. Which is a lot. Take an additional $900 out of ever tax payer's pay packet and you're not going to be popular. At all.

Oh, except that people without insurance are disproportionately likely to have conditions that require expensive treatment. So you can easily double that $6000.

Right, so just insuring the uninsured is going to cost you $1500 per taxpayer (and hence, the next election). So let's try to reduce those costs. Let's not pay as much for treatments. The dirty secret is, however, doctors don't have to work for the government. Sure, you can force costs down - however, for every 10% you cut reimbursement rates, you will lose another chunk of doctors and hospitals as they become unwilling to shoulder the cost and bureaucracy (because there will be bureaucracy, this is the federal government) of government patients. Ask anyone on Medicaid who lives outside a major metropolis how easy it is to find the care that they are theoretically entitled to.

And now there's the other aspect. Let's assume you succeed in squaring this circle and make public health affordable and available. Now you're going to get the sick families currently paying into employment insurance plans looking at their options and saying "hey, I can move jobs and get healthcare and pay less (or nothing)." And they do. So your bill has just doubled. So you start to means-test government assistance. So you've just stuck a huge marginal tax on the lower echelon of employed people...

If anyone can crack this nut in an economically sound way, they have my admiration. But don't confuse political plans with something that can be expected to work in any meaningful way.

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