Our Health Care System Is Organized for the Wealthy -- We Can Change That

Princeton health care economist Uwe Reinhardt recently recalled asking Victor Fuchs, a colleague, "When will we ever have universal health insurance in the U.S.?" Fuchs' answer:  "Not until World War III, a Great Depression, or a major epidemic that threatens everyone." 

In other words, Fuchs believed that it would take a catastrophe before Americans might finally realize that we are all in one boat together: Wars, natural disasters and economic upheaval can create great solidarity. 

We may not have long to wait for that moment. Despite President Obama's best efforts, it is all but inevitable that this recession will deepen. As the president recently warned, this is not an "ordinary, run-of –the-mill" recession.  In the worst-case scenario, the meltdown could lead to a "lost decade" of growth.

At this point, America's middle-class finds itself on the edge of a cliff.  As unemployment  rises, it will become apparent how quickly an upper-middle-class family can find itself part of the middle class -- no longer able to afford private school, skiing vacations, or, in the worst case scenario, the payments on a mega- mortgage. Meanwhile, middle-class families risk slipping quietly into the nearly invisible lower-middle-class -- a group often referred to as "the working poor."    

Rising insecurity should mean that the push for health care reform will build. But the recession cuts both ways: it also means that government tax revenues will shrink, leaving fewer dollars  for the subsidies we will need if we hope to cover everyone.  Conservatives will say that we simply can't afford health care reform.

Already, despite much talk of bi-partisanship, the debate over the fiscal stimulus passage makes it clear that conservatives are not in a compromising mood. New York Times columnist Paul Krugman pointed out that "centrist" Republicans have joined conservatives in stripping the stimulus package of $80 billion worth of programs that included "much needed spending on school construction," help for the unemployed, Food Stamps and aid for cash-strapped  sates -- "the measures that would do the most to reduce the depth and pain of this slump" for those who will be hit hardest. The version of the bill that cleared the Senate cut more than $50 billion from programs that specifically help children such as Head Start, school construction, education for disadvantaged children, and prevention programs

"How did this happen?" Krugman blames, "President Obama's belief that he can transcend the partisan divide -- a belief that warped his economic strategy."  The Princeton economist points out that "many people expected Mr. Obama to come out with a really strong stimulus plan, reflecting both the economy's dire straits and his own electoral mandate. Instead, however, he offered a plan that was clearly both too small and too heavily reliant on tax cuts. Why? Because he wanted the plan to have broad bipartisan support, and believed that it would. In the end, they barely escaped a filibuster with 61 votes. What does this mean for health care legislation?

There is a real danger, Uwe Reinhardt confides, that politicians will settle for universal coverage that continues to ration care according to ability to pay -- leaving us with a sharply tiered system. This, Reinhardt says, is what he thinks will happen, "unless we, the more affluent, step forward to tax ourselves."  

On the question of opening our wallets in order to cover everyone, the most recent Kaiser poll on health care reform conducted less than two months ago, is not encouraging. It shows that "the public is split down the middle in its willingness to sacrifice financially in order to cover more individuals: roughly half (49%) say they are not willing to pay higher insurance premiums or taxes, while a similar percentage (47%) say they are. There are big partisan differences here, with most Democrats (59%) saying they are willing to pay, most Republicans unwilling to pay (67%), and independents divided (49% willing, 47% unwilling)."

When asked whether the economic meltdown makes reform more or less likely, the answers again split along partisan lines: "more than three-quarters (77%) of Democrats think health reform  ‘is more important than ever' due to the economy, while six in ten (62%) Republicans believe the nation "cannot afford to take on health reform now."

Let me be clear: I agree that we cannot afford to subsidize care for all at current, wasteful levels of spending.  But all families, rich or poor, should receive the same level of evidence-based medicine. (Beware of reformers who talk of "a health care plan for every pocketbook.") And I worry that Republicans will trim government subsidies to a point that we wind up, as Reinhardt suggests, with two or three classes of health care.

This, after all, is what we have today. On the lowest tier, Medicaid pays health care providers significantly less than Medicare pays for the same procedure. On the next tier, Medicare pays primary care providers such small sums that, in cities like New York, many physicians are refusing to take new Medicare patients.  On the top tier, patients pay health care providers whatever they choose to charge.

I am not suggesting that all physicians are underpaid under Medicare:  in 2005, while Medicare paid only $82 for a 30 minute visit with a PCP, it paid $206 for a 30-minute colonoscopy. Most of the care that Medicare patients receive is at least as good as the care they will receive under commercial insurance. We need to redistribute the dollars that Medicare pays to doctors -- paying for value, not volume.  But we do not need to increase total payment.  

Physicians who take Medicaid patients, by contrast, are grossly underpaid. And this is a major reason why Medicaid offers "subpar" care.  Care-givers are stretched too thin and have too little support. Just two examples from an earlier post:  One study reveals that while 77.2 percent of new mothers received timely postpartum care under commercial insurance plans, only 40.7 percent of those on Medicaid were lucky enough to receive the needed follow-up.  Another recent study in the Journal of the American College of Surgeons found that patients who undergo colon cancer surgery in hospitals where more than 40 percent of patients are on Medicaid have a higher risk of death.

A Lopsided Economy -- How Wealth and Income are Distributed  

We are, after all, accustomed to living in a sharply tiered society.  American families play and work in separate pods, defined, to a large degree, by how much we earn. We send our children to different schools, shop in different stores, live in separate towns, and vacation in different places, segregated by what we can afford. And this, Reinhardt has suggested,  is why we are the only developed nation in the world that does not have universal health insurance. We lack "social solidarity."

In other countries, the majority of the citizens are middle-class, and they identify with each other. When it comes to healthcare, the French are willing to pay for high quality, universal coverage because they feel that nothing is too good for another Frenchman.  Sadly, in the U.S. we do not feel that way about each other.   

As Reinhardt reminded his audience at the conference last week, in our economy the lines separating us are stark. Consider how the nation's wealth is distributed: 

  --The richest 1 percent own 34 percent of total wealth  

   --The richest 20 percent own 85 percent of aggregate wealth     

--The remaining 80 percent own just 15 percent of the nation's wealth

"This isn't a middle-class country," Reinhardt observed after presenting these numbers. "It's not even a democracy; it's an aristocracy.” 

Wealth and power have become consolidated in the hands of a few because, over the past 29 years, income has been distributed so unevenly, allowing the wealthy to speculate on real estate and high-flying stocks. Since the early 1980s those who could afford to play this high stakes game have bid prices ever higher, and as a consequence, their net worth has soared.   

Despite the stock market crash of 2000, the real estate bubble kept the wealthy afloat: indeed from 1995 to 2004, the wealthiest 25 percent of the nation saw their net worth (assets minus debt) double while the middle class made meager gains.

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At the top of the economic ladder, high salaries gave the affluent the funds they needed to speculate.  According to the Census Bureau, in 2007 the 20 percent who own 85 percent of all wealth also commanded roughly 50 percent of all income while earning an average of $168,000 that year. (Half earned more than $168,000 and half earned somewhere between $100,000 and $168,000.)   

As the table below shows, just one giant step down on a five-step income ladder, upper-middle-class households earned 23 percent of aggregate income, taking home an average of $79,000. On the third and middle step, "middle class" households earned 14.5 percent of the total while receiving an average of $50,000 -- leaving a measly 12 percent of the pie for the 40 percent of the population stuck on the bottom two steps -- where they averaged $29,000 and $11,500 respectively.

  --In 2007, the wealthiest 20 percent earned 50 percent of all  income  

   --Households one step down on a 5-step ladder received 23 percent of all income  

   --Households on the middle step took home 14.5 percent of  all income     

--The bottom 40 percent of the population d divided 12  percent of all income

Some observers point out that the rich pay more in taxes than the rest of us, but even after taxes, the top 20 percent hauled home 45 percent of the nation's earnings.   

Others try to rationalize the consolidation of wealth at the top by arguing that income gaps have widened because education has become much more important. Granted, a college education makes a difference, but the last few decades have hardly created a meritocracy.  The bulk of the divergence in salaries has been among those with comparable levels of education.  High school teachers, nurses and CEOs all spend roughly the same number of years in school, but corporate chieftains earn far more than those responsible for educating our children and caring for the sick.  Even Ph.Ds and those with professional degrees in law and medicine often net much less than MBA's who work in business, real estate or finance.  
Conservatives also like to argue that if you add in the benefits that middle-class workers and poorer Americans have been receiving from employers and government, you will find that all Americans are gaining ground. To test that hypothesis, consider the research done by the Congressional Budget Office. When calculating income, the CBO includes all the standard household revenue streams -- wages, dividends, interest, and the like – plus food stamps, Social Security and employer-paid health benefits.

Using that formula, the CBO discovered that even if you include the health benefits the incomes of America's statistical middle class – the 20 percent in the exact middle of U.S income distribution -- rose only 15 percent over 25 years, or less than 1 percent a year. 

Finally, the bottom line: To get at the truth of income distribution, adjust all incomes for inflation, and you will find that from 1973 to 2005, the average income of all but the wealthiest 10 percent of the income ladder fell by 11 percent.  No wonder the middle class has so little savings to fall back on in hard times. 

Comparing the U.S. to Nations that Have Universal Coverage

As the twentieth century drew to a close, CEO pay set the bar for our New Rich. Take a look at the truly startling chart below: the ratio of executive pay to the average worker's pay has risen from 41:1 in 1960 to as high as 531:1 in 2000, at the height of the stock market bubble, when CEOs were cashing in big stock options. In 2005, it stood at 411:1.  By way of comparison, the same ratio is about 25:1 in Europe.  
CEOs' Pay As a Multiple of the Average Worker's Pay

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Source: Executive Excess 2006, the 13th Annual CEO Compensation Survey from the Institute for Policy Studies and United for a Fair Economy.

Indeed, the distribution of income is more lopsided in the U.S. then in any other developed country. This was not always the case.  For decades, the disparities were much wider in Europe. But over the last twenty to thirty years, the gaps between classes in the U.S. have grown. As the chart below shows, when you compare the incomes of the top 20 percent to the bottom 20 percent in the rest of the developed world, the ratio averages around 6:1. In the U.S. the ratio that separates the rich from the poor stands at 9:1. 
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The countries clustered in the middle of the chart are largely middle-class.  On the far right, the U. S stands alone. As Reinhardt points out, we are no longer a middle-class society. While  the middle-class shrinks, extremes of wealth and poverty have become more common. It's probably not coincidental that, as the vertical axis of the chart reveals, the U.S. also is an outlier when it comes to math and literacy scores:  in other developed countries, taxes are significantly higher, and more resources are poured into education. 

As Home Prices and Stocks Crater, Those Who Can Afford it Least, Lose the Most

Of course the current meltdown in housing prices, combined with the plunge in stock prices has made a dent, both in incomes and in total net worth.  But the recession isn't closing the gaps between the middle-class and the wealthiest  families. At the Center for Economic and Policy Research (CEPR) Dean Baker and David Rosnick have used the Federal Reserve's Survey of Consumer Finances to assess the effects of the  current recession, and their work shows  that  those who could least afford it took the hardest hit, while more affluent households shed a smaller share of their wealth. When an asset bubble bursts, this is almost always the case.

Baker and Rosnick assumed that stock portfolios have fallen in tandem with the S&P 500, and that, since March of 2008, homes have lost 20 percent of their value.  Using those numbers, they calculated that in middle-aged families (where the person responding to the survey was somewhere between the ages of 45 and 54) households  in the top quintile in terms of wealth lost 33.4 percent of their net worth (total assets minus debt) -- leaving them with $1.47 million.  One rung down on the ladder, families lost over 37 percent of their net worth, and because they had so much less to begin with, they were left with only $224,675. Clinging to the third rung of the ladder, the middle class watched its net worth fall by 60.3%, leaving it with net worth of $81,544.  On the bottom step, a family's holdings have been slashed to a point that the average family wound up in debt, with a negative net worth of $2,503.

In older households the wealthy fared even better. In families where the person who answered the survey was 55 to 64, those in the top 20 percent lost just 22 percent, winding up with $2.57 million. By contrast, those hanging on to the third middle rung of the ladder saw their net worth cut nearly in half (down 49%) leaving them with a home and savings worth $147,196. 

How We Got Where We Are Today

In 1972, a group of researchers funded by the Volkswagon Foundation published a book titled The Limits to Growth.  Based on a MIT computer model using system dynamics, the book predicted that unless the current trajectory of population and industrial growth was altered, we would eventually face a sudden and uncontrollable decline.  .

"By challenging our beliefs in the inevitable rightness and goodness of technical, industrial, and economic growth, the book evoked great controversy, notes John Van Doren writing on the Sustainable Home Blog, "and would eventually sell over 30 million copies in more than 30 languages."

The authors of The Limits to Growth predicted that the signs of imminent decline would include:

  • Rising debt; eroding goals for health and environment
  • Investment in human resources (education, shelter, health care) postponed in order to provide immediate consumption and security demands.
  • Deterioration in renewable resources - surface and ground water, forests, fisheries, agricultural land.
  • Rising levels of pollution.
  • Growing demands for capital, resources, and labor by military and industry to secure, process, and defend resources.
  • Growing instability in natural ecosystems.
  • Growing gap between rich and poor -- between the powerful and the weak.

Why would a widening gap between the elite and the rest of the population foreshadow an economic meltdown?  Van Doren turns to John Williams, of Shadow Government Statistics, for an explanation: "income variance is a long-term (multi-year) indicator of economic activity. The more extreme it gets, the worse the economy and the financial markets eventually will become. Looking at two simplified markets with one man making $100,000,000 per year or 1,000 men making $100,000 per year, there will tend to be more speculative financial markets in the first case, but more automobiles will be sold in the second case. The system tends to be self-adjusting when income variance reaches an extreme, with the speculative market bubble eventually bursting and income and economic activity tending to get redistributed."  

And this is exactly what has happened over the past 29 years.  As those at the top grew wealthier, they spent more. Driving consumption and investment, they pushed the price of everything from mortgage-backed derivates to condo sheathed in glass into the stratosphere.  Cars began to resemble military vehicles; homes became mansions with 15 foot ceilings, and hospitals became hotels. The problem was that with so much wealth concentrated at the top, too much money was chasing too few things.  Prices levitated far above fundamental values.  Meanwhile, everything from homes to healthcare became increasingly unaffordable for the rest of the population. Those who wanted to buy a house had to borrow more.  Alan Greenspan's easy money policy greased the path to insolvency.

An economy hooked on growth would depend on consumers to keep it going.   President Bush assured Americans that we could shop our way out of a recession if we just purchased more "stuff." 

The authors of The Limits to Growth were not against growth, per se, Van Doren explains, but they warned: "A sustainable society would be interested in qualitative development, not physical expansion. It would use material growth as a considered tool, not a perpetual mandate. It would neither be for nor against growth. Before this society would decide on any specific growth proposal, it would ask what the growth was for, and who would benefit, and what it would cost, and how long it would last, and whether it would be accommodated by the [natural] sources and sinks of the planet." 

But in the 1980s and 1990s, we didn't ask those questions. Instead, as the authors of The Limits of Growth predicted, "investment in human resources (education, shelter, [public] health care) were postponed in order to provide immediate consumption and security demands.”

By the spring of 2004, I was worried as I completed the final chapters of Bull! A History of the Boom and Bust, 1982-2004:  "U.S. real estate sits on a mountain of mortgage debt. If Washington's goal was to create a faith-based economy, it is succeeding." 

By 2005 the share of income held by the top 1 percent was as large as it had been in 1928, when the last Gilded Age drew to a close. This was an ominous sign.  

By 2006, "household debt equaled 90 percent of GDP, up from a low of 12 percent at the beginning of WWII," Van Doren observes . "U.S. credit card  debt currently exceeds $950-billion  . . .  For two decades consumer spending had been the engine that drove the U.S. economy but now, Van Doren points out, "the American consumer is ‘tapped out.'"  

In the second part of this post, I will explain what all of this has to do with healthcare reform. Americans are not all in the same boat, and this could threaten fair-minded reform. The divide is partially based on ideology, but it also reflects greater economic security among some voters. At the same time, the lobbyists already have begun to fight any effort to measure value in our health care system. Nevertheless, if the voters who elected President Obama unite, we can win high quality, sustainable healthcare for all.

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