Although the Affordable Care Act could make many of the problems worse with our system of health-care financing, that system clearly does call out for serious reform. Despite the widespread public opposition toward the new health-care law, simply reverting to the pre-Obamacare status would be viewed as unacceptable by most. A repeal only approach would leave many of the most significant flaws in our system of financing health care unaddressed. Most importantly among them would be steadily rising health-care costs, driven by the same misguided government policies that so evidently demand reform.
America's health-care system has many important strengths that must not be overlooked. Most notable among these are the opportunity for medical innovation that is absent from more centrally planned systems and a network of clinics and hospitals capable of offering the most advanced care found anywhere in the world. The vast majority of Americans, almost 80%, have ready access to this high level of care through third-party insurance arrangements, obtaining coverage from their employers or from federal programs like Medicare and Medicaid. Another 10% have individually purchased coverage.
For all its considerable strengths, the system suffers from established weaknesses as well. The most serious of these is rapidly rising costs. According to the Congressional Budget Office, between 1975 and 2005, annual health spending in the United States rose, on average, two percentage points faster than per-person economic growth. In other words, the increase of health costs has far outpaced the rise in our national income. This has left more and more people with the inability to afford adequate insurance, which now poses significant problems for government budgets. Federal and state governments spend an enormous amount on health care, but government's revenue base for taxation grows along with the economy, not with health-care costs. So as government spending on health care has surged, tax collection has not kept pace, creating the primary driver of today's deficits and mounting debt.
Of course, government health-care programs and policies are largely responsible for these rising costs in the first place. To begin with, the design of Medicare is terribly flawed. The program pays providers of care based on the volume of their services, which creates a massive incentive for inefficiency and overuse. Also, because Medicare is the biggest payer in most health-care markets in America, that incentive badly distorts the economics of the entire sector. Furthermore, the Medicaid program inflates costs by having states control how the program is run while the federal government pays most of the bills. The result is that neither party has both the incentive and ability to keep costs in check. The federal government does not count the amount that employers spend on health insurance for their employees toward workers' taxable income. This tax exclusion inflates costs by effectively rewarding higher-premium plans and by encouraging employer purchased insurance, and thereby preventing a real consumer market in coverage. In many cases, the people who use the insurance are not the people who buy it. As a result, many Americans have no idea how much is spent for the health care they receive. There is no clear relationship between cost and value, which means there can be no real prices, no real incentives for efficiency and quality, and no limitations on the growth of costs.
While the cost explosion is clearly the greatest problem with America's health-care system, costs are not…