Four models rule the developed world. The U.S. system is the most inefficient.
Citizens of industrialized countries other than the United States must find the debates over healthcare in the U.S. puzzling. After all, they have had universal healthcare for many decades while the U.S. lacks any such system, despite the passage in 2010 of the Affordable Care Act (otherwise known as the ACA or Obamacare).
Of course, it is more complicated than that. The United States has some of the best healthcare services in the world for those who can gain access to them, largely through employer-sponsored private health insurance. On the other hand, Canada, which boasts of its system of universal healthcare, has some of the longest waiting times in the industrialized world for many procedures and treatments.
The fact is, neither the U.S. nor Canada has too much to boast about. In a recent study, the Commonwealth Fund ranked the healthcare systems of 11 industrialized countries.1 While the U.S. came in dead last, Canada came in just two places ahead, in ninth place. Similarly, in the World Health Organization’s ranking of 190 countries, Canada is ranked 30 and the U.S. is ranked 37.2
How the healthcare system works in a country has a large impact on the financial, as well as physical, well-being of that country’s people. The systems around the world affect investors differently with respect to taxes, insurance premiums, coverage, and out-of-pocket expenses.
I believe that the best way to approach the financial aspects of health is the same as with other aspects of financial planning, through the life cycle.3 Just as human capital, financial capital, asset allocation, the need for life insurance, the role of annuities, and all other cash flows change in a systematic fashion as a person moves from beginning a career, to midcareer working years, to retirement, and finally to old-age,4the costs and needs of healthcare change as well. How well a country’s healthcare system meets the needs of its citizens over the course of their lives is a major factor in that system’s effectiveness.
The Economics of Health Insurance
Healthcare insurance, like all insurance, is based on risk pooling. In health insurance, a risk pool consists of many individuals, each of whom faces a small probability of having expensive healthcare needs. By charging each person in the pool a premium, an insurer has enough money to pay for the large healthcare costs of those few in the pool that end up needing it and pay the expenses of running the pool. If the insurer is a for-profit entity, it will set the premium high enough to make a profit.
This basic risk model has always been the basis of the private part of the U.S. health insurance system. This is why, historically, U.S. insurance companies would not accept people with pre-existing conditions into their regular plans.5To do so would increase the level of payouts and, thus, require a rise in premiums. All people with pre-existing conditions could do was to join special plans for them that had very high premiums.
The ACA outlawed rejecting people with pre-existing conditions from health insurance plans. In an attempt to keep premiums from rising, the law imposes a fine on anyone who does not purchase health insurance. In this way, healthy people join the risk pools and, thus, keep premiums down. However, because many healthy people see little benefit from having health insurance, they would rather pay the fines than buy the insurance. Hence, under the ACA, premiums are rising for those that stay insured while millions choose to remain uninsured.