Before WWII, over 90% of healthcare in America was purchased directly from the care provider. This is the most efficient way of obtaining any good or service, as consumers are much more cautious with their own money, forcing providers to compete on price and quality. Indeed by the start of the war, healthcare costs had actually been decreasing for over a decade, totaling less than 2% of GDP.During the war, FDR attempted to control inflation by imposing wage and price controls that prohibited employers from raising wages. Such a policy hurt business’s ability to attract and retain good workers, though, so companies started looking for other ways to remain competitive. Since fringe benefits did not count as wages for the purpose of wage controls, companies began offering benefits such as pensions and health care coverage in lieu of the prohibited wage increases.
In addition, the government created public health insurance programs in the 1960s for the poor and the elderly that further increased the number of enrollees. The amount of Americans using health insurance to obtain medical care skyrocketed. From 10% in 1940, it reached 85% by 2010.
But with that came a corresponding growth in costs, up to nearly 12% of GDP by 2010. Why have costs increased so much?
1. Paying through a third party, be it insurance or the government, introduces a very costly middleman, a bureaucracy of millions of workers and the infrastructure to support it.
2. Paying through a third party also hides prices from consumers. They only see insurance costs, or, even more opaque, pay through taxes which might not even be connected to the healthcare services they receive. And when price signals are skewed or unavailable, prices are no longer easy for consumers to compare. Health care providers have less incentive to keep prices down in such cases.
Thus for nearly 75 years, the healthcare industry has operated in a system that is increasingly less capitalistic in nature. And a system without direct, transparent price signals will never develop the decreasing price/increasing quality trend that freer market industries benefit from.
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