Manhattan Moment: Regulation, not size, is health care's biggest problem

As the White House tries to get health-care reform through Congress, it has repeatedly pointed out that the health sector constitutes 16 percent of America's GDP. The implication is that this is a bad thing.

But why? Officially, the logic is this: The larger health care's share of the economy, the higher the per-unit cost of care to the government, to employers, and to you. In Canada, for instance, health care is just 10 percent of GDP. Further, our northern neighbor covers almost every citizen and we don't. The U.S., then, seems to be paying far more to insure a smaller share of its population--to be paying more for less.

There are several flaws in this reasoning; first and foremost that a dollar spent is a dollar wasted. America's health-care sector is larger partly because, unlike Canada's, it includes for-profit corporations.

Consider the benefit: Companies invest billions each year developing innovative, life-saving drugs and devices. Are these expenses really something to lament? Similarly, is it a disadvantage that the U.S. has 11 percent more practicing doctors per capita than Canada? Or 15 percent more nurses?

Is it a problem that the United States has almost four times as many MRI scanners per capita as Canada does, or that we preventively test more of our population for common cancers? Hardly. The fact that America's health-care system is larger, more advanced, and better staffed than a system with rationed care is an advantage. To pretend otherwise is just a tactic to make the reform pill easier to swallow.

So the American health sector doesn't have to shrink. But it should certainly deliver care at a lower unit price. To see how, let's stop comparing our health care with what's available in Canada or Sweden or Mars and instead make some comparisons among various American health-care systems.

Take two very different states: Wisconsin and New York. In Wisconsin, a family can buy a health-insurance plan for as little as $3,000 a year. The price for a basic family plan in the Empire State: $12,000.

The stark difference has nothing to do with each state's health sector as a share of its economy (14.8 percent in Wisconsin as of 2004, the most recent year for which data are available, and 13.9 percent in New York). Rather, the difference has to do with how each state's insurance pools are regulated.

In New York State, politicians have tried to run the health-insurance system from Albany, forcing insurers to deliver complex Cadillac plans to every subscriber for political reasons, driving up costs. Wisconsin's insurers are far freer to sell plans at prices consumers want.

The gulf in insurance-premium prices among American states is a sign that too much government intervention--not too little--is what's distorting prices from one market to the next.

The key to reducing health-care costs for patients, then, is to promote competition, not to dictate insurance requirements from on high. Unfortunately, a government-run insurance plan is the core of ObamaCare.

America's health system faces real challenges. But to get the treatment right, we need to get the diagnosis right. American health care isn't too big--it's too expensive. And to lower its costs, we don't need more government in health care; we need more competition.

David Gratzer, a physician, is a senior fellow at the Manhattan Institute. This article is adapted from City Journal.