Thoughts on Health Care Reform

The President’s Council of Economic Advisers released a 50-page report making the case for “health care reform.” It alleged that reform could, over twenty years, raise family income by $20,000 (assuming a reduction in health care cost growth by 1.5% a year) and covering the uninsured would increase “net economic well being” by $100 billion a year. But, just how is the reduction in the growth of medical care costs going to be accomplished? Great Britain and Canada control health care costs by deciding how much to spend and then rationing care to meet the target. Generally this means that older people get less care. Ask my students what “a dollar spent on Dr. Dunk’s health care” is and they will reply, “a bad investment,” recognizing my advanced age and a budget constraint – we can’t spend an infinite amount of money on anything, so a dollar spent on my health care is a dollar not spent on a young person who would be productive for a lifetime. Such thinking makes people uncomfortable, but such choices are a necessity. We tolerate 50,000 auto deaths a year so we can drive fast. These are choices we make.

In our last assault on health care costs, we were told that we had a “health care crisis” because we spent an amount equal to 12% of GDP on health care. But people choose to make these outlays, they are not compelled to. Part of this is due to a mispricing of health care services. You might pay $5 for a doctor visit with your insurance, but doctors won’t work for $5 a visit. When visits are cheap, we take more than we would if they were accurately priced. In short, we take too many visits because they are underpriced, just as we buy more apparel at a half price sale. Compounding this, states require many procedures be covered in basic insurance that most people wouldn’t use. This raises the price for everyone, and subsidizes the few that take those services. Case in point, Medicare covers penile implants. Quality of life and all that. Medicare costs are out of control. Most of this money is spent in the last few months of life.

Most medical and drug innovations originate in the U.S. Once available, everyone wants the “best.” Always expensive, but we all can’t drive a Cadillac to work. Yet our politicians claim to want access to the “best” for everyone, an impossibility.

How we finance medical care does need to be changed. Health care insurance is provided by employers because Congress made it a tax deductible cost decades ago. All other insurance we buy from competitive providers. Auto insurance doesn’t cover oil change and maintenance for the car, it only kicks in when there is a “disaster.” Health care insurance typically pays for everything, “tune ups” (check up), routine maintenance, etc. Necessary, but this should be the responsibility of the consumer, not the insurer. Catastrophic health care insurance that covers serious “accidents” is not expensive, but “prepaid medical care” (which most of us have) is very expensive!

What to do: (1) make health care benefits taxable (Obama would love this, companies would get out of the business of helping health care insurers manage their insured, workers would get the cash and shop for the health care package that fits their needs. At the moment, I have no health care choice, just what someone at my employer negotiated for me. One size fits all?); (2) price medical care appropriately, no “free visits”; (3) let providers compete for customers; (4) provide a catastrophic insurance that removes the risk of financial ruin (how about you pay up to 10% of your income, the rest is covered?).