A Different View of US Health Care Expenditures

John R. Graham is the director of health care analysis for the Pacific Research Institute in California. In a November 2010 article, “American Health Care and American Productivity: An International Comparison,” he makes a very interesting case that US health care expenditures as a share of GDP are not out of line with our productivity and wealth levels compared with other countries.

This does not mean that we should not be hoping the new Congress will take steps to rein in the growth in health care costs. Still, it is a very interesting perspective that I thought you would enjoy reading.

Health Care Reform: “Change” is Not Necessarily Good

I have a few “issues” with the recently passed health care reform bill. First, it was passed on a totally partisan basis, paying no attention to the views of the citizens who were overwhelmingly opposed to this “change.” This “we know best and have the power” attitude smacks of authoritarianism. Second, it violated a host of important promises ranging from “transparency” to “no tax increases for anyone who earns less than $200,000” (originally $250,000), to the assertion that health care costs are preventing new firms from being formed–a real reach since it is not mandatory, yet, that firms must provide health care insurance. Add to that promises that we can keep our health care insurance, that we can see any doctor that we want, that premiums will fall and a host of other assertions from the White House and members of Congress and we see an ocean of promises floating away.

Assertions that health care is a “right” are simply incorrect. It’s not in the Constitution and it’s not someone’s “right” if I have to work to pay for it.

Finally, the preferences explicitly shown for trial lawyers and union members, “Obama Buddies,” were offensive. A sad showing indeed. This was not “government of the people, by the people,” but rather just a few people imposing their values on the rest of the people.

In order to remain financially solvent, the compensation that a firm can pay is limited to the revenue that a worker can add to the firm’s operation. In simple terms, a company cannot stay in business paying workers more than the revenue they generate for the firm. Compensation can then be divided between cash take-home pay and benefits and taxes. If you are worth $50,000 a year and have benefits and health care costs rise, it is hard to keep paying you the same take-home cash. This is the pressure that employers and employees face. But this bill does nothing to reduce costs by producing more efficient health care decisions. Instead, $500 billion in benefits have to be taken from the elderly while those who buy their own more expensive insurance must pay penalties. This is “rationing,” not “rationalizing” the health care market.

Bottom line, this legislation does nothing to make the health care system operate more efficiently, which is the “reform” that people wanted. Instead, it brings in millions of new “dependents,” those who will look to government for more handouts and vote for them (hang on for immigration reform, 12 million more votes). Furthermore, it manages to raise the health care bill for the country to be paid for by private-sector workers (unless you get a union “break”– stay tuned).

To be sure, many will like the “no pre-existing conditions” provisions and keeping “kids” (?) on the family policy until age 26 (guaranteed to raise health care costs). But these mandates, government definitions of “acceptable coverage” and the penalty structures are likely leading us to a single-payer, government-controlled health care system that will be rife with rationing. (How else, for starters, can we cut $500 billion out of Medicare?)

In the meantime, enjoy paying for the 16,000 new IRS “enforcers” out of your income. And here’s my confident forecast: there will be more taxes to come.

Speaking of That 50 Million Uninsured

LETTER TO THE FINANCIAL TIMES

Sir: In your “Analysis” (August 22) you continue to characterize the number of health care uninsured in the U.S. as “50 million.” This is a figure used by those trying to stampede Congress and Americans into radically changing our health care system based on vague promises of cost reductions, much of which will come from reduced care to the elderly. The figure is highly misleading and confuses the issue, making it much harder to focus on practical solutions to problems that do in fact exist.

First of all, this statistic applies to a given day, not a period of time like a year. Far fewer are uninsured for long periods of time. Second, over 10 million are non-citizens. Voters should be able to decide how much they want to spend to support health care for those illegally in the country. Third, 8 million of that 50 million are insured under Medicare; they simply have never signed up. It is deceitful to characterize them as “uninsured”. An additional 4 million or more “uninsured” children are insured under SCHIP. Again, someone simply needs to sign them up. It is misleading to characterize them as uninsured just because on a survey they claimed not to be insured. Then there are 5 to 10 million who choose not to pay for insurance (young, incomes over 300% of the poverty line).

Making first-dollar medical care insurance free to all will only insure that we spend more, not less, since none of the truly distortive aspects of the system will be repaired. And, no surprise, most of the problems are a result of government (federal and state level) regulatory distortions of the market, designed to help assure re-election and probably well-meaning. But good intentions codified in law in ignorance of the complexity and the facts on the ground only insures larger problems in the future. As a simple start, President Obama needs to begin by explaining how this “50 million insured” can suddenly become insured and given “quality healthcare” while our total health care bill for the nation is reduced. It doesn’t add up for ordinary folk and I suspect Congress has no idea how to do this as well. That’s the source of concern.

Hey Congress, Here’s a Health Care Reform Proposal for You

Here’s a quote from a top news magazine that is typical of the nonsense we are hearing surrounding the health care debate (and there is a lot of it!): “It is difficult to sustain in a global economy where American corporations have overseas competitors that aren’t saddled with providing health care for their employees.”

Last time I checked, providing health care coverage was not mandated by Congress, although it is one of the options being discussed today. At the moment, corporations CHOOSE to provide health care coverage. No gun is at their heads, just an innocent post WWII executive order that made health care benefits a tax deductible expense (put in place to offset the negative effects of another government regulation, wage controls–does it ever end?). With that tax incentive, firms started providing health insurance because they could capture part of the value to the worker of paying for insurance with pre-tax dollars.

And remember, “foreign competitors” are mostly located in industrialized countries where health care is paid for with higher taxes (like a VAT and profit taxes as well as labor taxes). It isn’t free, it is just paid for differently (and Medicare and Medicaid are examples of that kind of financing in the US–cash income is reduced by these payments on behalf of the employee). Many of our competitors have to deal with significantly more difficult labor rules than their U.S. counterparts.

Finally, in any country, firms cannot pay workers more than the value they add to the company (only state-owned enterprises that get continuous subsidies from the government can do this). “Pay” is defined here as a combination of cash and benefits and taxes on labor. The more that is paid in benefits, the less that is available in cash. And employer-provided insurance still leaves the worker with no health care choice–you are stuck with what management negotiates. One-fourth of small business employees would prefer to get the cash and pay taxes on it. Most employers prefer to provide the insurance and extract part of the “gain” the worker gets by using pre-tax dollars.

So, Congress, don’t “saddle” America’s corporations with a mandate. It will just produce a reduction in cash income as benefits rise. Instead, eliminate the tax preference, let companies pay the cash to workers and let corporations stop doing paperwork and other management services for the insurers. There are thousands of insurance agents selling auto, home, life and liability insurance–why not health care?

Focus on providing catastrophic coverage that excludes no one and that after “x” percent of your income is spent on health care, the catastrophic coverage takes over and prevents financial ruin (if you have no income, you have first-dollar coverage). That addresses the fear that President Clinton said motivated his plan.

And stop talking about “47 million uninsured” – it’s an inaccurate figure designed to panic Americans into supporting this monumental mistake. The current health care reform proposals in Congress do nothing to reduce the cost of delivering the current amount of health care we take. Instead, it will reduce the health care some get to control government expenses, and it can’t reduce the overall amount we spend on health care if we are indeed going to add the alleged 47 million without health care insurance now. Common sense makes this clear. Citizens seem to get this, the President needs to explain how his promise will be kept.

Why Economists Are Confused

As you know, the crystal ball of all economists remains murky these days. This results in a wide range of opinions about the economy for the next year or two. The biggest issue is whether PCE will stay around 70.0 percent of GDP or decline as consumers return their debt-to-income ratios to the 90.0 percent or so that was ” normal” in the 1990s or if they’ll return to more recent spending patterns with debt ratios around 110.0 percent. If the former develops (Ian Shephardson is quite articulate in this camp), then consumers will save much more than in the last 3 decades and the US economy will be on a permanently lower growth path. Variations on this theme fuel the predictions of Nouriel Roubini, who is not in any forecasting panels, and Rajeev Dhawan, who is.

If consumers find a way to keep spending (drawing down assets or finding new ways to raise their incomes) then the recovery will be robust. No one knows how this will turn out, so the arguments are endless and occasionally, even interesting.

Perhaps more harrowing than the prospect of slow growth is the oncoming bankrupcty of the US. The Pete Peterson- and Rudy Penner- or Larry Kotlikoff-types keep talking about the $55-75 trillion net present value of the deficit. Click here to read the full post and comment (Insights subscribers) »

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?).