Free is Expensive

In 2010 President Obama gave us the Affordable Care Act which it isn’t.  Republicans pledged to repeal and replace, which they didn’t.  Now, progressive democrat candidates for president are promising healthcare or Medicare for all.  

Milton Friedman once said something like if you want to know how expensive something is, make it free.  The Brookings Institute and the Mercatus Center have estimated that healthcare for all would cost over $32 trillion dollars in its first decade.  While in theory it would reduce healthcare costs by $22 trillion, the net effect remains a $1 trillion a year increase in the growing deficit and debt.

Healthcare in the United States is a mess and various attempts to “fix it” have only made it worse.  If Congress and a President ever get serious about improving the delivery of healthcare and reducing its cost, they first have to understand its many problems.  Tinkering doesn’t work.

Advocates for change often refer to systems in European countries like the Netherlands, Norway, and Switzerland.  While there are elements of those programs that might be appropriate here, they can’t be adopted in a wholesale fashion.  But US healthcare does not compare well with countries like Sweden, Norway, or Switzerland in terms of cost and quality. So, they are worth taking into account.

What’s the answer for us?  It begins with recognizing that we don’t have insurance as it is understood; nor do market forces come into play.  Employer provided health care along with government provided subsidies for Medicare and Medicaid have blunted normal market incentives. In the case of employer provided “health insurance”, wage controls during World War II led employers to provide medical coverage as a benefit to get around those controls.  Much of our health insurance involves third party payers, meaning consumers have low or no incentives to control costs. In addition, the market is balkanized and bureaucratically controlled resulting in no real competition.

Here are some suggestions for consideration.

Employer provided health coverage should no longer be tax deductible.  Employees who receive employer provided insurance should be taxed on its value or alternatively could receive the cash equivalent of that insurance.  Instead of providing insurance, employers should be encouraged collaborate in forming non-profit exchanges which would provide insurance companies incentives to compete for a large pool of employees’ business.  With a reformed health insurance market, employees would have more options to choose from.  Insurance companies should be allowed to sell across state lines to increase competition and provide employees the widest range of insurance options.

The government should draw on the Swiss model which produces good outcomes at a national cost well below ours.  The Swiss mandate that all citizens purchase insurance from private insurance companies, establishes a minimum package of benefits, and mandate coverage of preexisting conditions.  Those provisions are similar to ones in the Affordable Care Act.  Republicans hate those features but there are strong reasons for them.

Medicaid should be reformed along the lines of the Swiss model to subsidize premiums for lower-income people to keep their costs less than 10 percent of their incomes.  The subsidy should cover 100% of the premiums for the unemployable and permanently disabled. As a rich nation, we should take care of those who can’t take care of themselves.

The Swiss model also has other features worth adopting.  The Swiss require insurance companies to offer minimal policies on a nonprofit basis. They are based on relatively high out-of-pocket expenses to encourage consumers to spend wisely.  The Swiss also mandate that prices be made public, which helps consumer markets function efficiently.

To avoid adverse selection by those with pre-existing conditions, states should establish high risk pools similar to pools for uninsured motorists.  And like auto policies, there would be a fee as part of health insurance premiums to fund the high risk pools.

The reform of the health insurance market must also include Medicare reform.  Medicare spends much more money than it takes in and as a result is one of the drivers of the growing deficit and debt.

To change that, the age for eligibility should be increased in line with increases in life expectancy.  Also, the cap on social security and medicare taxes should be raised and benefits means testing levels should be raised.  There have been a number of proposals for making Medicare more efficient and for doing a better job of lowering costs.  Those need to be pursued aggressively instead of just gathering dust.

Author: billo38@icloud.com

Founder and president of Solutions Consulting which focuses on public policy issues, strategic planning, and strategic communications.

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