A Dose of Reality

Last week, after meeting groups representing hospitals and insurance companies, Barack Obama announced a breakthrough on reforming US healthcare. It was “a historic day”, he said. The providers had made “an unprecedented commitment” to curb the system’s costs, running at 16 per cent of gross domestic product. They had agreed, he said, to reduce growth in healthcare spending by 1.5 percentage points a year, enough to save $2,000bn (€1,480bn, £1,320bn) over the next decade.
Exactly how was something of a mystery. Was this an aspiration, a target or a forecast? Within hours all parties began clarifying the declaration to the point of meaninglessness. The producer groups, facing agitated members demanding an explanation, denied they promised anything. White House officials repeated the president’s assertion, then withdrew it saying he had misspoken, then affirmed it again.
Political slapstick is routine on this issue. What matters is whether the administration, the healthcare industry and the US electorate are moving any closer to facing the hard choices that Mr Obama is always telling the country he is willing to confront. So far the answer is no.
The president is right that costs need to be better controlled. Nobody disagrees. The US spends vastly more than any other country on healthcare, yet fails to insure tens of millions of its citizens. Expenditures are growing faster than inflation and faster than the economy’s trend growth. Yet judged by health outcomes the system gets mediocre results at best.
The US is closer to a consensus than ever before that something must be done. But what? Leaders of the House of Representatives have promised to complete a reform bill by the end of July. With that detail decided, all that remains is to work out the main points.
Cost control can and should be part of the answer, but not the larger part. Too much is expected of a new emphasis on preventing illness, bringing information technology to bear and reforming the way services are delivered. All these should be done – to improve outcomes and value for money. Experience suggests that they will do little to curb spending.
The deepest of these delusions is believing that subsidies to make health insurance near-universal will pay for themselves, through fewer visits by the uninsured to expensive emergency rooms rather than relatively cheap primary-care doctors and nurses. There will be some savings of that kind, but wider insurance will raise the consumption of health services. That is the idea, after all. No health-policy scholar I am aware of believes this change will come close to paying for itself.
Near-universal healthcare will require higher taxes. The administration said so in its budget, setting aside a “downpayment” of $600bn over 10 years. Most analysts think that comprehensive reform will cost $1,500bn or more. Even without healthcare reform, Mr Obama’s long-term budget does not balance. So count on it: US taxes are going up.
A simple way to raise a lot of money would be a value added tax, which I have advocated for the US before. But at a recent congressional roundtable, health-policy scholars representing a wide range of opinion mostly preferred a different approach. They wanted to eliminate, or at least cap, the income tax exemption for employer-provided health insurance.
This would raise surprisingly large sums. Eliminating the tax break altogether would yield some $250bn a year, Jonathan Gruber of the Massachusetts Institute of Technology told the roundtable. Even capping the exemption at quite a high level – denying the tax break to insurance plans costing more than a certain amount – could go a long way to meeting the cost of wider coverage. Most of the other economists giving evidence agreed. But in a rare show of comity, the Senate finance committee’s most senior Democrat and Republican were united against. This was not going to happen.
If you are to raise taxes, there is a lot to be said for scrapping the exemption. This is a tax increase that is broadly based, raises average rates more than marginal rates, affects those on high incomes more than those on low, and removes a subsidy for over-consumption of medical services. Its fatal flaw, politically speaking, is that it has another even greater advantage: it would encourage employers to drop health insurance altogether and force more workers to buy insurance for themselves.
By itself, this would leave the old and the sick at a disadvantage: losing their group coverage, they might find insurance unaffordable or unavailable. But as long as they were guaranteed affordable coverage – through subsidies, community rating, government plans or other means – breaking the link between employers and health insurance would make excellent sense. This link is, among other things, a principal cause of economic insecurity in the US: if you lose your job, you face the risk of a health-related financial catastrophe.
The standard counter-argument concerns the division of spoils between capital and labour: if an employer drops its health insurance, income is surely transferred from workers to the company. Not so. This is a fallacy, and there is plenty of evidence to prove it. What counts is total labour costs: wages plus benefits. If companies save money by dropping insurance, the labour market will clear with higher wages.
Unfortunately voters do not believe it; nor do politicians of either party. This is a great shame. If US health insurance is to remain predominantly employer-based, Mr Obama’s “comprehensive health reform” is going to be a lot less comprehensive, and affordable, than it ought to be.