In this Wall Street Journal ($) op-ed, economists John Cogan, Glenn Hubbard and Daniel Kessler make their pitch to make all health insurance tax deductible, not just employer-provided health insurance. This earlier post noted Messrs. Cogan, Hubbard, and Kessler’s earlier proposal on this topic, and it is a simple and common sense component of any overhaul of the American health care finance system. That’s probably why we did not hear either candidate propose it during the just completed Presidential campaign.
Messrs. Cogan, Hubbard, and Kessler note that the discrimination in the tax laws regarding health insurance has the following negative market effect:

The most important effect of tax deductibility would be to reduce unproductive health spending. Under current law, medical care purchased through an employer’s insurance plan is tax-free, while direct medical care purchased by patients must be made with after-tax income. As we and many others have observed, this tax preference has given patients the incentive to purchase care through low-deductible, low-copayment insurance instead of out-of-pocket, which in turn leads to cost-unconsciousness and wasteful medical practices. In addition, the tax preference for insurance creates incentives for the health-care system to rely on gatekeepers rather than deductibles and copayments when it does try to control costs. The cost of gatekeepers are financed out of insurance premiums that are paid with before-tax dollars; deductibles and copayments are paid with after-tax dollars.

On the other hand, Arnold Kling notes that providing a tax deduction for individual health insurance policies may simply change the problem. By allowing individuals to deduct health care expenses, a trend would likely occur toward disintermediation in health insurance — that is, more young and healthy workers will opt out of company-provided health insurance, which will leave businesses covering a relatively high-risk population that cannot afford individual policies.

Regular readers of this blog know of my skepticism that the costs attributable to America’s reliance on third party payors in its health care finance system are commensurate with the benefits of paying for medical service in that fashion.
Following up on that thought, Alex Tabarrok over at Marginal Revolution notes in this post that one of the most popular types of medical procedure has declined in cost recently precisely because it is not generally covered under America’s third party payor system:

Everywhere we look it seems that health care is more expensive: prescription drug prices are increasing, costs to visit the doctor are up, the price of health insurance is rising. But look closer, even closer, closer still. Don’t see it yet? Perhaps you should have your eyes corrected at a Lasik vision center.
Laser eye surgery has the highest patient satisfaction ratings of any surgery, it has been performed more than 3 million times in the past decade, it is new, it is high-tech, it has gotten better over time and… laser eye surgery has fallen in price. In 1998 the average price of laser eye surgery was about $2200 per eye. Today the average price is $1350, that’s a decline of 38 percent in nominal terms and slightly more than that after taking into account inflation.
Why the price decline in this market and not others? Could it have something to do with the fact that laser eye surgery is not covered by insurance, not covered by Medicaid or Medicare, and not heavily regulated? Laser eye surgery is one of the few health procedures sold in a free market with price advertising, competition and consumer driven purchases. I’m seeing things more clearly already.

Touche!

This NY Sunday Times article profiles Kaiser Permanente, the huge health maintenance organization. The article suggests that those who are reviewing ways to revamp the American health care finance system should follow Kaiser’s lead in attempting to increase the quality of care and to spend health dollars more wisely by using technology and incentives tailored to those goals. The entire article is well worth reading, but I was particularly drawn to the following summary of the American system of health care finance, which is spot on:

Health care systems in most industrialized countries are in crises of one form or another. But the American system is characterized by both feast and famine: it leads the world in delivering high-tech medical miracles but leaves 45 million people uninsured. The United States spends more on health care than any other country – $6,167 a person a year – yet it is a laggard among wealthy nations under basic health measures like life expectancy. In a nutshell, America’s health care system, according to many experts, is a nonsystem. “It’s like the worst market system you could devise, just a mess,” said Neelam Sekhri, a health policy specialist at the World Health Organization in Geneva.

Read the entire article.

Uwe Reinhardt is the James Madison Professor of Political Economy at Princeton University. He has written this Primer for Journalists on health care finance issues, and it is quite helpful for anyone wanting to understand the issues that we are confronting in the area of health care finance. Check it out.

In his latest WSJ ($) Business World column, Holman Jenkins, Jr. again addresses America’s broken health care finance system. Mr. Jenkins is an unusually gifted writer on business issues, and his prior columns in this area (here, here and here) have been typically insightful. In this week’s column, Mr. Jenkins addresses one of the main economic problems with America’s health care finance system that is dominated by third party payors for health care services and products — i.e., the system’s propensity to hide the true cost of such services and products from the consumer:

The problem is we hide from consumers what their health care is costing them, though hiding the cost in no way relieves them of having to pay the cost.
This is not the fruit of anybody’s design but of dumb acceptance of a system that has evolved unplanned over half a century. In 1940’s, the IRS allowed companies to pay their workers in untaxed health-care benefits, a subsidy that means a high-end worker now gets a 40% discount on health insurance and a low-end worker gets nothing. Then there’s Medicare, now grown out of all expectations, in which the richest generation of seniors in history gets “free money” to spend on health care, though the free money is actually provided by the involuntary contributions of workers.

Mr. Jenkins then points out that politicians, being adaptable sorts, have come to embrace the third party payor system as a means for political handouts and cost shifting:

Though a product of nobody’s explicit plan, politicians have learned to love the incentives implicit in this hidden-cost economics. To take an example more or less at random, Connecticut legislators recently voted to mandate that health insurers cover at least $350 a year in wigs for chemotherapy patients. Who wouldn’t want chemotherapy patients to have wigs? But now everybody in Connecticut who wants health insurance has to pay for wig coverage.
Duke University’s Clark Havighurst, one of the true sages of the health-care debate, has noted that “the systematic hiding of health-care costs from those who pay them” gives rise to the ultimate “moral hazard,” allowing politicians to spend the public’s money on health care in ways the public would never choose for itself either in the marketplace or the voting booth. “The consequence of the shell game in which costs are moved wherever employees/consumers/voters are not looking” is that health care is regulated in ways “that make sense only because price tags have been generally removed. Several whole percentage points of the nation’s gross domestic product are thus diverted wastefully to health care from other uses.”
He also notes the seldom-emphasized regressive nature of the transfer: “The United States has structured things so that lower and middle-income premium payers bear heavy burdens so that the elite classes can continue to enjoy the style of health care to which they are accustomed.”
You don’t hear this much from policy wonks and health-care economists. Treating cost as a factor in medical choices is considered somehow illiberal, though it’s the poor who’ve been priced out of the health-insurance market. But, say it again, in the final analysis there’s nobody to “shift” costs to. The health-care bill always comes home to working Americans in the form of higher taxes, lower take-home pay or unaffordable health care.

Indeed, Mr. Jenkins points out that the current political discourse over health care finance in the Presidential campaign reflects the politicians’ intransigence in changing the third party payor system:

Democrat John Kerry’s plan is astonishingly banal in the way it re-enacts the original sin, throwing yet more tax money at health spending while avowing disingenuously that “the rich” will pay for it. But our indictment here is of the conditioned cowardice of the health-care policy community at large. How can you expect better of Mr. Kerry when the arbiters of good policy (like, say, a recent Washington Post editorial) judge candidate health plans by a single criterion: Which would commit the most resources to health care?
There not being unlimited funds to spend on health care, Mr. Kerry’s plan would only speed the day when politicians, no longer able to write blank checks with the private sector’s money, would face directly the choice of whether to curb consumption or raise taxes to pay for it. That’s the job description of Europe’s national health systems, which are not exercises in beautiful egalitarianism but exercises in rationing for those not rich enough to jet off to a private clinic and get the treatment they seek.
Yet the same health-care wonks who mumble around the real problem of hidden costs are happy to be quoted finding fault with Health Savings Accounts, the heart of the Bush approach, which has the intolerable advantage of actually being aimed at the problem.
Better than HSAs, in our view, would have been flatly eliminating the tax deductibility of employer-paid health insurance and letting the system adjust. But HSAs are a much-better-than-nothing strategy, a way of rebalancing the tax incentives to encourage consumers to buy some or all of their health care directly from providers, demanding value for money.

An example of the type of mainstream skepticism toward HSA’s that Mr. Jenkins mentions above is this recent NY Times article. Although insurance will always be a substantial component of America’s health care finance system, Mr. Jenkins is correct that the current system’s failure to allow consumers to shop and determine what health care services and products to purchase is at the root of our spiraling health care costs.
Along these lines, I shook my head in amazement as I read President Bush’s comments on health care finance from last night’s debate. He started out pretty well:

I think government- run health will lead to poor-quality health, will lead to rationing, will lead to less choice. Once a health-care program ends up in a line item in the federal government budget, it leads to more controls.
And just look at other countries that have tried to have federally controlled health care. They have poor-quality health care.
Our health-care system is the envy of the world because we believe in making sure that the decisions are made by doctors and patients, not by officials in the nation’s capital.

But then, in response to Kerry’s promises of gifts to various voter groups, the President reverses field and touts his administration’s own give-aways:

We’ve increased VA funding by $22 billion in the four years since I’ve been president. That’s twice the amount that my predecessor increased VA funding. Of course we’re meeting our obligation to our veterans, and the veterans know that.
We’re expanding veterans’ health care throughout the country. We’re aligning facilities where the veterans live now. Veterans are getting very good health care under my administration. . .

Which only serves to underscore Mr. Jenkins’ point — so long as we continue to allow the health care finance system to mask the true cost of health care services and products to the public, the more the politicians will manipulate that system to troll for votes. Hat tip to Alex Tabarrok of Marginal Revolution for pointing out the above contradiction.

For those of you looking for an explanation of the sometimes numbing concepts used in discussions of health care finance issues, check out this useful Introduction to Health Economics.

The Wall Street Journal’s Holman W. Jenkins, Jr. addresses health care finance reform in his column today, and he makes the salient point that the Tax Code is a big part of the problem:

This is surprising only to those who never understood why the tax code was the problem in the first place. Notice that the typical family policy doled out by companies to their employees represents a total price-tag of about $9,086 a year. If you’re in the top tax bracket, the effective after-tax cost to you is about $5,500. If you’re in the working-poor bracket (i.e. pay no federal income tax), it’s $9,086.
In fact, it’s doubtful that such an insurance product would even exist in the marketplace in the absence of a massive tax subsidy, given the built-in incentives that naturally drive costs out of sight. Certainly you wouldn’t buy gold-plated, first-dollar health insurance if you faced the full tab alone.

Then, Mr. Jenkins cuts to the heart of the main problem with America’s health care finance system — overreliance on the third party (i.e., insurer) payor system:

No serious person doubts that our overreliance on third-party payment is the problem that will be solved — or will lead to a government-run, single-payer system that controls costs by denying care. In our information-rich economy, the medical industry doesn’t even publish price lists. Is this not downright weird and a sign change is desperately needed? (The exception is cosmetic surgery, where, as health economist John Goodman points out, consumers pay out-of-pocket and competition has meant prices are flat or falling).

Alas, a bold proposal for health care finance reform is subject to the shifting winds of the current political campaign:

Some in the Bush camp were prepared to go deeper than even the HSA [explained here] kludge, totally revamping the tax system. The idea was to help Americans shift their expectations: No longer will they send their tax money to government and hope government will take care of them in old age. Now they will have ownership of the assets that will take care of them in old age.
Hope for such boldness on Thursday night probably vanished the moment it became clear John Kerry was going backward in the polls. It may be just as well. The HSA revolution suggests that simply offering taxpayers a better choice may be the stealthy way to reform entitlements (and let’s admit that the tax deductibility of employer health care is a giant middle-class entitlement) without frightening swing voters with any Big Bang-like proposals.

John C. Goodman is a health care finance expert who was one of the leading advocates of Health Savings Accounts (explained here), which is one of the only positive pieces of health care finance legislation that has been enacted in years.
In this Wall Street Journal op-ed, Mr. Goodman reviews the Kerry Campaign’s health care plan, and he is singulalry unimpressed with what he sees:

Mr. Kerry is seeking to completely transform the health-care system. The changes are far more radical than even he has let on. If he is successful, millions of middle-income families will enroll in Medicaid, the federal-state health program for the poor. Millions more will get their insurance through a system of managed competition, similar to what Hillary Clinton proposed more than a decade ago. Most people would be unable to remain in the private health plan they have today.

Mr. Goodman then reviews the goals of Kerrycare and how it proposes to achieve them:

The ostensible purpose of the proposal is to insure the uninsured. By some estimates, as many as 44 million people lack health insurance at any one time. The Kerry goal is to insure about two-thirds of them.
How well will all of this work? More than half the money in this plan will be spent expanding Medicaid and the S-CHIP program (for low-income children). Emory University professor Kenneth Thorpe, Mr. Kerry’s health adviser, estimates that as many as 26 million new people will be enrolled. However, as the public sector expands, the private sector will surely contract.
Even Mr. Kerry assumes that for every 10 people who sign up, three people will lose private insurance from an employer; and it could be much worse. Studies in the 1990s found that every additional dollar spent on Medicaid led to a reduction in private insurance of 50 to 75 cents. More recent evidence suggests that private sector crowd-out is approaching one-to-one: Each new Medicaid enrollee is offset by one less person with private insurance. Moreover, most of the private sector subsidies will go to people who are already insured; and employers get their subsidies even if they fail to insure a single additional employee. Bottom line: It is entirely possible to spend $1 trillion and achieve no reduction in the number of uninsured!

And Mr. Goodman is not sanguine about the quality of care that would result from Kerrycare:

Quality of care will suffer under the Kerry proposal. People who go from employer plans to Medicaid will have fewer choices of doctors, longer waits for care, and inevitable health-care rationing. Those who join the system of managed competition will experience a different problem: Health plans will face perverse incentives to overprovide to the healthy and underprovide to the sick.

Which leads to the $64,000 question: How much will Kerrycare cost? Mr. Goodman comments:

In order to keep spending down in the latest 10-year projection, the Kerry team delays implementation for one year, so the first year’s costs can be zero. They also claim phantom savings that basically amount to the perennial promise to eliminate waste and inefficiency.
Counting the first full 10 years in operation and only savings that seem likely to be real, I put the actual cost in excess of $1 trillion, almost $1,000 per year for every household in America. Versus the budget Mr. Kerry has promised to balance, this cost is more than three times the new revenue Mr. Kerry hopes to get from high-income earners.
This estimate may be low. The reason: People will face perverse incentives to overinsure and overconsume. For example, faced with virtually no out-of-pocket costs, the 26 million new enrollees in Medicaid will have no reason to show restraint. The bills all go to someone else. Premium caps mean that a poverty enrollee under managed competition will pay no more than $600 or $700 a year, with the remainder paid by Uncle Sam. If they insure at all, they will tend to pick the most expensive plan. Why choose a Volkswagen when you can have an Aston Martin at no extra cost?
Whatever the cost, the plan will almost certainly lead to a new round of health-care inflation. Federal spending alone will increase by more than $100 billion a year. But since there will be no increase in supply, the bulk of this new spending will buy higher prices rather than more health care.

Mr. Goodman then asks the following common sense questions regarding Kerrycare:

A major problem with the current system is that tax subsidies for health insurance are arbitrary and unfair. But rather than move to a fairer system that treats equals equally, Mr. Kerry would create a slew of new subsidies that would make the system even more arbitrary.
The structure of the Kerry health plans raises a number of intriguing questions:

? Why spend billions on subsidies to small businesses if they join an insurance system that doesn’t even exist yet, while denying them those same subsidies if they buy insurance that is readily available in the marketplace?

? Why pay the cost of premium caps and other subsidies to individuals if they buy insurance that doesn’t yet exist, while denying them any relief if they buy insurance that is already available?

? And why spend billions enrolling middle-income families in Medicaid instead of using those same dollars to help them enroll in employer plans and individually-owned policies which they would probably much prefer?

Mr. Goodman concludes that there is only one logical answer to these questions:

The real purpose of this plan is not to insure the uninsured. The real purpose is to radically change our health- care system.

Read the whole piece.

Ceci Connolly of the Washington Post is one of the best reporters on health care finance issues. This article in yesterday’s edition reviews the dubious financial projections behind the Bush Administration’s health care finance proposals:

If the Republican-controlled Congress enacted President Bush’s entire health care agenda, as many as 10 million people who lack health insurance would be covered at a cost of $102 billion over the next decade, according to his campaign aides.
But when the Bush-Cheney team was asked to provide documentation, the hard data fell far short of the claims, a gap supported by several independent analyses.
Projections by the Congressional Budget Office, the Treasury Department, academics and the campaign’s Web site suggest that under the best circumstances, Bush’s plans for health care would extend coverage to no more than 6 million people over the next decade and possibly as few as 2 million.
“There’s little reason to expect that there would be any reduction in the overall numbers of Americans without health insurance,” Brookings Institution health policy expert Henry J. Aaron said. “We’re swimming against a rather swift current in our efforts to reduce the number of uninsured, and the power of President Bush’s proposals to move against that current is, it seems to me, very, very limited.”

On the other hand, the article notes that the credibility of the Kerry campaign’s health care finance projections is not particularly compelling, either:

Sen. John F. Kerry (Mass.), has released a health care agenda that is more ambitious and more expensive, with plans to expand government health programs, offer tax credits similar to Bush’s and reimburse businesses for some of their most costly catastrophic cases.
Forecasting the cost and impact of policy proposals is always complicated, and both presidential campaigns try to spin the numbers to their advantage. Kerry, for example, estimates his health care proposals would cover 27 million people at a 10-year cost of $653 billion. But that assumes $300 billion in “savings” that the Bush team says might prove elusive. Without the savings, the cost of the Kerry package jumps to nearly $1 trillion.

Sigh.

Following up on this earlier post, this NY Times piece interviews Michael E. Porter, who is one of America’s foremost business theorists and who has been recently studying America’s dysfunctional health care finance system. This is interesting reading on one of the most important domestic issues in American politics today.