As noted in these earlier posts, Arnold Kling continues to provide an enormous amount of lucid analysis on what ails America’s health care finance system. In this TCS Daily op-ed, Kling makes two excellent points, the first regarding tax treatment of health insurance premiums:

I would like to see the abolition of the tax break for company-provided health benefits as well as the tax break for Medical Savings Accounts. Company-provided health benefits ought to be included with personal income and taxed at the personal income rate. There should be no special benefits for savings accounts labeled “medical.” (I think that all saving ought to be tax-free, but that’s another topic.)
. . . Although I prefer real health insurance to insulation, I do not want to impose my preferences on others. All I ask is that we reform our tax code so that it is neutral.

Second, Kling makes an important point regarding the freedom to buy health insurance and the health care limits that society needs to accept if a person chooses not to do so:

[M]ost of the people who are uninsured today are reasonably healthy. They just do not want to pay for their own health insurance. In my view, they ought to be allowed to make that choice, but they should face the consequences. If they require health care, the cost should not be shifted onto other people who have insurance.

Clear Thinkers favorite Arnold Kling continues in this TCS op-ed to provide his typically insightful analysis on what is needed to reform America’s health care finance system. He concludes:

“[R]eal health care reform in the United States will not happen because of some wonk’s clever plan. It will not happen as a result of an election. It will only happen when we change some of our beliefs about health care.”

Read the entire piece.

Charles Wheelan, the Naked Economist, lucidly addresses the key issue in regard to the U.S. health care finance system:

Here’s a question to ask any presidential candidate from either political party: How do you plan to ration health care?
If the answer is “I won’t,” then he or she doesn’t understand health care. Or, more likely, they understand health care and aren’t in any mood to talk straight about it.
“Rationing” has a bad connotation, which is odd, because we ration just about everything. In fact, that’s what capitalism does best.
Not everyone gets an S-Class Mercedes-Benz or courtside tickets to the NBA playoffs or roses on Valentine’s Day. Who does? People who are willing to pay for them.
We call that a market, which is just rationing with a more attractive name. Everything worth having is scarce to some degree, so we use prices to figure out who gets what.
Health care is similar to German cars and basketball tickets — not everyone gets everything they want. But health care is obviously different in a crucial respect: People who don’t get what they want may become sick, stay sick, or even die. Unlike roses or Lakers tickets, health care is literally a life-and-death matter.
As a result, the most fundamental policy question related to health care is who gets what kind of care — or, put another way, how we choose to ration resources. Forget all the other complications, like aging baby boomers, malpractice lawyers, greedy drug companies, shockingly fat Americans, insurance forms in triplicate, and so on.
Do those things help to explain why our system is expensive and getting more so? Yes. But for anyone looking to control costs (e.g., a presidential candidate) those factors pale in comparison to the fundamental health care design question: Who gets what care and why? [. . .]
And therein lies the fundamental inefficiency of the American system. We have no good mechanism for saying “no” to expensive technologies and treatments that provide marginal benefits. If you’re a patient, that sounds terrific; your doctors will spare no expense. If you’re a business trying to keep up with skyrocketing health care costs, or a family trying to pay for benefits, it’s not. And, of course, as insurance costs go up, fewer people will have access to that kind of coverage.
At the same time, we don’t do a very good job of saying “yes” to treatments for the uninsured that would profoundly improve their health.
The combination of those two factors goes a long way toward explaining why the U.S. spends a ton of money on health care (15 percent of the GDP, compared to 8 percent for Britain and Japan and 10.5 percent for France) and gets relatively mediocre outcomes. . . .
In short, the rest of the industrialized world does a better job of rationing health care than we do.
Which brings me back to my original point. Every presidential candidate is going to talk about controlling health care costs. Most are going to talk about expanding coverage, too. Those goals are impossible unless we can design a system that says “yes” to the most cost-effective care — even very expensive treatments, provided they have corresponding benefits — and “no” to treatments with benefits that are too small to justify their costs. In other words, rationing.

Read the entire article. Wheelan doesn’t propose any solutions, but he does an excellent job of framing the issue. Stated another way, to what extent is American society willing to underwrite health care costs that individual citizens cannot afford — or are unwilling — to pay?

Christopher Tozzo recently articulated a troubling thought about the perverse incentives involved in a one payor, government-administered health care finance system:

A key premise in any call for socialized medicine is that physicians (and nurses and dentists and physical therapists and orderlies and equipment technicians and pharmacists and …) will continue to do what they do now, as much as they do it now (and where they do it now and as well as they do it now and for as long as they do it now and …) despite the efforts by government to enslave them. Like a battered spouse, the health care professional will, the bureaucrats presume, simply put up with it forever. [. . .]
If you’re smart enough to become a doctor, then you are smart enough to become a lawyer, accountant, investment banker or a dozen other ultra-skilled occupations that are not price capped. The laws of economics are not subject to repeal by any legislature. An artificial price ceiling creates a shortage, regardless of what “noble goals” underlie it. Doctors, especially future doctors, will not be turned into indentured servants without limit.

Tozzo’s point is a good one, and reminded me of the following note that I recently from one of my old friends, Dr. Jim Bob Baker. Jim Bob is a first-rate internist who was one of my late father’s best and brightest medical students. Jim Bob wrote about a new regulation that is creating similarly-skewed incentives for doctors under the current American health care finance system:

I wanted to let you know about the next new development in the mess that is the U.S. health care finance system. The newest wrinkle is what is being called “P4P”, or “Pay for Performance.” Ostensibly, the program purports to be a budget-neutral process whereby doctors and hospitals who meet certain guidelines in the provision of healthcare in specific illnesses will be given higher reimbursement, while those who fall below the benchmark will see their payments cut even further.
What we expect will happen has more of an Orwellian flavor. Hospitals and private practitioners are already preparing for the first installment of a scheduled 40% cut in Medicare payments to them that will occur over the next several years. In all likelihood, we will see an across-the-board cut to all providers. Then, if you want to see an “increase” in payment to get a portion of that cut reinstated, you have to jump through the particular hoops mandated by CMS. Those who fall below the standard will see their payments cut even further.
Pay for Performance is a noble idea. The doctors and hospitals treating patients most correctly get a higher payment for that treatment. However, as with most governmental programs, implementation of the noble idea falls woefully short of intended result.

Continue reading →

It’s looking as if the health care finance litmus test noted earlier this week is already quite revealing. The Washington Post’s Steve Pearlstein, who has never been particularly enthusiastic about the Bush Administration, reports:

But the most surprising and encouraging development is that a president who for six years has only nibbled around the edges of health-care issues has weighed in with some bold ideas to expand coverage, rein in costs and bring some fairness to the tax code. And get this: It actually involves raising taxes on the rich and lavishly insured and giving the money to the working poor and the uninsured.
Given that, you’d think Democrats would have welcomed a politically courageous proposal to put a cap on one of the biggest and most regressive features of the individual income-tax code. But instead, they’ve shifted reflexively into partisan attack mode, mischaracterizing the impacts of the proposal and shamelessly parroting the propaganda from the labor dinosaurs at the AFL-CIO.
“Dead on arrival,” declared Rep. Pete Stark (D-Calif.), chairman of a key health subcommittee in the House, hinting at a dark conspiracy to kill off employer-sponsored health insurance.
“A dangerous policy that ultimately shifts cost and risk from employers to employees,” said Charlie Rangel, chairman of the House Ways and Means Committee.
Sen. Harry Reid, the majority leader, called it nothing less than an “attack” on American workers.
Worst of all was the five-page memo distributed by Sen. Edward Kennedy to Democratic colleagues that ought to embarrass a man who considers himself the Senate’s leading health-care expert — a compendium of half-truths, unsupported assumptions and outright lies. Kennedy reverted to the hackneyed rhetoric of class warfare, asserting that the president’s proposals will do nothing for working families, give new tax breaks to the rich, increase the number of uninsured and encourage everyone to buy less insurance coverage than they should have.
In fact, all of these are almost precisely the opposite of the truth.
The president’s health plan would, in fact, put a cap on a $200 billion-a-year tax break that now goes disproportionately to those with the most generous and costly employer-provided health insurance plans. It would redirect a small portion of that break to those who have less generous coverage or those who have to buy their own insurance because their employer does not offer it. For a few million of the roughly 47 million Americans with no insurance, it may also make the difference between being able to afford basic insurance or not.
The fact that some of those who have these rich policies happen to be members of auto or postal unions doesn’t change that the president’s proposal would make the tax code more progressive, not less. They are the aristocrats of the working class who, like lawyers, investment bankers and journalists, earn more in tax-free benefits each year than uninsured janitors earn in taxable wages. And whatever modest tax increase they might face from the cap on tax-free health benefits, it is certainly less than the tax cuts they got from Bush that Democrats are so eager to rescind.
Almost every health economist agrees that the tax subsidy for employer-paid health insurance is not only unfair but that it also encourages people to buy too much insurance, consume too much health care and pay too much for both. Bush deserves praise for having the political courage to confront the issue.
Now is this the magic bullet that will solve the health-care crisis? Of course not.
Would any real solution also require finding billions of dollars more to subsidize the purchase of health insurance by low-income workers and getting states to reform dysfunctional markets for individual and small group insurance? No doubt about it.
But anyone seriously interested in health reform would welcome the president’s proposal as a basis for negotiations, raising public expectations and increasing pressure on the president to embrace more comprehensive reform. Unfortunately, that is not the approach of Messrs. Stark, Rangel, Reid and Kennedy, who apparently prefer demonizing the president and grandstanding on the issue until the next election.
Haven’t we had enough of this?

Read the entire piece. President Bush’s proposal — although not an all-encompassing solution to America’s dysfunctional health care finance system — addresses a fundamental problem of system — tax subsidies that have insulated many Americans from the true cost of health care through employer-based health insurance. The president’s plan identifies the problem and responds to it in a common sense way by proposing to negate the distorting subsidy. There are reasonable alternatives that should be examined — such as removing the tax subsidy of health insurance altogether — but to castigate the President’s proposal in favor of the insulation provided by the current system is the epitome of elevating political form over substance.

The Bush Administration announced over the weekend that President Bush will propose a common sense reform of the health care finance system during his upcoming State of the Union Address — extension of the tax deductibility of health coverage to everyone who acquires it outside of the workplace.
As has been noted many times in this blog, the federal government doesn’t currently tax employer-provided health insurance benefits but gives no tax breaks to most consumers who buy medical insurance outside the workplace. President Bush will propose to make it easier for consumers who do not have employer-provided health insurance to buy coverage on their own by making the tax incentive for doing similar so simlar to that of homeowners who deduct interest payments on their mortgages. The Bush Administration’s plan would also set a cap on the amount of employer-based health care benefit that an employee could receive tax-free.
The Bush Adminstration proposal is particularly sound because it addresses the mindset that has developed over the past couple of generations of Americans who are conditioned to employer-based health insurance — that is, that health care benefits are some sort of obligation from employers with regard to which employees have little incentive to care much about cost. The Bush plan treats employer-based insurance as compensation (which it is — such insurance arose as a loophole to get around wage and price controls during WWII), which provides a much sounder basis for assessment of the value of employer-based insurance. In so doing, it addresses the problem of medical “insulation” policies that Arnold Kling and others recently addressed over at Cato Unbound (see here and here).
By the way, this proposal addresses one of the issues that is a wonderful litmus test for political candidates. Although a politician could argue that removing the tax deductibility of all medical insurance makes even more sense than President Bush’s proposal, no reasonable argument can be made to support the current disparate tax treatment of employer-based versus individual policies. The Administration’s proposal is actually much more progressive than the current state of affairs because the wealthier employees currently benefit the most from not having to declare the value of their employer-based insurance as income.
Thus, if a politician opposes the Bush Administration’s proposal, then that politician is probably either ignorant about the issues involved or in the pocket of the large business interests that profit from the current employer-based insurance system. That’s a pretty clear indication that such a person should not be in a position of deciding one of the most important economic and social issues facing American society today.

This previous post reported on Arnold Kling’s insightful Cato Unbound piece in which he explains how America’s health care finance system is being undermined by health “insulation” policies rather than real health insurance.
Kling’s article has provoked three excellent responses, including this one from Duke University professor Clark C. Havighurst, who has taught courses and written on health care law and policy, antitrust law, and economic regulation at Duke since 1964. Professor Havighurst explains cogently how the tax subsidy on employer-based health insurance has become a destructive force in the health care finance system and why it survives despite the fact that everyone knows that it is the principal cause of wasteful spending on health care:

The tax subsidy thus introduces new ìmoral hazardsî into health care decision-making. Not only are employers, union leaders, legislators, and courts happy to commit employee-votersí money in ways that make themselves appear to care about health above all things, but their stake in not having to say ìnoî to more and better health care also coincides perfectly with the preferences of the politically powerful health care industry. For these reasons, the tax subsidy has survived through political thick and thin even though every policy wonk knows that it is a principal cause of wasteful spending on health services. Liberals, of course, resist proposals to fix this glaring defect in the incentive system that drives health care spending. Why fix incentives to encourage consumers to make more appropriate health care choices when big government stands ready to choose for them?

Read the entire Havighurst piece, as well as this one by Jonathan Cohn, (a New Republic senior editor and the author of Sick: The Untold Story of America’s Health Care Crisis ó and the People Who Pay the Price, which will be published by HarperCollins later year) and this one by Matthew Holt (author of the Health Care Blog), both of whom favor a universal care, one-payor system administered by government. Holt, in particular, provides a pithy explanation of why meaningful reform of the health care finance system is so difficult to achieve:

[T]he political strength of the health care system actors combined with the disaggregated weakness of the consumers and those paying the bill ó intermediated by the costs of health care being hidden within overall employment compensation and buried in the murky finances of the federal government ó has meant that the system has chewed up and spat out any serious attempt to reform it since the 1930s.

Update: All of the authors have now responded to each other pieces in this cyber-conversation.