Wealth of Nations June 2007

Fact and Fiction in Health Care Reform

The crux of health care reform is to give consumers real choices. This can happen only if employers are largely taken out of the equation.

Those who argue for socialized medicine—for a single-payer, government-run system along British or Canadian lines—are at least being more honest and more coherent. Set the government up as a monopoly buyer of health care, and it can use its power to drive costs down. But patients have limited choice in those systems, and access is rationed. In this country, those facts cannot be waved away. Americans are unlikely to take to such restrictions—not if they are happy (as most people with coverage say they are) with their present arrangements.

The French system is an interesting hybrid, closer to that of the U.S. system than you might suppose—with patient autonomy and multiple insurance intermediaries, but mostly paid for by taxpayers and with heavy government regulation. The French system is cheaper than America's but more expensive than Britain's or Canada's. It gets good results, but helps keep France's taxes very high. And American doctors would have some reservations about adopting such a system: They are paid about three times what their French counterparts earn.

A quite different reform strategy—which I think is preferable on the merits, as well as politically more feasible—is to retain the distinctively American aspects of this system, notably its reliance on competing private providers, while in key respects strengthening, not attenuating, the power of market forces. The crux of this idea is to give consumers real choices. That in turn can happen only if employers are largely taken out of the health insurance decision.

Employers do not insure your house or your car; why should they insure your health? No reason, except that a huge tax subsidy encourages them to do so. With employers selecting plans on their behalf, most workers cannot decide for themselves how to trade benefits off against cost—whether to sign up with a health maintenance organization (with the restrictions that imposes), or to pay more for a preferred provider organization, or more still for no-restrictions coverage. If consumers lack the ability to make such choices (and, having made them, bear the consequences on cost), the health care market is hardly a market at all, and the downward pressure on costs that market discipline would otherwise supply is never going to kick in. This is to say nothing of the other great drawbacks of relying on employers (including the problem of "lock in").

The administration has proposed one useful step in this regard: extending tax relief to individually purchased plans. Much more needs to be done to push employers out of the health insurance market. Most of the reforms now being touted, by Democrats and Republicans alike, aim to do the opposite.

Using market forces and consumer autonomy to drive down costs is worth a try, in my view, but that by itself will not solve the coverage problem. I would do that by guaranteeing everybody, regardless of income or health history, a voucher that would buy a standard HMO-type plan. This could be done in a variety of ways. You could give everybody a voucher (which could be used as partial payment for a more expensive policy) and recover the cost from general taxation. Or you could give full vouchers only to people on low incomes, tapering the value to zero as incomes rose, again asking taxpayers to pick up the check—and in this case also mandating that everybody buy at least the basic plan. You could satisfy the "ignore pre-existing conditions" criterion either through regulation or by adjusting the value of vouchers according to health risk. The cost would depend on such details, and many more besides—but you can be sure it would not be small.

I can understand why no Republican contender for the presidency is proposing this. Only a very unusual Republican would suggest a significant rise in taxes to mainly benefit the least-well-off. But why is no Democrat proposing such a scheme? Because it is politically more appealing to pretend that this great and long-overdue social advance can be achieved mainly at the expense of greedy employers (and grasping insurance and pharmaceutical companies).

It just ain't so. The saddest part, meanwhile, is that keeping up this pretense entrenches employer-based insurance, the very aspect of the present system that does most to inflate costs.

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