Tuesday, January 24, 2006

A Way Out of the Finger Trap

The health care policy debate in this country tends to be emotion-driven at times with a push towards more government involvement, rather than by a careful review of facts with implementation of economic policies based upon those facts. These vastly different methods tend to intersect like autobahns at right angles; the public struggle between the two may alternately be seen as a child struggling with a Chinese finger trap. It will come as no surprise to the two or three of you who read this blog that I favor the latter approach to getting us "out of the trap." An opinion piece published in the Wall Street Journal on Jan. 13th, entitled Keep Government Out (reproduced at the American Enterprise Institute web site), espouses just the kind of cold, hard look at the economics of health care policy and makes an excellent case for less, rather than more, government intervention in health care delivery. It is authored by R. Glenn Hubbard, visiting scholar at the American Enterprise Institute and dean of Columbia Business School, also former chairman of the Council of Economic Advisers; John F. Cogan, the Leonard and Shirley Ely Senior Fellow at the Hoover Institution, and also former deputy director of the Office of Management and Budget; and Daniel P. Kessler, a professor at Stanford Business School and a senior fellow at the Hoover Institution. They are the authors of Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System. A few excerpts:

Should health-care reform increase our reliance on markets, or on direct government involvement? The debate is often cast as a struggle between employers or insurance companies on one side and workers on the other, with workers getting the short end of the free-market stick. This view results from a fundamental misunderstanding of basic economics. A handful of policy changes that harness the power of markets for health services have the potential to give patients and their physicians more control over health-care choices, create more health-insurance options, lower health costs, reduce the number of uninsured persons--and give workers a pay increase to boot.

Last year, on these pages, we argued that health-care policy should limit, not expand, government intervention. Greater reliance on individual choice and free markets are the solutions to what ails our health-care system. As a starter, we recommended three main proposals to correct the harmful effects of current government policy:

  • Make all out-of-pocket health-care expenses deductible against income taxes for everyone who has at least catastrophic insurance--whether or not they itemize their deductions;
  • Allow qualified insurance companies to sell insurance nationwide, free from politically motivated state mandates and other costly state-imposed regulatory practices; and
  • Set reasonable caps on damages for pain and suffering in medical malpractice cases.

...If out-of-pocket health-care expenses are made tax deductible, workers would demand that employers provide health plans with lower health-insurance premiums and higher co-payments. The premium savings will accrue to workers in the form of higher money wages. In the past, workers have borne the higher cost of health-insurance premiums by receiving smaller wage increases.

...We estimate that, in response to making out-of-pocket expenses tax deductible, the typical worker will shift from a health plan with a 25% coinsurance rate to one with a 35% coinsurance rate. Coupled with our other reforms, this shift will reduce the premiums of the average employer-provided family health plan by around $2,300 per year. The economics of competitive labor markets ensures that this amount will accrue to the worker in the form of higher wages. To be sure, higher out-of-pocket expenses will offset part of this increase--$1,000 of it. But this still leaves the worker, on net, $1,300 ahead.

This is a well written, well reasoned article, worth the few minutes it takes to read. This approach is IMHO an excellent first step towards a better, more flexible health care policy that will provide better coverage for Americans than our current system.

UPDATE: It looks like the President is going to promote at least a portion of this plan -- see this article.