A tsunami is approaching. A preventable – but massive – fiscal problem will arrive in less than a decade. The problem lies not only with entitlements like Medicaid and Medicare, but with our healthcare system in general.
Like Social Security, Medicaid and Medicare are unfunded liabilities--which means given current revenue and demographic trends, the government won’t be able to take in enough to pay for them. As baby-boomers begin to exit the workforce en masse, they will consume government benefits at an unsustainable rate. In addition, the U.S. healthcare system is a crazy quilt of public, private and third-party payers channeled through employers, government and individual insurance companies. The system creates perverse incentives and gross distortions, all of which drive up health insurance premiums. When you combine higher premiums with unfunded programs that encourage overconsumption, you’ve got big problems. But these problems, while economically unsustainable, are entirely preventable.
Still, if nothing is done, healthcare costs alone will bankrupt the United States. No one on either side of the political aisle has had the courage to confront all of these problems—at least as of this writing. Indeed, none of the healthcare proposals of 2009-10 would deal directly with the entitlement crisis as described above.
Still George Shultz and John Shoven have written an audacious book titled Putting Our House in Order, in which they suggest a way to turn the tsunami into a manageable breaker. Let’s explore some of the major recommendations of the book in the area of healthcare:
- Expand the economic pie.
Shultz and Shoven recommend a few common-sense measures.
- First, keep taxes and spending low. More resources in the economy mean greater opportunities for economic growth. Why? Investment and consumption are growth drivers. The more that is taken from the economy in the form of taxes, the fewer resources are left for investment and consumption, which expand the economic pie.
- Second, keep people in the labor market longer. Because people are living longer and healthier lives, it’s reasonable to encourage people stay in the labor force longer. This makes older people less dependent on government resources and keeps them paying into any entitlement system longer. Also, because the labor market is not a fixed pie, encouraging longer careers doesn’t prevent the upward mobility of the young.
Encourage consumer- or patient-driven healthcare.
At any given time, one of three groups drives healthcare: government, health insurance companies, or providers (e.g. doctors, drug and equipment companies, and hospitals). What is missing in this equation is the patient. How did the patient go missing? It’s a complicated question, but it boils down to a basic economic concept: if someone besides the consumer (i.e. the patient) is paying the bill, then someone besides the patient is driving healthcare. That means prices are not determined the way they should be, competition is limited, and the costs of all the distortions get passed on to everyone in the form of higher premiums and taxes. To treat this problem, we have to allow consumers to direct more of the healthcare dollars, rather than shift costs to third parties.
- Institute means testing.
A long time ago, we had to give up on the idea that Medicare was anything but a pay-as-you-go system. So the question of its future solvency as a system depends on whether we view it as a social safety net or a future claim on resources already paid. Unfortunately, the sustainability problem forces us to view Medicare more as a social safety net. In order to pull it back from the brink, eligibility will have to be means tested. In other words, the wealthier you are, the less access to benefits you may have, despite how much you might have paid into the system. In some ways this may seem unfair, but such unfairness is an artifact of any pay-as-you-go system. If Medicare, as system, is to be maintained, it will require limitations on access. Other reforms, proposed by Shultz and Shoven should mitigate this unfairness in the future, however. (See Reform 4, for example.)
Expand health savings accounts (HSAs)—broadly and deeply.
A lot of people don’t know what HSAs are. But if more people did, we’d have fewer problems in our healthcare system. HSAs are tax protected accounts (like 401ks) in which one can set aside resources for healthcare expenditures. If you don’t use these resources, they’re yours to keep (minus taxes upon cash out). Over time, people save up money, which can be used for healthcare costs and deductibles, or cashed out at retirement. HSAs are usually coupled with high-deductible plans, so that most of the everyday expenses—doctor visits, drugs and maintenance care – comes out of the account. This is just one way to put patients back in control (see point 2). After all, if you’re spending your own money, you’re more likely to be a careful shopper. If someone else is paying the bill, do you even ask about the price of that visit or blood test? Probably not. Most people just hand over their insurance card and pay the co-pay. But that invisible cost adds up. Because the true costs are hidden from you, doctors and providers jack up prices. Why be competitive on price if you’re not paying attention?
Broad expansion means introduce HSAs into Medicaid and Medicare.
By voucherizing healthcare for the poor and seniors, you’re introducing powerful competitive forces that will lower prices and increase quality for a far larger segment of the total healthcare market. You also drastically reduce fraud incentives and preserve the social “safety net,” so that society’s most vulnerable have access to healthcare.
Deep expansion means lifting the annual contribution limit for HSAs.
Currently, people are allowed to put away $3,500 for their healthcare. But why shouldn’t they be able to put away more? All such contributions mean less strain on the insurance pool, less burden on the entitlement system and more healthcare dollars for old age. It also helps expand the “economic pie” in 1, above, as saved healthcare dollars get invested in the economy.
Change the tax code.
Another major problem of healthcare is the unequal tax treatment of different types of health insurance. This unequal tax treatment is unique in America – an artifact of World War II wage and price controls. “[A]s the tax advantage of employment-based insurance stimulated its use,” write Shultz and Shoven, “the dominant players came to be the employers (those who provided the money) and the insurers and medical professionals (those who provided the services)” Those who benefited from that system, employed patients, “had little incentive to evaluate relative costs or to take the outlook of a normal consumer, while they had every incentive to use the system without restraint because they did not bear a significant fraction of the costs.”
Another way of saying all this is: if you’re lucky enough to be offered health insurance through your employer – once you have it – you don’t think about it. But this causes distortions. Job-based insurance undermines cost-consciousness by hiding the true costs of both insurance and medical care from employees. Because the full cost is largely invisible, there is increased demand for services and more expensive insurance. As a result, wasteful, inefficient healthcare delivery is subsidized at the expense of more efficient care and coverage. Perhaps worse, it’s a subsidy for the wealthy at the expense of the working poor. As health insurance costs rise, wages and salaries stagnate. That’s because any economic growth goes to expanded health insurance costs at work (which most people don’t realize). Of course, employees with job-based coverage have little choice about their health insurance company. Most jobs offer only one option. Why would you shop around? That lack of shopping limits competition and you lose (expensive) coverage if you lose your job.
The fix is simple: either a) remove the tax privilege of employer-based insurance, or b) offer the same tax protection to policies purchased on the individual market.
Allow interstate purchases of health insurance.
Have you ever tried to buy less expensive insurance in another state? You can’t. The government won’t let you. One reason for this is mandated regulations in each state. North Carolina, New York, and Idaho each have their own government regulations on healthcare. The problem is that because there is no interstate competition for health insurance, virtual in-state monopolies emerge—and people can’t escape their states to be more affordable policies. In North Carolina, it’s Blue Cross Blue Shield. In another state it might be Aetna or Anthem. But in all of these cases, it is scarcely worth trying to compete within another state in which a provider is already dominant. But people aren’t dropping like flies in Idaho because they don’t have New York insurance regulations. So why can’t you get cheaper insurance from a company in Idaho? The regulations are used to protect the monopoly power. Consumers don’t benefit. Since regulations protect in-state monopolies and limit competition, premiums go up. We need simply to allow people to buy insurance in any state they choose to increase competition.
Offer tax credits to the poor.
Shultz and Shoven point out that there is surprising bipartisan support for the voucherization of health insurance for the poor. Instead of Medicaid, which is a government run and administered plan that is cannibalizing state budgets, just give people dollars devoted to healthcare—referred to as “refundable tax credits.” Because people spend their own money more wisely than they do other people’s money, the poor are more likely to get the insurance and the care they need, but not be encouraged to over-consume.
Doing away with the Medicaid system also helps people avoid wage traps, which discourages upward mobility and working. “Eligibility depends on income and wealth and varies widely by state and by the medical condition of the recipient. The average annual benefit for a family of four is approximately $12,000, a large number reflecting the fact that a small percentage of families have extremely large health costs.” Any extra work that might earn them, say, $1,000, could cause the person to lose eligibility. If the result is less income, there is no incentive to work—which serves to keep people trapped in low wages.
In fact, by coupling HSAs with these vouchers presented on a sliding scale, the wage trap is far less severe. The sums that once went to Medicaid would be more wisely disbursed and sustainable for American taxpayers. The social safety net would be preserved and market forces would keep the resource ecosystem competitive and relatively free of perverse effects such as overconsumption and wage traps.
The book is called Putting Our House in Order. It shows that George Shultz could never go away quietly and the book outlines possibly the best and most realistic set of options for healthcare and entitlement reform yet conceived.
Editor’s Note: None of the suggested reforms outlined above appear in the 2010 Healthcare reform bill passed by Congress.