David Leonhardt explains, in very clear language, exactly why addressing rising costs is the greatest priority in healthcare reform and why the solutions being proposed fall short:
Members of Congress have come up with one idea after another to pay for covering the uninsured. But they still haven’t put together legislation that could pass. And that’s in large part because most of those ideas have a basic flaw.
They do not raise revenue as quickly as health costs rise. The plan to impose a surtax on top earners, for instance, pays a decent chunk of the bill over the next few years. But the revenue from the tax rises only as fast (roughly) as the United States economy grows. The same is true of most taxes.
Health costs, on the other hand, are growing much more quickly than the economy. Over the last decade, the economy has expanded by about 20 percent, and health spending has ballooned 50 percent. The gap isn’t about to start closing, either.
So no matter what Congress has done to pay for its plans, it can’t keep up.
The graph at the left illustrates the gap between rising costs and prospective tax sources nicely.
What he doesn’t say but should is that increasing taxes, regardless of on whom the taxes fall, will cause the economy to grow less quickly than it otherwise would, aggravating the gap if the gap isn’t otherwise reduced by reducing the increase in costs.
This is identical to the problem with Cook County’s fiscal house that I commented on some time ago. The county depends on sales taxes and property taxes for revenue. Healthcare costs are rising significantly faster than either retail sales or property values. That’s a structural problem. It can’t be fixed with a single tax hike or even by several tax hikes. It would require continuous ongoing tax hikes, a prospect so politically painful as to be impossible.
To fix the problem you’ve got to change the nature of the game, you’ve got to change the incentives. One way to do that is to tax employer provided health insurance:
In recent days, the Finance Committee has been considering precisely such a tax, on the health benefits that Americans receive from their employers.
The fact that these benefits are not taxed, as the Massachusetts Institute of Technology economist Jonathan Gruber notes, stems from “nothing more than an arbitrary administrative decision made 60 years ago.†Unfortunately, that decision created all kinds of economic damage. Because health care — unlike food, clothing and most other things — isn’t taxed, it’s effectively on sale. And when something is on sale, people often buy more of it than they need.
In the case of health care, they buy — or their employer buys for them — insurance plans that don’t make much of an effort to control costs.
and, since insurance companies’ healthcare revenues are proportional to the premiums of the plans and the premiums of the plans are proportional to healthcare costs, they have little incentive to curb the rises in those costs.
It bears mentioning that employer-provided health insurance is an artifact of that “arbitrary administrative decision”. It’s always been a tax dodge. Without the exemption it would be no different than ordinary wages and it would be easier administratively just to provide the pay.
Unfortunately, that’s not the only incentive that’s out of whack. Not only are employers’ incentives, insurance companies’ incentives, and healthcare consumers’ incentives perverse, so are healthcare providers. They’re paid more if they perform more procedures and inevitably they’ll perform more procedures.
Even that’s not the end of it. As long as legislators view their offices as lifelong sinecures, their incentives are to do nothing that might displease the voters. That includes addressing the pressing problems in incentives in our healthcare system in a productive and timely manner.
Fixing that problem requires changing the incentives.
I greatly appreciated Mr. Leonhardt’s column this morning, and I also appreciate your posting and your blog.
Although I work in health care, I must admit that I do not understand the details of either the current health care financing system or the proposals for health care financing reform. It seems to me, however, that the current American system of employer-provided health insurance is exceptionally bad. When the health care bill is paid by the insurance provider and the insurance premium is paid by the employer, the consumer has very little incentive to seek care provided at the lowest available price. What is worse, however, is that the consumer may lose health insurance coverage if she loses her job, which may sometimes occur as a result of unexpected illness. In this situation, the health insurance provider fails to help the very consumer who needs help the most. Finally, the worst aspect is that the cost of health insurance coverage is so high that millions of Americans cannot afford the premiums and must do without health insurance coverage altogether.
I do not know the solution to these problems, but surely fundamental changes, rather than modest reforms, will be needed to ensure universal health insurance coverage and cost control.
I’ve heard that the plan now is to tax gold-plated insurance policies via some sort of excise tax on the insurer (not the insured). While I think such a tax would have regressive effects (the insurer may pass the cost of the tax onto Mr. Gold in part and onto Mr. Pauper in part), it really does raise the question of what is this all about.
I think the employer-based system is inefficient and inequitable, and the efforts being taken to preserve it are not worth it. As I write this I see Arjun has made several excellent points about this.