Why Healthcare Reform Is Hard

Back in the mists of the distant past, 2009 to be exact, I posted endlessly on how important healthcare reform was and why getting it right the first time was crucial. Charles Lane’s latest column illustrates some of the reasons that I think that. In the article he complains about Hillary Clinton’s latest proposal to abandon the tax on “Cadillac plans”:

The tax, set to take effect in 2018, is a key component of President Obama’s health-care plan and its most effective means of controlling health-care costs. Without it, Obamacare becomes one more entitlement program facing ever-rising health-care costs that the country will eventually be unable to afford. Ms. Clinton said she would find ways to make up the revenue the tax would generate, but that would not repair the principal damage. She also would have to find alternate ways to control health-care costs, and that seems unlikely. As the Huffington Post’s Jonathan Cohn wrote , “The Congressional Budget Office made it clear that, without something like the Cadillac tax, the health care law was unlikely to reduce health care spending.”

To understand why, you have to understand that health benefits are a form of employee compensation that the federal government doesn’t tax: The government subsidizes employer-provided health insurance, in other words, but not wages. This encourages firms to compensate people in health plans instead of in dollars, and the resulting distortion tends to irrationally push up health-care spending.

IMO the best way to explain Sec. Clinton’s proposal is that it’s constituent service. The two groups most likely to be subject to the tax are people in the top decile of income earners and union members, both groups Sec. Clinton needs to secure the nomination let alone the presidency.

The history of healthcare reform in the United States is one of fits and starts. About once a generation we’ll engage in major healthcare reform. The process is so painful, frustrating, and unsatisfying that it takes about a generation to recover. The model of continuous improvement (one of the underlying assumptions of the PPACA) has not been our experience and runs counter to the preferences of the Congress let alone the people.

What we have is Cheshire Cat policy. Little by little everything disappears until nothing is left but the smile. Dump the taxes, mandates, and penalties. Keep the subsidies.

The real problem is that what we need is not marginal, incremental reform but basic structural reform, something nobody wants to do.