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Heed The Diagnosis, Beware The Prescription
Before we bring in the federal government, let's give the market a chance.


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Michael F. Cannon

Two stumbling blocks typically thwart good health policy.

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The first is the pervasive belief that the focus of health policy should be to ensure that all individuals have health coverage. A more useful focus would be creating a vibrant, competitive medical marketplace that puts constant downward pressure on prices while striving to improve quality. Such a marketplace would be a better guarantor of quality, affordable health care (and coverage) than anything likely to emerge from focusing solely on expanding coverage. The second stumbling block is the tendency of many who avoid the first to argue nonetheless that for markets to work, government must grow.

Healthy, Wealthy & Wise, a new book by economists John Cogan, Glenn Hubbard, and Daniel Kessler, is rumored to be influencing President Bush’s State of the Union address. The Los Angeles Times reports that the administration has recruited Hubbard for a nationwide speaking tour. If the rumors prove true, it will be a mixed blessing. While Cogan & Co. deftly avoid the first stumbling block, they regrettably succumb to the second.

In a world of much health-policy quackery, the authors examine the health-care sector and deliver a precise diagnosis. “The problem,” they write, “is not that market forces cannot work in health care. Rather, public policies have prevented health-care markets from functioning properly.” The chief culprits are the tax code’s distortion of health-care prices, over-regulation of health insurance, a lack of information on health-care quality, a lack of competition among hospitals, and malpractice-liability rules that encourage waste and error. To address these root causes, the authors propose five reforms designed “to make markets work.”

Here the authors stumble. Rather than rein in a federal government that has caused so much mischief, they propose four reforms that would increase federal power over health-care markets and a fifth whose effect on federal power would be mixed.

The fifth reform entails reducing the harmful price distortions within the tax code. The authors advocate allowing people to deduct from their income taxes the cost of individually purchased health insurance premiums. That would provide some equity to those without employer-sponsored coverage. However, they also propose deductibility for all out-of-pocket medical expenditures. That move would likely lead to increased health-care consumption, with troubling implications for the price of medical care and insurance.

The other tax-based proposals are also a mixed bag. The authors would allow health savings accounts (HSAs) to be paired with any type of health insurance, instead of only catastrophic insurance. This is the best proposal in the book. However, another proposal would essentially increase taxes on every HSA holder who today fully funds his account.

The remaining reforms are straight increases in federal power over the health-care sector.

First, the authors propose having the federal government regulate even more of the health insurance market than it does today. They dismiss concerns that federal regulation would likely become as onerous as state regulation–and much tougher to dislodge–despite Congress’s manifest willingness to over-regulate in this area. They also give short shrift to a reform endorsed by President Bush that would put permanent downward pressure on unnecessary regulatory costs: namely, to allow individuals and employers the freedom to purchase insurance from out-of-state carriers. A similar model already exists in corporate chartering.

Second, the authors advocate imposing federal malpractice reforms on the states. Their preferred rules may have merit, but they do not discuss why it should be Congress that enacts those rules. Not only does the Constitution not grant Congress such power, but states are already experimenting with such reforms, and federal rules would prevent states from learning from each other’s experiments and competing to offer more efficient rules.

Third, the authors seek to increase hospital competition by beefing up federal antitrust regulation. But the authors do not consider that antitrust regulations sometimes block efficiency-enhancing mergers, often at the behest of inefficient competitors. There are plenty of regulations that reduce hospital competition, and the authors do not discuss why more regulation would be preferable to less.

Finally, the authors propose federal funding for report cards that measure the quality of health-care providers. By all accounts, consumers lack sufficient information about the quality and cost of medical care. However, the private sector has begun to furnish such data, just as innovations like HSAs have given patients incentives to demand it. It would make sense to see what the private sector can do by itself once we get all the incentives right.

The authors note that their proposals are meant to be incremental and politically feasible steps to improve the functioning of health-care markets–not wholesale changes, or even their ideal choices for reform. The trouble with limiting oneself to what is politically feasible–rather than trying to expand what is politically feasible–is that most of the available options involve increasing federal power.

There’s always a constituency for that.

Michael F. Cannon is director of health policy studies at the Cato Institute and author of Healthy Competition: What’s Holding Back Health Care and How to Free It.



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