Politics & Policy

The Free-Market Cure

Republicans, not John Kerry, could provide the right medicine for our health-care system.

Back in December, health care seemed like the last issue Democrats would want to highlight in this campaign. A prescription-drug benefit had just been added to Medicare–the largest expansion in the program’s history. “On Capitol Hill,” a Republican Senate staffer explains, “it was like in the movies after the intimate scene. Everyone was sitting around, smoking the metaphorical cigarette.” Republicans thought they had stolen a Democratic issue.

But now, health care is again on the national agenda. Last week, both President Bush and Senator Kerry spoke at length about health reform; both campaigns ran ads focused on the issue. No wonder: In a recent nationwide poll by Market Strategies, 86 percent expressed deep concerns about rising health costs; two thirds worried about the difficulties of obtaining the best medical treatment; and six out of ten saw the likelihood of bankruptcy due to major illness as a serious problem. And if Americans are concerned about their health insurance, the Democrats are in a position to benefit. “Historically, Democrats have an inside advantage,” Republican strategist Bill McInturff observes. In his 15 years as a professional pollster, McInturff says, the GOP has never surveyed well on health care. Americans still favor Democrats on this issue; even on Medicare, the president’s numbers are weak. In January, with the ink still wet on the new law, a Washington Post/ABC News poll asked Americans who would do a better job handling Medicare. Congressional Democrats bested President Bush a 53 to 35.

It’s not surprising, then, that John Kerry emphasizes health care. But it’s not exactly a natural issue for him: Since his 1984 election to the Senate, Kerry has sponsored just eleven bills on health care, and not a single one passed Congress. But he has already rolled out a big proposal and a series of ads attempting to capitalize on health-care angst. Sweeping through battleground states, Kerry proclaims that while health spending is up 10 percent a year under President Bush, more Americans are uninsured: “It’s not acceptable to do nothing while those premiums are rising four times faster than workers’ earnings.”

Kerry has a plan to shave $1,000 off every employee’s premium, and also to cut the number of uninsured in half and cover more children. He offers something for everyone: For employers struggling with rising costs, he promises that Washington will pay 75 percent of extraordinary health bills. He promises to create massive purchasing pools, so that employers and individuals can join together to buy insurance, cutting premiums further. He offers tax credits for the uninsured and an expansion of public programs, such as Medicaid, to cover most of America’s kids. And for anyone taking prescription drugs, which is to say most of the country, he promises lower prices by allowing importation of Canadian drugs (and thus Canadian price controls).

Such an ambitious plan comes with an ambitious price tag. Kenneth Thorpe, chairman of health policy and management at Emory University, pegged the total bill at $972 billion over nine years. Thorpe, by the way, is no Republican attack dog: He served as deputy assistant secretary of health and human services in the Clinton administration and enthuses about the proposal. Subsequently–perhaps under pressure from the campaign–he revised the figure down to $650 billion, arguing that there would be some cost savings from, say, electronic filing. Joe Antos of the American Enterprise Institute used CBO scoring techniques to cost out Kerry’s plan. The estimated pricetag? $1.5 trillion over ten years.

There is a sense of déjà vu here. But if Democrats see hints of 1992–when another President Bush lost to a Democrat focused on domestic issues–and are thus encouraged, perhaps the GOP can also find solace. Bill McInturff notes that “Democrats overestimate Republican vulnerability”–as they did in 1992, 1994, and 2000. “Polling shows that people worry about the Democrats’ overreaching.” And if that’s the concern, Kerry’s health-care proposals should give Americans heartburn: His plan would enlarge Washington’s role, involving it in the purchase and price-setting of much of American health care.

And there are other problems. Take Kerry’s promise to create voluntary purchase pools. His model is the Federal Employees Health Benefits Plan, whereby eight million federal workers get to choose from a menu of insurance options. Kerry wants to allow companies and individuals to join just such a pool. To make it attractive, he promises “community rating”–i.e., setting the same price for everyone, regardless of age or health status. The problem is, that’s not a good deal for young, healthy people (the sort of people, incidentally, who typically aren’t insured). When such initiatives have been tried at the state level, the results have been a flop: Older, less-healthy people join the pool, while others shy away. In Florida, such a scheme actually increased the number of uninsured.

“It’s a plan that is massive and big, and it puts the government in control of health care,” President Bush commented in Rochester last week. It’s a good attack–but Republicans should be careful. Kerry’s plan may be pricey and unworkable, but his identification of the problem is sound: American health care is getting too expensive. Around the time Kerry’s health ads started airing across the nation, the Federation of Independent Business released its latest survey of employer attitudes. The biggest concern faced by small employers? Rising health costs. Indeed, aspects of “KerryCare” win support from various business lobbies. “Kerry’s plan is just big government,” one lobbyist told me. “But the federal government should have a role in paying for catastrophic costs.” Another endorsed massive tax credits even for insured Americans, reasoning that such a move would help business.

According to a Kaiser Family Foundation study released in early September, health-care premiums rose 11.2 percent in 2004, up a whopping 60 percent since 2001. And there’s no end in sight. Republicans need to ask: Why does health care cost so much? The answer is that, for the most part, Americans don’t directly pay for the majority of their health expenses. Indeed, out-of-pocket expenses–that is, the amount not covered by public and private insurance–account for just 14 cents on every health dollar spent.

American health care is dominated by third-party payment. No one would suggest that third-party payment would work for food, clothing, or shelter–so how did this odd arrangement develop for health care? When the U.S. government imposed wage and price controls in the 1940s to help the war effort, employers began offering health insurance; they couldn’t offer better wages to attract employees, but they could offer this benefit. Rather than stamp out this gray market, the IRS ruled in 1943 that health benefits would remain tax-free. “That was the key mistake,” suggests economist Milton Friedman.

Because of this ruling, a dollar spent on health insurance would result in a dollar gained by the employee; a dollar spent on higher wages, however, might see only 50 or 60 cents reach the worker, depending on the tax rate. For employees, lavish health benefits have historically made sense, allowing them to get more bang for their employer’s buck. Not surprisingly, then, most working Americans have coverage from their employers. The resulting system is fraught with problems: Between private and public coverage, Americans are over-insured, paying just pennies out of pocket, so patients do not have to think twice before demanding expensive tests or procedures.

Federal policy should focus on moving key decisions away from employers to employees. The administration has already taken the first step, but it needs to go further. In the mid-1990s, Republicans in Congress wrote legislation creating medical savings accounts (MSAs). The idea of MSAs was simple: Individuals would be given tax-free dollars to purchase health care as they felt necessary, while a third-party payer would cover only high-expense catastrophic events. The legislation proved to be overly rigid and, worse, the MSAs were authorized only on an experimental basis. In 2003, however, provisions allowing for “Health Savings Accounts” (HSAs)–freer in structure than the MSAs and, more important, permanent–were added to the Medicare bill in a last-minute effort to win over reluctant House conservatives. HSAs allow people to purchase relatively inexpensive high-deductible insurance and then deposit money into a tax-free account, from which smaller health expenses are paid. For companies and individuals looking to avoid high-cost insurance, HSAs are immediately attractive. And with individuals shopping around with their health dollars, HSAs can create a market for health services, thereby reducing costs and increasing innovation.

But that won’t happen as long as health care remains the most regulated part of the economy. American health care today is a tangled mess of regulations that retard market forces and reward bureaucracy. This industry is as cost-ineffective now as the airline industry was in the 1970s. Medicare’s regulations span more than 100,000 pages. States have written endless regulations that require all health insurance to cover services such as wigs (Connecticut) and infertility treatment (Maryland). Laws governing health-facility ownership allow hospital monopolies to flourish; the red tape cripples innovation.

Republicans should offer a sweeping vision. To date, the GOP has been half-hearted in dealing with the issue. This summer, for example, a committee of senators offered a handful of modest initiatives. But with double-digit increases in health premiums, the GOP needs to be bolder than flirting with KerryCare Lite. Fortunately, starting with his acceptance speech, the president has done just that. He has touted health savings accounts and promised policies to make them successful: reducing state regulatory excess by proposing to Congress legislation to allow individuals and businesses to purchase health insurance out of state; offering individuals the same tax preference that businesses enjoy, by letting them purchase health insurance with pre-tax dollars; and targeting the uninsured with tax credits for HSAs.

These ideas are not particularly revolutionary or costly, but they are crucial. The president could even go further: appoint a health-regulations czar to streamline federal health rules and cut redundant regulations; abandon the archaic structure of Medicaid in order to directly help the poor; and convert federal support for the uninsured into block grants for the states, allowing them to experiment with options.

Ultimately, health insurance needs to be moved out of the office. Employer-based coverage doesn’t make sense in an age of quick job turnover: The average employee in a small firm works there for just 15 months. Changing jobs today means changing health insurance–and, possibly, family doctors and health networks. Not long ago, pensions were equally archaic; but Washington created 401(k)s, which aren’t tied to specific employers. That approach would work well with health insurance. Future reforms could allow employers to contribute to employees’ HSAs, then let them purchase insurance.

But first things first. American health care has reached a crossroads: Either government’s role will continue to expand, or health care will evolve away from bureaucracy. We know where Kerry stands. The president has begun to offer an alternative. He must make his case strongly and clearly, not simply for the sake of his re-election, but for the future of American medicine.

David Gratzer, a physician, is a senior fellow at the Manhattan Institute.


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