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It’s the System
The real health-care problem isn’t moral, as the president claims, but structural.
3 September 2009

Changing its tactics in the health-care debate, the White House has begun stressing the moral imperative to provide health insurance to all Americans. “I am my brother’s keeper, I am my sister’s keeper,” President Obama now argues. “And in the wealthiest nation on earth right now, we are neglecting to live up to that call.” But Obama is just plain wrong that America is neglecting its obligations to the most vulnerable. The real health-care problem is not moral but structural and systemic.

We already spend hundreds of billions of dollars every year providing health care to the elderly, through Medicare, and to the poor, through Medicaid. The first of these programs—which, experts estimate, may squander up to $60 billion every year in waste, fraud, and abuse—is running a staggering, and unsustainable, long-term deficit of $38 trillion. The second is in even worse shape, with a 2006 survey finding that as many as half of all physicians have either stopped accepting new Medicaid patients or limited the number they’ll see because reimbursements are so low. On paper, poor patients have great government insurance; their only problem is that they can’t find a doctor.

Further, the bureaucrats who manage both the Medicare and Medicaid programs issue thousands of price controls every year, telling hospitals and doctors what services they must cover and what payments they must accept—regardless of whether the payments actually cover costs. In 2008, the consulting firm Milliman estimated that low reimbursements for doctors and hospital services shifted nearly $90 billion in costs annually from public to commercial payers. This cost-shifting represents a hidden tax that effectively robs Peter to pay Paul, while allowing the public programs’ defenders to claim that they are more efficient because they have lower costs than private insurers.

The White House is correct when it says that millions of Americans can’t afford private health insurance. But what it doesn’t mention is that government regulations reduce access to affordable private insurance, strangle competition, and make insurance more expensive. State insurance regulators frequently require insurers to offer certain services—fertility drugs, alcohol-abuse treatment, and chiropractor services, for example—that consumers might not choose if they had a say in the matter. The Council for Affordable Health Insurance notes that these mandates may push up the cost of basic health insurance by 20 to 50 percent, depending on the state.

Such mandates are part of a long history in which bureaucrats and policymakers have, with the best of intentions, distorted markets. In fact, what health-law scholar David Hyman calls the “original sin” of American health care was the World War II–era decision to offer employers, rather than individuals, a tax deduction for health insurance. There’s no good reason why insurance should be tied to employment, especially since losing your job often means losing insurance coverage, along with access to your regular doctor. The way the deduction works is also unfair: it isn’t capped, giving higher-wage workers more of a benefit than lower-income workers. Further, employees at small firms that don’t offer health insurance have to purchase it out of their own pockets. And adding insult to injury, the tax preference for health insurance over wages—a dollar’s worth of wages is taxed, but employees get to keep a whole dollar in health benefits—drives health-care inflation, because employees opt for insurance policies with high (pretax) premiums and low (taxed) out-of-pocket payments. Over the long run, this health-care inflation saps middle-class incomes as insurance premiums rise much faster than take-home pay.

The American system of health insurance is unquestionably in need of serious reform. Mounting costs threaten to suffocate future prosperity as taxes skyrocket to pay for entitlements. But President Obama has let Congress craft legislation that does nothing to make the system any more sustainable and, moreover, would cost $1 trillion or more over the next decade. The president’s moral calls ignore the nuts-and-bolts economic causes of the system’s problems, promising to make “reform” nothing but a fiscal shell game with a few biblical allusions thrown in.

Paul Howard is director of the Manhattan Institute’s Center for Medical Progress and the managing editor of its web-based journal Medical Progress Today.

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