Healthcare reform debate

As a follow-up/rebuttal to the CNBC healthcare reform debate from last night, I figured I would inject some free-market sense into the conversation, as the entire debate (as far as I can tell) was completely one-sided. The point of this post is not to force my opinion on you, but to at least provide an alternate view.

As free-market economists point out, the rise in health care costs is no accident. Peter Schiff notes, “This painful condition has arisen from:  excess government involvement in the system, tax provisions that encourage the over-utilization of health insurance, and government support of an out-of-control malpractice industry. Rather than allowing more bad policy to drive health care costs further upward, we should all be looking at ways to allow market forces to reign them back in. If left alone, the free market drives quality up and costs down. Government programs produce the opposite result. Despite the president’s claim that a federal plan will bring costs down, there is no historical precedent for such faith.”

In fact, Schiff adds that a national health insurance plan will:

* Reduce the quality and increase the cost of health care.

 * Ensure an unconstitutional redistribution of wealth.

 Specifically taxing the rich to pay for health care for the uninsured is the wrong way to think about tax policy and is an unconstitutional redistribution of wealth. While the government has the constitutional power to tax to “promote the general welfare,” it does not have the right to tax one group for the sole and specific benefit of another. If the government wishes to finance national health insurance, the burden of paying for it should fall on every American. If that were the case, perhaps Congress would think twice before passing such a monstrosity.

* Kill jobs – mandating insurance coverage for employees increases the cost of hiring workers.

For an administration that claims to want to create jobs, this is one of the biggest job-killers yet devised. By increasing the marginal income tax rate on high earners (an extra 5.4% on incomes above 1 million), it reduces the incentives for small business owners to expand their companies. When you combine this tax hike with the higher taxes that will kick in once the Bush tax-cuts expire, and add in the higher income taxes being imposed by several states, many business owners might simply choose not to put in the extra effort necessary to expand their businesses. Or, given the diminishing returns on their labor, they may choose to enjoy more leisure. More leisure for employers means fewer jobs for employees. More directly, mandating insurance coverage for employees increases the cost of hiring workers. Under the terms of the House bill, small businesses that do not provide insurance will be required to pay a tax as high as 8% of their payroll. Since most small businesses currently could not afford to grant 8% across-the-board pay hikes, they will have to offset these costs by reducing wages. However, for employees working at the minimum wage, the only way for employers to offset the costs would be through layoffs. The uninsured self-employed, or those working as independent contractors, will be forced to buy insurance or pay a tax equal to 2.5% of annual income. Either choice will divert resources from more productive uses into an already out-of-control health care bureaucracy.

* Create a moral hazard for both patients and doctors.

Since consumers no longer pay for routine medical expenses out of pocket, comprehensive health insurance creates a moral hazard for both patients and doctors. To maximize the value of the health insurance “benefit,” most workers opt for low deductibles and co-pays. Therefore, doctors learn that their patients are not concerned with the cost of care, and so they are free to bill insurance companies at the maximum allowable rates.

* Do nothing to restrain/alter current out of control costs – will actually make things worse.

The simplest (but by no means fullest) explanation of why health care costs so much is that demand exceeds supply. Demand is a function of how much people are prepared to pay. Insuring more people will drive demand for health care services even higher. To truly get a handle on out-of-control health care costs, we need more people paying for routine medical care out of pocket, and tort reform for medical malpractice. Given our current tax code, the simplest way to bring down medical costs would be to fully tax health care benefits as wages and simultaneously increase the personal deduction by an amount significant enough to neutralize the effect of the tax increase. This would do two things. First, the uninsured would get a huge pay increase, enabling them to buy reasonably priced catastrophic policies. Second, those currently insured could opt out of expensive employer-provided plans, trading premiums for extra wages, then buy a more economical plan. The savings would go right into their pockets. The bottom line is that aggregate medical costs will never come down unless services are rationed more wisely. Rather than being used as a pre-payment plan for routine care, insurance should only cover unpredictable, catastrophic costs. As a comparison, homeowners often carry fire insurance, but seldom maintenance insurance. You buy fire insurance to guard against a catastrophic loss, which is a low probability but high cost event. As a result, fire insurance is relatively affordable, since premiums paid by all those homeowners whose houses do not burn down more than pay for the losses on those few whose houses do. On the other hand, no one carries home maintenance insurance to pay for a clogged drain or broken garage door. If insurance paid for the plumber visit every time a toilet overflowed, we would now have a plumbing crisis, and Congress would be looking to reign in runaway plumbing bills with “national plumbing insurance.”

* Force additional tax hikes to fund added expenses.

As costs continue to soar, expect additional tax hikes to fund the added expense. As these additional taxes further encumber a weak economy, the diminished tax base will yield lower total tax revenues – despite higher rates. As the politicians attempt to pass ever higher increases to make up for revenue shortfalls, a vicious cycle toward insolvency will ensue.

* Cause distorted health care pricing – government bureaucracy will administer a mis-priced plan.

The worst part of the whole fiasco is trying to imagine the bureaucracy necessary to administer this plan. My guess is that the government provider will mis-price its policies on the low side, pushing employers to dump private sector insurance for the taxpayer-subsidized alternative. Such a system will further distort health care pricing and, ultimately, make a bad situation intolerable. Few realize that Health Maintenance Organizations (HMOs), the companies that drive a wedge between the patient and his doctor, were a product of federal legislation and special interests. The HMO Act of 1973 essentially granted unfair privileges to certain sorts of companies and led to a distortion of the market. This has caused higher prices, less coverage, and more bureaucracy.

* Allow the government provider to run losses indefinitely.

President Obama claimed that government insurance would not drive private providers out of business. This is absurd. As the government provider will not have to produce a profit or accurately account for its contingent liabilities, it will provide insurance on an actuarially unsound basis. With taxpayer subsidies, the government provider can run losses indefinitely. If private insurers did this, they would either be shut down or go bankrupt. Therefore, the cost of government provided health insurance will not be confined to the premiums paid, but will include the taxpayers’ bill to continually bail out the government provider. When Medicare was first proposed back in 1966, it cost $3 billion per year, and the projection was for inflation-adjusted annual costs to rise to $12 billion by 1990. The actual cost in 1990 was $107 billion, and the 2009 estimate is a staggering $408 billion! So much for government estimates on health care. 

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