Health Care Reform that Will Kill the U.S. Economy

The fundamental problem is that the President and congressional leaders lack realistic plans to control the health care costs that are already crippling U.S. global competitiveness.
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With little fanfare, Congressional leaders may be near to agreeing on the most sweeping expansion of government in a generation - the de-facto takeover of the health insurance market by the government. Congressional Democrats are already icing the champagne. When the President's "Medicare for all" plan is coupled with the budget, which contains a "down payment" of $634 billion over the next decade for health care, government-run health care may be inevitable.

All sides in this debate acknowledge that the U.S. has long needed easier access to health insurance. This need has gained urgency for the many Americans who are fearful of losing their employer-sponsored insurance in the midst of a recession. Unfortunately, the President's plan will not only endanger the U.S. economy, but millions of patients as well.

The fundamental problem is that the President and congressional leaders lack realistic plans to control the health care costs that are already crippling U.S. global competitiveness. As a percentage of GDP, our businesses spend roughly 70 percent more on health care than competitors in other developed nations, yet we hardly receive 70 percent more in real value. Health care costs also distort the efficient allocation of labor, and therefore the potential of economic growth and increases in wages. Because health insurance can be so expensive - some estimate $14,000 for a family - untold millions reluctantly opt to stay in jobs in large, dying firms that offer health insurance, rather than pursue jobs in the productive, small companies that do not.

The President's budget is short on cost-controlling details, but so far, the Democrats are relying on a new national health-insurance marketplace, modeled on Massachusetts, in which private health-care insurers compete with an expanded Medicare program. But the cost control benefit of public programs, like Medicare, and state-run markets, similar to the one in Massachusetts, is illusory. Any "savings" are achieved with accounting gimmicks that shift costs to taxpayers and future generations, through deficits and unfunded liabilities, not through genuine innovations.

Massachusetts, which operates a U.S. analogue to a national government-run health-insurance market, is, in fact, a case study illustrating why health insurance run by Washington would collapse on itself. By March 2009, the state's uninsured rate fell to 2.8 percent from about 6 percent. The market, stocked with private-sector insurance policies, had insured 169,000 people in two new programs, one of which directly subsidizes uninsured individuals.

Good news, right? Wrong. Both the political right and left have correctly criticized the Massachusetts market for its inability to control costs.

The left complained that costs were so high that 73,000 people were excused from the requirement to purchase health insurance. Further, when 2008 premiums in the subsidized plans rose by 8 percent to12 percent, the government raised enrollees' deductibles and co-pays.

Conservatives criticized the limits on the competition that could lower costs in the government-run market. For starters, the state standardized plan benefits. The choices for patients are akin to a Soviet-style supermarket stocked with essentially identical products.

Conservatives also bemoaned the excessive generosity in benefit design (plans must cover 43 benefits, including in vitro fertilization and chiropractor services). Finally, conservatives questioned the generous level of subsidies (families of four with income up to about $63,000 are eligible).

Not surprisingly, enrollment by subsidized enrollees was some 36,000 higher than expected, while the 19,000 unsubsidized enrollees represented only half of the expected number. The state's bill for employees and their families who work for large companies increased 24.6 percent to $793.7 million in the last fiscal year.

By 2009, Massachusetts enacted almost $800 million in new taxes to fund, among other things, the third year of health care reform. Now, the state government, desperate for revenue, is considering setting the prices of health insurance and essentially taking control over all health-care costs, other than Medicare and out-of-pocket spending. If this sounds like a march into a single-payer Soviet-style system, that's because it is.

Some Democrats argue that Massachusetts cannot control costs because it lacks a public-insurance product akin to Medicare. They view Medicare as a successful cost-controller, pointing to its low administrative overhead, which they peg at 3 percent. But that figure ignores an inconvenient truth: Medicare's unfunded liabilities, estimated at about $34 trillion.

The comparison between the administrative expenses of private insurers and Medicare also ignores the fact that Medicare pays no taxes and, as a monopoly, need not incur marketing expenses. Further, the monopoly power of Medicare and Medicaid enable them to underpay providers by an estimated $90 billion dollars, sums made up by private insurers. But if the market were entirely composed of public insurers, who would take up the slack? The looming doctor shortage could become a national crisis. Prospective physicians who would incur massive debt for their education would reluctantly opt for other occupations in which the government is not their sole source of revenues.

A government market with an underpriced Medicare would likely lead to the death of private-sector markets and products. A recent study by the Lewin Group estimated that up to 118 million people would eventually move into Medicare and out of private-sector plans.

Are we surprised? Public markets and their products are administered by legislators and bureaucrats who often lack the entrepreneurial vision and skills to develop the products that people want at a price they can afford.

In the end, the Democrats' health care reform will require drastic rationing of health care for the sick to control its costs. Consider Canadian patients, who may wait a year or longer to get radiation therapy. Or ask one of the nearly 1.8 million Britons who are waiting to get into a hospital or have an outpatient procedure. Or talk to the German breast cancer patients who are 52 percent more likely to die from the disease than Americans.

Concerns about rationing and patient outcomes are not demagoguery. How else can a government control costs in the real world? Many experts, including the Congressional Budget Office, dismiss as wishful thinking the Democrats' claims of achieving efficiencies through bureaucrats' dazzling implementation of information technology and other technocratic tools.

Of course, all of us must be assured of access to reasonably priced health insurance. But what matters most in this debate are not the good intentions of the President or congressional Democrats but the likely consequences of their policies. Ultimately, the Democrats' version of health care reform will gravely injure both our economy and our ability to provide medical care to the sick.

U.S. Senator Tom Coburn (R-OK), M.D. is a practicing physician specializing in obstetrics.

Regina E. Herzlinger is the Nancy McPherson Professor at the Harvard Business School and senior fellow at the Manhattan Institute. She is the author of Who Killed Health Care? (McGraw-Hill, 2007) and senior author of Financial and Managerial Accounting for Nonprofit and Government Organizations (South Western, 1994).

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