FBB Part 4: Health Care

Critics of health care reform claim that now is not the time for it. With massive deficits and in the midst of a serious recession this is the wrong time to reform our health care system. President Obama has said the opposite. "Put simply, our health care problem is our deficit problem. Nothing else even comes close." The president is correct.

For more than a decade, private health care costs have had an average increase of more than 10% per year. The federal Medicare program cost $217 billion in 2000 and accounted for 2.3% of GDP. 10 years later Medicare cost $453 billion which is 3.5% of GDP. For the government, medical costs are growing faster than then economy. For the private sector it is worse.

Rising medical costs wiped out median income growth over the last 10 years despite rising productivity. Employers are cutting back on medical benefits they can no longer afford and passing the extra costs onto their employees. State budgets are swamped by rising Medicaid expenses. Municipal budgets are being squeezed.

We need to control rising health care costs in this country. That won't happen without comprehensive reform. Here, the status quo can not help us. Things are bad now. On our current path they continue to get worse. Much worse.

It may seem impossible to reign in medical costs. But many other countries manage to attain similar outcomes and life expectancy at half the cost. The nice thing about having a bloated, inefficient, patchwork system with few market incentives, local monopolies and inadequate cost control is this: There's room for improvement.

As a first step we must enact the health care reform bills before Congress today. Making affordable health insurance available to all Americans is a moral imperative. It will be an achievement worthy of celebration. It is also essential to control cost. Broader access to insurance will mean fewer emergency room visits, fewer medical bankruptcies, and fewer unpaid medical bills that get passed on as cost hikes for paying customers. Giving Americans access to a national health care exchange will provide more options and break local insurance monopolies. Eliminating exclusion based on health care history will mean health insurers will no longer be able to compete via risk management. They will no longer make profits by finding healthy customers and barring those that might get sick. Health insurance companies will be forced to compete by providing superior products at attractive prices. Instead of competing to keep away sick people they will have to learn to efficiently take care of them.

Beyond the basics of the bill, authors of the health care reform bill deserve a lot of credit for their thoroughness and dedication to creative cost control. The bill introduces market-based reforms such as price transparency. It includes a number of technical measures designed to reduce cost without cutting benefits. And much of the bill's frequently-maligned bulk comes for a host of pilot programs and experiments. These are designed to be tested on a small scale before the most successful ones are implemented and replicated nation-wide.

This is essential reform. We cannot afford to let it fail.

There are critics from across the ideological spectrum who say the cost cutting measures in the health care reform bill are insufficient. They may be correct. The current effort is an indispensable step. It it a giant leap forward. But really taming health care cost inflation may require we do even more.

There is a deep divide between the left and the right on the proper solution to health care cost inflation. Reformers on the right claim the insurance model itself is the source of the problem. Because consumers of care are separated from its cost they consume more than they otherwise would. People over-utilize and overpay because the bill is paid by someone else.

Reformers on the left point to model used in Europe, and Canada, and well, most every country on Earth. The public health is treated as a public good. The government provides for the health care of its citizens and manages the cost. It can control cost via massive purchasing power and regulatory authority.

If it to comes to Health Care Reform Part II (Secret of the Ooze?) the recommendation from Bank Slate health care economics team is that the American solution should borrow from both the left and the right. Do both. The government should offer a variety of public options and Medicare buy-ins. Some of these options should control cost aggressively. Some public plans should be less constrained. All plans should be priced to consumers to reflect their actual cost. Private health insurers should also be free to offer HSAs, high deductible plans, and other options that do more to put health care choices (and cost burdens) in the hands of consumers. Everyone gets their mandate. Poor people get their vouchers. Americans get to vote with their dollars and their feet.

Of all the budget problems we face, rising health care costs pose the greatest risk to our nations financial health. The one thing we can least afford to do is nothing at all.

Part 4 of the Bank Slate Federal Budget Blueprint series.