Recently I have been discussing the high cost of American healthcare and the urgent need to lower this cost. The current GOP plan, the American Health Care Act, partially addresses this problem by reforming the funding mechanism for Medicaid.
But much more needs to be done. All Americans will have to be involved in the solution and not just the poor. There are two main facets to the problem, neither of which is addressed by the AHCA:
The tax exemption for employer provided health insurance should be replaced by a universal (and refundable) tax credit limited to the cost of catastrophic health insurance (with a high deductible).
Medicare needs to be redesigned so that well-off retirees pay for more of their health care. Details to follow soon.
The U.S. spends 18% of GDP on healthcare, public and private, about $3 trillion per year, and almost twice as much per capita as any other developed country. Furthermore this already enormous relative cost will continue to get worse without major changes in policy.
The main reason for the huge cost is that free market forces are not operating properly. More specifically, it is because most of us, as individual healthcare consumers, do not have enough “skin in the game.”
This conundrum is caused by our third party health insurance system whereby most of us receive health insurance through our employers. This gives us as individuals little incentive to pay attention to the cost of our own care and to try to keep these costs as low as possible.
A good way to fix this problem is to limit the exemption for employer provided insurance to the cost of catastrophic care with a high deductible. Routine medical expenses would be handled through individual (tax preferred) health savings accounts. The self-employed can be included by granting them a (refundable) tax credit also equivalent to the cost of catastrophic care.
Conclusion. Americans are fortunate to have access to high quality health care. But we are paying unsustainably high prices for it. If we cannot figure out a rational and sensible solution to this problem, our healthcare system will soon collapse from its own deadweight and we will end up with a tightly controlled, government run, single payer system.
The Democratic Affordable Care Act expands access to health insurance for millions of Americans. This is its great virtue. However it does nothing to rein in overall costs which is a huge deficiency.
The Republican American Health Care Act, passed by the House and being considered by the Senate, has both strengths and weaknesses, as I have previously discussed. Primarily, it puts Medicaid on a budget by block-granting it to the states with sufficient flexibility for the states to operate it much more efficiently. This needs to be done and is a big money saver.
The major problem with the AHCA is that all cost savings come from just one program, namely Medicaid, and this is a program for people with low incomes. Simple fairness, as well as the need for much bigger savings, dictates that financially well-off people should also have to share in solving the healthcare cost problem. This can and should be done in two different ways:
The tax exemption for employer provided health insurance should be replaced with a universal (and refundable) tax credit sufficient to pay for catastrophic health insurance (with a high deductible). Also tax preferred Health Savings Accounts for all can be subsidized based on income. The purpose here is to force all of us to pay attention to, and take responsibility for, the cost of our own healthcare.
Redesign of Medicare. Medicare is already being subsidized by the federal government at a net cost (after FICA taxes and premiums paid) of over $400 billion per year, and this overall cost will continue to increase as the number of retirees increases and the net subsidy per retiree also increases (see chart). Details of possible redesign will be discussed later.
Conclusion. The ACA needs to be improved in many ways to get the cost of healthcare under control. The AHCA bill currently being considered by Congress needs major changes so that all Americans, rich and poor and in between, are part of the solution of our healthcare cost problem.
Our country faces many serious problems (terrorism, global warming, income inequality, etc.) but the most serious of all in the long run is our rapidly growing national debt and the inability (unwillingness?) of our national leaders to address it.
Furthermore, the fundamental driver of our debt problem is the cost of healthcare, public and private. The Affordable Care Act, established in 2010, expands access to healthcare but does not address the cost problem (see chart below).
I have previously discussed how to repair the ACA to make it more cost efficient, by, for example, repealing both the individual and employer mandates, establishing a universal (and refundable) tax credit for catastrophic care, migrating Medicare and Medicaid to the new universal system, etc.
But there are lots of other things, less political contentious, that we can do as well. I have just read an astonishing new book, “An American Sickness” by Elizabeth Rosenthal, an MD who works as a healthcare journalist, which provides a vivid and compelling description of our overly expensive and dysfunctional healthcare system. According to Ms. Rosenthal here are a few of the things we could do collectively to get costs under much better control:
Reform malpractice insurance to place limits on noneconomic damages.
Breakup oversize hospital conglomerates so that hospitals don’t have such huge monopoly pricing power.
State insurance regulators could do a much better job of enforcing transparency and accuracy for provider directories, in-network and out-network fees, etc.
Insurance companies could do a better job on reference (i.e. standardized) pricing, encouraging bundling of services, tying the size of co-payments to a procedure’s medical worth and urgency, etc.
Congress should permit Medicare to negotiate national drug prices.
Conclusion. Repairing the ACA, as is now being done in Congress, will go a long way towards much better cost control of healthcare. But there are many other common sense steps which can also be taken towards this goal.
President Trump has proposed spending $1 trillion over the next decade on public and private investment in infrastructure. The CATO Institute’s Ryan Bourne has just published an excellent analysis of the whole issue. Here are the highlights:
Any new federal spending must take into account that federal public debt now stands at 77% of GDP and is likely to keep rising given the demographic pressures on entitlement spending. This means that the long-term outlook for public finances is dire.
With a current low unemployment rate of 4.4% and a high of 6 million job openings, the economy does not need more government stimulus at the present time.
Bridge quality has improved substantially since 1990 (see chart) although roadway congestion has become more acute (second chart). Rail and transit systems appear to be the main areas with observable deterioration.
The difference between state highways (which are in good condition), local roads (which are in fair condition) and transit systems (which are in poor condition) is simple: state road maintenance is paid almost entirely out of user fees (gasoline taxes), local road maintenance is paid for by a combination of taxes and user fees (motor vehicle registrations and parking meters) while transit maintenance is paid for almost entirely out of taxes.
The above indicates that the following policy framework should be followed:
Privatize areas where government is not needed such as airports, air traffic control systems and railways (Amtrak).
Localize decision making as far as possible such as decentralizing responsibility for transportation infrastructure back to the states.
Remove payment barriers for charging users. This could reduce the cost of capital investment required for highway systems by 30%.
Level the playingfield for private sector funding. Currently interest income received for investing in municipal bonds is tax free which is not the case for private debt.
Conclusion. “Rather than imposing further costs on taxpayers, the Trump Administration should prioritize localizing decision making, removing regulatory barriers to private investment, encouraging use of user fees and removing tax exemptions for public investment.”
Donald Trump was elected President because of strong blue-collar support. Many blue collar workers feel left out of the American dream because of stagnant incomes and/or job loss.
At the same time there is a huge national focus on the high cost of college and the associated huge student loan debt. But student loan debt is a fixable problem and is not what is holding our economy back.
Take a look at the two charts below from recent issues of the Wall Street Journal, here and here.
The first chart shows the last four growth cycles and how wages eventually tick up as unemployment continues to fall. Missing this time is hardly any growth in wages towards the end of the cycle (Of course, the current cycle won’t be over until we have the next recession).
The second chart shows that there are now more job openings (6 million) than job hires for the first time since 2001. Furthermore there were only a low of 138,000 jobs added in May with an average of 121,000 per month for the past three months. This suggests that employers are having a hard time finding qualified workers.
Obviously, what is badly needed is a renewed emphasis on workforce training. Interestingly enough, the Business Roundtable has just issued an extensive report detailing what many major corporations are doing to close America’s skills gap.
Conclusion. Lots of people, certainly including President Trump and the Republican Congress, would like to see faster economic growth. Clearly there are practical and useful ways to achieve this and many people are already trying to make it happen.
As I have discussed previously, the evidence for global warming is overwhelming. I had hoped that President Trump would publicly recognize this scientific reality and decide to stay in the Paris Climate Agreement. Nevertheless, it will take more than three years for the U.S. to completely withdraw.
But in or out of the Paris Agreement, the best way for the U.S. to show leadership on this critical issue is to adopt a (revenue neutral) carbon tax. The American Enterprise Institute has just issued a comprehensive report on the desirability and feasibility of doing this.
Here is the gist of the AEI argument:
$40 per ton is often taken to be the social cost of carbon in the atmosphere. A carbon tax at this level would raise the cost of gasoline by 36 cents per gallon.
A carbon tax is a consumption tax. Taxing consumption rather than income promotes economic growth. The revenue neutral offset would likely be an income tax such as the payroll tax or corporate income tax.
A carbon tax need not disadvantage the U.S. globally since a border adjustment tax could be imposed on imports from countries without a carbon price regime.
Replacing arbitrary regulations. The primary carbon-reduction regulations currently in effect are the 1) Corporate Average Fuel Economy (CAFE) standards for vehicles and 2) Clean Power Plan which limits power-sector carbon emissions at the state level. Leaving carbon abatement decisions to carbon producers is far more efficient than leaving it up to regulators.
Growing public acceptance. 84% of registered voters, including 72% of Republicans, support actions to accelerate the development and use of clean energy. Even 49% of conservative Republicans say that “Americans will make major changes to their way of life to address climate change.”
Conclusion. For the U.S. to adopt a carbon tax would be an even stronger statement of world leadership than participating in the Paris Agreement.
I am just as personally embarrassed by President Donald Trump as most other people I know. He is rude towards other world leaders and especially our own allies. His destructive behavior endangers even his own policy initiatives. He was elected by blue-collar workers who feel left behind in today’s global economy. But how can he possibly lead others in implementing policies to help even his most avid supporters?
What is the Democratic Party doing about this? First of all, they are trying to stop acting so elitist toward the working class. But more fundamentally a new progressive social agenda apparently is emerging, here and here. It has many attractive features but there is one big thing missing, namely fiscal responsibility:
A “public apprenticeship” jobs program. The idea here is to maintain the employment rate for prime-age workers without a bachelor’s degree at the 2000 level of 79%. This would require the creation of 4.4 million jobs, ideally at a living wage of $15 per hour plus Social Security and Medicare payroll taxes, and therefore at a wage of $36,000 per year. This would cost $158 billion per year.
A universal child allowance of $250 per month. This would cost $190 billion per year, although half could be offset by consolidating less-efficient existing programs. This would cut child poverty by 40%.
An expansion of the earned income tax credit. A family of four making $40,000 per year would get a tax credit of $6000 instead of the current credit of $2000. This would cost $1 trillion over ten years. The idea here is extra motivation to hold a job.
Conclusion. Who is opposed to creating millions of new living wage jobs to put the unemployed and underemployed back to work? Such a program would give our economy a huge boost. Who is opposed to cutting child poverty in half (or doing even better)? But how in the world would we make room for such new programs in the federal budget? With $500 billion annual deficit spending already, we need to curtail federal spending, not increase it.