Redesigning the American Health Care System to Lower its Cost

 

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.

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The Fundamental Flaw in the GOP Healthcare Plan

 

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.

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The Urgent Need to Lower the Cost of American Healthcare

 

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.

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What Should the Federal Government Do about Infrastructure?

 

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 playing field 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.”

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The Only Way America Can Be Great Is To Provide Leadership

 

Like many other people I am upset that President Trump has decided to withdraw from the Paris Climate Accord.  It’s not that Paris solves the global warming problem but it is a major step in the right direction.  We’re the biggest contributor of carbon emissions  so it is our responsibility to lead in reducing them.


Here are some other major issues that need leadership:

  • Trade. The Trans-Pacific Partnership would have been a big win for the U.S.  But it is with China, responsible for two-thirds of our trade deficit, that we need a major rebalance.
  • NATO. Mr. Trump has withdrawn his campaign statement that NATO is “obsolete.” His criticism of NATO could turn out to be useful if it leads to an increase in NATO defense spending.

  • Faster Economic Growth. Economic strength is the backbone of our influence in world affairs. Lower corporate tax rates will encourage our multinational companies to bring their profits back home for reinvestment in the U.S. Administration efforts already under way to deregulate various aspects of the U.S. economy should soon lead to faster growth.
  • U.S. Budget. Mr. Trump has proposed to balance the U.S. budget within ten years which is hugely important. Unfortunately many of his specific proposals on spending and growth are not realistic.
  • Infrastructure Spending. This is an excellent idea if it is paid for directly and does not add to the federal deficit. Apparently Mr. Trump will soon announce a plan for private industry, cities and states to take the lead in new infrastructure spending with possible contributions from the federal government.

Conclusion. Although Paris is a disappointment, Mr. Trump will have many opportunities to redeem himself.

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How to Achieve a Balanced U.S. Budget

 

President Trump’s proposed 2018 Budget lays out a plan to achieve a balanced budget over a ten year period. I strongly endorse this goal whether or not the Trump budget is a realistic way to get this done.
The virtue of the Trump budget is to tackle waste and inefficiency across many different domestic programs (see chart below).


Its main defect is that neither healthcare reform nor tax reform has yet been implemented and the cost and/or savings of these two major initiatives are not yet known.
In the meantime the only way to think about balancing the budget is conceptually in terms of how it might be done.  Barron’s economic analyst Gene Epstein has done this recently.


Mr. Epstein proposes:

  • $8.6 trillion worth of spending cuts over ten years, of which 40% would come from programs other than Social Security and healthcare. By achieving a balanced budget in ten years it would lower our public debt (on which we pay interest) from 77% today to 58% in 2027.
  • By raising the age limit for full SS benefits to 67 (already enacted) at a faster pace, and indexing initial benefits to price inflation rather than wage inflation, $200 billion can be saved over ten years. Another $300 billion can be saved by phasing in a 25% reduction in SSDI benefits.
  • Cutting the estimated improper payment rate for Medicare of 12.1% in half would save $400 billion over ten years. Raising the premiums for Medicare Part B and Part D to 35% of costs from the current 25% of costs would save $400 billion.
  • Another $600 billion would be saved by turning Medicaid into a block grant program to the states and giving the states much more flexibility in how it is spent.
  • $950 billion could be cut from the military budget by cutting back on overly expensive new weapon systems as well as closing unnecessary military bases, both foreign and domestic.
  • Many cuts in government subsidies to individuals and businesses would save $1 trillion. Grants in aid to sates could be cut by $500 billion.

Conclusion. There are many different ways to curtail federal spending. It has to be done and the sooner we get started the less painful it will be for all concerned.

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Objections to the Trump Budget

 

President Trump’s budget for 2018 presents a plan to achieve a balanced federal budget in ten years, by 2027.  This is a highly desirable goal but there is much skepticism about whether or not his budget is realistic, see here and here.


My thoughts on this important matter are:

  • Fiscal restraint is a common sense necessity, and is not austerity. Our public debt (on which we pay interest) now stands at 77% of GDP, the highest since WWII, and will continue to increase without major changes in public policy. Right now the debt is almost “free” money because interest rates are so low. As interest rates inevitably go up in the near future, interest payments on the debt will skyrocket and become a huge drain on our federal budget and make annual deficits even worse than they already are.
  • 3% annual GDP growth, as assumed in the Trump budget, is almost certainly too optimistic. However the Trump Administration is on track to achieve significant deregulation  and averaging 2.5% growth over the next ten years is doable.
  • Insufficient entitlement reform is a big drawback for the budget. It will be very difficult, essentially impossible, to achieve and sustain a balanced budget without modifying Social Security and Medicare to make them self-financing. Turning Medicaid into a block grant program to the states would finally put Medicaid on a sensible budget.
  • Requiring able-bodied welfare recipients to work is a good idea and is the basis for cutbacks in social welfare programs.
  • The Departments of State, Interior, Education and Justice should be able to absorb cutbacks and operate more efficiently.

Conclusion. There are many good initiatives built into the Trump budget. Unfortunately there are also some invalid assumptions and glaring omissions.  It does not represent a bona fide plan to balance the budget in ten years but at least it recognizes the importance of doing so.

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