My last two posts, here and here, have made the case that:
Our national debt is now 74% of GDP (for the public part on which we pay interest), the highest since WWII, and steadily getting worse. This will create a huge problem in the not so distant future, as soon as interest rates return to normal (higher) levels.
Entitlement spending is the main driver of our increasing debt. The best way to control Medicare and Medicaid spending is to control the cost of health care spending in general.
The overall cost of health care, public and private, in the U.S. is now 17.4% of GDP, much higher than for any other developed country, and is steadily increasing.
The main reason our health care costs are rising so rapidly is that Americans do not have enough “skin in the game.” Health insurance pays for close to 90% of our health care costs so that we pay for very little directly out of our own pockets. This means we have little incentive to pay close attention to these costs.
Christus Health in Dallas and Privia Medical Group in Washington, DC are causing disruption by shifting health care delivery from hospitals to outpatient settings. They are putting in place a number of lower-cost and more consumer friendly options which reward collaboration, performance and a focus on cost and quality on the part of both management and front-line providers. As I have pointed out in previous posts, here and here, several policy changes would help speed up this process of needed change:
The tax exemption for employer provided health insurance should be limited to the cost of high deductible catastrophic insurance with an equal (refundable) tax credit for those without employer coverage. Health Savings Accounts would be encouraged for routine health care expenses.
Affordable Care Act exchanges would continue to operate as at present but without any mandates.
Medicare would provide a fixed level of assistance with which seniors would purchase a private health plan of their own choosing, rather than being open ended as at present. Medicaid. The federal government would give states fixed, per-person payments. Low-income individuals could combine Medicaid and the (refundable) tax credit to enroll in private insurance.
Conclusion. The whole idea is to make everyone, rich and poor, young and old alike, responsible for their own health care expenses. Only with such a consumer-oriented, free-market system will we be able to preserve the high quality of American health care and rein in excessive costs at the same time.
With a total national debt of $17.8 trillion, of which close to $13 trillion is public debt (on which we pay interest), it is easily understood that the U.S. has a very serious fiscal problem. At the present time the public debt is 74% of GDP and this already high percentage is predicted by the Congressional Budget Office to keep growing indefinitely.
The biggest driver of spending growth going forward is the cost of healthcare. For example just the three programs, Medicare ($492 billion), Medicaid ($280 billion) and Veterans Healthcare ($54 billion), cost a total of $826 billion per year in federal dollars. And these costs are all increasing rapidly. Of course, private healthcare spending, currently about $2 trillion per year, is also growing rapidly. Overall, the U.S. spends 17.3% of GDP on healthcare spending, public and private, almost twice as much as any other developed country.
How are we going to address this enormous cost issue going forward? The Affordable Care Act (aka Obamacare) doesn’t do it. What it does do is to provide healthcare to more people under our current model of employer provided health insurance with Medicare for the elderly and Medicaid for the poor. It is this model which is broken and must be reformed. Basically we have two choices for how to do this. Either we switch over to a “single payer” system like most of the other developed countries have or we establish a far more efficient free market system. As the above chart shows, right now we have a composite system and it is just not cost-effective. There are plenty of experts who claim that a free market cannot work in healthcare. For example, the tax lawyer, Edward Kleinbard, in a new book, “We Are Better than This: how government should spend our money” argues that what a free market gives us is: unavoidable controversy for excluded pre-existing conditions, moral hazard for risky behavior, uncertain premiums for permanent insurance, fragmented healthcare markets, monopoly provider organizations leading to price opacity, very high administrative costs, etc. The Manhattan Institute’s Avik Roy has a different point of view. In his proposal, “Transforming Obamacare,” (http://www.manhattan-institute.org/pdf/mpr_17.pdf) he points out that there are two countries, Switzerland and Singapore, which operate highly regarded free-market healthcare systems at very low public cost. Stay tuned for further discussion!
The New York Times is running a series of articles, “Paying Till It Hurts,” giving many examples of the very high cost of healthcare in the U.S. today. The latest article “As Hospital Prices Soar, A Single Stitch Tops $500”, focuses on the high cost of emergency room treatment around the country.
We spend 18% of GDP on healthcare, twice as much as any other country in the world. It is specifically the cost of healthcare entitlements, Medicare and Medicaid, which is driving our huge deficits and rapidly growing national debt. But to limit the cost of these entitlement programs, we first have to address the more fundamental problem: how to control the overall cost of healthcare in general.
Our current healthcare system, a combination of private insurance and government programs, is very inefficient. The basic problem is that the tax treatment of employer provided health insurance takes away the incentive for individuals to control the cost of their own care. And Obamacare does not solve this problem, because it just extends the present system to more people, rather than revamping it.
There are essentially two different ways to transform our current healthcare system to make it far more efficient. One way is to turn it into a single payer system, like what most of the rest of the world has. This could be accomplished by simply expanding Medicare to everyone. Costs would then be controlled by government regulation which would, of course, include rationing. Given the unpopularity of Obamacare, with all of its mandates and uniform coverage requirements, it is unlikely that Americans would be happy with such a highly proscribed single payer system.
The alternative is to change over to a truly consumer based, market oriented system. This could be accomplished by limiting the present tax exemption for employer provided insurance. For example, the current system could be replaced by a (refundable) tax credit equal to the cost of catastrophic insurance (i.e. insurance with a very high deductible). All other healthcare costs, whether paid for directly by consumers or through insurance, would be with after tax dollars. Subsidies could be provided to lower income people through the Obamacare exchanges. Once such a system is set up and running smoothly, it could fairly easily be extended to encompass Medicare and Medicaid.
Insurance companies selling catastrophic coverage would negotiate with hospitals and other healthcare providers to get the lowest possible prices for their customers. In other words, both insurance companies and providers would compete in the open market to deliver healthcare products at the lowest possible cost.
Something along this line will have to be done and the sooner we get started the better!
Yesterday’s Wall Street Journal has a very interesting article, “More Employers Overhaul Health Benefits”, which describes a movement just getting started whereby employers give their employees a fixed sum of money and let them choose their own plan from an online market place. The idea is that employers will be better able to predict and control their healthcare expenses for employees. Furthermore, employees will be able to get better value for dollars spent by selecting their own coverage options, deductible amounts, copays, etc.
In fact, in an exchange run by Liazon Corp., which has 60,000 people enrolled, 75% of workers have chosen less expensive plans than they had before, by accepting bigger deductibles and copays, as well as smaller choices of healthcare providers and restrictions such as primary-care gatekeepers.
This is such an appealing approach to private healthcare cost control that the Accenture Management Consulting Company estimates just five years from now there will be 40,000,000 business employees receiving their healthcare benefits in this manner. This would be a phenomenal development!
The United States spends 18% of GDP on healthcare altogether, both public and private, which is double the amount spent by any other country. This enormous expense is a major reason why wage growth is stagnant in our country as well as why the costs of public programs like Medicare and Medicaid are so high and contributing to so much government debt. It is critical for our country to get the rapid increase of healthcare costs under much better control. That’s why this new movement of employers and employees working together on this critical problem is such a big step in the right direction.
If the estimate by Accenture is anywhere nearly accurate about how fast this new private healthcare selection method will grow, then there will soon be an excellent opportunity for Congress to expand its benefits to the control of Medicare and Medicaid costs as well. This is very exciting indeed!
Today’s Wall Street Journal has a column by Neil Shah, “Stagnant Wages Crimping Economic Growth”, pointing out that the average hourly pay for non-supervisory workers, adjusted for inflation, has declined to $8.77 last month from $8.86 in June 2009, when the recession ended. It has also been reported recently, e.g. in the New York Times, that U.S. medium household income, now at $52,100, has not nearly recovered from its prerecession peak of $55,500 and is even below its $54,500 level in June 2009, at the end of the recession.
Lower income for workers and households mean lower consumer spending. This is a major reason for our economy’s low annual growth rate of only 2% of GDP since the end of the recession. Of course, the high unemployment rate, currently 7.4%, as well as increasing global competition, contribute to downward pressure on wages. But there is another factor, directly under government control, which is a major contributor to stagnant and declining wages.
Washington Post columnist, Robert Samuelson, in a recent column reprinted in the Omaha World Herald, reported that, from 1999 to 2013, wages and salaries rose 50% (adjusted for inflation) while health insurance premiums increased 182%.
Most health insurance is provided and largely paid for by employers and is therefore an indirect form of compensation. The huge disparity between wage gains and health insurance premium increases in recent years means that wages are being held back by the rapidly increasing cost of health care. The U.S. spends 18% of GDP on healthcare, twice as much as any other country and this is clearly out of line.
The best single thing we can do to slow down healthcare inflation is to remove the tax exemption for employer provided healthcare (and offset it with lower overall tax rates). Employees would then pay taxes on their health insurance benefits as part of their pay. This would have the beneficial effect of making consumers far more conscious of the true cost of healthcare and therefore consumers a strong incentive to hold down these costs.
It is up to Congress to change this provision of the tax code. Let’s insist that they get this done!
Today’s New York Times reports that “Health Care Costs Climb Moderately, Survey Says”. The average annual insurance premium for a family rose 4% in 2013 compared with a 1.1% overall rate of inflation, according to the Kaiser Family Foundation which conducted the survey. Since 1999 health insurance premiums have increased by almost 300% while consumer prices have increased by 40%. As insurance premiums rise, deductibles are also getting bigger. About 38% of all covered workers now face an annual deductible of $1000 or greater. Dr. Drew Altman, CEO of the Kaiser Foundation, refers to this “quiet revolution” as an attempt by consumers to keep the cost of health insurance from rising even more quickly.
A 4% increase in insurance costs may seem moderate, but at almost four times the rate of inflation, it is really very large. Obama Care is unlikely to have any impact in holding down such a rapid increase and, in fact, is likely to make matters worse because of massive new health care regulations which are coming. The basic problem is that America spends 18% of GDP overall on health care, almost twice as much as any other country.
What can we do about this? One major step would go a long way. We need to remove the tax exemption from employer provided health insurance. Employers could still provide health insurance for their employees, but the cost would be added to an employee’s salary for tax purposes. This can be offset with a lower tax rate, of course. But it would make employees, i.e. all consumers, far more conscious of the cost of healthcare and therefore to have a direct incentive to hold down these costs. For example, Dr. Altman’s “quiet revolution” would pick up steam as employees raise deductibles even higher in order to lower overall costs.
How can we get going in this direction? The Employer Mandate of Obama Care should be repealed, and not just postponed for a year. Ideally, removing the tax exemption for employer provided health insurance would become part of the broad based tax reform which is so badly needed to stimulate the economy.
Our fiscal and economic problems can be addressed with smart leadership. We should insist that our national leaders get going on such badly needed reforms!
In yesterday’s Wall Street Journal, Mortimer Zuckerman, the Chairman of U.S. News and World Report, writes that “A Jobless Recovery is a Phony Recovery”. He points out that counting the people who want full time work and can’t get it, as well as those who have stopped looking, the real unemployment rate is really 14.3% rather than the officially reported 7.6%. Enormous fiscal (deficit spending) and monetary (quantitative easing) stimulus has been able to stimulate an average growth rate of only 2% for the past four years since the recession ended in June 2009. During these last four years the civilian workforce-participation rate has actually declined from 65.7% to 63.5% which has never happened before in an even slowly expanding “recovery” like we have at the present time.
Keynesians and Obama Administration apologists say that we need even more fiscal stimulus (we can worry about deficits and debt later); tax reform won’t help because tax rates are already low; massive new regulations (ObamaCare, Dodd-Frank financial regulations, EPA environmental regulations) are so important that they override negative economic effects; etc. At some point, the sooner the better, we need to recognize that current policies are not working and are, in fact, retarding the recovery from the recession.
Tax reform is the biggest single change which would help. Removing deductions and tax preferences, and replacing them with lower tax rates, would give a big boost to investment and entrepreneurship, and thereby be a huge stimulus to the economy. This includes eliminating the tax exemption for employer provided health insurance. Combining this reform with repeal of ObamaCare’s Employer Mandate would also lead to getting the cost of healthcare under much better control. The overall cost of healthcare, 18% of the American economy and growing, is a huge long term burden and must be turned around.
The massive complexity of Dodd-Frank is a huge burden on the financial industry. Preventing banks from becoming “too big to fail” can be accomplished by having more adequate reserve requirements along with sufficient default and liquidity insurance pools, along with otherwise minimal regulation.
Only more private investment and risk taking can make the economy grow faster and bring down the unemployment rate. The sooner our national policy makers (and the voters who elect them!) figure this out and act accordingly, the sooner that our economy will truly begin to recover from the Great Recession.