Healthy, Wealthy, and Wise: 5 Steps to a Better Health Care System, Second Edition
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Healthy, Wealthy, and Wise - John F. Cogan
Healthy, Wealthy, and Wise
The Hoover Institution gratefully acknowledges
the following individuals and foundations
for their significant support of this publication:
JAN AND JIM BOCHNOWSKI
LYNDE AND HARRY BRADLEY FOUNDATION
FOUNDATION FOR BETTER HEALTH
Healthy, Wealthy,
and Wise
5 Steps to a Better Health Care System
SECOND EDITION
John F. Cogan,
R. Glenn Hubbard, and
Daniel P. Kessler
THE HOOVER INSTITUTION PRESS
Stanford University • Stanford, California
and
THE AEI PRESS
Publisher for the American Enterprise Institute • Washington, D.C.
THE HOOVER INSTITUTION ON WAR, REVOLUTION AND PEACE, founded at Stanford University in 1919 by Herbert Hoover, who went on to become the thirty-first president of the United States, is an interdisciplinary research center for advanced study on domestic and international affairs.
www.hoover.org
THE AMERICAN ENTERPRISE INSTITUTE is a community of scholars and supporters committed to expanding liberty, increasing individual opportunity, and strengthening free enterprise.
www.aei.org
Hoover Institution Press Publication No. 582
Hoover Institution at Leland Stanford Junior University,
Stanford, California 94305-6010
Copyright © 2011 by the Board of Trustees of the Leland Stanford Junior University and the American Enterprise Institute for Public Policy Research, Washington, D.C.
Copyright © 2005 by the American Enterprise Institute for Public Policy Research, Washington, D.C. and the Hoover Institution, Stanford, California
All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the Hoover Institution and the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the Hoover Institution and American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of the Hoover Institution or the American Enterprise Institute.
First edition 2005
Second edition, first printing 2011
Manufactured in the United States of America
Cataloging-in-Publication Data is available from the Library of Congress.
ISBN-13: 978-0-8179-1064-8 (cloth. : alk. paper)
ISBN-13: 978-0-8179-1066-2 (e-book)
Contents
Preface to the Second Edition
Acknowledgments
Introduction
CHAPTER 1: The Challenge: Obtaining High-Quality, Affordable Health Care
The Good: Innovation
The Bad: High Costs and a Large Uninsured Population
High Costs: No Easy Answer
The Uninsured Population: Many Causes, Uncertain Consequences
The Ugly: Backlash against Markets and the Misguided Policy Response
The Backlash against Markets
The Misguided Policy Response
CHAPTER 2. Five Policy Reforms to Make Markets Work
Increase Individual Involvement in Health Care Decisions
In Private Markets, Reform Taxation of Health Spending
Increase Cost Sharing in Government Programs
Deregulate Insurance Markets and Redesign Medicare and Medicaid
Deregulate Insurance Markets
Redesign Medicare and Medicaid
Expand Provision of Health Information
Control Anticompetitive Behavior
Reform the Malpractice System
Study the Tax Preference for Nonprofits
CHAPTER 3. Impacts of Proposals on Health Care Spending, the Uninsured, the Federal Budget, and the Distribution of Tax Burdens
Effects of Reforms on Health Care Spending
Tax Deductibility
Tax Credit
Insurance-Market Reform
Malpractice Reform
Summary and Discussion
Effects of Reforms on the Number of Uninsured
Tax Deductibility
Tax Credit
Insurance-Market and Malpractice Reforms
Summary and Discussion
Effects of Reforms on the Federal Budget
Tax Deductibility
Tax Credit
Insurance-Market and Malpractice Reforms
Subsidy for the Chronically Ill
Summary and Discussion
Distributional Impact
Conclusion
APPENDIX A. Estimating the Impact of Policy Reforms on Health Care Spending
APPENDIX B. Estimating the Impact of Policy Reforms on Uninsurance
APPENDIX C. Derivation of the Elasticity of Total Health Care Spending with Respect to the After-Tax Price of Out-of-Pocket Spending
APPENDIX D. Estimating the Impact of Policy Reforms on the Federal Budget
Notes
About the Authors
About the Hoover Institution's Working Group on Health Care Policy
Index
Preface to the Second Edition
When we published the first edition of this book in 2005, our country faced an important fork in the road in health policy: shift to more patient-centered health care, with incentives to control costs and promote innovation, or surrender to pressure for expansion of the role of government, with diminished incentives for both cost containment and innovation. With the passage of the Patient Protection and Affordable Care Act (PPACA) in 2010, President Obama and the Congress chose the second path.
This new law represents a wrong turn. Unpopular with the American people in no small part because of the uncompromising legislative process through which it was enacted, the law put the crucial first step of cost containment and innovation in the back seat of a car driven by costly expansion of access within a system of flawed incentives. This approach will lead to higher health spending, greater government involvement in health care administration, and negative effects on the U.S. economic activity.
There is a better way.
Fundamental reform centering on tax changes, insurance-market changes, and the redesign of Medicare and Medicaid can slow the rate of growth of health care costs, expand access to high-quality health care, and slow down the runaway budget train. While we wish the PPACA had not been passed and we believe Congress should start over, we also present pathways toward sensible reform within the recently enacted law and, importantly, within the existing frameworks of the Medicare and Medicaid programs.
It remains the case that unintended consequences of a handful of public policies are in large part responsible for the problems of the health care system. These policies share a common feature, now amplified by the PPACA: they fail to promote the proper functioning of markets. In two areas in particular, tax policy and health insurance regulation, government policy continues to actively hinder the operation of markets for health services.
Since the book’s initial publication, we have conducted additional research on the consequences of tax policy for health spending and health insurance. We present that work, along with updated estimates of the impact of our proposal on the federal budget, the number of insured Americans, and health care spending.
Our closing point in the first edition is now more true after the passage of the 2010 law: the time to implement sensible reforms is now. Failure to do so will exacerbate the problems of wasteful cost growth and lack of insurance. It will inevitably increase the pressure for more public intervention, with adverse consequences for the quality of health care and economic growth more broadly.
John F. Cogan R. Glenn Hubbard Daniel P. Kessler
Acknowledgments
We are grateful to Joe Antos, Chris DeMuth, Doug Holtz-Eakin, Al Hubbard, Ben Lytle, Cindy Miller, Sam Nussbaum, Mark Pauly, Dhan Shapurji, Marc Sumerlin, and Janet Stokes Trantwein for helpful comments and discussions; to Evan Lodes for exceptional research assistance; and to Sam Thernstrom and Barbara Egbert for excellent editorial advice.
Introduction
Health care in the United States has made remarkable advances over the past forty years. Dramatic improvements in medical technology have expanded both the length and quality of life. In general, Americans are remarkably satisfied with the quality of their health care. Yet our health care system also has several well-known problems: high costs, significant numbers of people without insurance, and glaring gaps in quality and efficiency.
How can we preserve the strengths of this system while addressing its weaknesses? Policymakers, like Americans as a whole, are divided about whether health reform should focus on increasing the role of individuals or of government. Supporters of individual choice and markets point out that these mechanisms provide consumer satisfaction in most situations; health care should be no different. Supporters of increased public intervention argue that our health care system’s problems prove that individual involvement has failed. According to this reasoning, imperfect information, irrationality, and insufficient competition should give government a more prominent role.
In our view, the argument for increased public intervention is seriously flawed. As we discuss in the following chapters, the unintended consequences of a handful of longstanding public policies are in large part responsible for the problems of the health care system. These policies share a common feature: they fail to promote cost-conscious behavior and competition. Such incentives permeate both private markets and government programs like Medicare and Medicaid. The central goal of health reform must be to change these flawed policies.
Most importantly, tax policy and insurance regulation have actively hindered the operation of private markets for health services. The recently enacted Patient Protection and Affordable Care Act (PPACA) of 2010, by failing to address these issues and by adding another layer of misguided regulations, will only make matters worse. Current tax policy generally allows people to deduct employer-provided health-insurance expenditures, but requires direct out-of-pocket medical spending to come from after-tax income. This tax preference has given consumers the incentive to purchase health care through low-deductible, low-copayment insurance instead of paying for it out-of-pocket. This type of insurance has led to today’s U.S. health care market, in which cost-unconsciousness and wasteful medical practices are the norm. Insurance regulation, by requiring health plans to cover certain types of care and restricting their ability to set premiums, has raised insurance costs and limited the available range of insurance options. These inefficiencies have been an important factor contributing to the rising number of uninsured people.
Poor design of government programs has similarly discouraged cost-consciousness. This flaw has, in turn, led to unsustainable cost growth. Medicare’s low copayments have left beneficiaries with little responsibility for the cost of their care—or skin in the game
—thereby attenuating incentives to limit their use of services. Although Medicaid’s low copayments are understandable, the current structure of the program allows both federal and state governments to avoid bearing budgetary responsibility for their benefits and eligibility decisions and thereby creates powerful disincentives for cost control.
In three other areas—the provision of health care information, the enforcement of antitrust laws, and the creation of medical malpractice rules—government policy has failed to give individuals and health care providers the tools to make sensible choices.
As a general rule, markets work well when information about product and service prices and quality is widely available. Although recently the federal government has taken steps to disseminate information about health care prices and quality to both consumers and providers, much more needs to be done to ensure that health care markets perform their essential role of promoting lower cost and higher quality.
Markets also work well when vigorous competition among suppliers prevails. Government enforcement of antitrust laws in health care markets has been too lax. As a consequence, health care providers are able to engage in anticompetitive practices that drive up prices and reduce quality.
Finally, markets work well when appropriate penalties are levied on suppliers of deficient products and negligent service providers. Current medical malpractice law imposes excessive penalties that have led to costly defensive practices and higher rates of medical errors.
The first steps in solving the problems of the U.S. health system must include changing these policies.
In this book, we propose five reforms