POLICY: Re-print from The Economist on why Bush’s health care tax policy is all wet

This is a straight re-print from the Economist magazine. Lots of people have sent me this article, but I found it in an accessible format here. Remember that the Economist supported Bush and even backed the Iraq war, so I don’t expect to agree with everything in this article! But is does give a decent overview of the problems with American health care and notes that extending tax-free spending on health care  will exacerbate the basic problem of health care cost increases.

Soaring medical bills are squeezing wages and pushing huge firms — and maybe the government — towards bankruptcy. Now the country may be headed towards socialized medicine by default.

The Economist Magazine(Jan 28, 2006)Everyone, it seems, has a health problem. Canada’s new Conservative prime minister, Stephen Harper, made a big fuss during the election about reducing the country’s lengthy medical queues. After pouring billions into the National Health Service, Britons moan about dirty hospitals, long waits and wasted money. The new German chancellor, Angela Merkel, is under fire for suggesting changing the financing of its health system. Across the rich world, affluence, aging and advancing technology are driving up health spending faster than income.But nowhere has a bigger health problem than the United States. Soaring medical bills are squeezing wages, swelling the ranks of the uninsured and pushing huge firms and perhaps even the government towards bankruptcy. Ford’s announcement this week that it would cut up to 30,000 jobs by 2012 was as much a sign of its "legacy" health care costs as car industry ills. Pushed by polls that show health care is one of his main domestic problems and by forecasts showing retiring baby boomers will crush the government’s finances, George Bush is expected to unveil a reform plan in next week’s State of the Union address.America’s health system is unlike any other. The United States spends 16 per cent of GDP on health, around twice the rich country average, equivalent to $6,280 for every American each year. Yet it is the only rich country that does not guarantee universal health coverage. Thanks to an accident of history, most Americans receive health insurance through their employer, with the government picking up the bill for the poor (through Medicaid) and the elderly (Medicare). This curious hybrid certainly has its strengths. Americans have more choice than anybody else and their health-care system is much more innovative. Europeans’ bills could be much higher if American medicine were not doing much of their R&D for them.But there are also huge weaknesses. The one most often cited — especially by foreigners — is the army of uninsured. Some 46 million Americans do not have coverage. In many cases that is out of choice and, if they fall seriously ill, hospitals have to treat them. But it is still deeply unequal. And there are also appalling inefficiencies: by some measures, 30 per cent of American health spending is wasted. Then there is the question of state support. Many Americans decry the "socialized medicine" of Canada and Europe. In fact, even if much of the administration is done privately, around 60 per cent of America’s health-care bill ends up being met by the government, thanks in part to huge tax subsidies that prop up the employer-based system.Proportionately, the American state already spends as much on health as the OECD average and that share is set to grow as baby boomers run up their Medicare bills and ever more employers duck out of providing health coverage. America is, in effect, heading towards a version of socialized medicine by default. Is there a better way?Even a glance around the world shows there is no such thing as a perfect health-care system. Every country treads an uneasy compromise between trying to harness market forces and using government cash to ensure some degree of equity. Health care is also the part of the public sector where market forces have had the most limited success. It is plagued by distorted incentives and information failures. To begin with, most health-care decisions are made by patients and doctors, but paid for by someone else. There is also the problem of selection. Private-sector insurers may be tempted to weed out the chronically ill and the old, who account for most of the cost of health care. In the longer term, America may have no choice other than to accept a more overtly European-style system.In such a scheme, the government would pay for a mandated insurance system, but leave the provision of care to a mix of public and private providers. Rather than copying Europe’s distorting payroll taxes, the basic insurance package would be paid for directly by government, though that cash might be raised by a "hypothecated" tax which would make the cost of health care more evident. The amount of cash given to insurers would take account of individual health risks, thus reducing insurers’ incentives to compete by taking only the healthiest patients. Such a system would not be perfect but it could mitigate the worst inequities in America’s health-care system, while retaining its strengths.In practice, however, it will not happen soon. American politicians are still scarred by the failure of Hillary Clinton’s huge health-care plan which tried in 1993 to force companies to insure workers. Incremental change, of the sort Bush is talking about, looks the only way forward. In fact, there are plenty of incremental changes that could help, especially when it comes to curbing costs. America’s health industry is already experimenting with new ways to improve efficiency. As the biggest buyer, the federal government has plenty of power to push for "pay for performance."And many of Bush’s mooted reforms make sense, such as limiting absurd medical litigation claims, deregulating the stifling state-based insurance market and making insurance policies more portable. But there is a flaw at the heart of his proposal. Bush goes straight to one of the biggest distortions in American health care — the generous tax subsidies doled out to firms providing insurance. These help to promote a culture where costs do not matter.But his prescription is the wrong one. Rather than reducing this distortion, which would force firms and employees to be more cost conscious and free up money to be spent on bringing more people into the system, the president wants to even things out by doling out yet more tax subsidies to others — for instance, letting individuals set more of their out-of-pocket medical expenses against taxes. Such handouts may have political appeal but will worsen the budget deficit and, most probably, drive up the pace of medical spending. America’s health-care system could be improved in small steps. But those steps need to be in the right direction.

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  1. Allan, the distruction of America’s largest industry, health care financing, is long over due. The tax free HSA will ravage government-controlled employer-based health insurance much like Senator John Kerry’s mentor, Jenjis Kahn did his enemies.
    Employers should never pick the health insurance on the children of their employees. The parents are the guardians and employers like Donald Trump will distroy a family’s financial security if his company can save a dime.

  2. you should read the special report that is the first real news story inside (you have quoted the editorial “leader”. It is accessible at (for subscribers and non-subscribers):
    America’s Health Care Crisis – Desperate Measures
    It’s interesting that you point out that the Economist endorsed Bush. I finished the special report (whose last sentence is “The Bush agenda may speed the reform of American health care, but only by hastening the day the current system falls apart.” I turned to my wife and said “wow, Bush has lost the Economist on health care– I don’t think he’s going to get much out of the SOTU speech if that’s it’s focus.