Senator Specter has always struck me as a moderate Democrat. It’s for the best that he made it official. I’m all for having a greater number of moderate Democrats in Congress, as opposed to the other varieties. Some people will fret about the Senator becoming the swing vote on key legislation. They should count to ten and remember the stimulus bill.
Author Archives: SEH
Market-Oriented Health Care Reform
The President and Democrat Congressional leaders have a vision for health care reform this year. While still blurred at this time, it is clear that they favor maintaining the tax preference for employer-sponsored coverage versus individual coverage. Similar in concept to the 2006 Massachusetts legislation, they would like to create a “national health insurance exchange†to facilitate the purchase of coverage by people who are currently uninsured and by people who may want “new health insurance.†Like the Bay State, subsidies would be provided to people with income below certain thresholds. Approved private plans would be available through the exchange. Private plans would have to meet federal criteria for what should be insured and for how much. The plans would need to be offered to all applicants at rates that would be substantially community rated — pushing the price far above costs for the young and/or healthy absent any significant taxpayer subsidy. The Democrat leadership also favors the creation of a public insurance alternative to compete with private plans.
The legislative text that emerges in the next month or two will likely require large employers to offer coverage to employees or pay some penalty. (They almost all offer coverage now.) Small firms will likely be offered tax subsidies to offer coverage. Expanded eligibility for Medicaid and SCHIP also are likely as a further step towards universal coverage. The proposal will no doubt include a bundle of initiatives with the hope of slowing medical cost growth throughout the system.
Regardless of what else may surface when specific text is proposed, any public insurance alternative should be repudiated. It cannot be credibly claimed that a public insurer can compete fairly with private plans. In response to criticism that a public insurer, like Medicare and Medicaid, would shift costs to private payers (its ostensible competitors), the idea is now being floated that the public insurer would agree to pay the same rates to medical providers as private insurers. That idea is neither credible nor practical (each private insurer negotiates it own rates with hundreds or thousands of providers). Even if it were credible and practical, a public insurer would still be backed by the federal purse and prone to deliberate if opaque under-pricing of private plans, which would be heavily regulated, thus preventing them from competing effectively on service and innovation.
In short, a public insurance alternative is a bad idea. Congressional Republicans and moderate Democrats should reject any plan that contains it. Even without a public insurance alternative, a national insurance exchange with federal standards and regulation of private plans would essentially centralize coverage design, pricing, and regulation, substantially displacing state authority. A national exchange would produce less choice and innovation, if not sooner, then certainly later. This idea also should be rejected.
While not on the table, the alternative approach to improving health care and its financing is to increase reliance on markets and incentives. What changes might help?
First, we should modify the tax treatment of health insurance to end the preference for employer-sponsored coverage versus individual coverage. This outmoded and anomalous tax preference stimulates excessive coverage and utilization of health services for many workers, in part by making the true cost of coverage opaque to employees. It simultaneously discourages people without employer-sponsored coverage from buying any coverage. These inefficiencies could be remedied, without increasing taxes, by replacing the current tax exemption for employer-sponsored coverage with a refundable tax credit for group or individual coverage. The results plausibly would include more efficient choice of cost-sharing arrangements – larger deductibles and co-payments for non-catastrophic expenditures – and greater willingness of workers to choose managed care arrangements that reduce use of services for which the benefits do not justify the costs.
The argument that eliminating the tax preference for getting health insurance at work would threaten the viability of the employer-sponsored market is a red herring. While the individual market would grow, the employer-sponsored market would remain preferable for workers as long as it provides real economies, and it certainly will for a significant majority of medium to large employee groups.
A second, market-oriented reform would be to repeal or constrain regulations that currently drive up the cost of individual and small group health insurance, especially for relatively young people in states with community rating requirements and multitudes of state mandated benefits. Along with growth in the demand for individual coverage that would be stimulated by changing the tax rules, the results would likely include significant innovations in plan pricing and design, including improved portability of coverage throughout a person’s life, as well as the possible development of pricing and coverage terms that provide significant incentives for becoming and remaining healthy. These changes could be accompanied as needed with increased funding for state mechanisms providing guaranteed access at subsidized rates to persons with severe, chronic health problems.
While on the table last fall, the market-oriented approach was neither clearly nor passionately articulated. If the Congress can avoid enacting misguided changes that will be impossible to roll back, the day could come when it market-oriented reforms are given a chance. Wouldn’t that be prudent before taking irreversible steps toward quasi-socialized health care?
FDR, Reagan, and Obama
During the current economic environment with unemployment reaching 8.5%, the highest level since 1983, and following the election of Barack Obama to the world’s most powerful and important office, it is natural to recall the times and Presidencies of Franklin Delano Roosevelt and Ronald Reagan.
An eloquent orator confronted by the Great Depression and menacing developments abroad, FDR denounced Wall Street greed and the privileged class. He oversaw the enactment of fundamental changes in the banking system and bank regulation. He significantly increased marginal income tax rates on the affluent, and he championed and signed into law Social Security, unemployment insurance, and public works for the unemployed, which were associated with substantial investment in the country’s infrastructure. He accomplished these changes in the face of extreme economic turmoil and great uncertainty about the stability of the American system. FDR believed that his strong interventionist agenda was necessary to preserve democratic capitalism, just as he believed that his actions in leading the country away from isolationism and in saving Great Britain were essential for defeating the Nazis and protecting America. FDR’s preparation for his rendezvous with destiny included service as Assistant Secretary of the Department of the Navy under Woodrow Wilson during World War I, as a state legislator, and later as Governor of New York, then the most populist state.  Between the war and his election as Governor, FDR exhibited iron strength and determination as he recovered from his crippling attack of polio, which required him to be carried up and down stairs the rest of his life. The same iron strength and determination characterized his years as President, along with an optimistic spirit that cheered a large majority of Americans and millions around the globe. The efficacy of many of FDR’s economic policies is still being debated, and it ultimately took war to bring the country out of the depression. But his national and international leadership up to and following American’s entrance into the war secures his stature as one of greatest Presidents.
President Reagan, whose preparation for the office included eight years as governor of California, inherited rampant inflation, sluggish employment, a moribund housing market, and a weakened national defense during the height of the Cold War. Also an eloquent orator, he denounced big government and bureaucracy. When confronted with high inflation and a recession that produced unemployment as high as 10.8% at year-end 1982, he championed and oversaw significant reductions in marginal income tax rates as a means of stimulating economic freedom and economic growth. He helped slow the growth of government and regulation. He played a leading role in accelerating the implosion of the Soviet Union, which freed tens of millions of people from totalitarianism, and billions of people from the overhanging threat of mutually assured destruction. Reagan’s leadership focused on several key policy objectives and principles. He stuck to those objectives and principles even when subject to avalanches of criticism for federal budget deficits and his hard-line stance towards the Soviets. Not unlike FDR, his cheerful optimism buoyed the spirits of many. Despite the Iran-Contra controversy in his second term, his stature as a great President is secure.
President Obama’s remarkable ascension to the Presidency following his service as both a state and U.S. Senator placed him in the midst of a banking crisis and sharp economic downturn, albeit much less severe than in the early 1930s and without the high inflation of the early 1980s. He faces rapid growth in entitlement spending, especially for Medicare. He is confronted by turmoil on our southern border, by shooting wars in Afghanistan and Iraq, by the continued risk of terrorist attacks, and by the threat of nuclear proliferation among radical regimes.  He has championed and signed an $800 billion stimulus package, with some investment in infrastructure, and he apparently has assumed de facto control of GM and Chrysler, if not AIG. He proposes higher marginal tax rates on top earners, and unprecedented increases in the federal budget and projected deficits. He champions expansion of government-subsidized and mandated health insurance, and he advocates green technology and cap and trade legislation to reduce greenhouse emissions, which would substantially increase energy prices. On the international front, he has apologized to Europeans for American arrogance and asked that they lend a hand in “overseas contingency operations.”
Given the historical parallels and his stunning ascendancy to the Presidency, speculation about whether President Obama could ultimately rise to the stature of Reagan or FDR, two giants of the 20th century, is difficult to resist. He is an inspiring orator who has buoyed the spirits of many Americans and thus far been well-received abroad.  He might have the “right stuff” — character, ability, skill, determination, persona — and opportunity from events to develop into a great President. Unfortunately, my strong belief, based on economic theory and the historical record, is that his current policy agenda is fundamentally misguided, including the amounts and types of proposed spending, the planned tax increases on the most productive citizens, an emphasis on greenhouse emissions that is disproportionate to the threat, and his apparent belief that significantly more government planning and control of economic activity is desirable and appropriate. Enactment of significant parts of President Obama’s agenda would slow economic growth, increase inflation, lower living standards, and undermine freedom and security at home and abroad. Let’s hope and pray for a better legacy.