Friday, May 02, 2003

Gephardt of Darkness

Part 2: “It was reckless without hardihood, greedy without audacity, and cruel without courage…”

To understand what’s wrong about Gephardt’s National Healthcare proposal, you need to understand (some of) what’s wrong with the status quo. The basic flaw in our current system can be traced back to WW2, when firms laboring under government-imposed wage and price controls were casting about for ways to attract employees without raising wages. They hit upon the idea of providing workers with health insurance and other benefits, and the War Labor Board gave them the thumbs-up. Eventually, the Board’s policy was written into the tax code.

Ever since then, employers have been able to provide health insurance to their employees tax-free. If your employer buys your health insurance, you’re not taxed on it, because it’s treated as a cost of business; but if you buy health insurance for yourself, you have to buy it using after-tax dollars. Now, tax breaks are generally a good thing, but not when they create perverse incentives. This particular tax break creates two. First, it encourages people to buy their health insurance through their employers, instead of individually or through other organizations like churches, schools, fraternal societies, etc. The result is that your health insurance is tied to your job, so that you may lose it if you lose your job. (Subsequent COBRA legislation mitigated this problem marginally.)

Second, and more importantly, the fact that the tax break is for health insurance only – not for other healthcare expenditures – encourages people to get the most expansive health insurance policies possible. Why pay for any healthcare with after-tax dollars if you can use pre-tax dollars instead? Routine and elective expenditures are now regularly included in health insurance plans, which is much like including gasoline and car washes in auto insurance plans. Consequently, health insurance has increasingly been transformed into a pre-payment system. You send checks to bureaucrats who send checks to doctors, even though it would be simpler and cheaper to pay your doctor directly for most services. The unsurprising result is rising healthcare prices.

The regular inclusion of routine and elective expenditures in health care plans has an additional disadvantage. Because these expenditures are typically more elastic than expenditures for low-probability high-cost (a.k.a. catastrophic) expenses, consumers respond to the low price at the point of service by purchasing a lot more of them. Every sniffle or cough leads to a doctor visit, because the doctor visit has effectively already been paid for. Healthcare providers are enabled to raise prices for these visits, because the consumers are insensitive to the price increase (because the insurance company is picking up the tab). In the aggregate, of course, everyone ends up paying more, because premiums must rise to cover all the extra visits and higher service prices. But the insurance system transforms the marginal costs (what you would have paid per doctor visit) into a fixed cost (the amount you pay out of your wages each year for insurance). Fixed costs don’t affect marginal decisions, so people continue to buy too many healthcare products and services for prices that are too high.

Of course, employers and other buyers of insurance policies have a strong incentive to control these costs. But how can they do so while maintaining the tax break? More and more, the solution has been to rely on HMOs. The primary function of an HMO is to ration healthcare services demanded by patients who pay close to nothing at the point of service. If the rationing is not accomplished by price, it will be accomplished by queues and bureaucracy. This is, of course, the primary source of animosity toward HMOs: people don’t like having someone else make all their decisions for them. But healthcare services are not costless, and therefore they must be rationed somehow. The only alternative to bureaucratic control of personal healthcare choices is to face the consumers with more of the cost at the point of service. (This is also, by the way, the problem with single-payer systems: they replace rationing by price with rationing by bureaucracy and queuing. A single-payer system is like one really big HMO.)

Back to Gephardt. Given all the above problems, which can in large part be traced back to the tax incentive for employer-provided healthcare, you might think that a healthcare reformer would try to break that link. We could eliminate the tax break, or we could expand it to cover all forms of healthcare expenditure (not just insurance) and types of buyer (not just employers). But Gephardt does nothing of the sort; in fact, it does precisely the opposite. His plan is designed to strengthen the bond between health insurance and employment. As noted in my post below, he would require all employers to provide health insurance. In addition, he would *double* the size of the tax break.

Interestingly, this is how Gephardt plans to dodge accusations of expanding Big Government: he’ll point out that he’s using a tax break, which is allegedly good for business. Yep, this is what passes for free market policy these days: corporate welfare. Calling it a “tax break” sounds good on the surface to free marketers, but it’s a complete misnomer. In the status quo, the tax break excludes health insurance expenditures from all income tax. There is already 100% tax avoidance here; anything over 100% is no longer a tax break, it’s a subsidy! In this respect, Gephardt’s “tax break” is a lot like the “tax credits” given to low-income people who paid almost no taxes in the first place. (See Amy’s comments on this subject.) And let’s not forget that Gephardt plans to finance his “tax break” by eliminating the tax cuts planned by the Bush Administration, which means the net impact on the nation’s tax burden will be breakeven *at best* – and that’s assuming Gephardt’s own optimistic cost projections are correct. In all likelihood, the cost will be much larger because of the incentives in his proposal for the further inflation of healthcare prices.


Wednesday, April 30, 2003

Gephardt of Darkness

Part 1: “Imagine the growing regrets, the longing to escape, the powerless disgust, the surrender, the hate..."

Dick Gephardt has announced the outlines of his National Healthcare plan, which he plans to make the centerpiece of his 2004 presidential campaign. Chuck suggested that I should “kindly destroy him, with extreme prejudice” on this site, and I’m strongly tempted. However, there’s just too much to say all in one post, so I figure I’ll do it one argument at a time.

The most glaring flaw in the Gephardt plan is that it would *require* all employers, regardless of their number of employees, to provide a health insurance plan for their employees. I’ll set aside the standard objections about imposing costly mandates on business (or rather, I’ll postpone them for another day’s blogging), and instead simply point out that “health insurance plan” is not a well-defined notion. There are many different health insurance plans, from the barest of bare-bones to the most bloated plan you can imagine. To enforce the policy – hell, even to *define* the policy – the government will have to state the contents of a health insurance plan that satisfies the mandate.

Adopting a vacuous phrase like “basic healthcare products and services” will not solve the problem, because what is basic to some is crucial to others. Does contraception constitute basic healthcare? How about psychotherapy? Dental care? Chiropractic? The phrase “medically necessary” is just as problematic, because there is no objective definition of necessity. And if even if there were, it wouldn’t matter, because the content of the law will be determined by the legislative process. The “basic” package to be included in all healthcare plans might initially be minimal, but over time it will succumb to the same special-interest lobbying that affects every other area of public policy. If psychotherapy is not initially included in the package, eventually it will be, once the psychotherapists’ lobby has its way. And likewise for contraception, dental care, chiropractic, acupuncture, hair transplants, liposuction, ad infinitum.

Don’t believe it? That is *exactly* what has happened in every state in the union, where mandated benefits laws require that any health insurance policy sold must include coverage for various products and procedures, including most or all of those listed above (yes, even hair transplants). Mandated benefits drive up insurance premiums, thereby pricing people out of the market and increasing the ranks of the uninsured. Given that medical interest groups have found it worth their time and money to lobby the 50 state legislatures to pass laws that affect only the individual state’s residents, it’s a no-brainer that they’ll do the same at the federal level. With Gephardt’s plan, the stakes will be immeasurably higher because (a) the law will affect the entire country and (b) businesses will be *required* to buy policies with the specified benefits (whereas with state-mandated benefits, individuals can choose to go uninsured).

As the number of medical products and services included in the government’s mandated “basic” healthcare package increases, the price of health insurance will inexorably rise. People who will now be covered for all these products and services, and who will have been forced to pay for them already (most likely in the form of reduced wages and compensation), will avail themselves of the medical products that will be effectively free at the point of sale – and the prices charged for those products will also go through the roof. (Indeed, that’s precisely why the medical lobbies will push to have them included in the standard package: because it will massively inflate demand, prices, and profits.) In short, Gephardt’s plan will lead to dramatic increases in the cost of both health insurance and healthcare products and services. All of this will, of course, get blamed on the free market, thereby fueling political demands for further state intervention in the healthcare system. I wouldn't be surprised to find Gephardt himself leading the charge.


Radio Silence

Internet connectivity in the building where I work has been down for the last 48 hours or so, and my connectivity from home has been sporadic. Hence the lack of blogging. In other news, my research productivity seems to have picked up over the last couple of days... can't imagine why.