The following is an essay I wrote for the Charles G Koch Summer Fellow Program.
Public Policy Essay *
Write a 500-word essay on a major issue of public policy. Your essay should address the significance of your chosen issue, the problems with the current policies, and your public policy approach to dealing with it. Please adhere to the word limit.
Reforming America’s health insurance system – and protecting it from the wrong sort of reforms – is critical for the preservation of our welfare and freedom. The modern health care apparatus is a crowning achievement of our era and has played a central role in our historically unparalleled standard of living. Today, health expenditures compose as much as 17% of US GDP. But this strength rests on an unsteady foundation.
The health care industry suffers from man-made maladies –government-induced incentives and regulations have warped the market and prohibited it from delivering its desired equilibrium. Employer-provided health care benefits are excluded from income tax liability, a subsidy that has atrophied the individual health insurance market. This system restricts Americans to the narrow set of options chosen by their employer – prohibiting many from selecting plans that truly match their preferences. Because so many purchase their insurance through employers, employees who are laid off simultaneously lose health insurance – compounding the miseries of the most desperate Americans.
At the same time, the states have slowly ratcheted down the number of options available to consumers. Insurers are required to include increasing number of procedures in their plans, even for those individuals who do not wish to buy them. Limits on deductibles and co-pays have been widely adopted in a misguided effort to “protect” consumers. “Community rating” rules force the young and healthy to subsidize the old and sick through redistributive premium prices. These regulations ensure that most do not get what they want, many pay more than they have to, and some simply decide that they would be better off without insurance.
A few simple reforms could remedy these problems. Individual states, or the federal government through its interstate commerce power, could permit Americans to buy insurance policies licensed under any states’ regulatory regime. This would free Americans from the specific requirements of their state of residence; the states would be forced to compete to deliver a “market equilibrium” bundle of regulations that best fit the needs of consumers and insurers.
The federal government could spur competition in the individual health insurance market by extending income tax exclusion to individual health policies. If Americans were allowed to use pre-tax health savings accounts to pay insurance premiums, they would no longer pay a tax penalty on insurance plans purchased outside their employer’s offerings.
Other proposals seek to “fix” health insurance through tighter government controls. These reforms aim at turning the risk-insurance market into something resembling a privatized welfare system in which all must participate. These reforms purport to “reduce costs”, but they can do so only by arbitrarily prohibiting Americans from seeking certain types of medical attention. Invidiously, those who would bear the redistributive costs of care would be rewarded for their “charity” with the loss of their freedom to make insurance decisions. In the long run, this rationing would reduce rewards to innovation, slowing the technological progress that has made health care so powerful today. We must not institute reforms of this nature.
This piece was originally posted on Americans for Tax Reform’s blog where I am an associate (intern).
A “public option” health insurer would create a new government sponsored enterprise in our health care market. Government enterprises are not merely inefficient – they are the harbringer of private competition’s slow death by regulation. Previously, we noted how the government has jealously legislated an anti-competitive zone around the US Postal Service. But there is an equally compelling example of government’s inability to tolerate competition in the health care market itself: Medicare.
In a Cato Policy Analysis publication, Kent Brown explains how Congress and the Medicare bureaucracy have systematically limited seniors’ choices to purchase health care outside of the Medicare bureaucracy. Through a combination of penalties for seniors who opt-out, regulations on providers, and subsidies, the government has driven private competition out of the senior health insurance market.
For most seniors, enrolling in Medicare need not be a conscious choice. Congress automatically enrolls most eligible seniors in the program. In order to opt out of Medicare Part A (hospital insurance), a senior must give up all Social Security benefits – an extremely painful option for low or middle income individuals who have been forced to pay payroll taxes for their entire working lives. Medicare Part B (outpatient care) is subsidized by general tax funds. Most seniors pay only 25% of their Medicare Part B premium. For every year that eligible seniors opt out of the program, their premiums increase cumulatively by 10%.
Between automatic enrollment, the loss of Social Security funds for opting out of Part A, punitive premium increases for opting out of Part B, and the artificially low cost of enrollment, choosing not to enroll in Medicare has become such an unrealistic option that, by 1997, private insurers had completely left the senior health insurance market. Only seniors rich enough to pay their own unexpected health care fees can afford to seek health care outside of Medicare.
Once seniors have enrolled in Medicare, they essentially lose the option to pay for their own health care. This is accomplished by a rule against “private contracting” for Medicare-covered services. This rule prohibits physicians from accepting private reimbursement for procedures that would be covered under Medicare. If a physician wishes to receive private reimbursement for these services, he must agree not to participate in Medicare for a period of two years. Because nearly all seniors have been herded into the program, opting out entirely would cripple most providers’ practices. Medicare ensures that providers will not find this alternative profitable by fixing rates for coverage of its beneficiaries.
Medicare has bullied away competition at both the insurer and provider level. The government’s freedom from competition has allowed it to act as an arbitrary monopoly. The result is predictable. Medicare operates inefficiently and unresponsively. Brown points to studies showing that nearly 30% of its provided care yields no health benefits. Medicare does not bother to provide true catastrophic coverage; as Sue Blevins has noted, Medicare does not cover the expenses of hospital visits after they exceed 150 days. Medicare also carefully regulates the legal amount of care that patients can purchase from even those providers who have opted out of the system – subjecting them to a government rationing scheme without alternatives.
These failings are not incidental to Medicare. They are predictable results of government entrance into the market. Because government enterprises rely on subsidies to provide “cheap” goods, people over-consume their products. Only by arbitrarily limiting the services it produces can Medicare control its costs. But if it allows competitors to remain in the market, consumers will notice the arbitrariness of these rationing decisions. Since only private, unsubsidized competitors will offer the rationed-away services, consumers will realize that the government inherently does not give them “what they want”. Killing private competition is the government’s way of covering up its own inevitable arbitrariness.
The public option can be no different from every other government venture. Because it has no stake in success and a government guarantee against failure, it will be run inefficiently. Subsidies will be necessary to ensure its health. And if these subsidies do not drive away its competitors outright, the public option will still have the same incentives for undercutting the private market as Medicare and the Postal Service: the private sector makes them look bad.
This piece was originally posted on Americans for Tax Reform’s blog, where I am an Associate (intern).
“If you think about it, UPS and FedEx are doing just fine, right? No, they are. It’s the Post Office that’s always having problems.”
– President Obama, 8/11/09
Obama is right – the post office isn’t doing so well. Recently, Postmaster General John Potter requested that Congress end Saturday mail delivery in order to cut costs. As a rule, government sponsored enterprises (GSEs) fail to operate efficiently. GSEs exist to fill political, rather than market, demands, and they may not offer a product at a price that anyone is really willing to pay. Because politicians will ensure that organizations like the post office continue to function, its directors have limited incentives to cut unnecessary costs or operate at a profit.
So what will happen when the public option realizes, like the post office, that it cannot, metaphorically speaking, pay for health care “every day of the week”? It could imitate the post office and simply shut down on Sunday and perhaps Saturday as well. No consumers would sign up for insurance that only offered a 6/7 chance of providing coverage.
But a plan so bad that no one would purchase it fails to satisfy the arbitrary political demand for substantial government interference in the market. A government determined to have a “viable” public alternative to the private market is left with a few options once their offering fails on its own merits. They can subsidize it openly and have taxpayers pay for “weekend health care”. They can subsidize it implicitly by outsourcing administrative functions to other branches of the government (as the government outsources Medicare funds collection to the IRS). Or it can tilt the market in the public option’s favor by granting it special tax status and immunity from certain types of regulations and by passing laws that require the private market to adopt the public offering’s more expensive methodology.
Or it can do all of the above. As Edward Hudgins explains, the post office is a vivid example of government interference in defense of its sponsored firm. Congress has favored the post office with direct subsidies, tax privileges, and bans against “first-class mail” delivery in inter- and intra-city markets. Despite this generous patronage, the US Postal Service is $6 billion in debt.
Government offerings are a threat precisely because they respond to political, rather than market demand. Like the post office, they can only control costs by rationing. And like the post office, they can only ration after their competition has been regulated away. The government can cut health care on Saturday only after it has cut the rest of the private market. The twin arbitrary political demands of a public option ensure that we will be left with one meager, inefficiently delivered option. Why cater to politicians’ demands instead of actual consumer preferences?
Photo Credit: Davonteee
And probably not a co-op.
Note: this post was originally written for Americans for Tax Reform. It has been posted here in advance and may be serialized later to the ATR blog.
The White House has started to hint that the public option may no longer be a required feature of health care reform. Yesterday, Obama’s Health and Human Services Secretary Kathleen Sebelius suggested that a “co-op” might be an acceptable alternative to a government run public plan. But what, exactly, is a co-op? And would a government run co-op be substantially different from the public option supported by most Democrats?
In general, a co-op is a company owned by its customers, or members. The members or owners of an insurance co-op would be its policy holders. Co-op advocates claim, somewhat speciously, that co-ops deliver superior care because policy holders will be co-owners of their policy (alongside the tens of thousands of other co-op members).
If co-ops are more efficient in delivering health care, why don’t they exist? They do, after a fashion. Michael Tanner of the Cato Foundation notes that successful insurers regarded as co-ops such as Seattle’s Group Health Cooperative, California’s PacAdvantage, and Minneapolis’s Health Partners, Inc. have existed for some time. Tanner concludes:
By all accounts the people insured through these co-ops are happy with their choice. But there is no evidence that they are significantly less expensive or more efficient than other insurers.
Why are Democrats excited about a co-op if its slightly different corporate organization yields an identical product? For one thing, they aren’t actually proposing a co-op. They’re offering a public plan and just calling it a co-op.
In particular, Senator Chuck Schumer, one of the key Finance Committee negotiators, has proposed a co-op that would be subsidized by a $10 billion start up fund and controlled by presidential appointees. Schumer has made it clear that he wants a government-run national alternative to the private market.
If a “co-op” is controlled by presidential appointees, it’s unclear in what sense it would actually be a co-op. It would be meaningless to claim that an insurance option was owned by its policy holders if it were in fact controlled by the government. Importantly, HHS Secretary Sebelius seems to have been endorsing Schumer’s version of the co-op, and not the more moderate version being discussed by others like Senator Kent Conrad. Co-ops are ok, she explained, as long as they are not private insurance companies (i.e. they are public government insurance companies):
That’s really the essential part, is you don’t turn over the whole new marketplace to private insurance companies and trust them to do the right thing. We need some choices, we need some competition.
A government controlled, subsidized, “co-op” national insurance option is not an alternative to the public plan – it is the public option. Despite rhetoric to the contrary, it would be a rigid, bureaucratic entity. The massive $10 billion subsidy would tilt the market in the co-op’s favor. Congress and the President would be invested in its success because of the politically appointed directorship. This makes further subsidies, perhaps glossed as temporary start-up funds, likely or inevitable.
As the Heritage Foundation has noted, the government sponsored enterprise (GSE) model has a long and dismal history. Smaller rural electricity cooperatives have remained subsidized for nearly 80 years. The larger GSEs Fannie Mae and Freddie Mac were able to drive many competitors from the housing finance market because they had the implicit backing of the Federal government. This guarantee became explicit when the government bailed out the failing firms after the housing market collapse – at a cost that may exceed $100 billion. Even if a government sponsored co-op were not explicitly subsidized past its start-up costs, it would still receive the same implicit subsidies that covered Fannie and Freddie.
Absent the direct government controls envisioned by Schumer and, apparently, Sebelius, explicit and implicit subsidies would still be a risk for any government-sponsored national “alternative” to the private market. The more moderate co-op proposals advanced by Senator Conrad and others on the Finance Committee suffer from these fatal flaws.
Heritage has laid out conditions under which co-ops could be created – if co-ops, and not a public government-run option were what Congress really wanted. As usual, increased health care choice requires less and not more government interference. Government cannot create options for consumers; it can only choose whether or not it wants to limit them. This reality may be upsetting to Schumer, Sebelius, et al. who undoubtedly want to be able to make something new for Americans. If the frustration grows unbearable, they can always look for a job in the private sector.
This post was originally written for Americans for Tax Reform’s Blog, where I am an Associate (intern).
This weekend, the CBO shot down another hollow Obama administration “savings” proposal. Obama’s budget director Peter Orszag endorsed an Independent Medicare Advisory Council (IMAC), which would have transferred some authority to the executive to reduce Medicare expenses (probably by reducing payments to doctors).
Savings might not be realized at all because the proposal specifies a process without specific goals for savings or a “fall-back” plan for ensuring spending reductions if the combination of annual IMAC recommendations and Presidential approval does not produce hoped-for savings.
To translate for the CBO: “Trust me” is not a savings proposal. IMAC is a vague promise to figure out, at some unspecified date in the future, some unspecified way of generating an unspecified amount of savings. Congress and Obama might as well just admit that they don’t want to deal with the hard, important stuff now. To be nice, CBO scored the proposal for just $2 billion in savings over the next ten years.
Democrat policy cheerleaders like Ezra Klein have complained that Americans aren’t paying enough attention to supposed-cost control measures. There’s a good reason Americans aren’t impressed. The cost-cutting reforms just aren’t serious and the draft health care bills prove it. The Democratic “reform” proposals are larded with massive subsidies that cost hundreds of billions of dollars a year. Why? Because if they smother the health care industry with money they can make costs look like they are decreasing – for a while.
If Democrats believed their proposals actually cut costs, they wouldn’t need the subsidies. Alternatively, if they were confident that measures like IMAC actually produced budgetary savings, they could make subsidies floating and dependent on CBO measurements of actually attained savings. Until the subsidies go away or are linked to attained savings, it is reasonable to assume that Democrats don’t take their own reforms seriously. With the stakes this high, “trust me” is not an option.
Public-plan proponents have feigned ignorance of how such an option would crowd out the public market. The answer is simple: a public plan would be a political, not a market, entity. Its justification is premised on a belief that the insurance market is not competitive and that insurers price oligopolistically, retaining excessive profits. Even if this were true, the public plan would have no way of knowing when it had priced away its more efficient market competitors’ oligopolistic profits. It would not know that it had destroyed these “inefficient” profits until it had lowered its premium prices to a level too low for private insurers to match. Or, as a flowchart:
It is inevitable that the government will stack the deck in favor of its own offering. Even if it is not openly subsidized, the public plan will almost certainly be able to outsource expensive administrative duties to government bureaucracies with their own operating budgets. It will likely have powers to impose its prices on providers that its private competitors will not. And it is absurd to think that the government would simply allow its plan to disappear if it failed to operate within its budget. The public plan’s political structure and mandate to drive down prices blindly guarantees that a bailout will be needed sooner rather than later.
This is one of my favorite Heritage charts:
The projections for the growth in these programs are pretty staggering – and worth taking a look into later. Yesterday, Christina Romer (Chair of Obama’s Council of Economic Advisers) testified before the House Committee on the Budget. She said that only a small part of the growth in Medicare spending was attributable to demographic people (more old people needing health care and living longer), and that most was due to the increased cost of health care (page 4 of this link).
The graph above seems to contradict that claim. Why would Medicare grow so much faster than Medicaid if demographic changes were not a very large part of the cost increase? I don’t know whether Ms. Romer is correct. I’ll probably be rooting through the CBO’s website later this week to see how exactly they came up with their numbers.
If you want more of something, subsidize it. If you want less of something, tax it. Obama’s plan to provide an “affordable” (read: subsidized) public insurance option is guaranteed to increase health care spending. His plan to tax the wealthy is just as sure to discourage entrepreneurship and prolong the recession.
Disclosure: I am currently an ATR Associate (intern).
Matthew Yglesias gives a pretty standard defense of a public health care plan:
A public option that strives to achieve public goals—quality care at an affordable price—will challenge private industry to do a better job. Then competition between plans will drive improvements in quality and efficiency. Without a public option, the risk is that private plans will compete by trying to screen out sick patients. That’s a viable root to private sector profits, but it does nothing to improve quality or control costs.
Yglesias treats “quality and efficiency” and “screening out sick patients” as mutually exclusive routes to profit. But they are not. The free market is not simply satisfied with one source of profit to the neglect of others. Firms will try to cut both kinds of costs – the costs of treating the sick and the costs of treatment in general. They make more money that way.
A public plan does not solve the dilemma of paying for sick policy holders. If the private market prices them out into the public plan, the public plan will be forced to pay for its higher average patient costs through premiums or subsidies. When the public plan raises premiums, the healthy will flee to cheaper private plans, perpetuating the cycle. When it subsidizes the treatment of the sick, it does not “control” costs (in fact, a subsidy incentivizes more consumption of health care, increasing overall costs), it justs forcibly redistributes them.
If there is truly no competition in the health care market (a possible explanation for “buried treasure” health care profits – all we have to do is start digging), the most likely culprit is the maze of state regulations that segment the national market and shackle insurers with mandates. The actual solution to this problem is to break down state barriers and reduce the number of regulations and mandates – but this answer does not lead to a redistributive system, so progressives will ignore it.