By Linda Gorman
The Obama Administration’s health law assumes that U.S. health care system problems occur because patients and providers have too much freedom. In contrast, Gov. Romney’s proposed reforms recognize that 70 years of regulatory accretion has compromised the ability of the system to adjust to dramatic demographic, economic and technological change.
In short, the problem is too much of the wrong kind of regulation rather than too little.
Gov. Romney says that he would increase choice and competition, reduce wasteful spending by equalizing the tax treatment of individually-purchased and employer-provided health plans, and rescue Medicare by replacing the Obama Administration’s Medicare cuts with premium support. He would also cure Medicaid’s dysfunctional spending incentives by using block grants that would better serve the poor and sick by freeing states to design innovative programs that fit their populations.
A major flaw of the President’s reforms is that they require virtually everyone to join a coverage plan that purchases health care for them with other people’s money. Current estimates suggest that President Obama’s emphasis on third-party payments will increase federal health spending by a minimum of $1.7 trillion in the next decade, will raise taxes by more than $1.2 trillion, and will increase the cost of individual insurance in Colorado by 19 percent in 4 years.
Most of the new revenues will be taken from individuals and businesses that currently use them to fund new jobs and innovation.
People who buy medical care with their own money spend more wisely than those who buy medical care with other people’s money. They often negotiate prices that are up to a third lower than those paid by either Medicare or private insurance networks.
One reason Americans spend so much on health care is that less than 12 percent of U.S. health spending is in cash, the third-lowest fraction in among the industrialized countries. Requiring everyone to use health coverage to pay for routine expenses is the most expensive possible way to purchase health care. If, for example, one buys eyeglasses using health insurance, one must pay both the price of the eyeglasses and the cost of the insurer’s overhead.
Gov. Romney would encourage people to purchase a larger share of their health care with their own money. One way to do this to end the preferential tax treatment of employer provided health plans.
A result of World War II price controls that exempted medical expenses paid for by employer coverage plans from taxation, the employer insurance tax preference is unfair to those who use after-tax money to purchase their own health insurance.
The tax preference fosters a “use it or lose it” mentality and encourages the provision of “free” services for everything from major medical events to routine doctor visits in employer health plans.By making individual coverage relatively expensive, it sets people up to lose their coverage if they lose their jobs, leave their jobs or become too sick to work.
Existing evidence suggests that eliminating the preference may result in a more rapid spread of individually owned policies that promote cash payment, reduce system overhead, provide better health security and lower costs.
For Medicare reform, the choice is between an orderly change or a traumatic one.
In 2011, total income from Medicare payroll taxes, premiums and other dedicated revenues was $530 billion, about 3.7 percent of GDP. Total Medicare expenditures were $549 billion. Although the Medicare balance sheet reports $344 billion in assets that can be used to make up the difference, the “assets” are simply claims on the remaining tax revenues in the U.S. Treasury general fund.
President Obama has opted for traumatic change. His plan cuts physician reimbursement rates by 31 percent in 2013. The Medicare Trustees say that along with other reimbursement cuts, this will bankrupt 15 percent of hospitals and nursing homes by 2019.
Though Medicare benefits theoretically remain the same, no reasonable person believes that access and quality can be preserved with cuts of this magnitude. Against a backdrop of hidden rationing and price controls, Obama’s reforms also make government the judge of who lives and who dies because it controls the purse strings and defines acceptable medical treatment.
Gov. Romney proposes orderly Medicare reform that would transition the program to premium support. The goal is to reduce costs and expenditures by rewarding Medicare recipients for finding ways to reduce their health spending, by encouraging innovation and by eliminating the need for large swathes of the Medicare bureaucracy.
Applied only to those at least a decade away from retirement, the government would invite insurers to bid on the provision of a package of Medicare benefits. It would pick one of the bids as the amount that will be given to every Medicare beneficiary to purchase health insurance from approved plans. People who wish to purchase more expensive plans are free to do so. People who wish to spend less may keep the difference.
Medicare Part D was a trial run for premium support financing. It is the only major government health program for which real spending has been lower than initially projected.
Gov. Romney models his Medicaid reform proposal after the successful TAANF reform for federal welfare programs. With block grants, states would no longer be paid to maximize their Medicaid spending. Instead, they would receive a fixed sum of money and be encouraged to design innovative programs to care for those who are in need.
President Obama’s law leaves Medicaid’s dysfunctional spending incentives in place. He had planned to expand Medicaid by an estimated 17 to 20 million people, paying for it by commanding states to expand the program or lose all of their Medicaid funding. Going forward, he has not so far advanced any coherent plan for Medicaid reform.
Linda Gorman is the director of the Health Care Policy Center for the Independence Institute in Denver.