This is going to hurt
From The Economist print edition
Barack Obama was elected in part to fix America’s health-care system. Now is the time for him to keep his word
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DIAGNOSING what is wrong with America’s health-care system is the easy part. Even though one dollar in every six generated by the world’s richest economy is spent on health—almost twice the average for rich countries—infant mortality, life expectancy and survival-rates for heart attacks are all worse than the OECD average. Meanwhile, because health insurance is so expensive, nearly 50m Americans, an obscene number in such a rich place, have none; those that are insured pay through the nose for their cover, and often find it bankruptingly inadequate if they get seriously ill or injured.
The costs of health care hurt America in three other ways. First, since half the population (most children, the very poor, the old, public-sector workers) get their health care via the government, the burden on the taxpayer is heavier than it needs to be, and is slowly but surely eating up federal and state budgets. Second, private insurance schemes are a huge problem for employers: the cost of health insurance helped bring down GM, and many smaller firms are giving up covering employees. Third, expensive premiums depress workers’ wages.
Every rich country faces some of these problems (see article), but nobody suffers worse from them than America. This summer’s debate about health care may determine the success of Barack Obama’s presidency. What should he do?
If he were starting from scratch, there would be a strong case (even to a newspaper as economically liberal as this one) for a system based mostly around publicly funded health care. But America is not starting from scratch, and none of the plans in Congress shows an appetite for such a European solution. America wants to keep a mostly private system—but one that brings in the uninsured and cuts costs. That will be painful, and require more audacity than Mr Obama has shown so far.
The uninsured are the relatively straightforward bit. All you need do is “mandate” everyone to take out health insurance, much as drivers are legally required to have car insurance. Poorer Americans would get subsidies, and (as with car insurance) insurance-providers would be forced to offer affordable plans and not exclude the sick or the old. This has already happened in Massachusetts as well as in a raft of countries, including the Netherlands, Israel and Singapore. All the main proposals now working their way through Congress include some version of a mandate. Mr Obama opposed a mandate on the campaign trail, but since he has not come up with any plausible alternative, he should quietly swallow one.
The snag is that all these subsidies are expensive. Those congressional plans might cost $1.2 trillion to $1.6 trillion over ten years: the White House is feverishly trying to massage the estimates downward, as well as working out how to plug the hole through various savings and tax increases. But the sticker-shock for the mandate is really just a reflection of the second big problem: the overall cost structure of American health care. Indeed, one of the worst things about Mr Obama’s oddly hands-off approach to health reform (see article) is that he is concentrating on a symptom, not the underlying disease.
A bolder president would start by attacking two huge distortions that make American health care more expensive than it needs to be. The first is that employer-provided health-care packages are tax-deductible. This is unfair to those without such insurance, who still have to subsidise it via their taxes. It also encourages gold-plated insurance schemes, since their full cost is not transparent. This tax break costs the government at least $250 billion a year. Mr Obama still shies away from axing it, as do the main congressional plans on offer; but it ought to go (albeit perhaps in stages).
The second big distortion is that most doctors in America work on a fee-for-service basis; the more pills they prescribe, or tests they order, or procedures they perform, the more money they get—even though there is abundant clinical evidence that more spending does not reliably lead to better outcomes. Private providers everywhere are vulnerable to this perverse incentive, but in America, where most health care is delivered by the private sector rather than by salaried public-sector staff, the problem is worse than anywhere else.
The trouble is that many Americans are understandably happy with all-you-can-eat health care, which allows them to see any doctor they like and get any test that they are talked into thinking they need. Forcing people into “managed” health schemes, where some species of bureaucrat decides which treatments are cost-effective, is politically toxic; it was the central tenet of Hillary Clinton’s disastrous failed reform in 1994.
But to some extent it will have to be done. There is solid evidence to suggest that by cutting back on unnecessarily expensive procedures and prescriptions, anything from 10% to 30% of health costs could be saved: a gigantic sum. The Mayo Clinic in Minnesota and the California-based Kaiser Permanente system have shown that it is possible to save money and produce better outcomes at the same time. So reform must aim to encourage more use of managed health care, provided by doctors who are salaried, or paid by results rather than for every catheter they insert. Medicare, the government-run insurance scheme for those over 65, could show the way, by making much more use of results-based schemes and encouraging more competition among its various providers and insurers.
But in the end it will be up to the private health-care system. One thing that should be unleashed immediately is antitrust: on a local level many hospitals and doctors work as price-fixing cabals. Another option, favoured by many Democrats and the president, is for the government to step in with a results-based plan of its own, to compete against the private industry. That could harm innovation and distort the market further. Mr Obama should use it as a threat, rather than implement it now. If the private sector does not meet certain cost-cutting targets in, say, five years, a public-sector plan should automatically kick in. Such a prospect would encourage hospitals and doctors to accept a painful but necessary reform now.
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