Health Care Reform that Can Kill the U.S. Economy
Prof. Regina Herzlinger, Harvard Business School, June, 2010
Health care reform laudably expands coverage but its expenses, more than $900 billion in the next decade, will put another nail in the coffin of the U.S. economy and gravely injure the sick along the way, as the US inevitably transitions to a single-payer system to control costs.
Reform contains no control of costs that already cripple global competitiveness. As a percentage of GDP, the U.S. spends roughly 70% more on health care than other universal coverage nations, yet cannot point to commensurate superiority in value, other than biotechnology and genomics.
Reform’s cost-controlling features rely primarily on public health-insurance marketplaces, labeled Exchanges, where private health insurers compete with public insurance, operated by Coops. These initiatives don’t control costs as much as shift them, to other payers, taxpayers, and our progeny, through deficits, cutbacks, and unfunded liabilities.
To picture their impact, imagine a government-run automobile dealership which sells cars made by Ford and Kia, along with government-manufactured cars. The legislators cater to voters with generous subsidies for buyers. All the cars are virtually identical, designed by the legislature with high-cost features buyers may not want. Legislators might, for example, cater to heated seats lobbyists by requiring them in every car.
Nevertheless, the price of the high-cost government manufactured cars could be artificially reduced, by passing some of their costs to future generations through unfunded deficits. Private competitors who cannot resort to deficit financing will thus be driven out. Ultimately, the high-cost cars and absence of entrepreneurs and competition will skyrocket costs and force government to ration cars.
The Massachusetts Exchange
The Exchange laudably reduced the uninsured rate to about 2% from about 7%. But, when it comes to the nation’s highest costs, the Exchange proved no panacea.
The left complained of costs so high that thousands were excused from State requirements to purchase health insurance, while enrollees were levied ever-higher out of pocket charges. Conservatives criticized the product standardization which limited competition (plans differ primarily in enrollee cost sharing. A version of a South African insurance plan which lowered the costs of diabetes by a whopping 21% by paying participants for healthy behaviors is not offered, for example). They also criticized the requirements to cover costly, questionable benefits which made insurance unaffordable to some (like Washington, which requires 57 benefits; Massachusetts requires 52, including in vitro fertilization which adds up to 8% to costs).
After raising taxes by $800 million for health care reform, among other activities, even wealthy Massachusetts needs more revenues. Desperately, the Governor capped insurance prices--causing hundreds of millions in insurance company losses- and proposes price controls on health care delivery.
How do you spell single payer?
Some argue that Massachusetts couldn’t control costs because it lacked public-insurance plans, pointing to Medicare, whose administrative overhead are 3% versus 12-18% for private insurers. But that figure ignores the Ponzi scheme of Medicare’s unfunded liabilities, estimated at about $38 trillion--roughly three times U.S. GDP. If Medicare recognized them, it would conservatively add an additional trillion dollars to administrative costs.
Underpriced public plans, financed by borrowing from our children, will drive out private competitors. Private insurers are no angels, but, unlike monopoly public insurers, they cannot incur such massive deficits, thus protecting future generations, and provide a modicum of competition.
Medicare and Medicaid’s monopoly powers also enable provider underpayment of billions of dollars, sums currently made up by commercial insurers. But if under-priced public plans forced out private ones, who would take up the slack? The looming doctor shortage could become a national crisis as prospective physicians, facing massive educational debt, reluctantly opt for other occupations, rather than accept the public plans’ inadequate payments.
Exchanges and public plans are administered by legislators and bureaucrats – competent people, but lacking entrepreneurial skills. Many experts dismiss the Democrats’ claims of government’s controlling costs through information technology and other technocratic tools.
Because the sick constitute roughly 20% of users, but account for about 80% of the costs, they are the politically-vulnerable, cost-control target. Although government-rationing can squeeze out some inefficiency, it is hardly benign or equitable: The government-controlled UK system, for example, has the lowest uptake of cancer drugs among the biggest five European economies and correspondingly low cancer survival rates. Many of the UK’s affluent buy private insurance to avoid government stringency, like those in other European government-controlled systems.
Of course, we must have reasonably-priced insurance, reform how private health insurers treat the sick and near poor, and control health care costs. But the health care reform will inevitably increase costs, further weakening our economy. Tragically, although it will expand insurance coverage, it will ultimately ration medical care for its important beneficiaries –the sick.
Regina E. Herzlinger keynoted Washington Policy Center’s 8th Annual Health Care Conference on June 4th in Seattle (watch her address online here). She is the Nancy McPherson Professor at the Harvard Business School and author of Who Killed Health Care? (McGraw-Hill, 2007).