Why It's So Costly What to Do About It


Just because President Clinton flagged health care as a major national problem, David Frum writes in the June issue of Commentary, doesn't mean it isn't one. In the most cogent exploration of the problem I have seen, he offers both a diagnosis and a possible cure -- just in time to remind Republicans that there are more urgent matters than flag burning.

First, the budgetary problem: Medicare and Medicaid cost $55 RTC billion in 1981. Today, they cost five times that amount. Unless the growth of these programs can be slowed to a manageable level, they will dwarf and eventually displace all other federal spending.

Second, the economic problem: Health care absorbs 13 percent of the gross domestic product and keeps rising -- as prices in other technology-driven fields are dropping. The average health cost per employee for large employers more than doubled between 1984 and 1993, from $1,645 to $3,781. Costs for small employers jumped even more.

Robert Reich take note: "The exploding costs of benefits are gobbling up money that might otherwise have been paid to employees in cash: one important reason for the wage stagnation during the 1980s boom."

Third, the social problem: When people pass the age of 65, they enter a phase of life in which dependence on government becomes virtually universal. This breeds habits (and politics) incompatible with self-reliance.

Fourth, the political problem: Though 80 percent of Americans rate their own care as "good" or "excellent," only 45 percent rate the health-care system overall as such.

Fifth, the moral problem: The working poor do not get the kind of health care available to welfare recipients, thus enhancing the inducements of the dole.

Clinton and Co. made the assumption that the problems of the health-care system were the result of unrestrained capitalism. Wrong. Mr. Frum writes, "In fact, health care is the sector of the economy where government's power weighs most heavily."

As Milton Friedman has taught, the great inflation in medical prices began in 1965 when Medicare and Medicaid pumped huge volumes of cash into the system.

State regulations further contribute to inflation by requiring insurers to cover a smorgasbord of medical services, from acupuncture to alcohol-abuse treatment.

But most distorting of all was the decision at the federal level, during World War II, to make contributions to medical-insurance plans non-taxable. An employer can give you a $100 a week raise, meaning you probably take home about $55 after taxes. Or he can contribute an extra $100 to your health coverage, leaving the entire $100 available to you.

The system of "third-party payers" has led to distortions of the market that inevitably cause inflation. The employee has no incentive to economize, "The same consumer who will drive across town to save $1.50 on a movie ticket will neither know nor care what he pays for medical services, because the money he saves belongs to his employer, not to him."

The cure? More capitalism, and more competition, not less, The National Center for Policy Analysis in Dallas has floated a plan (endorsed by 200 congressmen) called Medisave. It would work as follows:

The tax exemption for contributions by employers to health-insurance plans would be abolished. Instead, employers and employees would make contributions to tax-exempt Medisave accounts -- from which employees would pay routine health expenses. Anything left over at the end of the year would belong to the employee. Thus, the vast majority of health costs would be paid for without cranking up the huge machinery of the insurance claim.

Employees would also purchase true health-insurance policies to protect against catastrophes and serious illness. These would have high deductibles, which would keep premiums low.

As people began to spend their own money on medical services, they would become much more careful consumers, thereby driving prices down.

Further, the consumer, and not the state or some HMO, would determine just how much care he would receive.

As for the poor, Mr. Frum recommends turning Medicaid over to the states for experimentation, for the problems of Medicaid are not truly medical problems at all. They are social problems that will require social solutions.

His analysis should be must reading for every member of Congress.

Mona Charen is a syndicated columnist.

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