Health Care and Insurance and Economy and Education & Workforce Development and Government

ECONOMIC ANALYSIS: Ideas needed for fixing health care financing

March 19, 2007

It's been 15 years since third-party presidential candidate Ross Perot briefly captured the nation's attention with his crisp, witty promises to "look under the hood" to fix the problems in Washington.

Since that time, some problems have gotten worse, some have gotten better. But in this era of political polarization and legislative gridlock, the idea of a new face coming to town to actually fix some of the problems we face today is as appealing as ever.

What would such a person do to rein in the skyrocketing costs of health care?

For decades, as individuals, we've pursued a simple strategy. We've tried to get someone else to pay for it. Employers pay for most private insurance-at least nominally-which in turn pays for most of the services consumed. Those over age 65 receive Medicare, and many poor and indigent receive care through Medicaid, or through services provided at reduced or zero costs by not-for-profit hospitals and clinics.

As we all know, there are plenty of gaps in coverage. Stories of hospitals "dumping" patients who cannot pay, sick children receiving poor-quality care, and families forced to choose between medicine and food are upsetting, and proposals to address those situations are under consideration in Indiana and elsewhere.

But depressingly few folks are talking about the biggest problem with health care of them all. Namely, that we simply can't afford to keep doing what we are doing. We pay too much for health care that yields little, if any, perceptible improvement compared with countries that pay far less. We subsidize the health care of those who can afford to pay their own. And we insulate decision-makers from the financial consequences of their decisions.

And the problem is here, right now. States like Indiana have been squeezed for several years trying to keep up with the galloping costs of Medicaid, squeezing out funds that could be used for education, roads and other priorities. The unfunded liabilities of the federal government's Medicare program are five times larger than Social Security. And if current trends continue, by the year 2050 we will spend more on Medicare and Medicaid-as a percentage of the total output of the economy-than we spend on the entire federal budget today.

The silver lining of this dark cloud is that there are some sensible, effective things we could do to start getting costs under control right away, if we could summon the political will to do them.

Let's start with the private side. Today, the tax-favored treatment of employerfinanced health insurance benefits costs the federal treasury more than it spends on Medicare. It encourages the proliferation of so-called "insurance" plans that cover routine health care spending, since spending by the plan is not taxed, while most out-of-pocket spending comes from after-tax dollars.

The health insurance standard deduction would change that. If your employer provides health insurance, you receive a fixed deduction. But there's a catch-the benefits your employer pays on your behalf now count against your taxable income, just like wages. That stops the tax system from promoting higher health care spending.

On the public side, there are so many places to begin. Would any sane person design a system where one giant program (Medicaid) attempts to save money by dumping its costs on another (Medicare)? Or would we pass laws today that tax the first dollar of low- and middle-income wages to support the consumption of wealthy seniors?

The enormous long-term challenge to financing publicly funded health care requires nothing less than a complete revamping of these now-unmanageable systems. Can we say to our children and grandchildren that we are bringing them into a better world until we tackle these problems?



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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