Sunday, March 28, 2010

The New Health Care Law Is a Temporary Duct Tape Solution: It Ignores The Basic Economic Forces At Play

Drafting a good [health care reform] bill would have been easy, he [Nobel Economist Gary Becker] continues. Health savings accounts could have been expanded. Consumers could have been permitted to purchase insurance across state lines, which would have increased competition among insurers. The tax deductibility of health-care spending could have been extended from employers to individuals, giving the same tax treatment to all consumers. And incentives could have been put in place to prompt consumers to pay a larger portion of their health-care costs out of their own pockets.

"Here in the United States," Mr. Becker says, "we spend about 17% of our GDP on health care, but out-of-pocket expenses make up only about 12% of total health-care spending. In Switzerland, where they spend only 11% of GDP on health care, their out-of-pocket expenses equal about 31% of total spending. The difference between 12% and 31% is huge. Once people begin spending substantial sums from their own pockets, they become willing to shop around. Ordinary market incentives begin to operate. A good bill would have encouraged that."
From "'Basically an Optimist'—Still: The Nobel economist says the health-care bill will cause serious damage, but that the American people can be trusted to vote for limited government in November," by Peter Robinson in the Wall Street Journal on March 27, 2010.

Just because the new health care reform law was a tough political battle, it will not be the end or the solution to US health care problems.

The new health care law, including its amendments, does little or nothing to undo the economic incentives and forces created by the tax deduction to the employer of the health care employee benefit, the exclusion from employee taxable income of the value of their health care benefit, the expectation that health insurance will cover all health related costs, that health related costs are primarily paid by third party payers with no incentive for the user to limit or negotiate costs, government mandates of excessive minimum coverage, and the inability to risk price insurance.

Any architect who ignores the physical laws of nature, such as gravity and the structural strength of his materials, will watch his building collapse before his eyes. The new health reform law ignores all the economic and incentive forces at play in current health care and attempts to contain these forces through patches and duct tape. The new health care law is doom to failure. It is just a matter of time until the forces created by the employer tax deduction, the third party insurance payment system, and the lack of price transparency to the end user make the new law unworkable.

Additionally, the new law uses extensive government subsidy to avoid accurate price setting and price transparency. Without market pricing, poor allocation of resources and rationing will occur.

Just as gravity never ceases, the old economic forces that remain after health reform will create a mess of US health care costs and use under the new law.

See my December 15, 2009, post, "Health Care Reform Is Easy: Politics Is Hard"

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