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The government -- especially Congress -- is notorious for underestimating the cost of programs it creates...

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Eliminate Clunker Health Care

The government — especially Congress — is notorious for underestimating the cost of programs it creates…

The “cash for clunkers” car purchase subsidy has been deemed a success by the media despite the fact that the Obama administration and Congress vastly underestimated the cost of the program.  While $1 billion was originally budgeted, within a week it became clear that the program was vastly underfunded.  Congress then hurriedly tripled the cost of the program and President Obama signed the legislation.  

The government — especially Congress — is notorious for underestimating the cost of programs it creates.  And given its history on health care and related programs — huge cost overruns, bureaucratic failures, delays and uncertainty — we ought to look at the Obamacare proposals even more carefully than we have.

The government’s track record on estimating the cost of its health care programs gives us little comfort. When Medicare passed in 1965 the House Ways and Means Committee estimated that it would cost $12 billion by 1990.  The actual number was $107 billion.  In fiscal year 2009 it will cost $425 billion.  In 1987, Congress estimated that the Medicaid DSH program would cost less than $1 billion by 1992.  In 1992 it cost 17 times that much.  

Government currently accounts for 49% of national health care spending in the US.  The two giant government insurance companies, Medicare and Medicaid, alone spend more than one third of our nation’s health care dollar.  Massive distortions in the health care system are caused by the federal government tax policy.  Government intervention in the health care industry is already large, intrusive, and the primary source of the rising costs of health care.   Is it conceivable that a new government insurance company or new federal government mandates on what insurance companies must put in their policies will reduce health care costs?  

The solution to rising health care costs is obvious.  People should be able to purchase the type of insurance that they choose and should pay for the health care services they receive.  This is not revolutionary — it is how market-based economies work.   The market system is by far the most efficient system for providing goods and services for the masses.  There is no reason to exclude health care services from this system.

First we must end the disparate tax treatment of health insurance purchased by employers and health insurance purchased by individuals.  There was nothing handed down from Mount Sinai that commanded your employer to provide you with health insurance but not car or fire insurance.  The government tax treatment has resulted in individuals losing health insurance when they lose their jobs and having to receive the health insurance that the employer chooses rather than what they would choose.   Treat employer provided health insurance as regular income and reduce marginal tax rates to ensure there is no tax increase, allowing people to choose their own health insurance plan.  

Medicare and Medicaid recipients should get a high deductible policy and an account that they can use to purchase health care services.  Unspent money would accumulate in the account that could be passed on to beneficiaries upon death.  Doctors and other providers would compete on price as well as quality of service and the recipients would now become price sensitive.  One can imagine Wal-Mart setting up a clinic served by nurse practitioners in every pharmacy.  Rather than a Medicaid recipient being treated at an emergency room for $383 to find out that their child has an ear infection, they would be diagnosed by the pharmacy nurse for $15 and buy the medication for $4.

The current movement in Congress is to create a socialist health care system, with all its attendant inefficiencies.  Given that government is the primary cause of rising health care costs, separating government provision of health care services from government production of health care services is the only viable type of health care reform.

Written By

Dr. Wolfram is the William Simon Professor of Economics and Public Policy at Hillsdale College in Hillsdale, Mich. He also serves as an adviser to the Business & Media Institute.

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