Code Red: Two Economists Examine the U.S. Healthcare System

March 6, 2010

Craig Garthwaite on the “Deficit Reducing” Democratic Plan

Filed under: Budget,Health Reform,Health spending — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 1:26 pm

My Kellogg colleague Craig Garthwaite and I had a brief discussion about the ingenuity of the Democrats, who describe a massive new government program accompanied by even larger tax increases as “deficit reducing.” Here is Craig’s full take on the matter.

Much like the must-see TV it was attempting to emulate; last week’s bi-partisan health care was packed with style yet lacked true substance. One point, however, did become apparent—there was an extraordinary amount of praise for the reform being deficit neutral. This focus on the deficit neutrality (or lack thereof) of the reform did not begin in the summit, but rather it has dominated the past year. But watching the dueling rhetoric of last week’s dog and pony show brought a question to my mind: When did deficit neutrality become the sole metric by which we judge fiscal responsibility of a government proposal of this magnitude? While not increasing the deficit should be a critical concern (and frankly it is a point that was missed by nearly all parties during the debate about creation of Medicare Part D) it certainly does not serve as a complete accounting of the economic impact of this proposal. Surely the actual cost of the legislation—and the sheer size of the government with respect to the economy—must also be important. Simply expanding revenue collection and spending cuts by a lesser degree than increases in spending is a shockingly incomplete measure of sound economic policy. To paraphrase the point made by Representative Paul Ryan, if health care reform were to raise spending by $50 trillion, but be offset by $51 trillion in tax increases, would it still be a good policy?

This is particularly true when we know that, given our current fiscal situation, even a deficit neutral $1+ trillion health care reform might not be sustainable. Every tax that we raise or spending cut we enact as part of health care “reform” is another bullet unavailable for our proverbial deficit reduction gun. This further hamstrings the ability of future policy makers to tackle the structural deficit already weighing down the federal budget. Accordingly, the health care debate should take into account the real world into which it will be enacted rather than just pretending as if it operates in a vacuum. This is a really just a simple application of the economic concept of opportunity costs. In this case, the opportunity costs of the increased expenditures and revenue collection for health care reform involve not only the distortions created by higher taxes but also the increased difficulties of dealing with the structural deficit we currently face.

As an illustrative example, let us think about the proposed Medicare savings that are included in the current bill. If the proposed decreases in Medicare spending are actually the proverbial “hundred dollar bills on the sidewalk” they are being pitched as, why don’t we enact them on their own now to deal with the fiscal instability in Medicare? It isn’t as if we haven’t spent years looking for savings in this program. Using these cuts to fund health reform means that when it comes time to get America’s fiscal house in order these “easy” savings won’t be available to policymakers. At that time, policymakers will be forced to make even more difficult choices.

Instead of pushing for a vote within two weeks on a bill that is clearly only an incomplete reform, we should take the time to get this right the first time. Perhaps given the stalemate in Washington, instead of turning to reconciliation, President Obama should take a step back and look to existing plans and ideas that attempt to address the fundamental structure of the health system that has generated the runaway spending and lack of complete coverage. Senators Wyden and Bennett have proposed the “Healthy Americans Act.” This is a plan that would offer comprehensive reform of the health care system by, among other things, decoupling insurance from the employment market and offering real choice for consumers. Compelling recent research by my colleague Leemore Dafny (along with Katherine Ho and Mauricio Varela) shows that the benefits of having an increased choice of health plans would be substantial. Other practical and ready-to-be-enacted comprehensive reform plans could include a national catastrophic health plan and the increased use of Health Savings Accounts paired with a refundable tax credit and the end of deductibility of employer provided health coverage. Combining these policies with a large expansion of state-level high risk pools would also address many of the issues for individuals with pre-existing conditions obtaining insurance in the private market. These types of reform (among others) would do more than just pass the narrow test of deficit neutrality and increased coverage. They would reform, and not just expand, delivery systems for health care, increase coverage, and immediately being providing large incentives for controlling costs. While others may say that these reforms are not politically feasible, I think that arguably the same should be said about the current situation. Perhaps the current stalemate is providing an opportunity for previously unconsidered options to be more seriously considered.

I do not advocate taking a step back as a way to delay health reform until the efforts wither and die. Any sensible person (or at least economist) realizes there are also potentially enormous opportunity costs related to inaction. While I believe the quality of health care in America has been unfairly maligned over the last year, no serious individual can say that there are not large and arguably mounting problems that must be addressed. But when it comes to the current politicians start making statements that a bill of this magnitude must be scheduled for a vote in the next two weeks—enough is enough. Rather than an impediment, the current stalemate should provide the needed time to stand back, breathe, and think more broadly about reforming the health care system instead of simply growing it. Statements by policymakers that we can deal with coverage “now” and come back “later” to seriously address costs reflect either extreme naiveté or deliberate deception. Once we pass a large reform bill, the probability of a second effort on cost-containment is going to be worse than Vegas’ odds for my Detroit Lions winning the super bowl next year (which for those of you in a betting mood currently stand at 100 to 1).

1 Comment

  1. The hard facts for Nancy Pelosi:

    Comment by crosssection — March 6, 2010 @ 5:57 pm

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