Tuesday, August 25, 2009

Martin Feldstein On Rationing Health Care

Martin Feldstein wrote a scathing piece in last Wednesday's Wall Street Journal concerning "ObamaCare."

I found Dr. Feldstein's piece particularly illuminating because he noted an important fact which I had heretofore not realized,

"Although administration officials are eager to deny it, rationing health care is central to President Barack Obama's health plan.

One reason the Obama administration is prepared to use rationing to limit health care is to rein in the government's exploding health-care budge. Government now pays for nearly half of all health care in the U.S., primarily through the Medicare and Medicaid programs. The White House predicts that the aging of the population and the current trend in health-care spending per beneficiary would cause government outlays for Medicare and Medicaid to rise to 15% of GDP by 2040 from 6% now. Paying those bills without raising taxes would require cutting other existing social spending programs and shelving the administration's plans for new government transfers and spending programs."

Thus, a flawed approach to government-sponsored medical care from the 1960s haunts us today.

Thank you, LBJ and the Democratic Congress of that era. Logically, Feldstein observes that this wouldn't be a problem, were government to reduce its role in health care funding,

"The rising cost of medical treatments would not be such a large burden on future budgets if the government reduced its share in the financing of health services. Raising the existing Medicare and Medicaid deductibles and coinsurance would slow the growth of these programs without resorting to rationing. Physicians and their patients would continue to decide which tests and other services they believe are worth the cost.

There is, of course, no reason why limiting outlays on Medicare and Medicaid requires cutting health services for the rest of the population. The idea that they must be cut in parallel is just an example of misplaced medical egalitarianism."

Again, Feldstein's logic is sharp and unerring. Why do all of us who pay for our own health insurance and medical care have to suffer just because government is bungling the management of health care for the poor and/or elderly?

Next, Dr. Feldstein attacks the tax-preferenced nature of privately-funded health care,

"While an extra $100 paid to someone who earns $45,000 a year will provide only about $60 of after-tax spendable cash, the employer could instead use that $100 to pay $100 of health-insurance premiums for that same individual. It is therefore not surprising that employers and employees have opted for very generous health insurance with very low copayment rates.
Since a typical 20% copayment rate means that an extra dollar of health services costs the patient only 20 cents at the time of care, patients and their doctors opt for excessive tests and other inappropriately expensive forms of care. The evidence on health-care demand implies that the current tax rules raise private health-care spending by as much as 35%.

The best solution to this problem of private overconsumption of health services would be to eliminate the tax rule that is causing the excessive insurance and the resulting rise in health spending. Alternatively, Congress could strengthen the incentives in the existing law for health savings accounts with high insurance copayments. Either way, the result would be more cost-conscious behavior that would lower health-care spending.

But unlike reductions in care achieved by government rationing, individuals with different preferences about health and about risk could buy the care that best suits their preferences. While we all want better health, the different choices that people make about such things as smoking, weight and exercise show that there are substantial differences in the priority that different people attach to health.

Rationing is bad policy. It forces individuals with different preferences to accept the same care. It also imposes an arbitrary cap on the future growth of spending instead of letting it evolve in response to changes in technology, tastes and income. In my judgment, rationing would be much worse than excessive care."

Thus, Feldstein provides a coherent, sensible, exhaustive economic basis for rejecting the proposed universal, single-payer health care system, and, instead, fixing the current mess by correcting tax-based biases, allowing those who can afford to buy their own health care to do so without suffering due to government funding problems for the poor.

Finally, he reminds us, as the good economist that he is, of the target which we should not fail to keep in sight,

"Those who worry about too much health care cite the Congressional Budget Office's prediction that health-care spending could rise to 30% of GDP in 2035 from 16% now. But during that 25-year period, GDP will rise to about $24 trillion from $14 trillion, implying that the GDP not spent on health will rise to $17 billion in 2035 from $12 billion now. So even if nothing else comes along to slow the growth of health spending during the next 25 years, there would still be a nearly 50% rise in income to spend on other things."

The national economy, if left to grow as it has in the past, will provide income to allow people to afford more health care, should they choose that as a spending option.

A key part of the solution, though, is to quite making government the ultimate payer for all health care, thus requiring rationing of public spending on private health matters, and allowing each person to choose their own health care options using their own money, or that which the public has decided to allot to them.

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