"Nothing could be further from the truth," he has said.

Yet it's hard to see the 1,994-page bill that the House passed last night as anything else. After all, the bill uses the command "shall" -- as in "you shall do this," "businesses shall do that" and "government shall do some other thing" -- 3,345 times.

Not a great deal of choice or options there.

To make sure that we obey these "shalls," the bill would create 111 government agencies, boards, commissions and other bureaucracies -- all overseen by a new health-care czar bearing the Orwellian title "commissioner of health choices."

All this would come at a true cost of more than $1.3 trillion over 10 years. And virtually every aspect of health care would be subject to federal regulation.

For example, the government would force every American to buy health insurance and would control what benefits those policies must include. Even those who now have health plans and are happy with them would have to switch to policies that include the government-required benefits -- insurance that might well be more expensive, thanks to the new benefits you won't get to choose.

Another mandate would require that even small businesses provide their workers with a government-devised minimum package of insurance benefits. This could cost hundreds of thousands of jobs -- and force some workers to accept insurance benefits rather than higher wages.

Those insurance products that now give Americans the most choice and flexibility would be severely restricted. Health-savings accounts would be almost eliminated and Flexible Spending Accounts cut back.

Even if the final bill doesn't include the so-called public option, private insurance would be so regulated as to become little more than a public utility, operating much like the electric company, with the government regulating nearly every aspect of its operation.

And the public option itself holds the potential for driving most private insurance out of business, with millions of American workers dumped into the government-run program.

Programs like Medicaid, meanwhile, would be dramatically expanded, and federal subsidies would be extended to people earning as much as 400 percent above the poverty level (or $88,000 a year for a family of four), putting millions more Americans on a form of the dole.

Doctors, too, would find themselves micromanaged from Washington. For example, providers who perform too many tests or procedures would see their Medicare reimbursements cut.

That means every time a doctor decides on a treatment, he or she would have to ask: "Does the government think I'm doing this too much? Will I be penalized if I order this test?"

The government would also undertake comparative- and cost-effectiveness research and use the results to impose practice guidelines on providers.

Medicare would see even more micromanagement, as the government develops a "high value" reimbursement system by 2012. (Many "reform" supporters hope to see these guidelines extended to nongovernment insurance as well.)

Finally, Americans would have to pay nearly $730 billion in new taxes, fees and penalties over the next 10 years to fund this huge government expansion.

No doubt, we do need to fix the problems in our health-care system, but health care represents one-sixth of the US economy -- and some of the most important personal and private decisions in our lives.

Given that the government has mismanaged everything from "cash for clunkers" to the swine-flu vaccine (not to mention the Iraq war and the response to Hurricane Katrina), how much of our health-care system do we really want it to control?

If you're going the wrong way down a road, the answer isn't to step on the gas, but to turn around.

It is not that the U.S. doesn't need health care reform, but it needs the right type of reform. Problematic as our system often is, it is possible to make things worse.

All the bills making their way through Congress start from the same failed premise: They would put the government in charge of one-sixth of our economy and some of the important personal and private decisions in our lives.

They would force people to buy a government-designed insurance package or face a penalty. They would establish incentives and structures that could eventually lead to the rationing of care. Some versions would force millions of workers into a government-run plan.

And they would do so at enormous cost to the American people in terms of higher taxes, greater debt and increased insurance premiums. Even the cheapest bill costs more than $800 billion ($2 trillion if off-budget costs are included) over the next decade. Americans would end up paying more, but getting less.

But the problems facing our health care system stem not from too little government control, but too much. Government regulations add more than $169 billion annually to the cost of health care. Other regulations limit competition between insurers and providers by, for instance, prohibiting people from buying insurance across state lines. Government programs such as Medicare and Medicaid are trillions of dollars in debt and are models of waste, fraud and inefficiency.

And our current tax laws penalize people who don't receive insurance through their work, meaning that if you lose your job, you lose your insurance.

The bills now before Congress don't fix these problems. They simply pile on new mandates, regulations, taxes and subsidies. No amount of tinkering, or budgetary sleight of hand, can make them better.

It's time for Congress to scrap its current flawed government-centered approach and start over with a focus on creating a consumer-oriented free market in health care.

After all, isn't it better to get it done right than to just get it done?

For the past six months, six members of the Senate Finance Committee, led by Chairman Max Baucus, have been laboring mightily to design a health-care bill. Yesterday they finally brought forth their product — and it leaves us with more questions than answers.

Despite months of work, Baucus hasn't really produced a bill yet, only a 223-page summary of what he hopes a bill will contain.

Here is some of what we know and don't know:

First, he claims the bill would cost only $856 billion. (Remember when that sounded like a lot of money?) In fact, that likely understates the true cost. The Congressional Budget Office only looks at a 10-year budget window, that is, 2010 to 2019. But most of the bill wouldn't even start until 2014. Thus, the "10-year cost" covers only five years of actual spending. Future costs are expected to increase dramatically.

The proposal isn't all bad. Most significantly, it drops the idea of a government-run "public option" in favor of co-ops. Government involvement with these co-ops would essentially be limited to providing start-up grants. The co-ops are unlikely to have much, if any, impact on the cost or availability of health insurance, but are far preferable to a government-run plan.

Baucus would also take the first tentative steps toward letting people buy health insurance across state lines. He'd allow states to establish interstate compacts for insurance purchases starting in 2015, and also let insurers develop national products that could be sold in any state. National plans would be exempt from state-mandated benefits.

This doesn't go far enough, and risks simply transferring regulation and mandates from the state to the regional or national level. Still, it looks like a tiny step in the right direction.

But in the end, this is still a plan that will make Americans pay more and get less.

Its centerpiece is a heavily punitive individual mandate — a requirement that every American buy a government-designed minimum-insurance package. Failure to comply would result in a fine that could run as high as $3,800 for a family of four.

Moreover, the mandate may not apply just to those without insurance today. While Baucus' summary says that those with "grandfathered" plans wouldn't have to change their current policies to satisfy the mandate, it's vague about what qualifies as "grandfathered."

Plus, employer-provided plans — that is, the policies of the vast majority of us — would have just five years to comply with the new insurance regulations, and "grandfathered" plans wouldn't be eligible for any subsidies. There's thus an excellent chance that most people wouldn't actually be able to keep their current plans.

Some seniors would also be forced out of their current arrangements. Baucus would cut payments to Medicare Advantage — which is likely to push many insurers out of the program, while others would raise the premiums they charge seniors. Millions would likely be forced back into traditional Medicare.

(The plan also targets two other GOP health-care reforms of recent years: It would impose new restrictions on Health Savings Accounts and limit the ability of workers to take advantage of tax-free Flexible Spending Accounts.)

Baucus also wants a mandate for employers to provide insurance to workers, though it's less severe than the mandate in the House bills. He has no specific requirement for employers to provide insurance — but any employer who failed to do so would have to pay the cost of all subsidies that the government provides his or her workers to help them pay for insurance on their own, up to $400 a worker.

But it's not really employers who'll pay in the end: They'll respond by making offsetting cuts to their payrolls, by reducing compensation and/or staff. In other words, the government will be giving the worker a subsidy with one hand, and taking it back with the other.

Baucus also wants insurance regulations similar to the guaranteed-issue and community-rating provisions that failed so spectacularly in New York in the 1970s. Those provisions would drive up premiums for younger and healthier workers in order to subsidize premiums for those who are older and sicker.

Finally, the Baucus plan imposes heavy new taxes, mainly on the middle class. Chief among these is a 35 percent excise tax on health-insurance plans that offer benefits in excess of $8,000 for an individual plan and $21,000 for a family plan. Insurers would almost certainly pass this tax on to consumers via higher premiums. And there are a host of taxes, fees and assessments on health-care providers that will almost certainly result in higher health-care costs.

And it's not just federal taxes that would go up. The plan would force states to raise Medicaid eligibility to 133 percent of the poverty level, and to enroll single, childless adults. The federal government would pick up only part of the higher cost — obliging states to come up with more cash. Indeed, wealthier states such as New York and Connecticut could have to foot as much as 20 percent of the bill. Given the budget strains already facing states like New York, state tax hikes are likely.

Somehow, "it could be worse," isn't really the answer to health-care reform.

No, Mr. President. No you can't.

To go straight to the chapter and verse: under Section 59(B)(a) of HR3200, the bill making its way through the House, and Section 151 of the bill that passed out of a Senate committee, every American would be required to buy health insurance.

And not just any insurance: to qualify, a plan would have to meet certain government-defined standards. For example, under Section 122(b) of the House bill, all plans must cover hospitalization; outpatient hospital and clinic services; services by physicians and other health professionals, as well as supplies and equipment incidental to their services; prescription drugs, rehabilitation services, mental health and substance-abuse treatment; preventive services (to be determined by the Centers for Disease Control and Prevention and the United States Preventive Services Task Force); and maternity, well-baby, and well-child care, as well as dental, vision, and hearing services for children under age 21.

But that's not all. Section 1239(b) of the bill also establishes a federal Health Benefits Advisory Committee, headed by the U.S. surgeon general, which will have the power to develop additional minimum benefit requirements. There is no limit to how extensive those future required benefits may be.

If your current health insurance doesn't meet all those requirements, you won't be immediately forced to drop your current insurance for a government-specified plan. But you would be required to switch if you lose your current insurance or "if significant changes are made to the existing health insurance plan."

More critically, for the 70 percent of us who get our insurance through work, those plans would all have to satisfy the government's benefit requirements within five years.

More likely, your employer will simply find that the increased cost and administrative burden is not worth it, and will dump you into the government-run "public option."

The Lewin Group, an independent actuarial firm, estimates that under the House version of the bill, as many as 89.5 million workers will simply lose their current employer-provided plan and be forced into government-run insurance.

Seniors, too, could lose their current coverage, at least the 10.2 million seniors currently participating in the Medicare advantage program. That program offers many seniors benefits not included in traditional Medicare, including preventive-care services, coordinated care for chronic conditions, routine physical examinations, additional hospitalization, skilled nursing facility stays, routine eye and hearing examinations, and glasses and hearing aids But the House bill cuts payments to the Medicare Advantage program by roughly $156.3 billion over 10 years.

In response, many insurers are expected to stop participating in the program, while others increase the premiums they charge seniors. Millions of seniors will likely be forced off their current plan and back into traditional Medicare.

Finally, the bills would all but eliminate Health Savings Accounts (HSAs), currently used by nearly 10 million Americans. Section 122 of the House bill and 311 of the Senate bill set minimum payout levels for any insurance policy. Insurance payouts must cover 70 percent of claims under the House bill and 76 percent under the Senate bill. And the bills also prohibit any deductibles or co-payments for preventive care.

But virtually none of the high-deductible insurance plans in existence today, and required to accompany an HSA, can meet such a standard. They are simply not designed to work that way. The result will be that a plan designed to those specifications would offer few if any advantages over traditional insurance and would not be competitive in today's markets.

As a result, insurers warn they would stop offering high-deductible policies.

Any way you look at it, under the bills currently before Congress, millions of Americans will be forced out of their current health insurance plan, even if they are happy with it. Period.

It is time for the president to stop spreading this particular "willful misrepresentation and outright distortion."

First, if you get sick and then lose your job or get divorced, you lose your health insurance. With a pre-existing condition, new insurance will be ruinously expensive, if you can get it at all. This, the central defect of American health insurance, explains why most Americans are happy with their current coverage yet also support reform.

Second, health care costs too much. Yes, we get better treatment, but the cost-cutting revolution that has swept through manufacturing, retail, telecommunications and airlines has not touched health care.

The problems are real, but the proposed remedy—even more government intervention—is counterproductive. A market-based, deregulation-focused reform is possible, and it will work.

Health care and insurance are service-oriented, retail businesses. There is only one way to reduce costs in such a business: intense competition for every customer. The idea that the federal government can reduce costs by negotiating harder or telling businesses what to do is a triumph of hope over centuries of experience.

Take the claim that centralized record-keeping can cut costs. In his July 22 press conference, President Barack Obama noted that a new doctor today might run a test again rather than ask for records of a previous result. That seems silly. But maybe it isn't. Maybe the test is cheap, the condition changes, the test can fail, and the cost of setting up an integrated record system between these two doctors isn't worth two tests a year.

The cost-cutting revolutions in other industries didn't settle questions like these with acts of Congress, expert commissions, armies of regulators, or via a "public option"—while leaving in place a system in which consumers have little choice, aren't spending their own money, and suppliers are protected from lower-cost competitors. That approach has never spurred efficiency, and for good reasons. Cost-cutting is painful. Even in Mr. Obama's trivial example, lab technicians and secretaries will lose their jobs to computer programs, and they will complain. Patients might have to get tests at inconvenient times and locations. They will do this when their money is at stake—what people will put up with from airlines for a few dollars is truly amazing—but they will never accept it from the government.

But what about pre-existing conditions?

A truly effective insurance policy would combine coverage for this year's expenses with the right to buy insurance in the future at a set price. Today, employer-based group coverage provides the former but, crucially, not the latter. A "guaranteed renewable" individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker. Term life insurance, for example, is fully guaranteed renewable. Individual health insurance is mostly so. And insurers are getting more creative. UnitedHealth now lets you buy the right to future insurance—insurance against developing a pre-existing condition.

These market solutions can be refined. Insurance policies could separate current insurance and the right to buy future insurance. Then, if you are temporarily covered by an employer, you could keep the pre-existing-condition protection.

Some insurers avoid their guaranteed-renewable obligations by assigning people to pools and raising rates as healthy people leave the pools. Health insurers, like life insurers, could write contracts that treat all of their customers equally.

The right to future insurance could be transferrable to another company, for example, if you move. You could have the right that your company will pay a lump sum, so that a new insurer will take you, with no change in your premiums. Better, this sum could be occasionally placed in a custodial account. If you got sick but had something like a health-savings account to pay high premiums, you could always get new insurance. Insurers would then compete for sick people too.

Innovations like these would catch on quickly in a vibrant, deregulated individual insurance market.

How do we know insurers will honor such contracts? What about the stories of insurers who drop customers when they get sick? A competitive market is the best consumer protection. A car insurer that doesn't pay claims quickly loses customers and goes out of business. And courts do still enforce contracts.

How do we get to a competitive market? The tax deduction for employer-provided group insurance, which has nearly destroyed the individual insurance market, is a central culprit. If we don't have the will to remove it, the deduction could be structured to enhance competition and the right to future insurance. We could restrict the tax deduction to individual, portable, long-term insurance and to the high-deductible plans that people choose with their own money.

More importantly, health care and insurance are overly protected and regulated businesses. We need to allow the same innovation, entry, and competition that has slashed costs elsewhere in our economy. For example, we need to remove regulations such as the ban on cross-state insurance. Think about it. What else aren't we allowed to purchase in another state?

The bills being considered in Congress address the pre-existing condition problem by forcing insurers to take everybody at the same price. It won't work. Insurers will still avoid sick people and treat them poorly once they come. Regulators will then detail exactly how every disease must be treated. Healthy people will pay too much, so we will need a stern mandate to keep them insured. And this step further reduces competition.

Private, competitive insurance markets are a superior way to solve the pre-existing-conditions problem, and the only hope to lower costs.

Some of the sticker-shock items all but certain to be in the bill:

Taxing employer-provided health insurance. Under current law, health care benefits provided by an employer are not considered to be part of an employee's taxable income. Congressional Democrats are considering proposals to repeal, cap, or limit this tax exclusion. That is, they would tax employer-provided health benefits, at least for some types of plans and for some people.

If the exclusion were repealed entirely it would yield as much as $3.5 trillion over 10 years, more than enough to pay for the projected cost of health reform. Total repeal, however, would mean an enormous tax increase for every working man and woman in America. Therefore, the final plan is more likely to include some form of cap or trigger on the exclusion. Among ideas reportedly under consideration are capping the amount an employee is able to exclude from taxable income at an amount equal to the value of the standard benefit package under the Federal Employee Health Benefit Plan (FEHBP). A second option being considered would eliminate the exclusion only for workers with incomes above a certain level, say $100,000 per year. Or some combination of the two options could be adopted, capping the exclusion only for workers over a certain income.

Eliminating FSAs and HSAs. Currently some 8 million Americans have health savings accounts (HSAs), a savings program that allows individuals with high-deductible insurance plans to put away money tax-free in order to pay health care expenses not covered by their insurance. Even more workers, 48 million, participate in flexible spending accounts (FSAs), an arrangement under employer cafeteria plans that allows workers to pay for some health care expenses on a tax-advantaged basis.

Congressional Democrats are reportedly considering proposals to restrict or even eliminate these popular options. The likeliest avenue would be a limit on the amount of money that could be contributed on a tax-free basis. This could significantly increase taxes for those participating in such plans, and would certainly make continued participation less attractive. Ultimately, it could even lead to the demise of both HSAs and FSAs.

Limiting the deductibility of medical expenses. Under current law, medical expenses are tax deductible if they exceed 7.5 percent of an individual's adjusted gross income. Some congressional Democrats have discussed raising the floor for this deduction, restricting the definition of what constitutes a deductible medical expense, or possibly eliminating it completely.

Only about 10 million Americans take advantage of this tax deduction annually, but by definition, they are those in poor health with high health care expenses. Nearly 40 percent of them are over the age of 65. Thus, any change to the deductibility of medical expenses would fall heavily on some of the people least able to afford it.

Soda and beer taxes. Having earlier increased taxes on cigarettes to fund an expansion of the State Children's Health Insurance Program (SCHIP), congressional Democrats are considering increasing taxes on alcohol and soft drinks.

In addition, proposals call for a first-ever federal excise tax on sugar-sweetened beverages. This would include non-diet soda, fruit juices, energy and sports drinks, and iced teas and coffee.

Higher corporate taxes. The Obama administration has also proposed an additional $190 billion in corporate taxes over the next ten years to help pay for health reform.

The net result would be one of the largest tax increases in U.S. history. Yet it would still fall short of what is necessary to finance the president's health care plan. Adding all the above tax increases together (using the most likely options) would yield perhaps $450 billion in new tax revenue. The government would still have to find at least $560 billion to pay for reform.

In short, there appears to be no way to pay for President Obama's massive intervention into the American health care system without breaking the president's promise not to raise taxes on the middle class.

In April, House Democrats passed legislation that would impose onerous and unnecessary reporting requirements on people with tax-free health savings accounts. As of January, more than 6 million Americans have HSA coverage. That includes nearly 640,000 Californians, or about 3 percent of all Californians under age 65. In some states, HSA plans cover nearly one in 10 people under 65.

Current law requires HSA holders to document their withdrawals in the event of an IRS audit. The new legislation would require every HSA holder to document every HSA withdrawal, every time they file their taxes.

That's right: Congressional Democrats have found a way to make Americans' medical bills and tax returns even more complicated.

Led by Health Subcommittee Chairman Pete Stark, D-Fremont, supporters claim the legislation seeks only to prevent people from claiming a tax break for nonqualified expenses. Stark cites reports that "HSA funds appear to have been spent on escort services, at casinos and bowling facilities."

Yet Congress' own Government Accountability Office found that 90 percent of HSA withdrawals are applied directly to qualified medical expenses. Even if the remaining 10 percent were spent at brothels and bowling alleys, federal law does not require funds contributed to an HSA to be used only for medical care. It requires only that withdrawals not exceed qualified medical expenses, or that the account holder pay taxes and a penalty on any excess withdrawals.

In either case, random audits police compliance. More importantly, HSA critics haven't produced any actual evidence of unlawful withdrawals.

The real reason for the anti-HSA legislation lies elsewhere.

The federal government has traditionally offered workers a large tax break for job-based health benefits. In practice, however, that tax break effectively robs you of control over a large chunk of your earnings: the money your employer puts toward your health insurance. For the average insured family, that's about $9,000 per year. The law also robs you of control over your coverage decisions.

In 2004, Congress extended that tax break to employee-owned HSAs, enabling workers to reclaim ownership of a portion of those earnings.

If a family obtains a high-deductible health plan, he or his employer can contribute as much as $5,800 to an HSA, tax-free. The family owns the account, which stays with them from job to job. So long as they spend that money on medical care, HSA funds are never taxed. Otherwise, HSA rules are identical to those for traditional IRAs.

Some politicians just don't want workers to control their own earnings and have launched an all-out assault on HSAs.

Last week, Stark complained, "The total value of all Health Savings Accounts contributions reported to IRS in 2005 was about twice that of withdrawals … suggesting an interest in it more as a shelter than vehicle to obtain needed health care or supplement inadequate coverage."

Stark is shocked — shocked! — that workers are using their health savings accounts as … a savings vehicle.

Stark further alleges that HSAs "are an effective tax shelter for people whose average incomes are nearly triple that of average tax filers."

True, HSAs provide a tax break that gets more valuable as earnings rise. (That's because income tax rates rise with income.) Yet the tax break for employer-controlled coverage provides identical tax breaks to millions more high-income earners. Where is the outrage over that tax loophole?

HSA opponents offer no evidence that unlawful HSA withdrawals are a serious problem, and they can't say why random audits aren't enough to deter them. They are highly suspicious when Americans take money out of their HSAs — but equally suspicious when they leave it in. And tax breaks for the wealthy appear to be kosher, unless they let workers control their earnings.

All of which leaves Stark and his fellow travelers open to the charge that what really bothers them is the fact that HSAs let workers control their own money.

Mrs. Edwards is mostly wrong and the conservatives are mostly right. But McCain could improve on his plan in a way that would address both criticisms.

The centerpiece of Sen. McCain's plan would replace the current tax break for job-based health coverage with a broad-based health insurance tax credit. Every individual who purchases health insurance would save $2,500 on his taxes; families would save $5,000.

Conservatives are quietly grumbling that if the amount of your McCain credit is less than the tax break you currently get for your job-based coverage, your taxes would rise. Those taxes would fund what are essentially welfare payments to people whose tax liability is less than the amount of their credit.

In contrast to the existing tax break, which only works with job-based coverage, individuals and families could use McCain's tax credit to purchase health insurance from anywhere they wish. They could continue to get health insurance through an employer. They could also purchase coverage through a church or civic organization. Or they could purchase coverage directly from an insurance company on what is called the "individual" market.

Ms. Edwards suggests that if people could purchase insurance on their own, insurers would never cover people with high-cost conditions. That is simply not true.

Researchers such as Mark Pauly of the University of Pennsylvania and Susan Marquis of the RAND Corporation have found that the individual market covers lots of people with high-cost medical conditions — so long as they purchased the insurance when they were healthy. Moreover, those high-cost patients do not pay premiums that correspond to their health risk, and their coverage does not disappear when they change jobs. Over the long term, then, McCain's plan would provide more secure coverage of high-cost conditions than the current job-based system does.

Ms. Edwards is right in some respects. Insurance markets will not cover someone who waits until he has cancer to purchase insurance — nor should they. That would be akin to selling auto insurance to someone who just had an accident, and would invite irresponsible behavior. No one would purchase insurance until they needed it. I expect all Americans want to provide assistance to uninsurable patients, but insurance markets are not the proper means.

She is also correct that McCain's tax credits do nothing for those who are currently uninsurable. To fix that inequity, McCain should consider replacing the tax break for job-based coverage with tax-free "large" health savings accounts (Large HSAs).

Large HSAs would work like this: Employers would take the money they currently use to purchase health benefits and add it to their workers' wages. On average, that comes to almost $5,000 for workers with self-only coverage and $9,000 for family coverage. Then, individual workers could put up to $8,000 into a Large HSA, tax-free, each year. Families could contribute up to $16,000.

Workers could purchase health insurance from any source, tax-free. As with McCain's tax credit, workers could stay on their employer's plan, or purchase health insurance that stays with them when they get sick, and when they move from job to job. Large HSAs also would encourage consumers to obtain coverage that focuses on cost containment, such as high-deductible plans or managed-care plans like Kaiser Permanente.

Large HSAs would achieve as much as McCain's tax credit, and would be less vulnerable to criticism from the Left or the Right. They would avoid the criticism of the left by providing a tax break for health savings rather than health insurance. Thus the uninsurable would get the same tax break as everybody else, which could be worth $2,800 to an individual and $5,800 to a family.

Large HSAs would likewise head off complaints from the Right; unlike tax credits, they would create no new government spending and would likely be a tax cut for all concerned.

Sen. McCain's plan is a lot better than his critics suggest. But there's still room for improvement.

What do conservatives and Christian Scientists have in common?

Wait for it…

They don't do health care.

Zinggg!

Believe it or not, the wonks actually laugh, I think for two reasons. First, health-care wonks are all a bunch of lefties. But the second reason is that it's true: Conservatives don't do health care. And when they do, they often stop acting like conservatives.

From what this former-conservative-turned-libertarian can tell, conservative thinking on health-care reform is in need of a renaissance. No, I'm not hatching some libertarian plot to subvert conservatism — unless encouraging conservatives to return to their free-market principles would somehow subvert their cause.

So without getting too much into the weeds, I humbly offer a few thoughts that might help would-be conservative health-care reformers follow their freedom-loving instincts and recapture this issue.

• Think freedom, not universal coverage. In a field dominated by lefties and rent-seeking weasels whose unifying goal is to provide health insurance to everyone, it is easy to get caught up in universal coverage fever. Even erstwhile conservatives have been seduced into thinking we can achieve universal coverage in a free-market way.

Yet a free market would not provide health insurance to all; some people are uninsurable, others don't want health insurance. National Review made the point nicely: "to achieve universal coverage would require either having the government provide it to everyone or forcing everyone to buy it." Either way, government calls the shots. If conservatives adopt universal coverage as their goal, the left will have already won.

On the Cato Institute's blog, I recently launched the Anti-Universal Coverage Club, where I highlight prominent thinkers who reject that goal. Its membership so far includes the editors of National Review, Grover Norquist, Andrew Sullivan, and former Medicare trustee Tom Saving.

The Anti-Universal Coverage Club suggests a different goal for health-care reform: to make health care of ever-increasing quality available to an ever-increasing number of people. Now what could be better than that? And notice that only vigorous market competition, where consumers own the money involved and are free to choose how to spend it, can deliver on that goal.

Reforms that don't give consumers ownership of that money or don't tear down government barriers to consumer choice (including the choice to spend that money on things other than medical care) should be suspect. Conservatives have adopted an awful lot of ideas — such as Massachusetts-style managed competition, association health plans, government-planned electronic medical records, etc. — that are in open conflict with individual ownership and choice.

• Health-savings accounts are not enough. HSAs were a positive step, but conservatives need to move on to the next step. To do so, it may help to look at HSAs in a new light.

Employer-sponsored family coverage costs $12,000, on average. Economists tell us that money is subtracted from the worker's wages. Viewed from that perspective, the main benefit of HSAs is that they give workers ownership over a portion of their earnings that employers have historically controlled. Even with HSAs, however, employers still control the lion's share. Conservatives should not rest until workers get to own and control every one of those dollars.

For the under-65 crowd, that means leveling the playing field between job-based coverage and individually purchased coverage. One way of getting there would be to allow workers to deposit all of that money into a "large HSA." Another option would be a "standard health insurance deduction," proposed by President Bush and endorsed by Rudy Giuliani. Either would give workers ownership over those earnings, which they could use to purchase the health plan of their choice (Large HSAs actually have an edge here) from any source.

The same principle of ownership applies to Medicare: Don't give seniors a little bit of money in an HSA, give them all the money that Medicare would spend on their behalf and let them use it to buy the health plan of their choice. Give more to the poor and sick if necessary, but let the patient control the money.

HSAs let Congress dictate health insurance deductibles and coinsurance. Why should politicians have any say in such matters? When workers purchase health insurance with their own money, they are likely to gravitate toward higher deductibles and coinsurance anyway, because that reduces their premiums. We don't need to worry about patients being cost-conscious in the doctor's office if they are cost-conscious when purchasing their health insurance.

• Don't "improve" welfare programs — cut them. At the behest of conservatives, Jeb Bush and other governors have made Medicaid more consumer-friendly. The only problem is that Medicaid and SCHIP are welfare programs, and making welfare more attractive leads to…more welfare.

There are probably ten million people who are eligible for Medicaid but do not enroll. (Some of them actually have private coverage. Riddle me that.) Giving recipients (A) a choice of insurance plans, (B) cash in an HSA, or (C) a voucher for private insurance encourages more people to become dependent on government for their health care.

Conservatives' number one objective in this area should be to reform Medicaid and SCHIP the same way Congress reformed welfare: eliminate all federal entitlements and return the money to states as flexible, fixed-dollar block grants. That would be a nice step in the direction of getting the federal government out of the welfare business entirely.

• The lefties aren't always wrong. HSAs don't do enough to contain medical spending. Medical errors do kill thousands of patients every year. Health outcomes aren't noticeably worse in (fully) socialized medical systems. Private Medicare plans do cost taxpayers more than traditional Medicare.

We disagree with the left's ultimate goal, and so we sometimes get lured into disagreeing with them even when they're right.

Conservatives shouldn't be afraid to acknowledge the shortcomings of the U.S. health-care sector, largely because…

• We've already got socialized medicine. Government already pays for half of Americans' medical care. Government controls production and consumption by determining the number of physicians; what services medical professionals can offer and under what terms; where they can practice; who can open a hospital or purchase a new MRI; who can market a drug or medical device; and what kind of health insurance consumers may purchase. Government even sets the prices for half of our health-care sector directly, and indirectly sets prices for the other half.

Much of the U.S. health-care sector is private. But private markets are not necessarily free markets. What matters is who controls how the resources are used. More often than not, that "who" is government.

Conservatives should not lift a finger to defend this quasi-socialized mess, lest they unwittingly abet those who are unjustly enriched by it. To wit…

• The health-care industry does not want free markets. When President Bush created a massive government health-care program (Medicare Part D), the health-care industry was with him. When President Bush vetoed the expansion of a government health-care program (SCHIP), the health-care industry was against him. Notice a pattern?

America wastes gobs of money on medical care that makes patients no healthier or happier. Some 20 percent of Medicare spending — over $60 billion annually — falls into that category. Providers actively oppose most any attempt to root out such waste.

We have far too little competition among medical professionals, insurers, pharmaceutical companies, and hospitals. Yet try to deregulate providers, insurers, or pharmaceuticals and watch what happens. The industry's entrenched interests rally to preserve the laws that protect them from competition. It's no accident that the health-care industry has spent more money lobbying Congress than has any other industry for the past ten years.

Employers are just as bad. Companies that support universal coverage typically do so because it would increase the labor costs of their competition, whether through higher taxes or health premiums.

When interacting with industry lobbyists, conservatives need to remember their Adam Smith: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Further, conservatives should challenge the lefties to explain how — contrary to all experience — more government would serve patients rather than special interests.

• Fight health with health. Some people will oppose SCHIP because it subsidizes families who don't need charity, some because it crowds out private health insurance, and some will be agin' it just because Hillary is fer it. But most people care only about how it would affect people's health. Conservatives need to meet that concern by comparing the health effects of more freedom with those of more government.

For instance, people are generally surprised to learn that there is no evidence that expanding health insurance, such as through SCHIP, is a cost-effective way of promoting health. In other words, how do we know SCHIP would deliver the most health for the money?

SCHIP also discourages families from increasing their incomes (lest they become ineligible). Since income and education are correlated with health, might that negatively impact children's health?

And why are lefties so eager to expand Medicaid and SCHIP when they acknowledge these programs often provide lousy access to medical care?

Conservatives who pose such questions without venom, and who offer reasonable alternatives (e.g., allowing families and employers to purchase coverage out-of-state), will win the debate.

Health care is a tough issue for conservatives only because they have strayed from their free-market principles.

When conservatives return to those principles, health care will again become a tough issue for the Left.

"At least we know you didn't tear your ACL," he said, referring to my anterior cruciate ligament.

"How do we know that?" I asked.

"Because I tore my ACL once," he said. "Believe me, if you had torn yours, you would have done a lot more screaming and crying."

The ACL runs from the shin bone to the thigh bone. It keeps your knee from dislocating when you turn or pivot — unless you turn or pivot too hard. As many aging athletes can attest, ACL damage is among the more common sports injuries. Put too much sideways pressure on your knee joint, and your ACL will tear. Which is exactly what happened to mine.

So much for Nate's diagnostic skills.

There was nothing pleasant about tearing my ACL or having it surgically reconstructed. But there were a few silver linings. The first has to do with Nate, who foolishly admitted to me that when he tore his ACL, he screamed and cried more than I did. When I got the diagnosis, he was the first person I called. It's not every day you get to tell a 6' 5", 225–pound former Marine that he's a big sissy.

Another silver lining was that I finally got to use my health savings account. As a health economist, I have spent years arguing that this new type of health plan, also known as an "HSA," would make health insurance more affordable by giving patients an incentive to eliminate unnecessary medical expenditures. When Congress finally made HSAs available in 2004, I was one of the first to get one. But I've always been pretty healthy, so I never got a chance to use it. Until now.

HSAs are a far cry from HMOs. If I had an HMO, I might have gone straight from the soccer field to the emergency room, where they would have taken an X–ray and an MRI, referred me to an orthopedic surgeon, and maybe given me something for the pain.

Importantly, I probably would not have asked whether the ER trip, the X–ray, or the MRI were worth the cost, because I would have been responsible for only a small portion of those costs. According to the Kaiser Family Foundation, the average HMO deductible for family coverage is about $750. (Simply setting foot in an ER can cost more than that.) Co–pays for generic drugs average $11, and most people with HMO coverage pay less than $20 for a physician visit. Oftentimes, patients face no deductibles or co–payments at all.

That kind of insensitivity to price leads patients to consume a lot more medical care — including a lot of medical care that doesn't do them any good. Thirty years ago, an enormous and well–respected study (the RAND Health Insurance Experiment) randomly assigned thousands of people with all sorts of health problems to different health plans with varying coinsurance levels. Unsurprisingly, researchers found that the less patients had to pay out–of–pocket, the more medical care they consumed. Patients who paid nothing out–of–pocket — for whom healthcare was effectively "free" — consumed 43 percent more than those with a deductible of a few thousand dollars.

More surprising was that, overall, the additional care produced no better health outcomes. A lot of the added expenditures were simply wasted on low– and zero–value care.

America's dysfunctional healthcare system seems to be conducting a similar experiment over time. Back in 1965, patients paid, on average, 44 percent of their medical care out–of–pocket. Since then, that share has fallen to 14 percent. In other words, for every dollar of healthcare a patient receives, on average the patient pays only 14 cents from their own wallet.

The results have been predictable. Patients demand more low–value medical care, they file more health insurance claims, and year after year, health insurance premiums rise faster than family incomes.

That's where HSAs come in. HSAs resemble the "high–deductible" insurance from the RAND experiment — where patients purchased less medical care but ended up just as healthy. High–deductible insurance has always been available, but few Americans choose it because of an odd tax quirk.

Under the federal tax code, employer–provided health insurance isn't taxed — but any money you save for your out–of–pocket medical expenses is taxed. That provides a huge incentive to increase the share of medical expenses purchased through insurance, and reduce the share that patients purchase directly. That incentive is a big reason why out–of–pocket spending has fallen as a share of total private health spending.

The HSAs' big innovation was to give the money you save for your out–of–pocket expenses the same tax–free status as employer–provided insurance, thereby eliminating the bias against high–deductible insurance. Actually, it's kind of a no–brainer. No wonder it took Congress 60 years to do it.

So if you have HSA coverage, you can put money tax–free into a "health savings account" to cover your routine medical expenses. But you also have a health insurance policy with a deductible of $1,100 or more, which pays for any catastrophic medical bills.

The important part is that the money in your HSA belongs to you. It remains yours even if you change jobs or change health insurance. That gives you a big incentive to spend the money wisely, because whatever you don't spend rolls over from year to year and grows, tax–free. You can spend the money on future medical expenses without ever paying taxes on it. Or you can use it for other things. The tax rules are the same as for an IRA: withdrawals are taxed as income, with an additional penalty that goes away at age 65.

Of course, HSAs are controversial. Despite the evidence from the RAND experiment, some fear that if patients are more cost–conscious, they will skimp on needed medical care.

With my HSA, a $2,500 deductible, and a swollen knee, I was about to become part of this experiment. Would I make better decisions than if I were spending an HMO's money? Or would I end up hurting myself by forgoing necessary care?

As my teammates kept playing, I sat on the sideline trying to figure out what to do next. Since I would be paying for my first $2,500 of medical expenses out of my HSA, I had to ask myself whether a trip to the emergency room was really necessary. I decided that the pain was bearable, so I skipped the ER and iced my knee until I was able to see my wife's orthopedist.

The orthopedist recommended both an MRI and an X–ray. Since I would be paying for these items myself, I asked him whether both were necessary. According to one estimate, as many as 30 percent of such imaging tests are either unnecessary or the wrong type of test. He agreed that the X–ray probably wasn't necessary, so I skipped it.

As for the MRI, I was aware that they can be quite expensive. So I appreciated it when my orthopedist offered to intervene on my behalf if I thought his radiologist over–charged me.

Most patients don't even pay attention to the bizarre kabuki dance that goes on between the doctor's bill and the insurance company's "Explanation of Benefits." They just look for the part that says, "You owe this much." But since I knew I was paying for 100 percent of this MRI, I paid close attention to how much the radiologist charged me.

And over–charge me, he did. The radiologist initially billed me $1,500, though my insurance company's "negotiated discount" brought the price down to $1,380. But even that seemed steep compared to an imaging center near my house, where, I discovered, they charge cash–paying patients just $600 per knee.

Here's a dirty little secret: the amount that healthcare providers initially charge isn't the actual price so much as the sticker price. According to a recent study, hospitals charge cash–paying patients two–and–a–half times what insurance companies ultimately pay, because insurance companies demand discounts. Savvy patients demand discounts too, and frequently get them. Unfortunately, many cash–paying patients aren't insistent, and end up getting gouged.

Knowing all that, I wasn't intimidated by the radiologist's sticker price. Nor was I particularly impressed with my insurance company's negotiating skills. So I started negotiating on my own behalf.

When I explained that I would be paying cash, the radiologist's billing agency lowered the price again, to about $1,000. Finally, seven months after my MRI, we settled on a price of $700. That's a 53 percent discount from the sticker price — and more than six times the discount negotiated by my insurance company.

The woman I negotiated with has handled this radiologist's billing for the last 20 years. She told me that if — God forbid — I ever need another MRI, I should just walk up to the front desk and demand a 50 percent discount. I think of it as the George Foreman approach to price negotiations: I'm not going to pay a lot for this MRI.

Skipping the ER and an X–ray; haggling with the radiologist — spending my own money made me behave differently than if I were spending an HMO's money. Since ACL damage is such a common injury, it makes me wonder how many people unnecessarily use those services — or pay too much for them — each year.

That kind of cost–consciousness is one way HSAs can make health coverage more affordable. My cost–consciousness kept my expenses down, which kept me from filing claims with my insurance, which helps keep my health insurance premiums (and those of my coworkers) from rising. That may be one reason why, according to Deloitte Consulting, premiums for HSA–qualified high–deductible insurance have grown at less than half the rate of premiums for traditional insurance. The online insurance broker eHealthInsurance.com reports that in some cases, those premiums actually fall from one year to the next.

But what if my cost–consciousness led me astray? What if I had broken a bone, which only an X–ray would detect? By forgoing an X–ray, wouldn't I just be setting myself up for even greater costs down the road?

As it turns out, I hadn't broken any bones. What the RAND experiment showed to be true in the aggregate was also true in my case: making me cost–conscious didn't hurt my health. People aren't perfect, but they appear to make pretty good decisions when spending their own money on healthcare.

One reason for that may be that cost–consciousness encourages patients to use information that they would otherwise ignore. When my knee dislocated, I heard a tear, not a crack — which suggested soft tissue damage, but no broken bones. The only reason I used that information to rule out an X–ray was because I had a financial incentive to avoid unnecessary spending. Without that financial incentive, I would have ignored that information, submitted to the X–ray, and pushed my insurance premiums upward — all for absolutely zero health benefit.

HSAs will not cure everything that's wrong with America's healthcare sector. But my HSA plan did get me more engaged in my healthcare decisions, in a way that benefited me directly, and that helped make health insurance a little more affordable for others. With enough savvy, cost–conscious patients behaving that way, HSAs might actually force down the prices of individual healthcare services, as well.

As if that sense of optimism wasn't silver lining enough, I did manage to find one more: all the informal healthcare I received from the other person covered under my HSA plan. It was my wife who picked me up from that soccer game, who drove me home from surgery, and who patiently endured the screaming and crying that Nate would never see.

HSAs are worth a look. But a good wife is the best insurance policy.

Or more precisely, you subsidize it. Gov. Schwarzenegger would fund nearly the entire plan through Medicaid. Under that program's rules, roughly half the funding comes from California and half from the federal government — in other words, from taxpayers in other states. But, if you look closely at how the program will be funded, it becomes clear that Schwarzenegger wants to bend the rules so non-Californians would pay over three times as much as Californians would.

The governor's thinly veiled shakedown is both dishonest and emblematic of what ails America's health-care system.

The centerpiece of TerminatorCare is a requirement that every California resident purchase health insurance. Though many call this an "individual mandate," that's just a fancy term for a sort of tax. Instead of spending your money itself, the government forces you to spend your money according to its instructions. The result is the same: You end up with less money to use as you see fit.

The governor claims a mandate is necessary because the uninsured's medical costs get shifted to everyone else; a mandate would ensure that all Californians have coverage. Yet the governor vastly overstates the free-rider problem, which is dwarfed by the amount of waste in our health-care system. And requiring people to purchase insurance doesn't mean they'll do it. California requires drivers to purchase auto insurance, yet one in four California drivers are uninsured.

The governor also wants to tax employers four percent of their payroll if they do not offer health benefits. If this proposal becomes law, we can expect to see California employers dropping coverage: The tax would be less than what many employers spend on health benefits. If employees can readily gain health insurance apart from their employers, there will be less incentive for employers to provide health insurance, and a strong economic incentive for them not to."

As for regulation, the governor would require insurance companies to cover all applicants, regardless of health status. He also proposes to limit how much insurers can charge those with high expected-claims. Such regulations are supposed to make coverage more accessible for sicker individuals, yet on balance they tend to make coverage less accessible. In states such as New York and Washington, these regulations have increased insurance premiums, increased the number of uninsured, and caused insurers to flee the state.

With regard to subsidies, the governor would increase spending on preventive care, reasoning that he can reduce health-care costs by catching diseases early. Yet when Stanford University economist Victor Fuchs polled health economists, only one out of nine agreed that greater spending on preventive care would even marginally reduce overall spending.

And then there are the subsidies. Schwarzenegger would expand government programs for the poor, including California's version of Medicaid — i.e., Medi-Cal. In fact, he would expand these programs so much that they would cover many Californians who aren't poor at all. Families of four making $60,000 per year — including illegal immigrants — would be eligible.

That would be dangerous: Such programs discourage people from climbing the economic ladder, because recipients lose benefits if their income rises. Expanding programs like these ensnares middle-class families in what experts call a "low-wage trap." Such programs also tend to increase the cost of privately purchased medical care and insurance; expanding them would make private options even less affordable.

But the truly audacious part is that the governor wants non-Californians to pay for it all — or most of it, anyway — a fact that he and his advisors tried to disguise.

Here's how it would work: The governor would increase Medi-Cal payments to doctors and hospitals by $2.2 billion, expecting Washington to chip in another $1.8 billion; that's the way Medicaid works, with half of the costs being borne by the federal government. The governor would then tax $3.5 billion from the providers — i.e., from the doctors and hospitals, to whom payments had been increased by $2.2 billion. That means the state would recoup not just the $2.2 billion it originally paid the providers, but also $1.3 billion of what the federal government paid the providers. The proposed increase in payments to providers, which is subsequently revoked by taxes, is merely a ploy to get even more money from taxpayers in other states. It turns out that the governor wants to shake down non-Californians for over three-fourths of the costs of the increase.

If nothing else, the governor has highlighted what's really wrong with America's health-care system. Health care grows more expensive every year because everyone in the system is spending someone else's money, and so no one spends responsibly. Even Medicaid encourages governors to make wild spending commitments because they can make taxpayers in other states pick up the tab.

The late Milton Friedman — a Nobel Prize-winning economist and philosophical mentor to Gov. Schwarzenegger — neatly summarized the problem with America's health-care system: "nobody spends somebody else's money as wisely or as frugally as he spends his own."

Forcing more people to participate in this broken system is no solution. Health-care reformers need to change the incentives so that everyone starts acting responsibly.

Thanks to Gov. Schwarzenegger, reformers now have a poster child.

Health savings accounts, or HSAs, are a new health insurance option that became available in 2004. HSAs couple a tax-preferred savings account (the HSA) with high-deductible health insurance. Enrollees or their employers, or both, make tax-free contributions to the HSA. Enrollees use the funds in their HSAs to purchase medical care until they reach their deductibles. At that point, health insurance begins paying part or all of enrollees’ medical expenses.

HSAs reduce government’s influence over consumers’ medical decisions by reducing the price distortions created by the federal tax code. However, HSAs as they exist today do not eliminate those distortions. Current HSA law restricts consumers’ health insurance choices, makes it difficult for the chronically ill to save for their future medical needs, and discourages cost sharing above the health insurance deductible.

To address some of those shortcomings, President Bush proposes to reduce the price distortions further, through higher HSA contribution limits and tax credits for individuals who contribute to their HSAs or who purchase their own HSA-compatible insurance. Although those steps would be helpful, HSAs should be expanded further still to give individuals full ownership of and control over all their health care dollars.

Unfortunately, HSAs (and proposals to expand them) have become politicized. Critics contend that HSAs benefit only the healthy and the wealthy and that HSAs are ineffective or even harmful. In most cases, criticisms of HSAs fall flat. In some cases, the critics do have a point. However, the failures they identify stem not from HSAs or proposals to expand them but from the problems that HSAs are meant to correct. Expanding HSAs would help to correct those problems faster.

The Claim: The U.S. spends too much on health care.

The Facts: It is true that the United States spends more on health care than any other country. Why is that a bad thing? There is no "right" amount to spend on health care or anything else. The United States spends more on athletic shoes than any other country. No one speaks of the athletic shoe crisis.

Economists consider health care a "normal good," meaning that spending rises or falls with income. As incomes rise, people demand more and better health care. America's wealth determines its spending on healthcare.

The real problem is the fact that the people spending the money are not the people paying the bills. Because those purchasing health care are able to pass the bill onto third parties, the usual market disciplines don't apply. True health-care reform would focus on giving consumers a greater stake in the decision-making process.

The Claim: Though we spend more, we get less.

The Facts: America offers the highest quality health care in the world. Most of the world's top doctors, hospitals and research facilities are located in the United States. Eighteen of the last 25 winners of the Nobel Prize in Medicine either are U.S. citizens or work here. U.S. companies have developed half of all the major new medicines introduced worldwide over the past 20 years. And Americans played a key role in 80 percent of the most important medical advances of the past 30 years.

If you are diagnosed with a serious illness, the United States is the place you want to be. Tens of thousands of patients from around the world come to this country every year for treatment.

Critics of American health care often point out that other countries have higher life expectancies or lower infant mortality rates, but those two indicators are bad ways to measure the quality of a nation's health-care system. In the United States, very low-birth-weight infants have a much greater chance of being brought to term with the latest medical technologies. Some of those low-birth-weight babies die soon after birth, which boosts our infant mortality rate, but in many other Western countries, those high-risk, low-birth-weight infants are not included when infant mortality is calculated.

Life expectancies are also affected by other factors like violent crime, poverty, obesity, tobacco, and drug use, and other issues unrelated to health care. When you compare the outcome for specific diseases like cancer or heart disease, the United States outperforms the rest of the world.

The Claim: A government-run health-care system would expand access to care.

The Facts: The one common characteristic of all national health care systems is that they ration care. Sometimes they ration it by denying certain types of treatment altogether. More often, they ration indirectly, imposing cost constraints through budgets, waiting lines, or limited technology. One million Britons are waiting for admission to National Health Service hospitals at any given time, and shortages force the NHS to cancel as many as 100,000 operations each year. Roughly 90,000 New Zealanders are facing similar waits. In Sweden, the wait for heart surgery can be as long as 25 weeks. In Canada more than 800,000 patients are currently on waiting lists for medical procedures.

The Claim: Health care is too complex for average Americans to make decisions about price and quality.

The Facts: Health care is increasingly high-tech and complex, but so are many other products and services that Americans purchase everyday without specialized expertise. A consumer does not need to know how an internal combustion engine works in order to buy a reliable car, or how silicon chips are manufactured before he selects a computer. When consumers have good information about product prices, quality and safety, they naturally gravitate toward the goods and services that offer the highest value for the lowest price.

There are numerous studies that show health-care consumers make decisions about price and quality. The current problem with the healthcare sector is that there isn't enough good information available for consumers to make sound decisions about which healthcare provider or facilities offer the best value. But that's rapidly changing as providers respond to increased consumer empowerment.

At the same time, patient advocacy companies are springing up to help health-care consumers make informed choices. When consumers, rather than insurers or employers, control the money, markets naturally respond.

The U.S. health-care system represents one-seventh of the American economy, and is literally a matter of life and death for millions of Americans. Here's hoping that they'll be able to sort the facts from the fallacies in the coming debate.]]> Fri, 03 Mar 2006 00:00:00 EST http://www.cato.org/pub_display.php?pub_id=5871 http://www.cato.org/pub_display.php?pub_id=5715

More people, both in Washington and in the country at large, need to be better educated concerning the trends, constraints and trade-offs involved in health policy. Some well-established facts are rarely brought up in the public debate, while myths, half-truths and rash promises are widely circulated. Here are some issues that Americans, liberals and conservatives alike, should consider: Our health-care system is pulled in different directions by competing objectives. For example, individual consumers would prefer to have health-care expenses covered for them, rather than worry about paying for health care. This is the objective of Insulation.

However, we are concerned with the rising share of resources devoted to health care. This is the objective of Affordability.

Finally, we do not like the idea of being denied health care because of a bureaucrat's decision. This is the objective of Accessibility, because we want to be able to access whatever our doctor recommends.

These objectives conflict with one another. For example, managed care was an attempt to move toward Affordability, but it reduced Accessibility.

We cannot slow the growth of health-care spending in this country without changing health-care practices. Experts agree that new technologies make medical care more expensive. In addition, the rapid rise of physician specialization accounts for a large share of our health-care expenditure growth.

Reining in health-care spending would require wrenching cultural changes. A market-based approach would be to reduce Insulation and instead steer people toward catastrophic health insurance, requiring them to pay more out of pocket for routine care. A government-based approach would be to set a national budget for health care and provide only the services that fall within that budget. The consequences of either approach are not well understood by policy-makers or the general public. The better plan would be to experiment with different approaches at the state level instead of suddenly lurching in one direction for the country. Perhaps California could be one of the states that attempts to experiment with a single-payer system. As a non-Californian, I would like to see that. My guess is that single-payer will require enormous tax increases and ruin the state's economy. Better that should happen in California than in Maryland, where I live.

We lack information about the effectiveness of health-care protocols. Critics complain about "information asymmetries," in which doctors know more than patients. But that problem pales in comparison to the information gaps shared by doctors and patients alike. For example, after a heart operation, no one knows how often a patient should be seen by a cardiologist. Is it cost-effective to be followed up once a month, once every six months or once a year? Researchers at Dartmouth University found that the main factor in determining follow-up visits was cardiologist availability. Cardiologists with a lot of room in their calendars will see a given patient more often than those with more crowded schedules. Overall, the researchers documented a shockingly broad pattern of differences in health-care practices that appeared to have no relationship to medical outcomes.

Those of us who propose market-oriented health-care reform need to spell out what this will mean for consumers -- how it will increase their responsibility to study the costs and benefits of alternative treatments.

Those who favor universal government-provided health insurance also have an obligation to describe how health-care decisions will be made. If we cannot afford all the health-care services that everyone might want, then we are going to need policies for rationing health care.

Before electing to undergo surgery, we want the diagnosis explained, the alternatives described, the risks outlined and our responsibilities for contributing to a successful recovery made clear. By the same token, surgery on our health-care system requires a more thoughtful conversation than this country has had so far.]]> Wed, 01 Mar 2006 00:00:00 EST http://www.cato.org/pub_display.php?pub_id=5715 http://www.cato.org/pub_display.php?pub_id=5482

Unlike the Medicare drug program, the response to HSAs has been overwhelmingly positive. In just two years, three million Americans have signed up for an HSA. More than one-third of HSA enrollees were previously uninsured, which means HSAs already may have reduced the number of uninsured by 1 million. Deloitte Consulting L.L.P. reports that, for two years running, insurance premiums for HSAs and similar plans rose at about one-third the rate of increase for other types of coverage.

So in his State of the Union address, Bush proposed expanding and enhancing HSAs. His new Medicare entitlement? He didn't even mention it. Go figure.

Fortunately, his HSA proposals would make health coverage and care better and more affordable for hundreds of millions of Americans.

HSAs couple high-deductible health insurance with a tax-free savings account (the HSA) for out-of-pocket medical expenses. Individuals and/or employers can contribute money to HSAs tax-free up to the amount of the insurance deductible. HSAs must be coupled with insurance that has a deductible of at least $1,050 for individuals and $2,100 for families.

HSA funds may be withdrawn tax-free for any medical expenses. Once expenses reach the deductible, insurance takes over. Any funds that remain in the HSA roll over from year to year and grow tax-free.

Right off the bat, HSAs save money because high-deductible insurance is cheaper than low-deductible coverage. The Kaiser Family Foundation reports that the difference in premiums between the average HSA-compatible policy and the average for all types of insurance is $1,324. That is more than enough savings to cover the average annual HSA deductible ($1,901) in just two years. Sometimes, the savings covers the entire deductible in the first year.

HSAs also let consumers control more of their health-care dollars and decisions. Since consumers own the money that covers their out-of-pocket expenses, they can see any doctors they like, whenever they like. At the same time, patients scrutinize their medical bills and their doctors' recommendations more carefully because it is their money on the line.

The chronically ill, however, likely would use up all their HSA deposits in a given year and have little opportunity to save for future medical needs. Even with HSAs, consumers without access to employer-sponsored insurance still pay a hefty tax penalty when they purchase health insurance on their own.

To address those problems, the President proposes essentially doubling the limits on HSA contributions and allowing people to purchase health insurance with tax-free HSA funds. The higher contribution limits ($5,250 for individuals and $10,500 for families) would help the chronically ill and their families by allowing them to put more money aside tax-free for their medical needs. Allowing HSA funds to purchase health insurance would provide tax equity to millions who are unfairly punished by the tax code.

Critics claim that HSAs are only good for the healthy or wealthy. If true, that would mean HSAs benefit only about 80 percent of the population. Not bad, that. But in fact, eHealthInsurance.com reports that half of HSA enrollees are over 40 years old, 20 percent earn less than $35,000, and 40 percent earn less than $50,000.

Unfortunately, the President's proposals are unnecessarily complex and would continue to restrict HSAs to those who purchase high-deductible insurance. There is no reason why HSA holders should not be able to choose their health plan themselves.

Nonetheless, Bush has made a solid proposal that would improve the quality and affordability of private-sector health insurance and medical care. As for Medicare, well...]]> Sun, 05 Feb 2006 00:00:00 EST http://www.cato.org/pub_display.php?pub_id=5482 http://www.cato.org/pub_display.php?pub_id=5422 The White House has been dropping hints that the president will make health-care reform the centerpiece of his State of the Union address. The Bush administration's health care record is, to put it delicately, inconsistent. It has supported efforts to remove government influence over the health care sector, such as health savings accounts (HSAs). On the other hand, the president signed into law the largest expansion of federal power over health care in generations the ill-fated Medicare drug program.

So in an attempt to help the administration straighten up and fly right, here's my health policy wish list for the State of the Union.

1. Propose "large HSAs." Federal tax laws encourage workers to surrender control over their health care to their employer. Among other things, that means that most people lose their health insurance when they leave a job.
   
   HSAs give some of that control back to workers. Workers and their employer make tax-free contributions into an HSA, which covers out-of-pocket medical expenses. But workers are required to purchase catastrophic coverage, with deductibles in the neighborhood of $1,000 to $5,000. For many, that makes HSAs downright unappealing.
   
   The president should propose using HSAs to give workers control over all their health-care dollars. First, nearly all workers and employers should be allowed to deposit the entire amount they are now spending on health benefits into a "large HSA." Then, workers should be allowed (but not required) to use their HSA funds to purchase a health plan of their choosing, from their employer or any other source. Large HSAs would allow a worker to purchase the coverage she wants rather than what politicians or employers think she should have and that stays with her when she leaves her job. Large HSAs would also increase competition among insurers, and make health care more affordable for workers who cannot obtain coverage, either because they are too sick or too poor.



2. Push hard for interstate commerce in health insurance. A big reason that health insurance is so expensive is over-regulation by the states and the fact that each state forbids you to buy insurance from carriers in another state. The Congressional Budget Office estimates some state regulations increase insurance premiums by as much as 15 percent.
   
   The Constitution allows Congress to remove such interstate trade barriers. The president already supports legislation (sponsored by Rep. John Shadegg and Sen. Jim DeMint) that would allow individuals and employers to purchase insurance from states where regulatory costs are lower. He should push Congress hard to give purchasers that freedom now.



3. Avoid further expansions of federal power. There is no shortage of people who argue that health-care markets would work better if only we gave the federal government more power. They want taxpayer dollars to create electronic medical records. Or they want to require health-care providers to furnish price and quality information. Or they want Washington to make decisions that belong to the states, including health insurance regulation (read: "association health plans") and medical malpractice reform.
   
   The president should explain that markets will deliver conveniences like electronic medical records and price and quality information just as soon as government stops monkeying with market incentives. And he should explain that expanding federal power at the expense of states is improper, because it limits individual freedom and the states' ability to experiment.



4. Clean up the Medicare mess. Finally, it would be nice for the president to acknowledge that the Medicare drug program that took effect this month was a huge mistake. Though the intent was to expand coverage, so far the program has caused many to lose the coverage they had, including some of the poorest and sickest seniors.
   
   But the worst is yet to come. The Medicare drug plans will soon begin dropping drugs and pharmacies from their plans to keep the sickest seniors away. And the cost of the program, which already looks to be twice the sticker price, will continue to outstrip projections. At a minimum, the president should commit to reforming Medicare. The program's fiscal outlook is six times worse than Social Security's, and the president himself is responsible for a large part of Medicare's troubles. Absent reform, Medicare will require a tax increase equal to one-quarter of wages. It's time for the president to start thinking about his legacy, and whether he wants that type of tax increase to be a part of it.

Seniors are confused and frustrated, while fiscal conservatives stand aghast as tax dollars fly from the Treasury like bats fleeing a cave.

Congress can redeem itself with a simple and cost-free cure rather than a expensive complication. The Health Care Choice Act, sponsored by Republicans Rep. John Shadegg of Arizona and Sen. Jim DeMint of South Carolina, would let American consumers buy health insurance across state lines, as they now may shop coast to coast for mortgages.

Shadegg-DeMint would let insurers licensed in one state sell to individuals in the other 49. As such, Congress would use its constitutionally enumerated powers to liberate interstate commerce and transform 50 separate, closed medical coverage markets into one open, national health-insurance market.

The proposal applies to state-regulated health plans, roughly 55 percent of the insured marketplace and purchased primarily by small businesses and individuals, according to America's Health Insurance Plans, a trade association for the health insurance industry. The other 45 percent of the insurance market are health plans purchased by large employers and labor unions, among others, and, as well as federal programs like Medicaid and Medicare, would not be affected.

"Two-thirds of the uninsured have incomes below 200 percent of the federal poverty level, and most cite unaffordability as the top reason for why they are uninsured," said Mr. Shadegg, who hopes to succeed Rep. Tom DeLay, Texas Republican, as House majority leader. "Until consumers can purchase their health care like their auto, homeowners, or life insurance, we won't reform health care; we will only re-regulate it."

"Just as Delaware became a magnet for banking, some states will become magnets for health insurance," predicts David Gratzer, a physician and Manhattan Institute senior fellow, and one of this idea's earliest proponents. "People seem to understand intuitively that it doesn't matter whether their checks come from Delaware or New York or California. Likewise, the issues around health insurance are cost and availability rather than state of origin."

Location matters. A health policy for a single Pennsylvanian costs roughly $1,500 annually. Cross the Delaware into New Jersey, as George Washington did in 1776, and a similar health plan costs about $4,000, thanks to state regulations.

"When doctors worsen a patient's condition, we call it an iatrogenic ailment," Mr. Gratzer notes. "We lack an equivalent term for when politicians aggravate a problem."

By mandating benefits, state legislators have swelled the uninsured numbers. As Victoria Craig Bunce and J.P. Wieske explained in their January 2005 report for the Council for Affordable Health Insurance: "Mandating benefits is like saying to someone in the market for a new car, if you can't afford a Lexus loaded with options, you have to walk."

Making every health policy cover acupuncture, marriage therapy, or in vitro fertilization, as some states do, looks less compassionate when such adornments drive the humble from the market. CAHI estimates state mandates can raise insurance prices 20-45 percent.

"Guaranteed issue" rules, which let people wait until they ail to purchase coverage, also boost prices. Ditto "community rating." It slaps the same government-controlled price on insurance for everyone -- young or old, fit or fat -- in a given jurisdiction. This is as idiotic as charging 16-year-old boys and 60-year-old widows the same auto insurance rates.

Economics aside, Mr. Gratzer praises Shadegg-DeMint's clinical potential: "The more people who are covered the better. That means fewer people hesitate to get tests or follow up with physicians. Eventually, that will lead to a healthier population."

Critics argue letting consumers shop for health insurance will launch a dreaded "race to the bottom" as Americans buy inexpensive plans from unscrupulous insurers in unregulated states. But which states, precisely, let health insurers operate like numbers rackets? Of course, consumers could avoid questionable plans in clueless jurisdictions by patronizing reputable, sensibly supervised providers.

So, what's the cost? Nothing. Unlike nearly every act of this Congress, this proposal spends no tax dollars. Your wallet is safe. For now.

Democrats routinely complain 45 million Americans lack health insurance. Many are between jobs, young, or more prosperous, and decide to forgo insurance. Still, Democrats correctly call this a serious concern for many Americans. The Shadegg-DeMint proposal could be a key solution to this problem.

Democrats should embrace this Republican idea. If they would rather deny the uninsured an expanding array of lower-cost health-coverage options, let them say so this election year.]]> Mon, 23 Jan 2006 00:00:00 EST http://www.cato.org/pub_display.php?pub_id=5425 http://www.cato.org/pub_display.php?pub_id=5158

Employers can exclude an unlimited amount of employer-provided health benefits from wages when calculating payroll and income taxes. That tax exclusion is both inequitable and inefficient. It gives the biggest tax breaks to the highest earners, and causes everyone (high earners in particular) to buy excessive amounts of health coverage and health care.

In 2004, Congress created HSAs, which counteract that incentive by granting the same tax-free treatment to a limited amount of health savings. The worker owns her HSA deposits, can spend them tax-free on health care, and whatever she doesn't spend grows tax-free. That levels the playing field between (1) employer-sponsored health insurance and (2) health savings and the direct purchase of health-care services.

Economists and others have long recommended eliminating or capping the exclusion to promote equity and efficiency. However, that by itself would be a tax increase. Therefore, caps must be accompanied by some offsetting measure, such as a reduction in tax rates, to prevent a net tax increase. And whatever Congress does to change the tax code, it is crucial that it not tilt the playing field back toward over-reliance on health coverage.

The tax reform commission's leading proposal — Plan A — seems to fail on both these counts. According to reports, it would cap the exclusion without any offsetting measures and would tilt the playing field back toward over-reliance on health insurance.

Plan A reportedly includes three major changes affecting health care:

• It would cap the currently unlimited tax exclusion for employer-sponsored health insurance at $5,000 for those with self-only coverage and $11,500 for those with family coverage.
• Second, it would create what Tax Notes describes as "an equivalent tax break for individual policies" for those without employer-sponsored insurance.
• Third, it would roll HSAs (and other tax-preferred savings accounts) into "save for family accounts." (Let's call them SFFAs.) Unlike HSA contributions, SFFA contributions would be taxed.

Thus, it seems the commission's Plan A would cap the exclusion without any offsetting measures to prevent a tax increase. What's more, the proposal would seem to eliminate tax-free HSA contributions. The end result would be two health-related tax increases,

The impact would be severe. Projections by the Lewin Group suggest the commission's caps would tax the health premiums of 29 percent of those with self-only coverage (11.2 million individuals) and 18.5 percent of those with family coverage (7.7 million families).

Eliminating tax-free HSA contributions would affect over one million Americans and destroy the benefits of HSAs. Since below-the-cap premiums for third-party insurance would remain untaxed, workers and employers would stick with or gravitate back toward excessive coverage.

The commission's proposed caps would be set well above the average premium for HSA-compatible high-deductible health plans ($2,700/self-only, $7,909/family). Since only insurance premiums would be untaxed, employers and workers would have every incentive to maximize that tax break by sticking with comprehensive third-party coverage (average premiums: $4,024/self-only, $10,088/family).

An impetus behind the commission's efforts is the need to head off growth of the alternative minimum tax (AMT). Under current law, the AMT automatically will increase taxes for millions of middle-class Americans. The commission wants to repeal the AMT — but preserve the tax revenue that it would generate. Maintaining those revenue levels requires a tax increase, and it looks as though the commission has set its sights on health insurance and HSAs.

A better way to promote efficiency and equity in health care would be to cap the exclusion, but grant workers ownership and control over every one of those health-care dollars. One proposal would do be to increase HSA contribution limits so that workers could elect to receive all their health benefits as a cash contribution into their HSA. That would allow Congress to cap the exclusion, but give workers considerably more freedom with regard to their health benefits.]]> Mon, 31 Oct 2005 00:00:00 EST http://www.cato.org/pub_display.php?pub_id=5158 http://www.cato.org/pub_display.php?pub_id=5070 Hurricane Katrina has brought to the fore the strengths and weaknesses of America's health care delivery system. Millions of individual Americans, acting on their own initiative, rushed to meet the dire need Katrina created. Those efforts include providers rushing to assist in person, as well as charitable contributions made by those who never left home. In contrast, the response of government has been alarmingly slow and has even thwarted private efforts.

Why the discrepancy? Entrepreneurs and private charities often respond much faster than government because they are more agile and flexible. Just as important, they avoid wasting valuable resources, allowing help to go where it's needed the most.

These considerable advantages emerge from the fact that government must follow cumbersome rules, and that individuals are more careful with their own resources than with other people's. There is a lesson here for America's daily struggle with how to make health care more accessible.

In many sectors of the economy, market competition consistently improves quality while reducing costs. Health care is an exception, but not because competition cannot work. In fact, the recent rise in cash-paying patients traveling abroad for medical care shows that market competition makes even urgent, high-cost acute care more affordable.

Rather, health care is an exception because market competition is not allowed to work. Market competition requires three key elements: (1) a large pool of actual and potential producers with new ideas; (2) consumers who are free to choose different products; and (3) consumers who weigh the costs and benefits of those products. At every turn, government tax, spending, and regulatory policies thwart these necessary conditions of a free market.

To mention just one example, heavy government subsidies (through programs such as Medicare and Medicaid) and tax penalties (for workers who do not let an employer purchase their health care) discourage patients from weighing costs against benefits. As a result, Americans pay for more of their medical care through third parties (86 percent) than patients in 17 other advanced countries, including Canada.

Time and again, free markets have proven an effective framework for making products of ever-increasing quality available to an ever-increasing number of consumers. To make high-quality care available to more Americans, we need reform that will allow markets to work in health care. That should include:

• More flexible health savings accounts.
  Though promising, this new health insurance option is too restrictive. Congress should create large HSAs that are more flexible and give workers ownership of all their health care dollars and decisions.
• Injecting choice, competition, and ownership into Medicare.
  This federal program for the elderly engenders enormous waste and will soon impose a crushing tax burden unless we act soon. Congress should give seniors greater choice of health plans, and allow workers to save their Medicare taxes in personal accounts for their health care needs in retirement.
• Reforming Medicaid as Congress reformed welfare.
  This federal-state program for the poor creates the same harmful incentives as the welfare system Congress reformed in 1996. Those reforms should be applied to Medicaid.
• Health insurance deregulation.
  Costly state regulations make health insurance too expensive for many, and each state prohibits the purchase of coverage licensed in other states. Congress should tear down those barriers.
• Provider deregulation.
  Regulation of medical professionals (e.g., licensing, scope-of-practice, and telemedicine laws) and facilities (e.g., certificate-of-need laws) restrict the availability of medical care, particularly for the poor. Those laws should be relaxed.
• Competitive certification of medical technologies.
  Private markets already certify the effectiveness of secondary uses of drugs, and faster than the FDA does. That same process should be put to work for initial uses of drugs and medical devices.
• Letting patients and providers negotiate malpractice protections.
  Patients can choose different levels of malpractice protection by going abroad for care. They should be able to have the same choice at home.

Though not comprehensive, these reforms would go a long way toward improving the quality and convenience of medical services, while making care more accessible.

People are suffering in the wake of Katrina. But others suffer every day because our health care system is not what it should be. The gains are there to be had. We must build the will.]]> Tue, 04 Oct 2005 00:00:00 EDT http://www.cato.org/pub_display.php?pub_id=5070 http://www.cato.org/pub_display.php?pub_id=5137

We need it because competition is a tool for finding solutions. As Nobel laureate Friedrich Hayek explained, "Competition must be seen as a process in which people acquire and communicate knowledge," including innovative ideas for improving quality and reducing costs. In a free and open market, economic competition casts a wide net for the best ideas and puts them to work.

Where real market competition can be found in health care, it drives quality upward and prices downward. Laser eye surgery and cosmetic surgery are both competitive markets; in each, producers provide the information patients need, quality has improved, and inflation-adjusted prices have fallen.

It even works in acute care. In a growing trend, foreign hospitals are competing against hospitals in advanced countries that suffer under high prices or long waits for treatment. Just one example: North Carolinian Howard Staab had no health insurance when his doctor told him he needed open-heart surgery. Durham Regional Hospital said the procedure would cost $200,000. Instead, Staab flew to New Delhi, where a former NYU med school professor performed the operation for less than $10,000.

These are exceptions rather than the rule because we have disabled market competition throughout the health care sector. Government tax, spending, and regulatory policies limit the pool of competitors, restrict consumers' freedom to choose, and discourage consumers from shopping for value. The result is too little competition, too little choice, and too little attention paid to costs and quality.

Fortunately, where we have begun to restore those necessary conditions, market competition is starting to show results. In January 2004, Congress made tax-preferred health savings accounts (HSAs) available to those under age 65. HSAs encourage patients to weigh the costs and benefits of routine care, because HSA holders own the money in their account (which receives the same tax treatment as employment-based coverage).

Now that consumers care more about costs, producers are starting to provide price information. This month, Aetna announced it will publish the payment rates it negotiates with doctors and hospitals in order to help its customers make the best use of their dollars. The move will spur other carriers to do the same. The Consumer-Driven Market Report quoted a "leading national employee benefits advisor" as saying, "Imagine how many people in a Blues plan or United will want to see those prices, but they have to join Aetna to see them." Competition among providers - to provide price transparency, lower prices, and better quality - is soon to follow.

HSAs could do even more to promote competition if not for rules that limit their reach and make them unappealing to many consumers. HSAs currently require a high-deductible health plan, even though most workers are accustomed to lower deductibles. And though HSAs expand choice and encourage shopping for value when purchasing routine care, they do neither when it comes to purchasing coverage or expensive care.

Expanding HSAs can solve these problems. As Karen Davis of the Commonwealth Fund recommends, the insurance requirement for HSAs should be relaxed to allow coverage with lower deductibles and more flexible benefit designs. Better yet, eliminating that requirement would further expand coverage choices and spur competition among insurers.

Next, workers should be allowed to take the entire value of their health benefits as a cash deposit into their HSA, and to use HSA funds to purchase coverage from any source. That would dramatically increase coverage choices and encourage workers to make prudent decisions about the coverage they purchase.

Fixing all the obstacles to market competition in health care would require many more column inches than the typical opinion piece. But "large HSAs" would be a good first step toward making medical care of ever-increasing quality available to an ever-increasing number of consumers.]]> Sat, 01 Oct 2005 00:00:00 EDT http://www.cato.org/pub_display.php?pub_id=5137 http://www.cato.org/pub_display.php?pub_id=4528

Medicaid has ballooned from an effort to provide medical care to the poor into the most likely vehicle for a government take-over of the health care system. In 2003, there were 36 million Americans living in poverty, but 52 million on Medicaid. The states, which administer the program, have seen Medicaid become the largest item in their budgets, even larger than elementary and secondary education.

Medicaid is also notorious for providing low-quality care. Recipients have little choice of providers, and typically receive a much lower level of care from nursing homes compared to other patients. The Urban Institute has found that low-income adults who are eligible for Medicaid but have private coverage have fewer unmet medical needs than eligible adults who are enrolled in Medicaid.

A number of Republican governors believe they have struck upon a solution to both problems: improve quality by giving recipients more choices, and control costs by giving recipients a share of the savings.

They propose to give Medicaid recipients a voucher to purchase a health plan of their choice and/or to deposit money into an HSA for the recipients to manage. The idea is that insurers and providers will be more responsive to customers who can shop around, and recipients will help contain costs if they can keep whatever is left over in their HSA.

These approaches have an undeniable appeal to those who prefer the private sector to public programs. Thus they have attracted the support of Republican governors such as Jeb Bush (Fla.), Mark Sanford (S.C.), and Bill Owens (Colo.), as well as any number of market-oriented health policy groups.

Personally, I support HSAs and believe they should be expanded in the private sector. But that does not mean that they or vouchers are the solution to Medicaid’s problems. If we look at all the costs Medicaid imposes on society, it becomes clear that vouchers and HSAs could make Medicaid’s problems worse.

The key point is that Medicaid is a welfare program. Like all welfare programs, it encourages dependence and discourages self-reliance.

Nowadays, everyone understands that a welfare check can trap people in poverty by discouraging work, saving, etc. That’s why Congress reformed welfare in 1996. Yet Medicaid provides average benefits twice as valuable as those available under that reformed federal cash assistance program – and to 10 times as many recipients. It’s no wonder that scholars have found Medicaid also increases dependence and discourages self-reliance.

Which is why HSAs and vouchers spell trouble for Medicaid. Though they may improve the quality of care, they would do so at the cost of greater dependence and higher taxes.

Only two-thirds of Medicaid-eligible individuals are actually enrolled at a given time. With HSAs and vouchers making Medicaid benefits more attractive, we can expect something closer to full enrollment (read: higher taxes). Once enrolled, recipients will be even less eager to give up those now-more-valuable benefits (read: more dependence).

And what happens when seriously ill Medicaid patients face gaps in coverage after they have depleted their HSAs? Given the politics of health care, it is likely that states will cover those expenses too, which would make any budgetary savings evaporate.

There is a better solution, but it involves more political courage than making Medicaid benefits more attractive. There are credible indications that a sizable chunk of Medicaid enrollees do not belong there, including many who substitute Medicaid for private coverage or who feign poverty so that Medicaid will pay for their nursing home care.

Medicaid does not exist for these people. States should rededicate the program to the truly needy by disenrolling those recipients most likely to land on their feet. Ironically, that may actually increase overall coverage, as it did for non-citizen immigrants when Congress blocked them from the Medicaid rolls in 1996. Some states, led by Democratic Gov. Phil Bredesen (Tenn.), are taking this road, but they need more help.

Congress could provide that help by reforming Medicaid as it reformed welfare in 1996: cap federal funding, but give states broad flexibility to target the truly needy and reduce dependence. Doing that would reduce the overall cost of Medicaid, as it did for that other type of welfare.]]> Tue, 07 Jun 2005 00:00:00 EDT http://www.cato.org/pub_display.php?pub_id=4528 http://www.cato.org/pub_display.php?pub_id=4237

Most critics of personal accounts seem unconvinced of their own arguments, and therefore scared to death that many would jump at the chance to put a bit less into Social Security (and take less out), in order to build a retirement account they own and control.

Indeed, the latest Washington Post poll (oddly described as bad news for President Bush) finds that "68 percent of adults 18 to 29 years old said they support investing some Social Security contributions in the stock market. That support falls with the respondents' age, to 60 percent among those 40 to 49, 53 percent among those 50 to 64, and 37 percent among those 65 and older." The only age group that doesn't like the idea is ineligible and unaffected.

The first phase of this debate began with strained efforts to show that those lucky enough to have defined contribution plans, such as a 401k, have not fared so well if you pick a period short enough to be dominated by the market's decline in 2000-2002. Tom Luricella's Wall Street Journal piece last December thus cited a study claiming amateur investors earned "only" 6.4 percent a year over the 10 years ending in 2002, while funds managed by experts earned 6.8 percent. That proved nothing, because the figures were not adjusted for risk. Professional investors may have just invested a larger share in risky small-cap stocks and less in cash.

Looking only at 10 years ending in the bear market of 2002 also made investor returns look much worse than usual. The S&P500 index returned 10.9 percent a year over the past 15 years, and several of the largest, most popular managed funds did significantly better. Even if you shave off a few percentage points to compensate for inflation, the real return on stocks over any extended period has been enough to double the real size of a pension fund every 10 years. It might not be that good on the particular year you turn 65 or 67, but it would be absurd to compel people to liquidate or annuitize their account at such a young age. And, contrary to a New York Times report, retirees can buy annuities that leave any leftover money to heirs.

Desperate critics of personal accounts, tired of being caught fibbing about actual investment experience, have switched to hypothetical estimates of future investment returns. To make these hypothetical returns as low as possible, they first assume no more than half is invested in the stock market.

Jonathan Weisman of the Washington Post cites figures from Robert Shiller concerning a "life cycle" account that would have only 15 percent in stocks by age 60. Since Shiller calculates that U.S. stocks have long earned 6.8 percent a year in real terms, after adjusting for inflation, while bonds earn a more-variable 3 percent, any life cycle plan requiring a tiny share in stocks after middle age guarantees a low median return of only 3.4 percent. That is, he notes, "considerably below the 4.6 percent that the Social Security actuaries have assumed," because the actuaries assumed 50 percent in stocks (which is also much too low most of the time).

Weisman neglected to mention that Shiller found, "Workers could do better, of course, if they eschewed the life cycle accounts and went for 100 percent stocks. In this case ... the median net account is ... 10 times as large as with the baseline life cycle account. ... Workers who choose the 100 percent stocks option lose only 2 percent of the time."

In 1999, when Bill Clinton was president, Shiller appeared more worried about overtaxing younger people to subsidize retiring baby boomers. "We should do more yet to encourage saving," he wrote; "The younger people already have their own income concerns and needs without also having to bear the burden of the risks of the retired."

Shiller's figures reveal one genuine risk with personal accounts -- namely, that Congress might allow people too little choice between stocks and bonds. A 50-50 stock-bond split was originally mandated for 529 college savings plans, which has now been wisely scrapped. The notion that bonds are safer than stocks is a particularly risky illusion. Indeed, Shiller's study shows, "the outcome of a portfolio of 100 percent bonds is terrible. The final balance is negative 89 percent of the time." The value of bonds falls when interest rates rise, so investors in "safe" U.S. Treasury bonds have frequently been clobbered by big capital losses.

In the Federal Reserve Bank of St. Louis Review, Thomas Garret and Russell Rhine earned the last word on this topic. They calculate what the return would have been to those who retired in 2003 if they had instead been allowed to invest the money they "contributed" to Social Security in an S&P 500 index fund or 6-month CDs. Then, they compare what retirees' amortized monthly income would have been if payroll taxes were invested with what it actually is under Social Security. What they found was that "over 99 percent of the U.S. population would have earned a greater return by investing in the S&P 500, and over 95 percent would have earned a greater return by investing in 6-month CDs relative to the current Social Security system."

Specifically, "A person retiring at age 65 will only benefit more from Social Security relative to a private investment in the S&P 500 if he is a low earner and lives to be at least 96 years old. For those retiring at age 70, the only individuals that benefit more from Social Security are low earners who live to be at least 94 years old and average earners who live to be at least 108 years old."

In the future, the relative payback from a lifetime of paying Social Security taxes will get much worse: "Since those people retiring in 2003 have not always paid into the system at the current high rate of 12.4 percent, their average tax rate is only 10.7 percent, assuming 40 years of work. This average tax rate will increase in later years, as future retirees have fewer years paid in at lower tax rates and more years paid in at higher rates."

Whenever economists or journalists pretend that Social Security offers a better or safer return than the stock market, just remember Don Luskin's apt phrase about "the conspiracy to keep you poor and stupid."]]> Sun, 27 Mar 2005 00:00:00 EST http://www.cato.org/pub_display.php?pub_id=4237 http://www.cato.org/pub_display.php?pub_id=3523 President Bush has made it clear that reforming Social Security is one of his top priorities for his second term. Battle lines are forming among supporters and opponents of his proposal to allow younger workers to invest privately a portion of their Social Security taxes through individual accounts. At times the debate can seem mind-numbingly complex, full of arcane actuarial terms and competing claims about insolvency and rates of return.

But underneath all the noise, there are only a few things that Americans need to know in order to understand the Social Security crisis.

First, the current Social Security system is what is known as a "pay-as-you-go" system. It is not a savings or investment system, but a simple transfer from workers to retirees. The payroll taxes from each generation of workers are not saved or invested for that generation's retirement, but are used to pay benefits for those already retired. The current generation of workers must then hope that when their retirement comes, the next generation of workers will pay the taxes to support their benefits, and so on.

Obviously, a pay-as-you-go system is very sensitive to the number of people paying in versus the number of people collecting benefits. In other words, the ratio of workers to retirees is crucial to the financing of the current system.

The current worker-to-retiree demographics in the United States spell trouble for Social Security and its ability to keep up with its promised benefits. People are having smaller families resulting in fewer new workers paying taxes into Social Security. And seniors are living longer and collecting benefits for many more years. Add to this the fact that the Baby Boom generation is about to retire and you end up with far, far fewer workers than retirees than when Social Security started.

In 1950, there were 16 workers paying taxes into the system for every retiree who was taking benefits out of it. Today, there are a little more than three. By the time the baby boomers retire, there will be just two workers who will have to pay all the taxes to support every one retiree.

Fewer workers for more retirees mean each worker bears an increasing financial burden to pay the benefits that Social Security has promised. The original Social Security tax was just 2 percent on the first $3,000 that a worker earned, a maximum tax of $60 per year. By 1960, payroll taxes had risen to 6 percent. Today's workers pay a payroll tax of 12.4 percent.

It is going to get much worse. In order to continuing funding retiree benefits, the payroll tax will have to be raised to more than 18 percent. That's nearly a 50 percent increase.

Let's look at that financial burden another way. The Social Security payroll tax is already 12.4 percent of wages, or one eighth of a worker's total annual wages. It is the biggest tax the average household must pay. Roughly 80 percent of American families pay more in Social Security taxes than they do in federal income taxes.

Despite that already huge tax burden, the payroll tax will have to be increased by nearly half in order to continue paying Social Security benefits. That's a terrible burden to impose on our children and grandchildren.

The only way out of this problem is to change Social Security from a pay-as-you-go model to a system based on savings and investment. That is why President Bush wants to allow younger workers to begin saving some of their Social Security taxes. Those who disagree have an obligation to tell the rest of us how they would deal with the grim demographic reality.

Such legislation would be the most fundamental, and needed, reform since President Roosevelt introduced Social Security in 1935 as part of his New Deal. This reform means moving from a tax-based system to one of saving and investing in the strength of our economy.

The nest egg the president referred to would be one's personal property, a marked improvement over the existing system, wherein one has no personal property rights. This would allow retirees to bequeath their accumulated assets to their loved ones should they choose.

And for the first time, low-income workers would have the opportunity to accumulate wealth --- not magically become multimillionaires, mind you --- but build a nest egg they would own.

The problem with all of this, many argue, is that it would be too expensive. Their point is that under present law, projected payroll taxes will not be enough to pay all promised benefits. Redirecting some of that tax to personal accounts would, therefore, incur a further burden.

This argument does not consider the costs of the existing system should it not be reformed. According to Social Security's trustees, this would lead to payroll taxes being insufficient to pay all benefits by about 2018. Let's further assume that the government at that time borrows the difference so that all benefits are honored.

Such borrowing would continue through 2078 and then well beyond because the demographic trends that cause the imbalance are well established and not subject to meaningful change. The trustees estimate that total borrowing only to 2078 would be about $4.5 trillion in present value terms.

Another way of presenting this is each American family would have to give the government about $43,000 today, plus pay payroll taxes stipulated in present law in order to afford promised benefits.

Now let's assume we reform the system as broadly outlined by Bush. First of all, not everybody is going to jump on the president's idea, and for good reason. A 64-year-old wouldn't want to budge from the current program because he wouldn't have sufficient working time left to save and invest enough to replace what he would otherwise receive from the government program.

Conversely, a 21-year-old would opt for the personal account because he does have time to accumulate enough wealth on which to retire with benefits that most likely would be far greater than those from Social Security.

Let's assume all workers older than 35 would stay with Social Security, pay the full payroll tax and receive the stated benefit. All workers younger than 35 would choose the market-based alternative, save and invest part of their payroll tax for their retirement and continue to pay the remainder of the payroll tax to the government to help provide for those who stay with Social Security. The government is largely off the hook for them and fully off the hook for all new, younger workers who enter the labor force.

The government's liability, therefore, is now capped at the benefits payable to those over 35 and the much lower accrued benefits of those under 35. Starting almost immediately, the total number of workers and retirees in the older group shrinks because of death and the fact that no one enters the group.

When the last person dies, the government's benefit payments drop to zero. The government's ongoing liability for the younger group phases out as well because more and more people of this expanding group provide for themselves exclusively through their personal accounts.

It is true that achieving President Bush's vision for modernizing Social Security will require a transition period, bridge financing and an earlier date when we experience negative cash flows.

But under all reasonable assumptions, a market-based Social Security system will, over the long run, always be less costly than remaining with the present tax-funded structure.]]> Sun, 12 Dec 2004 00:00:00 EST http://www.cato.org/pub_display.php?pub_id=4023 http://www.cato.org/pub_display.php?pub_id=2812 The speed with which President Clinton received quadruple bypass surgery provides an important lesson in health care reform that voters should keep in mind this election season.

Last Thursday, the former president went to Northern Westchester Hospital, near his home in Chappaqua, New York, complaining of chest pain and shortness of breath. According to the New York Times, "initial tests showed nothing extraordinary," but doctors asked the former president to return the next morning.

Friday morning, cardiologists performed an angiogram. One reported seeing "multi-vessel coronary artery disease, normal heart function and no heart attack." However, the extent of the blockage in his coronary arteries was severe enough that doctors sent him to Columbia-Presbyterian Hospital in Manhattan.

Clinton's wife, Senator Hillary Rodham Clinton (D-NY), said that when doctors at Columbia-Presbyterian saw the extent of the blockage, "[t]hey did advise him to have bypass surgery, and to do it as soon as he could." Columbia-Presbyterian admitted the former president Friday and performed a successful quadruple bypass Monday.

The timeframe is important.

President and Senator Clinton's greatest health care legacy is their attempt to pass the Health Security Act in 1993 and 1994. At the time, it was said that 39 million Americans lacked health insurance. President Clinton made "health coverage that cannot be taken away" his administration's top priority, and planned to make good on that promise by turning America's health care system over to the federal government.

Under the Clinton Health Security Act, the federal government would have compelled all Americans to buy health coverage, dictated what type of coverage they would receive and where they would purchase it, set prices for coverage and medical services, and encouraged states to form their own single-payer health care systems.

The power of individuals to make countless choices about their health care would have been handed over to government, and the few remaining market mechanisms that contain costs and promote quality would have been lost.

The Economist wrote of the Clinton health plan, "Not since Franklin Roosevelt's War Production Board has it been suggested that so large a part of the American economy should suddenly be brought under government control."

Critics warned that socialized medicine would have the same effect in America as it has in other countries.

When government makes medical care "free," people demand medical care without regard to cost. Governments can't keep up with the excess demand and therefore must find some way of allocating care amid shortage conditions. Most choose to make patients wait.

According to Nadeem Esmail and Michael Walker of Canada's Fraser Institute, the median wait for an appointment with a cardiologist in Canada's single-payer health care system was 3.4 weeks in 2003. The wait for urgent bypass surgery was another 2.1 weeks on top of that, while the wait for elective bypass surgery was an additional 10.7 weeks. Canadian doctors reported a "reasonable" wait would be 0.9 and 6.1 weeks, respectively. Great Britain and New Zealand have even longer waiting times for bypass surgery.

Esmail and Walker cite studies confirming that longer waits for heart surgery result in a higher risk of heart attack and death.

In fact, they report American hospitals act as a "safety valve" for Canadian patients who face life-threatening shortages: "The government of British Columbia contracted Washington State hospitals to perform some 200 operations in 1989 following public dismay over the 6-month waiting list for cardiac bypass surgery in the province... A California heart-surgery centre has even advertised its services in a Vancouver newspaper."

Had America had followed his lead ten years ago, President Clinton might not have been able to get his diagnosis and surgery appointment so quickly.

Instead of waiting overnight for an appointment with a cardiologist, he might have had to wait the 3.4 weeks Canadians do.

Instead of waiting three days for quadruple bypass surgery, he might have had to wait over two weeks.

Instead of receiving care from what Senator Clinton called "one of the great hospitals in the world," President Clinton might be looking for a safety valve.

Since the Clinton health plan was defeated, untold patients have been aided because America's health care system, whatever its faults, was not subjected to the shortages and waiting lines that plague other nations.

But the future is less certain. Democratic presidential candidate Senator John F. Kerry (D-MA) is aggressively promoting his $1 trillion health care plan that borrows heavily from the Clinton health plan. Senator Kerry too seems to believe that having government issue a paper guarantee of "coverage" is the same thing as having access to medical care.

Truth be told, presidents and senators will never have a hard time getting medical treatment. Esmail and Walker report "a profusion of recent research reveals that cardiovascular surgery queues are routinely jumped by the famous and politically-connected." It's the rest who have to wait. Despite the Canadian government's egalitarian rhetoric, "low-income Canadians have less access to specialists, particularly cardiovascular ones, and have lower cardiovascular and cancer survival rates than their higher-income neighbours."

I join all Americans of good will in wishing President Clinton a speedy recovery. And I hope they will join me in wishing Senator Kerry's health plan a quick, painless death.

Waiting for bypass surgery
	Appointment with cardiologist	Urgent bypass surgery
President Clinton	0.5 days	3 days
Typical Canadian	24 days	15 days
Source: Fraser Institute, author's calculations

After President Bush announced last year he would spend "up to $400 billion" over 10 years to add prescription drug coverage to Medicare, senior officials in his administration suppressed estimates by chief Medicare actuary Richard Foster that projected the leading bills before Congress would exceed that amount by as much as $200 billion. Tom Scully, then Bush's Medicare administrator, expressly forbade Foster to share his estimates with Congress and allegedly threatened to fire Foster if he disobeyed. The non-partisan Congressional Research Service opined this week it is possible Scully's actions violated the law.

Meanwhile, Scully and Health and Human Services Secretary Tommy Thompson campaigned for the bills, citing a Congressional Budget Office cost estimate that met the president's target. As a result, Congress and the public debated and approved the largest entitlement expansion since the creation of Medicare, unaware of the existence of a higher (and highly credible) cost estimate that could have changed the outcome.

Only after the president signed the program into law did the administration release its higher estimate, which came in at $534 billion. When asked about the higher estimate, Bush's response was Clintonian. Without actually saying so, he hinted he learned of the higher estimate only after he signed the bill. An April 16 letter from HHS to Rep. Henry Waxman (D-Calif.) musters all the obfuscation it can to obstruct Waxman's investigation.

Bush made trust the theme of his last campaign. Yet he and his administration clearly did not trust the people with all the relevant information.

And this scandal compounds another. When brought to a final vote in the House at 3 a.m. on a Sunday, a clear majority voted against the program. Yet GOP leaders held the vote open for nearly three hours -- rather than the usual 15 minutes -- until they twisted enough arms to change the outcome.

The Republican leadership did exactly what Republicans criticized Al Gore for attempting in Florida: keep counting until you get the result you want, then stop. Congressional scholar Norm Ornstein calls the vote "the ugliest and most outrageous breach of standards in the modern history of the House."

These are officials who once signed a Contract with America that promised "to restore the bonds of trust between the people and their elected representatives," to give legislation "a clear and fair vote," and to end "government that is . . . too easy with the people's money." These principles were set aside, and in the unwitting service of the administration's deception. Yet not one Republican has joined House Democrats in calling for greater openness from the administration. We're a long way from 1994.

The greatest scandal is the program itself. No one putting his own money on the line would invest in a product like this.

Foster testified before Congress that rather than provide catastrophic-only coverage, the program violates "standard classical insurance principles" by providing coverage that begins at a low deductible then disappears and reappears as one's expenses rise. The point of this bizarre structure, he explained, is political: broad subsidies for non-catastrophic expenses attract more votes. The problem is, they also will lead to over- consumption, inflated drug prices and, if history is any guide, will cost well over $534 billion.

The subsidies were made so broad they will force taxpayers to pick up costs the private sector is now paying voluntarily. The CBO estimates every fourth participant would have had private drug coverage anyway. Employers and unions will receive $71 billion just to keep them from dropping their retirees into the program.

It's hard to remember when more people violated more stated principles to enact such an unprincipled law. Fortunately, the drug program does not take effect until 2006. That gives enough time to repeal it and hold an honest, principled debate about reforming Medicare.

That is, until now.

Breaking what must have been a difficult 10-year silence, Sen. Clinton (D-N.Y.) asked on the cover of a recent issue of the New York Times Magazine, "Now Can We Talk About Health Care?" Without waiting for an answer, she called for "a new social contract for a new century premised on joint responsibility to prevent disease and provide those who need care access to it." Unfortunately, the new social contract looks a lot like the old social contract she offered last century: perverse incentives plus tight federal controls on the practice of medicine, health benefits, insurance pricing, medical records, municipalities, hospitals, doctors, household cleaners, gym class, diet, urban sprawl, you name it. It's déjà vu, all over again.

Of course, we never actually stopped talking about health care. The past decade has seen the Health Insurance Portability and Accountability Act, federal benefit mandates, the State Children's Health Insurance Program, a Medicare prescription drug benefit, tax-free health savings accounts, hundreds of lawsuits, regulations, and state laws, and thousands of proposals that mercifully never became law, such as greater federal regulation in the name of patients' rights. The conversation hasn't abated because Congress' perennial approach to health reform -- shift responsibility and control away from patients -- keeps creating problems that merit discussion.

However, we did stop talking about nationalization, which, ironically, has benefited the left. American medicine is already largely socialized, which causes problems that create an impetus for government action. Since nearly every act of Congress with "health" in the title brings greater socialization, the left has been slowly and surely moving us toward its goal.

So why would Clinton try to shift debate from a successful incremental strategy to the historically inhospitable terrain of "comprehensive health care reform?"

It certainly isn't because the case is any stronger. Except for a few 21^st century garnishes, Clinton's manifesto relies on decade-old misconceptions and drifts into cognitive dissonance. She argues the U.S. ranks 42^nd among nations in infant mortality, even though many nations underreport such deaths. We use a more inclusive definition of live births, and when measured by birth weight, infants do better here than in nations with supposedly lower mortality rates. She speaks of 43 million uninsured Americans despite authoritative scholarship showing the number is closer to half that figure. At the same time she decries the lack of treatments for rare diseases, she praises the same Food and Drug Administration that makes such treatments unprofitable. "Individuals should understand that they put their lives at risk with unhealthy behavior," she says, but risk-based insurance pricing is cruel. Administrative costs are bad, but third-party payment is good. Emergency room overcrowding is not a consequence of socialization, but evidence of the need for greater socialization.

Nor has her prescription gotten any sounder. It remains "universal coverage," despite evidence that what such health systems provide is neither universal nor coverage. She hints at rules that would substitute the government's judgment about what treatments are appropriate for the judgment of the physician on the spot. The public health system would be brought "up to date" with authority to "control dangerous behaviors," such as eating fast foods. To drive home the Orwellian tone, she pens, "It comes down to individual responsibility reinforced by national policy."

No, the reason behind Clinton's shift in strategy is hidden to all but the most ardent supporters and opponents of socialized medicine.

Tucked away in the recently enacted Medicare prescription drug bill is a deceptively small provision allowing personal, tax-free health savings accounts. Health savings accounts mark a fundamental shift in federal health care policy. Health savings accounts treat an individual's medical expenditures and savings on a par with tax-free employer expenditures. As a result, they empower individuals to become stewards of their own health care dollars rather than force people to depend on their employer to spend those dollars wisely.

The consequences of this little-remarked change will be profound. Health savings accounts will lead patients to curb rising health care costs, demand greater value, and eliminate waste because it's their money at stake.

However, the consequences that frighten the left are political. The left cannot impose a government-run health care system without a widespread sense of entitlement and openness to dependence, both of which are manifest in America's health care sector. Yet health savings accounts breed the opposite values of personal responsibility and self-reliance. Where socialized medicine requires a culture of submission, health savings accounts will accustom millions to making their own decisions. This cultural change not only will lead voters to resist socialization of the private health care sector, but as these voters reach retirement age they will demand reforms that give them a greater degree of choice within Medicare. Just as IRAs and 401(k)s made the political landscape more hospitable to Wall Street and free markets by turning Americans into investors, health savings accounts will generate the political will to enact consumer-based Medicare reforms by turning millions of Americans into sovereign health care consumers.

Former Sen. Phil Gramm quips that the left reacts to health savings accounts like a vampire reacts to a cross, because the left knows that once patients get a taste of freedom, all hope of achieving a government-run health care system will vanish.

Clinton inadvertently acknowledges this reason for her change in strategy by veering off-message for several column-inches to denounce health savings accounts and similar reforms. She argues that as stewards of their own health care dollars, consumers aren't sophisticated enough to demand value from medical providers and will harm themselves by forgoing needed care to save a few bucks. Like all opponents of consumerism, the real object of her disapproval is the public's intelligence. More importantly, health savings accounts and similar reforms threaten, as she puts it, "what we consider traditional insurance."

To the most ardent supporters and opponents of health care consumerism, Clinton's desire to accelerate socialization makes perfect sense. Considering how health savings accounts will transform America's health care sector, it's imperative.

For the first time, advocates of socialized medicine are on the run. This ought to be good.

Though Kerry claims he would reduce costs and expand access to medical care, his two-pronged health plan would have the opposite effects, for it would bring America several steps closer to a system of socialized medicine, with all the increased costs and rationing of care that follow. Kerry would nationalize significant portions of the private health insurance industry and subject what remains to tight bureaucratic control from Washington, D.C.

Kerry's first swipe at patient sovereignty would be to enlarge existing government health programs. While former Clinton administration health official Ken Thorpe estimates these expansions would cover 18 million previously uninsured Americans, those individuals may be disappointed with what they get. Patients enrolled in government health programs often have difficulty finding doctors that accept government coverage. Oregon's Medicaid bureaucracy admitted to such rationing when it lamented in its 2001 Oregon Heath Services Commission Report, "Having coverage does not always guarantee access" to medical care.

Worse, research by RAND Health suggests this expansion would induce as many as 18 million additional Americans to switch from private health coverage to the "free" government coverage. Not only would this leave millions with worse coverage than before, it would force taxpayers to bear costs that today are borne voluntarily by the private sector. Because it is often employers who decide to drop private health insurance when their workers become eligible for government programs, the Kerry health plan would take away many Americans' current coverage against their will and leave them with poorer coverage.

The second prong of the Kerry health plan would draw much of the remaining private health insurance market into a nationwide "health alliance" created and tightly regulated by the federal government. Through various inducements, this health alliance would drain employers and individuals out of state-regulated markets, thereby advancing the trend toward greater federal regulation of health insurance at the expense of state regulation. This health alliance also would require invasive controls over the provision of medical care and ultimately bureaucratic rationing.

The primary inducement for participation in the health alliance would be a promised 10 percent discount on health premiums (or $1,000 for a family of four) that would flow from having taxpayers cover 75 percent of all health insurance claims above $50,000. In effect, this would nationalize the catastrophic health insurance industry.

What Kerry claims would be a reduction in health care costs merely would be a shift of existing costs from premium-payers to taxpayers -- some $290 billion over nine years, according to Prof. Thorpe. Moreover, the proposal would lead to higher costs by making patients, doctors, employers, and insurers less responsible for their decisions about what medical care to consume, provide, and reimburse. To control spending, the federal government would be forced to impose bureaucratic controls that restrict what care patients may receive both above and below the $50,000 threshold. The health alliance soon would come to resemble Medicaid, where having "coverage" doesn't mean you get medical care.

Other inducements include subsidies for small businesses, the near-elderly, and low-income individuals to enroll in the alliance's nationalized catastrophic health insurance program.

In total, Prof. Thorpe estimates the Kerry health plan would cost $972 billion over nine years. This is about twice the cost of the recently enacted Medicare prescription drug benefit and would require a tax increase roughly equivalent to what the Treasury Department estimates to be the cost of repealing both Bush tax cuts.

The Kerry health plan does contain two market-friendly proposals. One, it proposes greater freedom for Americans to purchase prescription drugs from abroad, which would help eliminate foreign price controls and eventually reduce the cost of medicines through a more equitable international distribution of the costs of researching and developing new drugs. Two, it proposes to limit the ability of drug innovators to extend their patents by gaming the process for approving generic drugs. Unfortunately, Kerry fails to address the excessively slow and costly approval process for new drugs that leads to such gaming.

As a final note, Kerry's website details numerous additional controls he would have the federal government impose on private health insurers and consumers. America would be better off sitting on its hands than enacting such sweeping socialization of its health care system.

States are attempting to impose price controls on pharmaceuticals. Ambitious attorneys general and left-wing interest groups have joined to target drug makers for a host of alleged offenses.

Doctors across the nation have sued nine major health insurers over their reimbursement policies. Aetna has broken industry ranks, agreeing to a $300 million settlement, but the rest of the class-action lawsuit continues.

Fixing the health-care system seems more difficult than ever.

The focus of much criticism has been on health maintenance organizations, which are designed to limit care. While they are an important option in a competitive medical industry, government and businesses are increasingly pushing reluctant patients into HMOs.

Doing so is supposed to save money. Yet Hewitt Associates reports that HMO premiums will rise 22 percent this year.

The percentage of the public viewing HMOs as doing a good job fell from 51 percent to 29 percent between 1997 and 2001. This has led nearly half of all states to pass any-willing-provider laws mandating that managed-care networks accept any doctor or hospital agreeing to its fees and rules. Consumers get more choice, but HMOs lose bargaining power to exact lower fees.

Individual managed-care companies have become the target of special disdain. For instance, California's WellPoint Health Networks, the nation's third-largest system (by enrollment), has been criticized for the high salary of its CEO, Leonard Schaeffer – No. 19 among America's top 500 firms – and its takeover of nonprofits, such as Blue Cross/Blue Shield of Georgia and Missouri.

A WellPoint cost-cutting tactic is to lobby the Food and Drug Administration to move drugs from prescription to over-the-counter status. In 1998, the company petitioned to shift the anti-allergy drugs Allegra, Claritin and Zyrtec to OTC. Last year, WellPoint filed a similar motion for Clarinex.

Normally, drug makers lead the push for OTC status; Claritin was moved to OTC in December only after manufacturer Schering-Plough dropped its opposition. But now FDA Commissioner Mark McClellan is considering acting on his own initiative.

By allowing patients to self-medicate, OTC increases consumer choice and reduces costs. However, most insurers, including WellPoint, do not cover OTC medications. So in the near term, at least, only insurers save money – indeed, patients actually may have to spend more money for the same medicine.

Insurers, and especially HMOs, also make it hard for patients to receive competing prescription drugs. For instance, Dr. Lewis Kanter, an allergy specialist in Camarillo, north of Los Angeles, complains that he is "bombarded with paperwork" from insurers if he doesn't direct patients to OTC Claritin.

Some insurers simply drop coverage. Last fall, Aetna requested permission to stop paying for non-sedating antihistamines altogether. California responded by advising insurers not to drop coverage for an entire class of drugs just because one went OTC. This rule, like state any-willing-provider laws, expands choice, but only by increasing insurer costs.

The problem with HMOs is not HMOs per se, but the environment in which they operate. Government policy inadvertently discourages provision of quality health care, as exemplified by the artificial emphasis on HMOs.

Because the federal government doesn't tax employer-provided health insurance, businesses provide insurance, which means they choose providers and plans. Most companies, understandably, are more interested in constraining health care costs than expanding coverage. Thus their ever-stronger push, mirrored by government policy, to get patients into managed care.

The system makes no sense. Employers don't provide auto or homeowner's insurance.

Similarly, people need to be able to tailor health insurance to their own circumstances, and thus choose the right balance between cost savings and coverage limitations. One solution is placing medical savings accounts on a level playing field with traditional insurance, thereby returning health-care decisions to employees.

There are only two reform paths for today's broken system. The first is to fully nationalize the system, which would sacrifice coverage and quality to save money. The alternative is to reintroduce consumer choice and industry competition to medicine.

Congressional Democrats and Democratic presidential candidates want to take the first course. For the American people's sake, the Bush administration and Congress must travel the second.

Nevertheless, President Bush will move Medicare reform to the top tier of his domestic policy agenda for 2003. His State of the Union address on Jan. 28 is expected to emphasize not only his support for providing a new (and more expensive) prescription drug benefit to seniors, but also the need to begin basic restructuring of the 37-year-old health care program for seniors. If the president hopes to get Medicare out of reform school, he will need to concentrate on four key objectives:

One, get the overall program structure realigned correctly, and worry about budget savings later;

Two, structurally integrate the various portions of the antiquated Medicare program (Part A for hospital care, Part B for outpatient care, and Part C for private plan options) into a single package, instead of constructing another new financing "silo" for expanded drug benefits;

Three, spend political capital in setting Medicare payments according to indicators of market-based prices, instead of administered price controls. Some early, if limited, version of competitive bidding -- to determine prices and reimbursements and set up level playing field competition between the traditional Medicare program and private plan alternatives - is essential; and

Four, provide strong economic incentives to Medicare beneficiaries who choose lower-cost private plan options. But before the president can lead the way in an improved political landscape, he will need to jettison some recent rhetorical baggage and reexamine some details of the latest draft proposal circulating at the White House.

Over the last two years, the Bush administration generally limited its activity on the Medicare reform front to a statement of broad principles in July 2001 that promised new benefits and downplayed the structural changes needed to keep the program affordable and sustainable. The president tried to offer seniors an improved Medicare program that did not appear to threaten the status quo. He promised seniors already enrolled in Medicare and those near retirement that they could keep their Medicare "exactly the way it is today."

Last year's unresolved Medicare drug debate will be back, in a different political context. Republicans are back in nominal control of both houses of Congress. The Bush re-election team and other GOP candidates in 2004 will find it harder to tell seniors again that the "Democratic dog ate my Medicare drug homework." Senior voters will insist on finally redeeming some of the rhetorical commitments made again and again by top Republicans, including Bush.

However, the price tag keeps climbing higher with each new round of the Medicare prescription drug debate. The scope and scale of any new Medicare drug benefit will need to be reduced significantly to remain fiscally sustainable and politically realistic. Keeping most of the things in Medicare "the way they are" is only the way it used to be. Traditional calculations of Medicare's trust fund solvency don't capture the full dimensions of the imminent collision ahead between the demands of our major entitlement programs, like Medicare, and the resource-base available to sustain them. But consider the latest annual Financial Report of the U.S. Government, which uses accrual accounting under generally accepted, non-Enron-like, accounting principles. The 2001 Report estimated that the net present value of negative cash flow (the funds needed to cover projected shortfalls) over the next 75 years for Medicare under current law is $12.8 trillion. That's $12,800,000,000,000.00, if you paid off the intergeneration balloon note today.

Taxpayers cannot and will not keep trying to fill that massive fiscal sinkhole indefinitely. Hence, renewed interest in fitting a more limited drug benefit within a reformed Medicare program that no longer remains on a collision course set by autopilot.

Further adding urgency for broader Medicare reform are growing signs that the political expedient of controlling Medicare costs through arbitrary price controls on physicians and hospitals is running out of gas and beginning to jeopardize access to quality health care. Increasing numbers of physicians who refuse to see new Medicare patients, drop out of the program entirely, or retire early are the "mine canaries" that signal even more serious threats ahead to continued access to quality care for Medicare seniors.

Yet one should remain skeptical that serious Medicare reform is imminent, given a host of traditional political obstacles that always argue to "stop thinking about tomorrow." Other important hurdles to overcome include the legacy of past flawed reform efforts that triggered the meltdown of Medicare+Choice private plan options and the tendency for promises of new and improved benefits to drown out the need for structural changes that set limits and require tradeoffs.

At the moment, President Bush appears likely to propose a three-tiered menu of Medicare options that would limit expanded drug coverage to seniors who move to new types of private plans and are willing to pay more for better health benefits. Unfortunately, simply trying to hook seniors on private insurance plans by offering them drugs will not fly - either politically or commercially. Most current beneficiaries will remain in the traditional Medicare program even if the availability of private plans improves. Fear of change and inertia by beneficiaries, as well as the obstacles to private plan penetration in rural markets, will slow the pace of change.

A better approach would provide integrated and comprehensive benefits options that compete on a truly level playing field, as once proposed by a majority of the 1999 Bipartisan Medicare Commission. If Medicare payments to beneficiaries were linked to market prices by using the enrollment-weighted competitive bids of all plans ready to serve all comers in a given regional market, the traditional Medicare program could and should provide drug benefits - as long as its administrators could adjust the program's other benefits and cost sharing provisions to meet market-based fiscal constraints.

Other fine-tuning of the Bush administration proposal should include providing full cash rebates (not just 75 percent) of the savings to seniors who choose plans that cost less than the price set through the regional competitive bidding process. Initial versions of basic drug benefits should focus on stop-loss protection against high drug costs, without early dollar coverage as well. Some secondary subsidies for lower-income seniors and beneficiaries with exceptionally high medical expenses would be far simpler to administer than continuing the perpetually elusive search for broader risk-adjusted reimbursement methods that could actually work in practice.

The essential long-term goal is to inject real-world price information into the entire Medicare program, so that even its dominant fee-for-service portion will need to adjust its operations to the marketplace, instead of the other way around. Standard politics, which resorts to top-down price controls and hidden benefits reductions, won't be able to reform traditional Medicare in the decades ahead. But market pressures and beneficiary choices will.

When you listen to the president's State of the Union address, salute him for trying to move beyond politics as usual. This year's debate won't be pretty. But the clearest sign that Medicare has a chance to graduate from reform school would be a credible threat by the president that he will walk away from any political deals on Capitol Hill that offer only expanded Medicare drug benefits without key structural reforms of the overall Medicare program.

Don't just read his lips, read between the lines, too.