Avoiding a Health Care Disaster

January 22, 2009 • Speeches

The speech below was delivered at a Cato event on Capitol Hill on January 22, 2009.


We are just two days into a new administration. I am pleased to report that I am still on a high over America having its first African‐​American president.

Our new president, Barack Obama, has indicated that health care reform will be one of his top priorities. 

The need for reform is great. The cost of health care and health insurance continues to climb faster than wages. The Congressional Budget Office reports that government health care programs will cause the federal budget to double as a share of GDP, reaching 40 percent by the end of this century.
Making matters worse, we’re not even getting our money’s worth. The CBO also estimates that $700 billion – some 5 percent of U.S. GDP – is wasted each year on medical care that provides no discernable value. 
At the same time, millions of Americans are without health insurance, for no good reason. The Institute of Medicine estimates that a lack of health insurance leads to 18,000 unnecessary deaths each year, while medical errors lead to as many as 100,000 deaths each year.
It is too soon to know when Congress and the Obama administration will take up health care reform, and we cannot know exactly what shape reform will take. 

But given the similarities between the reforms proposed by the Obama campaign, by Senate Finance Committee chairman Max Baucus, by Health and Human Services Secretary Tom Daschle in his recent book, and the reforms written into legislation by Sen. Ron Wyden, we can make a pretty good guess.

And we can also conclude that, if Mr. Obama and congressional Democrats adhere to the basic principles of those reform proposals, America would be better off with no health care reform at all.

I say that not because Mr. Obama’s plan would force millions of Americans to give up their current health coverage – though it would. And not because forcing people to change their health coverage inevitably threatens their ability to see their current doctors – though it does.

The real problem with the leading Democratic health care reform proposals is that they would give us more of the same. If Congress creates: a new government health insurance program for those under age 65, modeled on Medicare; mandates that require people to purchase a government‐​defined health insurance plan; price controls for health insurance premiums; or new government bureaucracies to implement these and other activities;
America’s health care sector will continue to cost too much and produce too little.

Let’s examine each of those proposals in turn.

A Public Plan

Messrs. Obama and Baucus propose to create a new government health insurance program for those under age 65. The new public plan would be modeled on Medicare. It would compete with private insurance companies. And may the best plan win.

Though the idea of fair and open competition is as American as apple pie, the notion that there would be fair competition between a government health insurance plan and private insurers is nonsense. 

Not only would one competitor make and enforce the rules to which all must adhere, but that competitor would have the unique ability to subsidize its activities in ways that other competitors cannot. Competition between a public plan and private insurers would be about as fair as playing in an NBA final where the ref has money riding on the other team. 

The clearest evidence that supporters of a public plan do not want fair competition is Mr. Obama’s recent proposal to eliminate the Medicare Advantage program. Mr. Obama did not propose leveling the playing field between traditional Medicare and private Medicare plans. He proposed eliminating private plans entirely, and ousting 10 million seniors from the health plans they chose.

Moreover, Medicare is an unwise model for reform, because it is the leading force pushing costs upward and quality downward. Medicare’s change‐​resistant payment system rewards waste and error, while punishing quality.

Researchers at Dartmouth Medical School estimate that Medicare wastes one‐​third of its budget – some $150 billion per year – on medical care that makes seniors neither healthier nor any happier. Diverting those resources from more productive uses, such as expanding coverage, costs lives.

When doctors, hospitals, and private insurers try to improve quality – through electronic medical records, better coordinated care, or by reducing medical errors – Medicare’s change‐​resistant payment system punishes them for doing so. That discourages innovation and costs lives.

Creating a new government health insurance program would subject even more of the market to those perverse incentives and block innovations that would make medicine better, cheaper, and safer.

Mandates & Price Controls

Two other reforms common to all the leading Democratic proposals are mandates requiring Americans to purchase health insurance, and federal price controls that would increase health insurance premiums for healthy people in the hopes of lowering premiums for the sick. 

Much is made about the difference between an “employer mandate,” which Mr. Obama endorses, and an “individual mandate,” which Mr. Obama has criticized but that has been endorsed by Messrs. Baucus, Daschle, Wyden, and others. 

In the presidential primaries, Mr. Obama essentially criticized Sen. Hillary Clinton’s “individual mandate” as a tax on the uninsured. But the same is true of Mr. Obama’s employer mandate. The chairman of Mr. Obama’s National Economic Council, Larry Summers, describes employer mandates as “disguised tax and expenditure measures” that increase unemployment, work against the very people they purport to help, and expand the size of government. That’s an odd prescription for an economy in the midst of a recession.

There is greater unanimity among Democrats when it comes to imposing price controls on health insurance premiums. And the idea has obvious surface appeal. Yet, just as price controls have failed in every application throughout history, Mark Pauly of the University of Pennsylvania and his colleagues have shown, premium controls offer little or no improvement in terms of covering the sick.

Rather, premium controls encourage insurers to avoid the sick. And who can blame them? If insurers receive a premium keyed to average medical expenses for each enrollee, then enrollees with higher‐​than‐​average medical expenses are nothing but a liability. That’s why Humana called the sickest people in its Medicare prescription drug plan to tell them that Sierra Health Services’ SierraRx plan offered better coverage. Premium controls themselves lead to worse health care for the sick, because they reward insurers for skimping on care or otherwise getting rid of the sick.

But it is acting in tandem that mandates and premium controls do the most damage. Together, they would execute a pincer movement that would march all Americans into a narrow range of government‐​run health plans.

With its requirement that all Americans purchase “meaningful” coverage, Mr. Obama’s proposed employer mandate could eliminate the most economical 50 percent of health plans available today. Some 80 million Americans with employer‐​sponsored insurance could have to purchase a more costly plan.

At the same time, premium controls unleash adverse selection, which will eliminate the most comprehensive health insurance options. That’s what has happened in the health insurance exchanges run by the federal government, the University of California, and Harvard University. The effect of adverse selection on Harvard’s health insurance options was documented by none other than Obama advisor David Cutler.

Taken together, mandates and premium controls would effectively socialize private health insurance. They would eliminate both low‐​cost and comprehensive insurance options, and slowly march everyone into a narrow range of health plans.

It matters little that we would still call these health plans “private.” If government compels you to participate, if the government decides what you will put in, and what you get out, then what is there left to socialize?

Daschle’s Rationing Board

And for all the disruption that the leading Democratic plans would bring, they will neither contain the growth of health care spending nor improve the quality of care.

The reason why can be found in a few inspirational passages that I’d like to read from Mr. Daschle’s book on health care reform. Mr. Daschle writes:

What medical services should the government, or private insurers, have to cover?…

White House policymakers and members of Congress aren’t qualified to make those decisions…

Because health care is so complex, special‐​interest experts have the upper hand in their dealings with lawmakers…

The American people need to know that decisions on coverage and cost are being made for the public good, and aren’t tainted by politics and special interests…

Professional expertise and trustworthiness – these are qualities that Congress lacks when it comes to health care…

In Congress, every decision is political…

Health care policy shouldn’t be subject to the whims of subcommittee chairmen and special interests. It is too complicated and too important for that…

After nearly a century of failure, it’s time to try another way…

If coverage decisions are taken out of the hands of elected officials, advocacy groups with political clout wouldn’t be able to exercise it…

I suspect that most members of Congress would be glad to be rid of their responsibility for controversial health policy decisions.

I read those words and I say, amen. Mr. Daschle gives one of the best explanations I’ve ever read of why Congress should return to individual Americans the power to choose their own health plan and make their own health care decisions. 

Unfortunately, that is not what Mr. Daschle has in mind. 

Instead, Mr. Daschle hopes to break the cycle of government failure with a new Federal Health Board – a Daschle ex machina, if you will – which would make decisions about your health care free from political influence. The Federal Health Board would:

  • Dictate health insurance premiums and provider payments,
  • Make “specific coverage decisions” that will determine whether millions of Americans get the drug or surgery they want,
    Create “a single set of standards” for all government health care programs,
  • “Exert tremendous influence on every other provider and payer, even those in the private sector,” and
  • Operate under “a decision‐​making process that is one step removed from Congress and the White House.”

Make no mistake. What Mr. Daschle proposes is, in fact, a Rationing Board. No matter what Mr. Daschle or other advocates of this approach may say, the aim of a Federal Health Board or any federal agency dedicated to generating and using comparative‐​effectiveness research is to ration medical care.

The reason that we’ve been unable to make health care better, cheaper, and safer, as Mr. Daschle sees it, is not because Congress has too much power over your health care. It is because the American people’s access to their members of Congress – their right to petition government for a redress of grievances – makes it too difficult for Congress to exercise that power. Therefore, the influence of the people must be curtailed. Mr. Daschle does not have a problem with power. His problem is with accountability.

It is tempting to think that a Daschle ex machina can overcome the political obstacles to reform. Yet the danger of those proposals is not so much that they will succeed in rationing care. 

More likely, they would fail. As Matthew Holt recently wrote at The Health Care Blog, “the Federal Health Board, if it gets established, will get defanged by lobbyists immediately.” 

Why? The graveyards in Washington are littered with agencies that have tried to use comparative effectiveness research to reduce government spending on low‐​value medical services, as well as schemes to contain Medicare and Medicaid spending that have later been undone by Congress. 

A Better Way: Freedom

Mr. Daschle is correct about one thing. “After nearly a century of failure, it’s time to try another way.” 

Over the past century, health care reform has largely meant asking freedom to yield to government. Rather than asking the American people’s freedom to control their health care to yield to government once again, it is time we asked government to yield to freedom. 

It is time we gave all Americans – whether under or over age 65 – the freedom to control their health care dollars and choose their own health plan.

It is time that government eliminated regulations that have blocked the freedom of innovative health plans and providers to introduce secure health coverage and better‐​cheaper‐​safer medical care.

Freedom will make health insurance more affordable, as law professors Henry Butler, Larry Ribstein, and David Hyman will argue in a forthcoming Cato study. 

Freedom will deliver better‐​coordinated care, as Arnold Kling and I argue in a Cato study available today. 

Freedom will deliver more comparative‐​effectiveness information, as I argue in a forthcoming Cato study. And freedom will enable purchasers to use that information to contain costs – something that government has proven over and over that it is incapable of doing. 

Freedom will make private health insurance possible for many more patients with high‐​cost medical conditions, as University of Chicago finance professor John Cochrane argued in his classic 1995 Journal of Political Economy article, and will argue again in an upcoming Cato study.

Finally, freedom will enhance society’s ability to care for the sick and needy, as I argue in the Cato Handbook for Policymakers to be released early next month.

Five or Ten Years from Now

Admittedly, the freedom to control your health care and the freedom to innovate are unlikely to gain ground in this Congress. 

And so, it would be better if this Congress adhered to the principle of “don’t just do something – stand there!” 

It would be better if Congress blocked new government health programs, mandates, price controls, and the bureaucracies designed to implement them, and we put off health care reform until we have a Congress that looks more favorably on these freedoms than the past few Congresses. 

Because if we do not block these measures, then in five or ten years, we will be right back where we are right now: lamenting the growing cost of health care; outraged that insurers are avoiding the sick; bemoaning the lack of choice in health insurance; decrying our health care sector’s inability to coordinate care; lamenting the lack of comparative‐​effectiveness research, and how we don’t even use the information we have, and scratching our heads over why health care lags other sectors in terms of information technology

We face serious challenges in health care. 

But the first rule of holes advises that when you’re in a hole, stop digging. An intolerable status quo is no excuse for making things worse. Better that we do nothing than rely on the same tired ideology that brought us to where we are now.

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