We Simply Must Spend Less

The health-care reform discussion of 2009 is entering the phase at which there either will be a compromise agreed upon or no legislation will be passed. Doing nothing is always an option. However, a clear understanding of the status quo is needed to determine whether a compromise bill is better than nothing.

While cost and coverage are linked, rising costs are the biggest problem. If we do nothing, the United States will spend $35 trillion on health care over the next 10 years. With no change, health-care cost inflation in Medicare will increase deficits, and inflation in nonelderly employment-based insurance costs will consume most wage growth.

Given the status quo, Medicare is not sustainable due to the increased number of beneficiaries, fewer workers paying taxes to finance Medicare and the rate of cost inflation throughout the system. The only variable that can be changed is the rate of inflation; the demographic changes are inevitable. The Medicare hospital insurance fund will be insolvent and unable to pay for the care of Medicare beneficiaries in 10 years, and the fund that pays doctors will claim more and more income tax revenue to make payments.

The "good" bad news is that we spend a substantial amount of money on health care today that does little or nothing to improve the lives of patients. It neither extends life nor improves quality of life. The Congressional Budget Office has noted this recently and stated that substantial savings could be realized without harming the health of beneficiaries.

There are several ways to reduce Medicare spending. A commission of nongovernment experts could apply the best research and develop new models of how care is financed, what is covered and when. I think this is the best way. Another approach would be to seek savings via reducing waste, fraud and abuse (WFA) in Medicare.

We should do this, but I suspect Congress talks about it so much because WFA doesn't have a lobbyist, and it will not produce enough savings to make Medicare solvent. Tort reform would reduce the cost of defensive medicine, but again, this wouldn't be enough to make Medicare solvent. Cutting payments to providers is another way, but it doesn't alter incentives that lead to increased use. Still another way would be to add more substantial co-pays and deductibles to Medicare in an attempt to reduce use.

Deleting a Tax Subsidy from the EquationThe "bad" bad news is that we say we want to save money, but then we are horrified when we realize that saving money means actually spending less (especially if it affects us and not "them"). All of the approaches noted above mean that less money will flow through the system, thereby reducing someone's income and reducing the amount of care that someone receives. The biggest roadblock to reducing costs is not technical, and it is not the politicians. It is "we the people."

Some say they would rather overspend than risk rationing. This is a legitimate point of view, but if it is yours, I have a question: What would you like the Medicare payroll tax to be?

It appears that we will keep a largely private insurance system for nonelderly persons. Recent data show that health-premium costs in North Carolina have doubled in 10 years, while wages have risen by only one-fifth. Doing nothing will mean this trend will escalate, and the next 10 years could well see most wage growth consumed by health-care costs.

The bills under consideration in Congress focus on increasing insurance coverage for the nonelderly. This is an important goal, but it will not reduce costs.

There is a simple, though major policy change that could reduce health-care inflation in the nonelderly market: end the tax exclusion for premiums paid by employers for their employees. This would mean everyone purchased health insurance with after-tax dollars. This is the best way within a private insurance paradigm to expand insurance coverage while reducing costs. A new system would have more predictable coverage, but insured persons would face more of the initial costs of their care while being protected from catastrophic costs. Health-care cost inflation should slow, and so would premium growth.

I have heard it said that the politicians need to level with us on reform. First, we need to level with ourselves. Do we want to reduce health spending or not?

Donald H. Taylor Jr. is an assistant professor of public policy. His blog www.donaldhtaylorjr.blogspot.com is available for discussion of this article and health care reform in general. This article was first published in The (Raleigh) News & Observer on August 21, 2009.  This is part of a weekly series of articles by Donald Taylor exploring aspects of the health care reform issue.