FOUR MORE YEARS: The U.S. health care system is in critical condition. How the president can revive it. By Daniel P. Kessler.
The first step to solving these problems must include
reforming a handful of poorly designed public policies. I suggest three
areas for immediate attention: the tax treatment of health expenses, the
regulation of insurance markets, and the medical malpractice liability
system.
Tax reform. A simple
change to the tax law would cut unproductive health spending, reduce the number of
uninsured, and promote greater tax fairness and
progressivity. For anyone with at least catastrophic insurance coverage,
all health care expenses—employee contributions to employer-provided
insurance, individually purchased insurance, and out-of-pocket
spending—would be tax deductible. The deduction would be available
both to those who claim the standard deduction and to those who itemize.
The most important effect of tax deductibility would
be to reduce unproductive health spending. Under current law, medical care
purchased through an
employer’s insurance plan is tax free, whereas direct medical care
purchased by patients must be made with
after-tax income. As many others and I have observed, this tax preference
has given patients the incentive to purchase care through low-deductible,
low-copayment insurance instead of out of pocket, which in turn leads to
cost-unconsciousness and wasteful medical practices.
Tax deductibility has two other important benefits.
First, by making health care more affordable for a large number of
uninsured persons, it will reduce the number of people who are uninsured.
Second, it will make the tax system fairer and more progressive. Current
tax law penalizes workers whose employer does not offer them health
insurance, making them buy insurance with after-tax dollars. Moreover,
percentage tax reductions from deductibility for low-income households are
much larger than the same reductions for high-income households, despite
the fact that a one-dollar deduction benefits a high-income taxpayer more
than a low-income one because low-income taxpayers are more likely to have
high levels of out-of-pocket spending.
Regulatory reform. Two
types of state regulation—“mandated benefits” laws and
“any-willing-provider” laws—drive up the cost of health
care and increase the number of uninsured. The
Congressional Budget Office estimates that
mandated benefits laws—which require that health plans cover particular types of persons, services, or providers (e.g.,
alcoholism treatment or chiropractic services)—increase health
insurance costs by 5 percent, and possibly as much as 15 percent, beyond
what they would be if consumers were free to choose the benefits package
they most preferred. New research finds that
“any-willing-provider” laws (which require that health plans
reimburse for care provided by any doctor,
hospital, or pharmacist who is willing to accept the plan’s terms and conditions) increase
health care costs by 1 to 2 percent, by weakening the cost-containment effects of managed-care
plans.
Therefore insurance companies should be allowed to
offer their plans on a nationwide basis, free from costly state benefit
mandates and excessive regulations. Regulations should be uniform and cover
only essential areas. The benefits of nationwide insurance are
considerable. Health insurance will become more portable because people
could switch jobs across state lines without their insurance being
canceled. All people, but especially the uninsured, would have access to
lower-cost insurance options.
Malpractice reform. Two
reforms to the malpractice system would reduce
the cost and improve the quality of care. First, reasonable caps on non-economic damages will reduce the prevalence and cost of
“defensive medicine”—treatment
based on fear of litigation that drives up costs but offers minimal health benefits. Second, data on adverse medical events
collected by insurers, hospitals, and
physicians to improve the quality of care should not be admissible as evidence in medical malpractice trials. In general,
such data are discoverable by plaintiffs,
unless they fall under a state’s specific statutory exception.
Providing this additional protection to potential defendants will enhance
their incentives to reduce the number of medical errors.
Special to the Hoover Digest. Available from the Hoover Press is Politicizing Science: The Alchemy of Policymaking, edited by Michael Gough. Also available is Personal Saving, Personal Choice, edited by David A. Wise. To order, call 800.935.2882. Daniel Kessler is a senior fellow at the Hoover Institution. In addition to his Hoover appointment, he is a professor in the Stanford Graduate School of Business and a professor, by courtesy, at the Stanford Law School. His research interests include empirical studies in antitrust law, law and economics, and the economics of health care. His most recent book is Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System, which he coauthored with Leonard and Shirley Ely Senior Fellow John Cogan and R. Glenn Hubbard. |
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