Health Care: Policy and Politics

February 20, 2008

Health Matters

Health care is one of the biggest hot-button issues of the current presidential campaign. Thanks to a century of U.S. innovations in medical procedures, technologies, and pharmaceuticals, the quality of American medical care is the envy of the world. 

Yet these innovations come at a cost. 

According to the Kaiser Family Foundation, the average annual premium for family health insurance coverage is $12,106.  For many years, the growth in health insurance premiums has exceeded overall inflation and the growth in take-home pay; the increasing cost of benefits is often blamed for the lack of growth in real wages.  This dramatic growth in the cost of private insurance has led to decreases in the number of people who buy coverage. 

Despite their ideological differences, every major candidate for the Democratic and Republican presidential nomination has rallied behind some sort of health-care reform or changes to the current system. The major differences between the parties lie in how they view the role of government programs (mandates versus market) in solving the problem. Experts believe that, as the race tightens, the issue is likely to gain even greater momentum.

Health Care by the Numbers

A common misconception is that health care is in a "crisis" or that most people are dissatisfied with the current system. When people are asked what they think about health care in the United States in general, they respond negatively.  A recent poll conducted by CBS and the New York Times, for example, concluded that 36 percent favored major overhauls to the system. 

When people are asked more specific questions, however, the picture looks very different.  A 2007 Gallup poll, for example, reported that 83 percent of people rate their own health care as good or excellent—a number that has remained roughly constant during the past 20 years.  In addition, surveys suggest that people are far less eager to support major health policy reform when they are informed about its cost. 

A 2007 Harris/Wall Street Journal poll found 76 percent of respondents favored offering a government-subsidized health insurance plan to individuals who do not have access under the current system. When asked if they would be willing to pay more income taxes to cover people under Medicare or Medicaid, however, only 26 percent responded favorably. Seventy-four percent favored requiring employers to provide health insurance for all their employees; only 47 percent agreed that the benefits of requiring smaller employers to provide health insurance would outweigh the negative impact it might have on their businesses.

It is this tension--systemwide cost problems, combined with a majority preference for the status quo--that makes health-care reform so difficult. Scott W. Atlas, a senior fellow at the Hoover Institution and a professor of radiology and chief of neuroradiology at Stanford University School of Medicine, believes many Americans have been misled by myths about the U.S. health-care system perpetuated by “politicians, academic leaders, the media, and a host of self-anointed experts.”

Sources of the Problem

As the late Nobel laureate and Hoover senior fellow Milton Friedman (1912–2006) pointed out, the current system's shielding the consumer from considering cost is largely responsible for spiraling health-care costs: “The major defect of our present system is that employees, most of them, are spending in practice more on medical care than they would if they had their free choice,” Friedman said. “They’re getting something for free—supposedly for free—that somebody else is paying for.”  Experts point out that, when combined with costly new technologies, the result is the situation the public and private sectors are now grappling with.

According to Hoover senior fellow Daniel P. Kessler, “The current public policy has contributed to the medical care cost-growth problem.  Care purchased through an employer’s insurance plan is tax-free, while most medical care purchases by patients must be made with after-tax income.  This tax preference for employer health insurance has been instrumental in creating today’s third-party payment system. 
“In this perverse world, true insurance, in the form of coverage for catastrophic health events, is the exception; prepaid health care, in the form of coverage with low deductibles and copayments, is the rule,” Kessler said.  “The tax preference for insurance is the primary reason why five out of every six dollars of health-care spending are made by third parties.

“Low co-payments and deductibles fuel excessive cost growth and breed wasteful medical practice,” he added.  “When medical care is purchased through a low-copayment employer-sponsored health insurance plan, the patient thinks he or she is paying only a fraction of the costs. Somebody else is paying the rest.  As a result, consumers have little incentive to limit their use of unnecessary medical care services, little incentive to shop for the health plan that best suits their needs in a cost-effective way, and little incentive to evaluate their care on the basis of value.”

Policy Responses

Experts say that revoking the tax preference for employer-sponsored insurance would make the health-care system vastly more efficient but would amount to a massive tax increase on the approximately 65 percent of people who receive it.  Not surprisingly, neither political party supports it. 

John F. Cogan, the Hoover Institution’s Leonard and Shirley Ely Senior Fellow, together with Kessler, suggests making all health spending tax deductible, giving employer-sponsored and out-of-pocket health spending equivalent tax treatment.  They believe that, with a level playing field, workers will no longer have a tax incentive to take their compensation in the form of expensive health insurance with low copayments; gradually, workers will shift to health plans with higher deductibles and higher coinsurance rates; market forces will ensure that the insurance premium savings will be passed on to workers in the form of higher wages.  Their view is that, just as workers have borne the burden of rising health care costs, so will they reap the benefits when costs are brought under control.

According to Kessler, Republican reforms are aimed at taking advantage of the power of markets.  Individuals' fears about bankruptcy from health expenses, uninsurance, and budget pressures created by Medicare and Medicaid are all symptoms.  As a consequence, Republicans are focused on changing tax policy, insurance regulation, and liability law to try to reduce the price of coverage.  He adds that Democratic reforms are more focused on increasing insurance coverage directly: for example, Senator Hillary Clinton’s “American Health Choices Plan” would require all Americans to acquire health insurance, subsidizing it with tax revenues for those with low and moderate incomes.  Senator Barack Obama’s health-care plan calls for a new public insurance program open to all Americans, including self-employed individuals and small businesses.

Despite many candidates’ claims that everyone can be given health insurance with only modest additional government spending, such an outcome is unlikely.  As Judge Richard A. Posner of the United States Court of Appeals Seventh Circuit (and a Hoover Studies author) points out, all the options are “bound to be very costly, whether the role of government in bringing about the expansion of coverage is large, as in the case of the Democratic candidates' proposals, or small, in the case of the Republicans' proposals, which generally are limited to increasing the tax subsidies for the purchase of private health insurance.”