Health Care: The Prognosis

Friday, July 2, 2010

John F. Cogan and Daniel P. Kessler:

The health care law promises to be one of the most costly public policy mistakes in generations. It will raise health care spending, taxes, and the national debt. This misguided law is a new beginning, not an end, to government intrusions into our medical affairs.

Its main emphasis is expansion of health insurance coverage. The law seeks to accomplish this through extensive regulation of insurers, employer and individual mandates to buy insurance, and government subsidies to employers and individuals. We estimate that it will raise health insurance premiums 10–15 percent. On top of that will come new taxes on drugs, devices, and insurance—all of which will inevitably be passed on to consumers.

Much like Lehman Brothers, which manipulated accounting rules to mask its true asset position, the Obama administration and the congressional majority manipulated the scoring rules of the Congressional Budget Office to falsely portray the health plan’s budget impact. The revenue raised from the aforementioned taxes is not nearly enough to finance the plan’s cost.

Nor, if history is any guide, will the savings from cutting future Medicare payment rates materialize. For the past twenty-five years, Congress has repeatedly “cut” payment rates, yet Medicare expenditures have continued to outstrip the program’s dedicated revenues. Recently, at the same time Congress was claiming Medicare savings to finance the health care law, it was undoing previously enacted Medicare savings in another law. And thus President Obama signed a bill on April 15 that prevented a scheduled cut in physician reimbursements. The budget impact from this action had no effect on the CBO’s scoring of the health plan because it was written into another law.

Once the health plan’s false savings and other accounting gimmicks are stripped away, we see the true picture of a law woefully underfinanced.

The central problem of U.S. health care, high cost that provides poor value for our money, hasn’t gone away. Thus the changes that we and others have advocated—reforms to the tax treatment of employer-sponsored insurance, insurance regulation, and medical malpractice liability law—are as valid in the coming debate as they were in the past, perhaps more.

In the coming years, Americans will face a choice: either increased government involvement that seeks to stem rising costs by fiat, creating shortages as price controls always do, or increased market forces, which have been shown to allocate resources efficiently in virtually every other sector of the economy. Either way, the new law is just the opening act in the health care drama.


John F. Cogan is the Leonard and Shirley Ely Senior Fellow at the Hoover Institution and a member of Hoover’s Thomas and Barbara Stephenson Task Force on Energy Policy, Working Group on Health Care Policy, and Working Group on National and Global Economic Markets. Daniel P. Kessler is a senior fellow at the Hoover Institution, a member of Hoover’s Working Group on Health Care Policy, the David S. and Ann M. Barlow Professor in Management at Stanford University’s Graduate School of Business, and a professor of law at Stanford. They wrote this article for the Hoover Digest.


Scott W. Atlas:

The great irony in the Obama administration’s latest expansion of entitlements, its massive commitment to health care, is that the administration and the congressional Democrats have created an entitlement that most Americans don’t want. Poll after poll demonstrated that a majority of Americans opposed this radical change to America’s health care system—not just because of its cost, but because of specific changes that shift power and control away from the individual to the federal government—yet the president and congressional Democrats pressed ahead anyway.

The plan audaciously imposes the federal government into perhaps the most personal area of American life. Americans will be forced to buy insurance they may not want or value; businesses will be fined unless they acquiesce to government dictates about the composition, structure, and breadth of health insurance benefits; coverage must be certified as acceptable by government, not by the individuals and their families who receive the insurance; private insurance companies will be forced to price their products according to government order, rather than market forces; and doctors will be compelled to accept lower fees for medical care based solely on what bureaucrats determine to be appropriate.

This irrational expansion of an entitlement health insurance program—one that is already failing and widely acknowledged as financially unsustainable—will also conjure up massive tax increases, including taxes on insurance itself.

It could have been done without jeopardizing the superior medical care Americans receive right now. After all, the vast majority in the United States already report being very satisfied with their health care system—more than in Canada. Americans have better access to important new medical technologies and preventive cancer screening, better survival from cancer and other serious diseases, earlier availability of new life-saving medications, faster access to subspecialty-trained doctors, and a long list of other advantages. The would-be reformers could have built on this record by breaking down anticompetitive barriers, reducing administrative waste, eliminating mandate-created distortions of the health insurance market, and making reasonable reforms to a medical-legal liability system run amok.

Such genuine reforms would have brought down cost, reduced the numbers of uninsured, increased individual choice, and allowed Americans to make value-based decisions for their families. They would have left Americans free to keep their health insurance, maintain their chosen doctor, and manage their own and their family’s pursuit of medical care without government control.

Instead, many Americans will certainly lose their current insurance and thus their access to their chosen doctors. Physicians, too, will be swept up in the coming conflict. While government arrogantly assumes that doctors will endure government-dictated low reimbursements, surely more and more physicians will refuse to see patients under such health plans. Even so, I have no doubt that the new Big Brother policies will force doctors to take whatever the federal bureaucrats choose to pay, just as they have in Massachusetts, where medical licensure is tied to accepting the state insurance plan.

All who value control of their own health decisions, access to highly trained subspecialty doctors of their own choosing, continued innovation in new diagnostic methods, and safer, more effective treatments must recognize what they are about to lose. Government can be a piece of the health care puzzle by fostering competition and greater choice, better care, higher quality, and cost based on value. But there should be no confusion about the “rights” of Americans with regard to health care. This isn’t about having the right to health care as defined by the federal government. Instead, individuals have the right to direct their own medical care without the intrusion of bureaucrats. The long-standing, sacred social contract of medical decisions for that care must remain between a patient and her doctor.


Scott W. Atlas, MD, is a senior fellow at the Hoover Institution and a member of Hoover’s Working Group on Health Care Policy. He is also professor of radiology and chief of neuroradiology at Stanford University Medical School. This essay appeared in Forbes on April 20, 2010.


Richard A. Epstein:

Comprehensive health care reform has been hailed by the president and its many other supporters as an achievement equal to the passage of Social Security in 1935 and Medicare in 1965. This comparison is all too apt. Both Social Security and Medicare have been deeply flawed from the outset, and their positions grow more perilous by the day. Both systems have relied on the optimistic view that growth in the underlying economy will fund their lavish provisions, and both have been constantly forced to increase their taxation base to make good on the ever-expanding set of benefits that Congress introduces piecemeal.

Shouldn’t the serious risk of social collapse in these programs have led lawmakers to think hard before boldly embarking on yet another program whose reach is equal to, or greater than, those already in place? But no, idealism beat realism. The realists, however, will have the last laugh.

Why am I so sure? The clues are found in the childlike innocence that President Obama exhibits as he envisions how this new approach will lead to sunshine in America:

  • More health care is better than less. Hence the president can denounce nasty insurance companies for charging more money to people known to be high risk than to those who are not. He can also denounce as an evil “special interest” anyone who thinks about the long-term stability of the health care system. Such doubters apparently fail to grasp how moral imperatives should drive a concrete political system.
  • The president can talk in woolly terms about how his vast, new network of health care exchanges will work, without bothering to ask whether the mandated set of benefits will price everyone out of the market before the program is put into place.
  • It is easy to gloss over the complex network of taxes that promises to erode our productive capacities in ways that will make it harder to raise the funds for this vast expansion of government services. Moreover, this wide array of taxation will make it harder to attract and retain mobile capital, which will spot better opportunities for investment outside our borders. It will also hinder job formation. Recent unemployment levels hovering around 10 percent threaten to become the new norm rather than a dismal historical exception.
  • How comforting it is to assume that the level of health in America depends exclusively on the amount of health care provided, ignoring people’s ability to keep the doctor away through sound diet, healthy social lives, and productive jobs.
  • Comforting too is the assumption that the health care establishment can remain intact despite an increase in regulation and reduction in income that are likely to drive many older physicians, including those who work in primary care, into early retirement.
  • Last but not least is the fond hope that the costs of these new entitlements will be kept to around $1 trillion. Many key decisions on how this health care program operates will depend on crucial administrative decisions made by Obama operatives—and cost control is the last thing on their minds.

Richard A. Epstein is the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution and a member of Hoover’s John and Jean De Nault Task Force on Property Rights, Freedom, and Prosperity. He is also the James Parker Hall Distinguished Service Professor of Law at the University of Chicago and a professor at the New York University Law School. This essay was posted on the Daily Beast (www.thedailybeast.com) on March 22, 2010.


Victor Davis Hanson:

President Obama has crossed the Rubicon. The health care bill was not really about medicine; after all, a moderately priced, relatively small federal program could have offered a basic medical plan to poorer Americans who aren’t covered under Medicare or Medicaid.

No, the bill was about assuming a massive portion of the private sector, hiring tens of thousands of loyal, compliant new employees, staffing new departments with new technocrats, and feeling wonderful that we are “leveling the playing field” and have achieved another landmark civil rights law. Apparently we have no interest in stopping trial lawyers from milking the system for billions, nor do we want to address in any meaningful way the individual’s responsibility in some cases (drink, drugs, violence, dangerous sex, bad diet, sloth, and so on) for costly and chronic health procedures. We live in revolutionary times in which the government will reserve ever more decision making and power for itself.

There won’t be any more soaring rhetoric about purple-state America, reaching across the aisle, or healing our wounds. (That was so 2008.) Instead, we are in the most partisan age since the Vietnam War, ushered into it by a self-acclaimed postpartisan leader. Apparently that leader figures that although people may not like the present partisanship, they didn’t like FDR at the time, either. Yet with whom do they associate their Social Security checks?

I see no reason why the ram-it-through health care formula won’t be followed by similar strategies for blanket illegal-immigration amnesty, cap-and-trade schemes, and expansions of the state takeover of car manufacturing, banks, student loans, and energy. All of these can be packaged as “comprehensive” reform—comprehensive health care, comprehensive immigration, comprehensive energy, comprehensive monitoring of even the banal decisions we make.

And all of us will get even more official-looking letters in the mail, advising us to fill out a form, pay a fine, and be warned that a new regulation or tax is on the way. After that, of course, comes the usual state or federal representative’s newsletter bragging about the new entitlement he has “won” for us with our borrowed money.


Victor Davis Hanson is the Martin and Illie Anderson Senior Fellow at the Hoover Institution. This essay appeared on his website, Works and Days, on March 21, 2010.


Gary S. Becker:

Recently I was asked whether I preferred the health care legislation then under consideration to no change in the health delivery system for a decade. “No change,” I replied. The U.S. health care system has many defects, but regrettably the bill signed into law was a messy compromise that fixed few of them. Instead, it emerged full of complicated, and generally bad, new regulations, higher subsidies, and more taxes.

The most important needed reform was, and remains, an increase in the fraction of total medical costs coming from out-of-pocket expenses: large deductibles and significant co-payments. Out-of-pocket spending accounts for only 12 percent of total American spending on health care; by comparison, it is more than 30 percent in Switzerland, a country considered to have one of the better delivery systems. Partly because of this difference, health care takes up 11 percent of Swiss GDP compared to much more in the United States.

Another desirable reform would be to make the American health system less reliant on tax-deductible employer-based insurance. This kind of coverage has encouraged low deductibles and co-payments and has locked workers with health problems into their current jobs. The health reform law does pledge to phase out tax deductibility for the more expensive plans by 2018, but who knows if that will ever be implemented?

Instead, the law increases our dependence on employer-based health care by imposing sizable penalties on companies that do not provide their employees with sufficient coverage. Many companies are already calculating the anticipated increases in the costs of insuring their employees, and because smaller companies (which are more likely not to provide health insurance for their workers now) are responsible for a disproportionate share of additions to the job rolls, this provision will tend to reduce the demand for workers.

The U.S. health care market is already overregulated. States impose many mandates on insurance companies, such as coverage of the costs of normal childbirth. (Such coverage has little to do with insurance against unexpected health costs, whereas coverage of extraordinary delivery costs would be a desirable protection.) The health care law pushes toward greater regulation, such as imposing limitations on how much insurance companies can spend on administrative costs relative to other costs, mandated reviews of premium costs, and mandated provision of insurance by small companies.

Health savings accounts (HSAs) have been among the most important innovations in the health care field in the past decade, yet they received short shrift. These accounts stipulate large deductibles, such as $2,500, that individuals and families must cover out of pocket. They encourage people to economize on their normal health care expenses, such as visiting doctors for colds or flu shots that they could get more cheaply at drugstores or retail medical clinics. Unused money can be carried over tax free from any year to future years, and can eventually be phased into pension accounts. In the new law there is little mention of health savings accounts, and certainly no encouragement to their expansion.

The law does take a valuable step by encouraging development of online medical records and medical histories for all individuals, no matter how many doctors they have seen or how often they have moved. But despite a few other nods to greater transparency and information sharing, the law mostly obscures rather than enlightens consumers. Many important taxes arrive early while the additional spending kicks in much later, so that it will appear for a few years as if the new system is cutting medical costs. Consumers will get a false impression of the new system’s efficiency.

Savings from cuts in Medicaid and Medicare are touted, but it is far from obvious how they would materialize. Moreover, some changes will clearly increase costs, including expansion of Medicaid coverage to those above the poverty line and broader drug coverage for seniors under Medicare. There is no contemplated increase in out-of-pocket payments by Medicare enrollees. Congress is likely to continue to override any scheduled cuts in payments to Medicare providers. The most likely attempt to cut Medicare costs will come through greater rationing of health care to the elderly, but lobbying groups for seniors will fiercely resist.

Although the impact of 40 million uninsured people on U.S. taxpayers is usually exaggerated, I do support a requirement that everyone have insurance for medical catastrophes. Limited coverage would not be expensive because the uninsured are mainly young and generally in good health. The health care law makes insurance compulsory, but in an unsatisfactory way: it demands extensive benefits and seeks to subsidize coverage for individuals and families far above the poverty line.

The American health care system has many strengths and some serious weaknesses. The new law will generally weaken the strengths and strengthen the weaknesses.


Gary S. Becker is the Rose-Marie and Jack R. Anderson Senior Fellow at the Hoover Institution and a member of Hoover’s Working Group on Economic Policy and Shultz-Stephenson Task Force on Energy Policy. He is also the University Professor of Economics and Sociology at the University of Chicago. He was awarded the Nobel Memorial Prize in Economic Sciences in 1992. This essay appeared on the Becker-Posner Blog on March 28, 2010.


Russell Roberts:

I’m surprised that the comprehensive health care legislation passed. I presume that some of the people who were crucial to its passage will not be re-elected. Their votes will be costly for some of them, and I’d like to understand how their arms were twisted.

I’m also sorry the bill passed, but there are consolations. The existing system of health care—a mishmash of top-down regulation and private attempts to respond to it—was bankrupt, both intellectually and financially. It was a nominally “private” system but the hand of government was the dog, not even the tail that wags the dog. Given the role of Medicare reimbursement and the tax advantaging of generous private plans, there was already precious little room for the invisible hand. Put simply: too little health care has been paid for out of pocket. The patient should be the customer, but is not. And the system as we knew it was broke: its generosity could not be maintained in the face of the aging of the population. The status quo was not so great.

I favor a world of patient as customer, but there is little public taste for that world. People like having other people pay for their health care. They don’t see that that drives up the price and makes it harder for poor people without insurance to pay for care. This bill, a step away from my ideal world, may make the costs easier to see and encourage people to favor alternatives. Unlikely, I know, but there’s a chance.

The status quo has encouraged a lot of innovation, which offers a free ride to the rest of the world. In the future there will be less innovation. The truth, however, is that we probably have too much innovation because so much of it is paid for by others. It’s really expensive and part of the reason that the system was unsustainable.

The legislative promises of Medicare and Social Security are a train wreck that cannot be avoided without radical change. Expanding health care coverage is a nice idea, but now it just brings the train wreck closer.


Russell Roberts is a research fellow at the Hoover Institution and a professor of economics and the J. Fish and Lillian F. Smith Distinguished Scholar at the Mercatus Center at George Mason University. This essay appeared on his blog, Café Hayek, on March 22, 2010.


Tunku Varadarajan:

So the Democrats have a health care win—a win that could prove mighty Pyrrhic. It will cost them dearly in the midterm elections. And come 2012, the remarkable man who seemed a shoo-in for a second term at the time of his first inauguration will stand every chance of losing to any half-decent candidate the Republicans can muster. And in truth, this remarkable man, who has collapsed in stature since the day of that first, stirring inauguration, will have wrought his own eclipse.

Americans witnessed an ugly and extraordinary display of how the practice of democracy can so often overwhelm its theory. They saw, first, how those who claim an exalted moral stature for health care reform made a naked attempt to dodge a basic constitutional requirement for the passing of a bill. The subversion of the Constitution was abandoned when it became clear that the Supreme Court would not put up with a law that had been “deemed” to have passed.

What Americans saw next was the legislative souk at its most squalid: cajoling, bribing, threatening, wheedling, all designed to bring aboard those Democratic congressmen and -women whose votes were needed to attain (or surpass) the number 216 and whose “principles” were getting in the way of a yes vote. Hewing to principle is difficult because it makes party whips angry, spoils dinner parties, and ends careers and friendships. So Kucinich, Stupak & Company succumbed. To borrow a phrase from the historian Tony Judt, writing in the New York Review of Books: “We . . . have abandoned politics to those for whom actual power is far more interesting than its metaphorical implications.”

So we’re on the verge of a tectonic change in the way American society is regulated—a change vigorously opposed by more than 55 percent of all Americans. Barack Obama did, of course, promise change in his presidential campaign. He just left out the bit about its being change in which those who think they know what’s good for us pass a law that most of us oppose with a passion—a passion born not merely of political opposition, but of a sense that President Obama has dealt the nation a calamitous hand.


Tunku Varadarajan is a research fellow at the Hoover Institution and a professor at New York University’s Stern School of Business. This essay was posted on the Daily Beast (www.thedailybeast.com) on March 21, 2010.


David Davenport:

President Obama overcame popular opposition to national health care reform, using “reconciliation” sleight of hand to get it through the U.S. Senate, but he still faces one more obstacle: a constitutional challenge in federal court. Within weeks of the law’s passage, twenty states, one business lobbying group, and two individuals had joined to argue that it was unconstitutional.

The core issue will be the unprecedented requirement that individuals purchase health insurance or pay a fine. The government will argue that this mandate is allowed because it significantly affects interstate commerce. But if my healthy twenty-year-old child decides not to buy health insurance, there’s no commerce involved. The government may also claim that this requirement falls under its power to tax, but no matter how you label it, the payment by the insurance holdouts is really a penalty.

In addition, the states have a strong argument under the Tenth Amendment, which provides that all powers not given to the federal government be reserved to the states or the people. Nothing in the Constitution gives the federal government power over health care, which has traditionally been a state matter. Nor would Congress find constitutional support to create unfunded mandates or require states to rewrite their Medicare laws, as this law will do.

Ultimately, if the interstate-commerce clause allows the federal government to require people to enter into private health care contracts, what power does it not have? What is left for states? These are serious, if inconvenient, questions that the courts will need to answer.


David Davenport is counselor to the director and a research fellow at the Hoover Institution. He wrote this essay for the Hoover Digest.


Robert Zelnick:

Everything about the health care reform bill smacks of political excess rooted in ideological purity. Not surprising, Democrats had enormous difficulty even articulating the need for this legislation, given that most of the truly needy were already protected by Medicaid.

About rising medical bills—often owing to exotic life-support systems for the terminally ill—the new law does nothing. Ditto with the rising cost of specialists. The bill would take a mighty chunk out of payments to physicians a few years down the road, but not one in fifty people familiar with physician compensation believes that those sorts of cuts will ever come to pass.

The law slaps a series of tax increases on the earnings of those bringing home $250,000 and above, along with taxes on investment, corporate earnings, other “unearned” income (that is, job-creating investment income), and estates—again, areas not even remotely linked to the subject of the legislation.

The health care package faces legal challenges and political battles galore. Before saluting those who promoted and passed this product, one should recall that Social Security was carefully tailored to satisfy a pressing need for security among the elderly. Medicare and Medicaid also responded to well-defined public needs. Obama care does nothing of the sort: it is little more than a left-wing contrivance whose political costs will be even harder to bear than its substantial economic costs.


Robert Zelnick is a research fellow at the Hoover Institution and a professor of national and international affairs at Boston University. This essay was posted on Politico (www.politico.com) on March 22, 2010.


Charles E. Phelps:

Comprehensive health care reform has now become law, but certain areas of true reform never really entered the debates. No one dealt with the widespread variations in medical care use, an area of potentially enormous gains in reducing costs without adverse health risks. No one seriously addressed health habits, either by funding priorities for government research or by creating incentives for individuals through taxes or linkages of insurance costs to lifestyle choices. For decades, private insurers have successfully reckoned the impact of smoking on premiums for life insurance, homeowners’ insurance, and disability insurance. Nothing but political will stands in the way of taking a similar approach for health insurance and how it should be adjusted for smoking, obesity, and alcohol use.

Nor has anyone tackled the issue of how information and education might ameliorate the effects of obesity. The cumulative effects of legal changes, research findings, educational campaigns, and, finally, public sentiment have greatly changed the landscape of tobacco consumption, leading to both better health outcomes and lower costs. Why couldn’t a similar long-term campaign help resolve the growing epidemic of obesity, with its health problems and costs?

The process of introducing new technologies into the health care system has essentially remained outside the sphere of discussion, although most health economists (myself included) believe that technological change accounts for much of the “real” (inflation-adjusted) growth in medical care spending.

Beginning with the congressional mandate in 1964 that Medicare cover procedures that are “necessary and reasonable,” the discussions about covering new drugs, devices, and procedures have been almost devoid of cost considerations (by contrast, the British National Health Service uses cost-effectiveness analysis to decide coverage). But remember the widespread outrage that greeted a federal panel’s recommendation to narrow the age group recommended for breast-cancer screening. This suggests that our political system will have a very hard time dealing with these concepts, even though cost control sits at the heart of much of the economic and political debates about reform proposals.

Indeed, the reform legislation represents the beginning, not the end, of a journey. Americans still must assess future proposals and think clearly about the issues involved in reforming our health care financing system and the entire health care system.


Charles E. Phelps, a member of the Hoover Institution’s Working Group on Health Care Policy, is a professor at the University of Rochester. This essay is excerpted from Eight Questions You Should Ask about Our Health Care System (Even if the Answers Make You Sick), by Charles E. Phelps (Hoover Press, 2010).