Major federal legislation dealing with our health care system is currently winding its way through the Congressional sausage factory. Seasoned observers (and many lobbyists) feel that the probabilities of such legislation becoming law before the end of the year are considered good.
But the legislative process is never a pretty picture in such matters, and the resulting product could be highly dangerous to our economic health. Instead of addressing the root causes for distortions in pricing, costs, modalities in treatment and assurance of supply, Congress appears to bent on simply establishing new entitlement programs, mandates, and cost controls.
Only when there is a clear and present danger that serious economic disruption caused by the mistaken policies of the past does the Federal government seem able to identify the true underlying causes and take effective action.
Case Study: Natural Gas Supply. Consider the history of natural gas price regulation. In 1954, bowing to political pressures “to protect consumers,” the Federal government began a process that eventually led to widespread shortages of gas and a costly, convoluted, Rube Goldberg pattern of market inefficiencies. The situation reached near-crisis stage in the winters of 1976-1977, when many schools and factories in the Midwest were forced to close due to a shortage of natural gas to run their facilities – while at the same time there was substantial supply in Louisiana and other gas-producing states.
As a result, finally, legislation was passed in 1978 that started the industry on the road to de-regulation, although the final lap was not completed until 1992. There have been no significant problems with natural gas supplies since that time.
How to Create A Market Failure. Federal tinkering with the U.S. health system has an even longer history, going back to World War II. At that time, responding to union pressures for higher wages than allowed for by the wartime wage/price control system, the Federal government permitted employer-paid health insurance benefits to be considered nontaxable to the employees (and exempt from employers’ matching Social Security contributions).
By 1982, Congress – and the public – were told clearly, in President Ronald Reagan’s first Economic Report, that the growing costs and inefficiencies in the health care industry “are due to inappropriate tax policy and inadequate incentives for both consumers of medical services and providers of health care to reduce costs.” Tax policy created excess demand and spending for gold-plated health insurance – and marginal medical services. Medicare reimbursement schedules discouraged newly-minted MDs from primary care careers and enticed them into more lucrative specialty niches. Paying for hospital stays and treatments rather than patient outcomes provided perverse incentives for hospitals.
Clearly, not much has happened at the Federal level in the ensuing 25 years to address the problem. Instead, it has tended to grow worse. Economic growth and swelling tax revenues permitted politicians the luxury of adding new benefits (e.g. Medicare’s prescription drug program) without addressing the underlying problems. “No crisis? No real problem” summed up Washington's attitude.
Current Prospects. Two years ago, writing in this space, I was cautiously optimistic that “the laboratory of the states” was moving policy in potentially useful directions. Some of these efforts, as well as others by the Veterans’ Administration, have been bearing modest fruit and are now being imitated by others. It would be disheartening if further initiatives were put on hold or pushed aside by the prospect of “one size fits all” Federal legislation.
While the odds of new legislation that makes the current mess worse are better than even, chances appear to be brightening for at least one long overdue reform. Confronted with the costs of expanding coverage for the uninsured, the Administration uncharacteristically has told Congress that the legislation must be paid for in additional revenues. It has even intimated that it would go along with taxing employer-paid health benefits, something Obama slammed John McCain for advocating during the Presidential campaign.
If applied across the board, eliminating this tax-free benefit would net the government well over $100 billion a year in additional tax revenues. More importantly, it would provide the incentives for individuals and their employers to rethink what kind of health insurance they really need and do away with the thicket of health savings plans based on tax avoidance dreamed up by financial advisors. Finally, this step would eliminate the highly unfair treatment of self-employed individuals, who have to pay for their insurance with after-tax income.
It would be a pleasant surprise if, unlike the sorry history of government’s role in the natural gas supply market, the legislative sausage factory could produce one major, substantive improvement in approach to health care without the whip of a genuine crisis, presently scheduled for 2017 - when Medicare runs out of cash.
But don't bet on it.
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