Change the tax code rather than opt for government rationing of health care

Martin Feldstein does the best job I've read of explaining the conservative approach to health care reform. First he lays out why the Democrats' proposals will lead ultimately to rationing by the government of health care options. This will have to happen in order to rein in outlays in federal spending. Instead, one way to limit the growth of spending for Medicare would be to raise the deductible and put the choice in the hands of seniors to decide how they wanted to spend their health care dollars. Unfortunately, I can't see our legislators doing something likely to raise such a fuss from seniors. They'd be banging on congressmen's cars like they did to get Dan Rostenkowski to change a plan that would have decreased their Medicare benefits.

Instead of spreading the problems we're facing with Medicare to the rest of the population, Feldstein recommends altering the tax incentives we provide to tie health care to employment.

But budget considerations aside, health-economics experts agree that private health spending is too high because our tax rules lead to the wrong kind of insurance. Under existing law, employer payments for health insurance are deductible by the employer but are not included in the taxable income of the employee. While an extra $100 paid to someone who earns $45,000 a year will provide only about $60 of after-tax spendable cash, the employer could instead use that $100 to pay $100 of health-insurance premiums for that same individual. It is therefore not surprising that employers and employees have opted for very generous health insurance with very low copayment rates.

Since a typical 20% copayment rate means that an extra dollar of health services costs the patient only 20 cents at the time of care, patients and their doctors opt for excessive tests and other inappropriately expensive forms of care. The evidence on health-care demand implies that the current tax rules raise private health-care spending by as much as 35%.

The best solution to this problem of private overconsumption of health services would be to eliminate the tax rule that is causing the excessive insurance and the resulting rise in health spending. Alternatively, Congress could strengthen the incentives in the existing law for health savings accounts with high insurance copayments. Either way, the result would be more cost-conscious behavior that would lower health-care spending.

But unlike reductions in care achieved by government rationing, individuals with different preferences about health and about risk could buy the care that best suits their preferences. While we all want better health, the different choices that people make about such things as smoking, weight and exercise show that there are substantial differences in the priority that different people attach to health.

Of course, the unions will block anything that would reduce their leverage to negotiate gold-plated plans for their members.

It seems that anything that would truly reform our system would be blocked by some interest groups. The only thing they seem to be able to agree on are programs that increase government spending. The taxpayer lobby just can't compete.

But if we can't implement sensible reform, let's avoid reforms that will worsen what we have now.

Like virtually every economist I know, I believe the right approach to limiting health spending is by reforming the tax rules. But if that is not going to happen, let's not destroy the high quality of the best of American health care by government rationing and misplaced egalitarianism.