COLUMN RIGHT / PHIL GRAMM : A Novel Idea: Pay-as-You-Go Health Care : As an incentive to cut costs, a ‘medical IRA’ could cover routine needs, with insurance for catastrophic illness.
We’ve got to find a way to control health-care costs without sacrificing our system’s great strengths, and we need to do it soon. But our efforts must not produce an outcome where the average American--who works and has health insurance--ends up paying more and getting less. If working people feel they are being cheated by the reforms, they will reject both reforms and reformers.
In order to contain health costs, we need to understand how they got so high in the first place. Basically, the reason is that 65 years ago, when health insurance started to expand on a massive scale, it did so under a false premise. Back then, we assumed that people were either sick or well. If they were sick, there was a defined amount of health care they needed; if they were well, they didn’t need any health care at all. We assumed you could insure against health-care costs the way you insured against fire and casualty. We were wrong.
It turns out that there’s no such thing as a fixed amount of health care that a sick person needs, or that a healthy person doesn’t. Rather, we have an incentive to consume health care up to the point that the value we get from it equals the cost. And the cost is virtually pennies when a third party--an insurance company or the government--is paying the bills. More than 90% of the population is in the third-party system.
If health-care consumers aren’t cost-conscious, there’s no incentive for health-care providers to be cost-conscious, either. To bring costs under control, we’ve first got to change the system’s incentives.
That should be what the President’s health-care reforms are all about, and in part they are. President Clinton is trying to change the system and control costs largely through two new concepts--”managed competition” and “global budgeting.” Managed competition is a collectivist’s approach to changing behavior in the health-care market, and global budgeting is price controls and rationing.
Though many people have endorsed managed competition, nobody seems to have a clear notion of exactly what it is. Having slogged my way through such descriptions as “health-insurance purchasing cooperatives” and “accountable health partnerships,” I’m left with the impression that the program will work well until somebody has the bad luck of getting sick. If consumer cooperatives the size of states can be efficient, why don’t we see them operating in any other market?
As for global budgeting, here, at least, we do know what the President means. While we may not know too much about his actual plan, we know quite a bit about price controls and rationing. From Hammurabi to Nixon, they have been employed in all times, in many places, and never, ever, have they worked.
The best answer is to change consumer and producer incentives by changing health insurance itself. One approach would be to convert from the typical low-deductible insurance plan to a high-deductible catastrophic plan and a “medical IRA.” Consumers would purchase two policies: a catastrophic policy that kicks in when annual medical expenditures exceed $3,000, which can be provided relatively inexpensively by dozens of insurance companies; and a “medical IRA” of $3,000--a tax-free individual savings plan. Currently, less than 10% of families use more than $3,000 of medical care in any given year.
The medical IRA would “travel”--it would belong to the employee even if he left his job. If unspent at the end of the year, it could be used to help finance a first home, send the kids to college or anything else for which a conventional IRA can be used. Since the money in the medical IRA that remained unspent at the end of the year would belong to the person buying the health care, for the first time that person--the health-care consumer--would have a direct incentive to be cost-conscious. Similarly, the health-care provider would have an incentive to offer alternatives and to compete on the basis of price.
As these reforms began to modify behavior, produce price competition and reduce overall health-care costs, we could phase in a 100% tax credit for the self-employed to purchase catastrophic coverage and medical IRAs and fund some form of universal coverage.
While medical IRAs are not the only way to correct the problems in the health-care market, this simple example suggests that we can deal directly with the distorting impact of third-party payments without performing life-threatening surgery on the world’s greatest health-care system.
