Centralize Finance, Decentralize Delivery : Health care: A national tax to provide insurance is the only answer, given the states’ diversity of wealth and generosity.
The recent call by several governors for a state-by-state approach to health-care reform has a readily understandable appeal. We are a large, heterogeneous nation. We have a federal system of government. Most health care is locally produced and delivered. Most Americans, myself included, fear the growth of a huge, centralized bureaucracy. Finally, a state-by-state approach permits more flexibility and experimentation.
There is just one overriding problem. A state-based system cannot realize President Clinton’s goal of universal coverage that is equitably financed. Such an approach may begin with high hopes, but over time it will self-destruct because it is so easy for individuals and business firms to move across state lines.
Imagine two neighboring states such as California and Arizona, which differ appreciably in the health benefits they offer and in the level of taxes or mandated premiums required to support those benefits. The sick, the disabled and the elderly will understandably be attracted to the state with the generous benefits. The healthy, the young, and individuals and firms who wish to avoid costly taxes and mandates will prefer the other state.
At first the differential migration may be small, but it will set in motion a political and economic dynamic that will increase rapidly. In the state with generous benefits, differential migration will lead to higher health expenditures, an eroding tax base and higher tax rates. The other state will experience lower expenditures, an expanding tax base and lower tax rates. Thus the incentive to migrate will grow, and the expenditure and tax differentials will get ever larger.
Consider the experience of California, with its generous program of Aid to Families With Dependent Children. This state, with only 12% of the U.S. population, accounts for more than 25% of the nation’s AFDC payments. It is not surprising that the effective tax rate on residential property in Los Angeles is double the average of the nation’s 50 largest cities, nor is it surprising that even California-based firms are building their new plants in neighboring states. New York City has followed a similar scenario of generous benefits, exploding welfare caseloads and a shrinking tax base. In order to combine compassion with efficiency, some problems must be approached nationally.
Advocates of a state-by-state approach to health insurance point to Hawaii to support their case, but that state’s situation is exceptional. Hawaii is separated from the mainland by almost 2,500 miles of ocean, and its economy is based primarily on tourism and defense installations. Most other states are much more vulnerable to migration of individuals and firms. Consider, for instance, the greater possibilities and incentives for movement between Massachusetts and New Hampshire, or New York and New Jersey, or Illinois and Indiana.
The need for a national system of finance becomes evident when we realize that there are only two reasons why 35 million Americans are uninsured. First, most of them are too poor or too sick to afford insurance. Second, there are those who can afford to pay but are unwilling to do so. To achieve universal coverage, there must be subsidization for the first group and compulsion for the second. No state, or nation, can achieve universal coverage without subsidization and compulsion. The challenge is to find a stable, equitable financing mechanism that accomplishes both objectives.
In my judgment, a national value-added tax, earmarked for health insurance, offers the best combination of efficiency and fairness. It is more efficient than a payroll tax, which discourages hiring by discriminating against labor. It is preferable to an income tax because it encourages rather than discourages saving. It is fair because no family can escape its impact through tax loopholes, and the burden rises roughly in proportion to family spending. But it must be uniform across the nation.
Higher taxes on cigarettes and alcohol can contribute to financing health care while discouraging harmful behaviors, but their revenue potential can only supplement a value-added tax, not replace it. Moreover, the “sin taxes” will be most effective if they are uniform across the nation in order to prevent evasion through cross-state purchasing.
While financing must be centralized, the governors are correct in asserting that the organization and delivery of care can and should be decentralized. The diversity among states in geography, population size and density and cultural norms suggest that it would be foolish to try to impose a uniform national system of health-care delivery. The key to wise health policy is to make a sharp distinction between the delivery of health care and the financing of health insurance, between what should be kept decentralized and what must become the responsibility of the federal government.
