How to get better health care for less money

June, 2018

Sometimes, as Ronald Reagan claimed, government is the problem. But other times it is the solution to the problem. There are some things that can be done only by government. Defense is one. Imagine putting the defense of our country out to bid. Would you trust a company like Facebook with control of our nuclear arsenal?

There are other things that the government can do better than private industries. Health insurance is one. Pensions are another. Why is government better at those things? Because government can avoid the problem of “adverse selection;” and it doesn’t have to spend millions on marketing.

In the case of health insurance, private companies spend huge amounts of money and time trying to sell to healthy people and avoid unhealthy ones. Young, healthy people don’t buy health insurance; sick ones do. And when most of your clients have health problems (“adverse selection”) you cannot make any money. In fact you cannot even stay in business. If you raise rates to cover your losses, you start a “death spiral” as your customers leave for other suppliers.

It was for this reason that the Affordable Care Act, which originally came out of the conservative Heritage Foundation, had a provision requiring people who did not sign up for health insurance to pay a tax instead.

All of the other developed nations use the government to control their health insurance. Their systems are very different, but according to Mark Pearson, head of the Division on Health Policy at OECD, they spend about one-third of what we spend on administration. Total spending is also less. Our $8,233 per capita expense is about two and a half times the OECD national average, and they get better results.

The people who set up Medicare 50 years ago understood all this, and designed Medicare to be efficient, effective and popular. Medicare eliminates the problem of adverse selection by funding itself mostly with a payroll tax. It sets low rates for all services, and does not waste millions on marketing. More than three-quarters of those who have Medicare are satisfied with it. I am one of them.

Social Security is not necessarily more efficient than a private retirement plan but it avoids the problem of what to do with retirees who do not have a private plan for one reason or another. When they can no longer work, do we let them starve? Live on the street?

By using the government we can make sure everyone gets at least a small pension, and the more they pay in, the more they can take out. People don’t have to worry about their investments tanking, or their old employers going bankrupt. We pay our payroll tax and the government guarantees our pensions.

Almost two-thirds of federal expenditures now go to insurance services like Medicare, Social Security, Medicaid, and veteran’s benefits (through the VA).

Unfortunately, when the government created these programs they did not foresee that there would be a massive change in our demographics. Over the last forty or so years, the birth rate has dropped precipitously and the population has gotten older.

By 2030 demographers expect that for the first time in our history there will be more Americans over 65 than under 18. There will be only two active workers paying taxes for each person receiving Social Security or Medicare. Three is the minimum number required to balance the books.

Because of this, Congressional conservatives have been talking about “reform” of entitlements. For example, George Bush tried to privatize Social Security, taking away the stable funding source and government guarantees against investment risk.

Other ideas involve cuts of various kinds. The retirement age for Social Security is being steadily increased, for example. Medicare has been experimenting with partial privatization (Medicare Advantage), but so far that has increased costs not cut them.

I think there is a better way. I would shift the burden of payment from the workers to all consumers with a modified Value Added Tax (VAT). A VAT is simply a sales tax that is buried in the price of things we buy. Most developed countries have one (including Canada) and they generally cover most things we buy. I would not include food, medicine, health services real estate or rents.

This tax will generate enough money to allow us to bring the benefits of Medicare to everyone (“Medicare for All”) as well as make Social Security solvent for the foreseeable future.

Yes, a VAT will raise prices on the things to which it is applied, maybe as much as 20%, but if you work, your income will increase by more than 20% because there will be no more payroll taxes for Social Security and Medicare. And you and your employer won’t have to take so much out of your pay to cover full private health insurance. “Medigap” supplements are much cheaper.

Almost two-thirds of the federal budget goes to pensions and health insurance. As the economist Paul Krugman says, the U.S. government is an insurance company with a defense department attached. This plan will benefit everyone.

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