Healthcare Reform: Good Intentions, Flawed Policy

Aug. 4.09 | About: iShares U.S. (IYH)

President Barack Obama's plan to overhaul the US health care system got a major boost when the US House of Representatives committee approved the measure late Friday, July 31. A health care reform bill however, is not yet certain as the Senate still needs to approve the bill, probably by the end of year.

The U.S. healthcare system represents about 17% of our annual GDP. President Obama's primary goal is to extend formal health insurance to low-income, uninsured individuals despite the nearly $300-billion-a-year Medicaid program. The president's health care plan would cost more than $1 trillion and increase our debt by $239 billion. More than $800 billion in tax increases would be necessary to pay for the massive administration of the government-run plan. (Fig. 1)

The President said that savings in spending on federal Medicare and Medicaid programs, as well as increasing taxes for high-income Americans, would help cover the increased costs of health care reform.

A recent report by the White House Council of Economic Advisers also claims that the government can cut the projected level of health spending by 15% over the next decade, and by 30% over the next 20 years, although the reduced spending would result from fewer services rather than lower payments to providers, and that this may be done without lowering the quality of care.

Dr. Martin Feldstein, professor of economics at Harvard University, and president of the National Bureau of Economic Research (NBER), who served as Chairman of the Council of Economic Advisers from 1982 to 1984, recently wrote:

Although the president claims he can finance the enormous increase in costs by raising taxes only on high-income individuals…. Experience shows that raising the top income-tax rate from 35% today to more than 45%…would change the behavior of high-income individuals in ways that would shrink their taxable incomes… The result would be larger deficits and higher taxes on the middle class. Because of the unprecedented deficits forecast for the next decade, this is definitely not a time to start a major new spending program.

As the UBS tax case illustrates, many wealthy Americans are already successfully evading the current tax structure through offshore accounts. That means a higher tax rate on these wealthy individuals would incentivize even more UBS-like tax evasion practices.

Other economists also predict the government will most likely pay for the health care plan with a carbon tax on fossil fuels (the cap-and-trade system), and will also likely resort to raising income taxes on middle-class Americans making between $50,000 and $250,000 a year. Companies would also find it difficult under the House measure to offer consistent benefits to employees in different locations because states could receive waivers to set up “single-payer” systems with the government as the only provider of coverage.

We don't need to go far to see the failings of a government-run health care plan. Canada's system is known as a “single payer” system, where basic services are provided by private doctors, with the entire fee paid for by the government. The rates are negotiated between the provincial governments and the province's medical associations, usually on an annual basis.

Studies by the Commonwealth Fund found that 57% of Canadians reported waiting four weeks or more to see a specialist. Another criticism of Canada’s health care program is the shortage of medical professionals caused by the non-competitive nature of an annually-negotiated doctor pay structure. In addition, a government-run health care program could also stifle R&D and innovation in the medical and technology field.

Indeed, for the 85% of Americans who already have health insurance, the health plan means higher taxes, less health care services, and even more inefficient bureaucracy. No one denies that our current health care system needs many improvements. However, forcing the 255 million people currently with coverage into a government-run system, and destroying the entire framework of health care in America is not the way to provide coverage for the 46 million uninsured. For health care reform to really succeed, we must eliminate waste, fraud, abuse, bureaucracy and pass medical lawsuit reform. It also must allow for direct patient choice of doctors and insurance, and protect the doctor-patient relationship.

Looking back at American history, in 1941, nine years after the beginning of the New Deal, unemployment in the United States was still around 15%. One of the reasons was that taxes on the top income bracket were about 80%, which severely inhibited entrepreneurism and new business development. So, the consequences were that the economy stagnated.

Between the cap and trade plan and additional taxes on the middle class required to fund the health care plan, the U.S. will likely face double-digit unemployment and economic stagnation over the next decade.

Note: This article has been published on Daily Market