With Health Care, First Fix Terms of Engagement

By Steven Pearlstein
Wednesday, January 18, 2006

In the coming weeks, President Bush intends to initiate a long-overdue national debate on what do about health care. The sector represents 16 percent of the economy and is growing twice as fast as the incomes of the people who pay for it. Even at that level of spending, however, 40 million Americans have no health insurance at all, while the health of those who do is worse than in many other industrialized countries where spending is considerably lower. If we don't fix it, the health care "system" will render U.S. businesses uncompetitive, require huge increases in taxes and eventually bankrupt the country.

In other words, it's important to get it right this time, and a president nearing the end of his second term who is willing and able to take on the special interests is just the person to lead it. Unfortunately, by framing the debate as an ideological choice between individual control and more government, Bush is setting himself up for another Social Security-like failure.

The White House line that we need to get government out of the health care business, or that we'd have better, cheaper health care from an unregulated market, is not only nonsense. It is also the kind of ideologically charged rhetoric that will immediately ensure that Democrats oppose anything that follows it.

Government -- in the form of Medicare, Medicaid and insurance coverage for employees and veterans -- already pays half of the nation's health bill. Those are among the most popular government programs, cherished by Republicans and Democrats alike. So to think government won't be heavily involved in health care is an economic and political fantasy.

Moreover, we know that by its nature, health care is a highly imperfect market.

It suffers from tremendous "information asymmetries" between sellers (doctors, hospitals and insurers) and buyers (patients).

It is rife with what economists call "principal-agent problems" -- like the doctor who benefits financially by providing more medical treatment than patients need, or health insurers that are always trying to get them to consume less.

In rural areas, there are often few providers and little or no competition.

And left alone, insurance markets will tend to lower costs for the young and healthy and raise them for the sick and aged -- an outcome that is as socially unacceptable as it is economically efficient.

We know from behavioral economics that people are particularly irrational about health care risks, with a tendency to overconsume, overpay and over-insure.

Moreover, threats like that posed by the Asian bird flu remind us that public health is a public good in which private markets reliably underinvest.

So, please, let's dispense with the free market, personal choice rhetoric. Economically, its inappropriate. Politically, its just stupid. It didn't work with Social Security and -- trust me on this one -- it really won't work with health care.

That doesn't mean there aren't ill-advised government policies that need fixing, as Bush suggests, like the malpractice-tort system or the tax-free treatment of employer-provided health insurance.

Nor does it mean that we shouldn't make health costs more transparent or find market mechanisms to make patients and doctors more cost-conscious in deciding which treatment to choose or how much health care to consume.

Health savings accounts combined with higher-deductible catastrophic insurance -- the centerpiece of the Bush consumer-driven health care push -- are already gaining traction in the marketplace and show some real promise.

And yes, preempt those crazy state laws mandating coverage of chiropractors, podiatrists and massage therapists.

At the same time, the president must acknowledge that there can be no credible reform without extending health insurance for every American. In the context of our employer-based system, every employer should be required to pay half the cost of basic health insurance for every employee, with the government pitching in to help the unemployed and working poor. We already do that for unemployment insurance, worker's compensation and Social Security. Now its time for the world's richest country to extend the approach to health care.

Both economic theory and recent experience tell us that "universality" is an economic necessity. In a competitive marketplace, the sick and poor tend to be priced out of the system while an increasing number of employers and healthy workers try to free-ride by getting others to pay for their emergency-room care.

Just as important, universality is a political necessity. Leave it out and you can be sure that Democrats will mau-mau the issue and refuse to participate in the discussion. On the other hand, include it as a central purpose of health care reform and Democrats will have no choice but to join in.

Steven Pearlstein will host a web discussion today at 11 a.m. at washingtonpost.com. He can be reached atpearlsteins@washpost.com.

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