The Next Policy Bungle?

Monday, January 30, 2006

PRESIDENT BUSH'S State of the Union speech tomorrow night looks set to address health care. Mr. Bush is choosing a ripe topic: The United States spends almost twice as large a share of its economy on health as other rich countries do, yet it still has lower life expectancy and 46 million uninsured people. Some of his team's thinking is good but not entirely new. For example, both Medicare and private insurers are beginning to reward doctors and hospitals that score well on measures of quality and cost-effectiveness. Other administration ideas are good if done the right way, such as caps on doctors' liability. But the president's team is also enthusiastic about the trend toward out-of-pocket payments, which it sees as a way of driving down health costs. Its enthusiasm is misguided.

The theory behind out-of-pocket payments is that patients who pay their bills themselves will shop carefully. This is likely to hold true some of the time but not most of it. Most consumers aren't equipped to distinguish between good medical service and bad; the results of poor service show up only after they've paid for it. A minority of motivated consumers may do the research necessary to judge whether a doctor's advice is sound, but even this minority can't be expected to start poring over medical journals when they are hit by a medical emergency -- and emergencies account for a large chunk of health spending.

Indeed, in many cases the doctors themselves can't be expected to know how much treatment will cost until after the fact. They admit a patient, perform some tests; those tests lead to new tests, and so on. So even if the White House could conjure superhero patients who assiduously researched their options even when in pain, the superheroes couldn't discover what sort of bill they faced before they checked into a hospital.

Nor is that all. No vision of consumer-driven health care assumes that all payments will be out of pocket; above a certain ceiling, insurance would take over. There are limits to how high that ceiling can be. People may be expected to pay $3,000 or $5,000 a year, perhaps a little more if they are affluent. But many medical procedures cost more than any of those ceilings, so the incentive to economize vanishes. Meanwhile, advocates of consumer-driven health care tend to argue that people with chronic diseases deserve a special break; they are faced with large bills that aren't discretionary, so they shouldn't have to pay them out of pocket. But if chronic care and procedures costing more than $5,000 aren't going to be disciplined by consumers, the gains from consumer-driven care can be only limited. They are unlikely to justify the harshness of forcing people to pay for health out of pocket -- or the risk that people will cut back on preventive drugs and so boost health costs in the long run.

If the White House is determined to go down this road, it should at least rethink the tax incentives it uses. To encourage out-of-pocket payments, the administration wants to give them the same tax treatment as health insurance costs, which employers are allowed to deduct. Since the object here is to restrain America's extraordinary rate of medical spending, ending the tax deductibility of insurance so that all health spending comes out of post-tax dollars would be logical. But the administration wants to go the other way, allowing all health spending, including out-of-pocket costs, to come out of pretax dollars. This would subsidize medical consumption, deprive the Treasury of revenue and constitute yet another favor to the affluent: The tax deduction is worth most to people in high tax brackets.

In sum, Mr. Bush may be about to go after the wrong target using the wrong tool. He needs to rethink his strategy.

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