For Health Care Woes, a Capitalism Prescription

Amid the Congressional page scandal, the most important pocketbook issue of the election is getting lost in the noise of the campaign season. Health care costs are not just soaring, they're reaching unaffordable levels, meaning that we'll have to look to managed care (again) or find a government solution, a prescription for rationing. With spiraling costs projected to continue, thereby doubling spending in the next 8 years, that choice will be made by 2014 unless we find a third option. What's the cure? Congress needs to administer a strong dose of capitalism.

Businesses struggle to pay for health premiums, which have nearly doubled since 2000. It's not simply corporate giants like GM that have trouble -- only 61% of American companies offer their employees health insurance, down from 69% in 2000. Even insured Americans feel the pinch -- though labor costs are up, median family income has dropped 2.6% over the past half decade, the largest decline since the last recession, in large part because soaring health premiums have swallowed up new money.

The situation will precipitously worsen in the next seven years as health spending is projected to rise to $4 trillion dollars a year, up from $2 trillion. Former Health and Human Services Secretary Tommy Thompson declares this unsustainable, noting that as a percentage of GDP, US spending will soar from 16 percent to 21 percent. 2013 holds more problems: Medicare will start drawing dollars from the U.S. Treasury.

But for employers, employees, and government officials already fretting the cost of health care, beware: you haven't seen anything yet.

For years, the debate has been about 2 options for dealing with the cost crunch.

First, embrace HMOs. The idea faltered in the late 1990s but managed care held costs relatively stable in the mid-1990s (rising, for example, just 2 percent in 1996). But HMOs turn basic decisions over to bureaucrats, a paternalistic philosophy at odds with American values.

Second, convert to some type of government health care, an approach every other Western country has adopted. Though the idea grows in popularity -- California legislators recently passed single payer legislation -- socialized medicine is built on rationing care, forcing the sick and elderly to wait for even the most basic care in countries like Canada.

Is there another option? Look to capitalism, which governs the other five-sixth of the economy. Ultimately, we must choose market reforms.

That may sound easy enough, but for more than 60 years, government policy has drifted fitfully in the opposite direction. In the rest of the economy, we have moved away from regulations, price controls, and overreaching government agencies. Yet in health care, we have distorted the tax code, bulked up the Medicaid rolls, and let a million regulations bloom. Medicare alone has more than 100,000 pages of them. Price controls are endemic to Medicare and Medicaid. The result is a half-broken, semi-socialist system, low in satisfaction and high in cost.

How to employ market reforms? Here are five simple steps.

Make health insurance more like other types of insurance. Health savings accounts, which passed as part of the Medicare reforms of 2003, were an important first step, separating smaller expenses from high-deductible insurance, for catastrophic events. However, the legislation is overly rigid. Congress must expand and revise the structure of HSAs, and level the tax playing field for those not covered by an employer plan.

Foster competition. American health care is the most regulated sector in the economy. The result? A health insurance policy for a 30-year old man costs four times more in New York than in neighboring Connecticut because of the multitude of regulations in the Empire State. Americans can shop out-of-state for a mortgage; they should be able to do so for health insurance. Likewise, many laws intended to promote fairness end up reducing competition and thus innovation. Congress should reconsider such laws, beginning with the federal Emergency Medical Treatment and Active Labor Act (EMTALA).

Reform Medicaid, using welfare reform as the template. Medicaid spending is spiraling up, now consuming more dollars at the state level than K-12 education. Like the old Aid to Families with Dependent Children, part of the problem stems from the fact that the program is shared between both the federal and state government -- and is thus owned by neither. Congress should fund Medicaid with block grants to the states, and let them innovate.

Revisit Medicare. Back in the late 1990s, a bipartisan commission approved a reasonable starting point for Medicare -- junking the price controls, and using the Federal Employees Health Benefits Plan as a model. Elderly Americans would then have a choice among competing private plans. Given that the unfunded liability of Medicare is four times greater than that of social security, the time is right to experiment with this idea.

Address prescription drug prices by pruning the size and scope of the FDA. It costs nearly a billion dollars for a prescription drug to reach the market, and roughly 40% of that is due to safety requirements. This is effectively a massive tax on pharmaceuticals. With new technology and focus, it would be possible to update the FDA, drawing from President George H. W. Bush's experiments with contracting out certain approval steps to private organizations, which boasted lower costs and faster approval times.

None of these steps would be dramatic but all are important. Congress also slowly needs to weigh bigger issues: how to shore up Medicare, create portability of health insurance, and foster a market for medical innovation.

Of course, in today's political environment, this seems implausible. Just last year, Congress spent months negotiating a budget that called for Medicaid growth to be trimmed back to 7.5 percent a year, not the forecasted 7.7 percent -- an inauspicious start on a difficult journey. But the political need to act is growing, literally, on a daily basis.

America has been at the forefront of medical innovation: death by cardiovascular disease has plummeted by two-thirds in the last fifty years; polio is confined to the history books; childhood leukemia has gone from a death sentence to an eminently treatable condition. If we have achieved so much with medicine, the task of health care reform seems relatively modest. The patient is fading; Congress must act.

David Gratzer, a physician, is a senior fellow at the Manhattan Institute for Policy Research. He is the author of The Cure: How Capitalism Can Save American Health Care (Encounter Books).