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Hiding Health Care's Costs

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By Robert J. Samuelson
Wednesday, January 31, 2007

We are awash in health-care proposals. President Bush has one. So does California Gov. Arnold Schwarzenegger. Democratic Sen. Ron Wyden has a plan, as does a coalition led by Families USA (a liberal advocacy group) and America's Health Insurance Plans (a trade group). To some extent, all these plans and others aim to provide insurance to the estimated 47 million Americans who lack it -- a situation widely deplored as a national disgrace. But the real significance of all these proposals, I submit, lies elsewhere.

For decades, Americans have treated health care as if it exists in a separate economic and political world: When people need care, they should get it; costs should remain out of sight. About 60 percent of Americans receive insurance through their employers; to most workers, the full costs are unknown. The 65-and-older population and many poor people receive government insurance. Except for modest Medicare premiums and payroll taxes, costs are largely buried in federal and state budgets.

It is this segregation of health care from everything else that is now crumbling -- and the various health proposals are just one sign. We see others all the time. For example, even with employer-provided insurance, workers' average monthly premiums (which cover only part of the costs) have skyrocketed. From 1999 to 2006, they doubled, from $129 to $248.

Look at Massachusetts. Last year, then-Gov. Mitt Romney made headlines by signing legislation to cover all the state's uninsured. The law required that those whose income exceeded three times the federal poverty line buy "affordable" insurance (those with incomes below that threshold would be subsidized on a sliding scale). Romney suggested that annual premiums for a single worker might total $2,400. But when insurance companies recently provided real estimates, the cost was much higher: $4,560. Is it sensible policy to force workers making $30,000 -- about triple the poverty line -- to spend almost a sixth of their pretax income on health insurance, as opposed to food, rent or transportation? Good question.

The hard questions won't sit still, because health care (now a sixth of the economy, up from one-eleventh in 1980) is too big to be hidden. Myths abound. Contrary to conventional wisdom, the doubling of premiums for employer-provided coverage doesn't mean companies shifted a greater share of costs to workers. In both 1999 and 2006, premiums covered 27 percent of costs, says Paul Fronstin of the Employee Benefit Research Institute. It's simply the rapid rise in total health spending that's depressed workers' take-home pay.

One myth about the uninsured is that, because they're heavy users of emergency-room services, providing them with insurance (and regular care) would actually lower their costs. This may be true for some -- but not most. The trouble is that the uninsured don't really use emergency rooms heavily. A study in the journal Health Affairs finds that their use is similar to that of people with private insurance -- and half that of people with Medicaid. Extending insurance to all the uninsured would be costly, because they would get more and (presumably) better care. John Sheils of the Lewin Group estimates the annual cost of their care would rise 75 percent, to $145 billion.

Our health-care system will inevitably combine government regulation and private enterprise. But what should the mix be? How important is health care compared with other public and private goals? Will an expanding health-care sector spur the economy -- or, through high taxes and insurance premiums, retard it? We have refused to have this debate for obvious reasons. It makes us queasy, because it pits moral imperatives (including the right to live) against coldhearted economics. A case in point: A friend of mine recently had a near-death experience; he survived only because he had superb medical care.

I don't intend to examine -- at least now -- all the new proposals. Some would do better at some goals (say, protecting the poor) than at others (say, controlling costs). But the Bush proposal does have one huge virtue: It exposes health-care costs to the broad public. By not taxing employer-paid insurance, the government now provides a huge invisible subsidy to workers. Bush wouldn't end the subsidy, but by modifying it with specific deductions for insurance ($15,000 for families, $7,500 for singles), he would force most workers to see the costs. By contrast, some other proposals disguise their costs. Schwarzenegger's plan shifts costs to the federal government, doctors and hospitals. It's clever, but it perpetuates the illusion that health care is cheap.

However our health system evolves, Americans need to come to a more realistic understanding of its limits. Underestimating its costs and exaggerating its benefits guarantee disappointment. If the present outpouring of proposals signals a start of our needed debate, it is long overdue.


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