Can We Afford Health Care Reform? We Can't Afford Not to Do It.

By Simon Johnson and James Kwak
Tuesday, September 1, 2009; 8:29 AM

"Moderate" opponents of health-care reform like to say that we cannot afford it, particularly in the midst of a recession that has widened the deficit with both reduced tax revenue and the fiscal stimulus package. This was the argument advanced by Sen. Joe Lieberman on TV a week ago and repeated by Michael Gerson in this newspaper: "Obama's massive spending, intended to stabilize the economy, also drained the Treasury, making it more difficult to propose major new expenditures."

But what does this mean?

The major cost of reform, generally estimated at about $1 trillion over 10 years, is subsidies to help poor and middle-class people buy health insurance. (The subsidies phase out at 300 to 400 percent of the poverty level, depending on the proposal.) There are two ways to look at whether we can afford this.

The first is to take the perspective of the country as a whole. Our economic well-being is generally determined by the amount of goods and services that we consume; transfers of money between us have no impact on that total. (Trade with the rest of the world is relatively insignificant when it comes to health care.) So the relevant question is whether our economy should be producing $100 billion more of health insurance each year so that virtually everyone in the country can be covered. The trade-off is either consuming less of other goods and services or investing less in future growth.

Seen from this perspective, the question vanishes: Of course we can afford it. The $100 billion doesn't disappear; it flows to insurance companies, then health-care providers -- and they are people, too. The relevant question is whether this is a productive use of resources. A strict free-market argument is that only unregulated markets produce optimal resource allocation, because then prices settle at levels at which all choices maximize welfare; that is, if someone isn't buying health insurance, that's because it's worth less to him than the other things he can buy with the money.

But it's hard to argue that 46 million people want to have exactly zero health insurance. This market failed for several reasons. One is when some people buy insurance and others do not, insurers assume that the buyers are sick and price them accordingly -- and then the healthy cannot afford coverage. This market failure also has a cost: Uninsured people under-consume preventative services, thereby increasing their long-term health-care costs, many of which will eventually be borne by the system -- Medicare, if by no one else.

So in addition to the obvious moral case for reform -- $100 billion per year is a small price to pay to ensure that everyone has access to health care -- there is an economic case to be made. Our aggregate welfare would be increased if, instead of people over 400 percent of the poverty line buying more of whatever it is they buy, some of that money went to pay for basic health insurance for those below that level. The $100 billion in question is about 0.7 percent of our annual GDP and far less than the annual cost of the Bush tax cuts.

The second basic way to answer this question is from the perspective of the federal government, and here things seem to be trickier. At a time when the recession has boosted estimates of short-term budget deficits, the idea that the government cannot afford reform seems plausible. But that argument has two fatal flaws.

First, as Ezra Klein has pointed out, health-care reform isn't a "major new expenditure" to begin with. The net cost of the reform bill isn't $1 trillion over 10 years, because all versions of the bill attempt to offset that cost, either through new taxes or through spending reductions. The net cost of the House bill is about $200 billion (and could be zero with a change that Klein points out), and the net cost of the Senate "Gang of Six" bill is expected to be about zero. Even $200 billion over 10 years is a rounding error when it comes to the federal deficit.

Second, the size of the current deficit doesn't itself make any given initiative a good or a bad idea. People who like to say that the government has to be run like a private company often forget this. If a company has a lot of debt as well as a great new product innovation, then it makes perfect sense to borrow more money to capitalize on that innovation. The current amount of debt affects spending decisions in only two ways: It may increase the cost of capital, which makes a new project somewhat more expensive, and it increases the risk of bankruptcy.

The federal government faces versions of these constraints. If investors believe that the government will not be able to pay back its debts without inflating them away (printing more money), they will demand a higher interest rate on Treasurys, increasing the cost of capital. Major additions to the national debt will increase the risk that we reach a point where our ability to borrow money is compromised.

However, the real long-term risk to national solvency is . . . health-care costs. According to Congressional Budget Office projections, the long-term change in the government's fiscal situation is entirely due to growth in Medicare and Medicaid spending. From an investor's perspective, the primary risk is that the government will do nothing; in that case, Medicare costs will explode the budget within our children's lifetimes. Insofar as long-term budget imbalances are a threat, and insofar as that threat has been increased by the recession, the argument for health-care reform is only strengthened. This is why all versions of the bill include measures to reduce the growth rate of health-care costs. There may be disagreements about how best to reduce costs, but that's where the debate should be, not over whether we can "afford" reform.

Put another way, if you are for fiscal discipline, you should be for health-care reform. If our government cannot produce some kind of reform, that will only reinforce the perception that our political system is incapable of resolving our largest, most difficult problem -- and that is what will make investors think twice about investing in America.

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