George W. Bush found the solution to America's healthcare crisis seven years ago. Too bad nobody listened.
By EDWARD LAZEAR
February 18, 2014
The Congressional Budget Office’s warning that the Affordable Care Act will cause employment to fall by the equivalent of 2.5 million full-time workers is just the latest of Obamacare’s negative surprises. Unfortunately, House Minority Leader Nancy Pelosi’s statement that “we have to pass the bill so that you can find out what is in it” is proving to be depressingly accurate.
The law’s defenders legitimately argue that it is not sufficient merely to criticize the Affordable Care Act; responsible action requires proposing an alternative. Fortunately, Republicans have a good one, and it’s been hiding in plain sight for the past seven years. The plan was first described in President George W. Bush’s 2007 State of the Union Address, but it remains timely. This plan would remedy most of the major problems that exist in America’s health care system and cause less destruction with fewer adverse consequences than Obamacare.
There are two main problems associated with health care in the United States today. First, it is expensive. Health economists, among them Daniel Kessler at Stanford, have shown convincingly that the United States spends a larger share of its gross domestic product on health care than other countries (for example, about one-and-a-half times what Switzerland spends per capita) because of inappropriate incentives to use care efficiently. Patients who have insurance or rely on state funds to cover their expenses bear little of the cost of any treatment received, which causes them to use health resources as if they were almost free. This means that health care is overused and the scarce resources do not always go to those who need them most. Part of this is a result of a Tax Code that subsidizes expensive plans, which have low co-payments and overly extensive coverage. The second problem is the large number of uninsured Americans who do not have reasonable access to health care and who obtain the health care that they do receive in inefficient ways, such as using emergency rooms for minor ailments.
So what would the ideal alternative to Obamacare look like? It should provide cost-effective care and the quality treatment that Americans deserve. Effective reform should discourage over-insurance that results from the subsidy of so-called Cadillac plans that pay for basic, inexpensive and predictable procedures and have patient co-payments that are too low. Reform should encourage consumers to use America’s scarce health resources efficiently by inducing them to get tests and treatments that are justified instead of those that are selected because they are almost free to the decision-makers. Finally, reform should make health insurance available to the vast majority of Americans, some of whom cannot afford insurance without help.
The Bush 2007 plan achieves these goals. The basic structure is to offer all Americans a standard tax deduction, in 2007 set at $15,000 for families and $7,500 for individuals. The deduction would apply to payroll tax — both employee and employer contribution — as well as to income tax. Importantly, the size of the deduction would be independent of the amount spent on the plan. Any taxpayer who has a plan that includes catastrophic coverage gets the full deduction, irrespective of the plan’s cost. That is important because it creates the incentives to choose efficiently. A family that wanted to spend less on the plan than the value of the deduction would pocket the difference. A family that wanted to spend more on a plan than the value of the of the deduction would bear the additional cost out of pocket. As a consequence, consumers would reap the full benefit of keeping the cost of their plan low, which prompts them to shop and choose effectively. If the extra coverage offered by a $10,000 plan over an $8,000 one is not worth at least $2,000 to the consumer, he will not purchase it.
Under the current system, part of the cost is borne by others because the tax system does not treat employer-provided health insurance as income. As a consequence, a dollar spent by the employer or worker costs less than a dollar to that worker. The Bush plan would eliminate that distortion, replacing the non-taxed status of employer-provided health insurance with the standard deduction. By eliminating the link to employers, health insurance becomes more like auto insurance, where the consumer has appropriate incentives to shop around. Other features of the Bush proposal include allowing the purchase of plans across state lines to enhance competition and reform of medical liability to reduce the amount of defensive medicine.
None of this would break the bank, either. When the Treasury Department scored the plan, it estimated it to be revenue-neutral over 10 years. The cost of the standard deduction was offset by revenues associated with treating employer-provided health care as taxable income. The large majority of those who currently have health care would enjoy a net decrease in the cost of their plans through the tax deduction, Treasury found. Many without insurance would be able to obtain it and get a tax rebate that would exceed the cost of the policy, netting money on the deal. And the substantial number of Americans whose policies are not provided by an employer would enjoy a big gain.
The Bush plan would create strong incentives to choose the right policy, meaning one that covers large, unpredictable expenses, rather than small, predictable ones. And by giving the consumer the advantage of choosing higher co-payments and less coverage of inexpensive and predictable treatments, there would be fewer incentives to over-use health care. Not only would this cut health care costs, but it would also allocate the scarce health resources to those who need them most. Unlike Obamacare, which mandates coverage for conditions that many would opt against insuring, the Bush proposal pushes consumers toward choosing more efficient, low-cost plans that deal with catastrophic, high cost and unpredictable events over which the individual has little control. That is exactly what insurance is supposed to do.
By allowing more consumer choice and competition across state lines, the likely effect is that quality and services of insurance providers would rise and the costs would fall. Medicare Part D, another Bush-era idea, provides an example of a health care plan that cost less than expected because the premium-reducing effects of competition were so strong.
The Bush plan works primarily for those who earn income and pay some tax, be it payroll or income. To the extent that subsidies to the very poor, especially those not working, are needed, provisions can be added to the plan that would assist those individuals without altering its basic structure. Of course, since the U.S. economy has changed in the past seven years, the plan would have to be updated too, but this could be done without significantly changing its overall fiscal footprint.
Several Republican senators recently proposed health care reform legislation that shares some of the features of the Bush 2007 plan. Unlike the Bush plan, the senators’ plan caps but does not eliminate the non-taxability of employer-provided health benefits. That legislation provides another Republican alternative and one that is far better than Obamacare. But more significant reform, as we proposed in 2007, would do more to control health care costs and allocate care in a more rational way. It’s time to put the Bush plan back on the agenda.