Time for Some Hard Choices on Health Reform

In the 1980s, if you had a heart attack and went to the hospital, you had about a 60 percent chance of living a year; today, it is more than 90 percent. The rapid development of new medicines and technologies has transformed the health of the American public—but such innovations come at a cost. They are responsible for as much as two thirds of the annual spending increases in healthcare.

We might like to get back to the costs of 1980, but nobody is willing to go back to 1980 medicine. Americans want the most advanced diagnostic tests, drugs, and surgeries, and doctors want the freedom to prescribe them.

There is much to learn in the legislative history of healthcare, notably in the formation of Medicare and Medicaid under President Johnson. One authority on this is Johnson's former senior domestic policy aide and later secretary of health, education, and welfare, Joseph Califano, who wrote about the failure then to anticipate the costs associated with medical discoveries and changes in longevity. "No one had discovered MRIs, PETs, CAT scans, organ transplants, and exotic and expensive cancer chemotherapy," he said. "None of us anticipated the extraordinary leap in the life expectancy that would lead Medicare to spend a third of its budget during the last year of a beneficiary's life and Medicaid to pump an even larger proportion of its dollars into nursing homes. Now we are in the early days of a revolution in neurology, genetics, molecular biology, stem cell research, mechanical hearts and lungs, and domino transplants that promise all sorts of (costly) cures that don't exist today."

In other words, it is impossible to imagine healthcare during the next decade without taking into account the potential expense of medical discoveries. And that is something beyond the clairvoyant powers of members of Congress. We should be extremely skeptical about government projections of healthcare costs 10 years into the future—much less beyond that. They are guesses, maybe wild guesses.

Cost is the central dilemma facing the ambitious plan of President Obama to introduce a universal, new system of healthcare that will extend coverage to millions of people of limited means. Quite simply, it threatens to break an already fractured bank. Given the pace of medical discoveries, we are certainly facing big increases in the costs of applying them, which conceivably could reach $1 trillion in the next decade and even more after that. Yet Obama, in his recent speech to Congress, said he won't add "one dime to our deficits."

So how will he do it? It is not enough for the president to say that the bill on an incremental basis would be revenue neutral. That will lead us down the same path to insolvency that Obama and others warn is unsustainable. No eloquence can get around the fact that we have to find a way to cut back the exploding costs of healthcare that are bankrupting us and pricing people out of care and yet do it without sacrificing quality. Paying for it all by income taxes is not in the cards, tempting as it must be to conventional Democrats. But those potential revenues must be kept available to close the gigantic structural budget deficits threatening the entire economy. These days, millions of Americans have learned the hard way that excessive debts really have consequences.

Where else could the money come from? Here are some possibilities:

1. Collecting tax on the benefits from employer-provided health insurance. The president has ruled this out—it is resisted by organized labor—though it could raise more than $3 trillion over 10 years. But even a modest tax-exemption ceiling for employer healthcare benefits at the current average of $13,000 annually would raise more than $1 trillion over the next decade—not to speak of discouraging gold-plated insurance plans for top executives that promote excessive consumption of health services and benefit the wealthy over the average worker. Such a cap would produce significant revenue and would also create incentives for firms and insurance companies to redesign their policies to keep costs below the caps.

2. Focus on individual behavior. The president seeks to tax insurance companies rather than the individuals who receive a higher level of benefits, although he did not offer details of the threshold to which this would apply. In fact, the insurance companies would find a way to pass it back to the consumer. He didn't say how that would be averted.