23 Mar 2010

Regina Herzlinger on the Passage of U.S. Healthcare Reform Legislation

Regina Herzlinger

Regina E. Herzlinger
the Nancy R. McPherson Professor of Business Administration and author of Who Killed Health Care?

The United States finally has the universal health care coverage I have long advocated. Further, the legislation's subsidization of health insurance costs for employees who earn up to $88,000 can lower employers' costs.

But don't break out the champagne-the costs of this legislation, more than $900 billion, will put another nail in the coffin of the U.S. economy and open the door to a government-controlled health care system that gravely injures the sick and the entrepreneurs who could help them, along the way.

The problem? The absence of a way to control the costs that already cripple U.S. global competitiveness. As a percentage of gross domestic product, this country spends roughly 70 percent more on health care than other developed nations; yet we cannot point to commensurate superiority in value, other than in biotechnology and genomics. And these official numbers fail to include the $38 trillion in unfunded Medicare liabilities-the dubious gift we leave to our progeny.

The legislation's cost controls rely primarily on public health insurance marketplaces, labeled Exchanges, where private health insurers compete with public insurance. These initiatives don't control costs as much as shift them, through deficits, cutbacks and unfunded liabilities.

Ultimately, absent entrepreneurial innovators and competition, they will lead to a single-payer health care system that controls costs by rationing care.

The well-managed Massachusetts Exchange has reduced the uninsured rate to about 3% from 7%. But although advocates initially claimed it would create economies of scale, it proved no panacea.

The left complained of costs so high that more than a 100,000 were excused from state requirements to purchase health insurance. Conservatives criticized the features the Massachusetts legislature required: Product standardization limited competition, and plans were required to cover costly, questionable benefits that made insurance unaffordable to some (among the 52 required benefits are chiropractic services and expensive in vitro fertilization that add up to 8% to costs).

After raising taxes by $800 million for health care reform, among other activities, wealthy Massachusetts needs yet more revenues and has the country's highest health insurance costs. Desperately, Governor Deval Patrick has proposed price controls on locally-insured health care, mirroring the actions of the Netherlands, which also featured a national exchange in the vain hope of controlling health care costs. If government price controls sound like a march to single payer, that's because they are.

Some argue that Massachusetts couldn't control costs because it lacked public-insurance plans, pointing to Medicare, whose administrative overhead is 3% versus 12-18% for private insurers. But that figure ignores the Ponzi scheme of Medicare's unfunded liabilities, estimated at about $38 trillion--roughly three times U.S. GDP. If Medicare recognized them, they would add an additional trillion dollars to administrative costs, at a Federal borrowing cost of 3 percent.

Underpriced public plans, financed by borrowing from our children, will drive out private competitors. Private insurers are no angels, but unlike public insurers, they cannot survive massive deficits, thus protecting future generations, and unlike monopolistic public plans, they do provide a modicum of competition.

Medicare and Medicaid's monopoly powers also enable provider underpayment of billions of dollars, sums currently made up by commercial insurers. But if underpriced public plans forced out private ones, who would take up the slack? The looming doctor shortage could become a national crisis as prospective physicians, facing massive educational debt, reluctantly opt for other occupations. You can count potential health care entrepreneurs out, too.

The percentage of Americans insured by the government will inevitably grow as private plans disappear and employers urge their employees into heavily-subsided public plans.

But how will they control costs? Many experts, including the Congressional Budget Office, dismiss the Democrats' claims that government can control costs through information technology and other technocratic tools.

The unavoidable fact is that because the sick constitute roughly 20% of users, but account for about 80% of the costs, they are a politically vulnerable cost-control target. Although government-rationing can squeeze out some inefficiency, it is hardly benign or equitable. The government-controlled system in the United Kingdom, for example, has the lowest adoption of cancer drugs among the biggest five European economies and correspondingly low cancer survival rates. Many of the UK's affluent buy private insurance to avoid government stringency, like those in other European government-controlled systems.

There's no question that we must have universal coverage; but, the present bill will inevitably increase costs, further weakening our economy. Tragically, although it will expand insurance coverage, it will ultimately result in rationed medical care for its beneficiaries and suppress the entrepreneurs who could help them.

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