Samuelson: Rx for Health Care: Pain

We need to have a candid debate about health care in 2008, but the odds are against it. The fact that covering the 47 million uninsured already looms as the centerpiece of this debate is a warning sign that it won't be serious. We're told that the uninsured are our biggest health-care problem, but they aren't. Runaway health spending is. Although politicians pay lip service to that, what they really enjoy is increasing spending. The Bush administration created a new Medicare drug benefit, congressional Democrats urge more coverage for children, and now there are the uninsured.

It's understandable, because expanding benefits is so much easier and more politically rewarding than trying to control them. Everyone believes in adequate health care; people should have it when they need it. Politicians cater to these beliefs. But the intellectual and even moral laziness of this approach results in an invisible abdication of political responsibility. We are letting the unchecked rise in health spending automatically determine national priorities. Consider some facts:

• Health spending already totals more than $2 trillion annually, about 16 percent of national income (gross domestic product). By 2030, it could easily exceed 25 percent—one dollar out of four—projects the Congressional Budget Office. Higher health spending is the main force expanding the federal budget.

• There's a massive transfer of income from young to old. Americans 65 and older now represent about an eighth of the population and about a third of all health spending. By 2030, their population share will be about a fifth, and they could account for nearly half of health spending, finds a study by the Centers for Medicare & Medicaid Services. Under present law, the 19- to 64-year-old population would pay most of those costs.

• Neither the government nor the private sector has succeeded in controlling health spending. From 1970 to 2005, average spending per Medicare beneficiary rose 8.9 percent a year; spending for Americans with private health insurance rose 9.8 percent annually over the same period (the figures cover similar health services). The small difference may reflect cost shifting. When Medicare imposes prices controls, doctors and hospitals increase prices for privately insured patients.

Questions arise. How much will health spending increase taxes, depress take-home pay and crowd out other government spending—on schools, roads, parks, defense, the environment? Is the growing intergenerational transfer fair and sensible? But our national policy toward these issues is: don't ask, don't tell.

The politics of health care rests on a mass illusion: most Americans think that someone else pays for their care. Workers with employer-provided insurance believe that their companies pay. Retirees and the poor think that the government, through Medicare (retirees) and Medicaid (the poor), pays. No one has an interest in controlling spending, because everyone believes that it burdens someone else. Naturally, the health-industrial complex—doctors, hospitals, drug companies—has no interest. Higher health spending raises their incomes and profits.

In practice, the costs are mostly disguised. Because employer-paid insurance is not counted as income for tax purposes, most workers don't realize what they're getting (companies now pay about $9,000 for a family policy, reports the Kaiser Family Foundation). But higher insurance costs do limit wage and salary gains. From 2000 to 2006, average compensation for full-time workers rose by $3,500 after inflation, says economist Gary Burtless of the Brookings Institution. But $1,045 went to health insurance. Similarly, Medicare and Medicaid's effects get buried in the larger budget; since 1990, they've gone from 12 percent to 21 percent of federal spending.

People need to see and feel health costs. Politically, we need to create constituencies for spending control. Here are a few suggestions. First, make Medicare beneficiaries pay more; many retirees can afford more. Second, create a dedicated federal health tax to cover all government health spending (Medicare, Medicaid, etc.). If health spending rose, the tax would rise. People would know why. The tax could be an energy tax, a payroll tax or an income surtax. Third, eliminate the income-tax exclusion for employer-paid insurance and replace it with a tax credit of lesser value. Workers would have more pretax income, but they'd have to spend more after-tax dollars for insurance.

Note that these proposals take no position on how big, or small, the government's role should be. That's what we should debate. If (as many liberals desire) we went to a government-run universal system, then the health tax would be much higher. If (as many conservatives want), we relied more on market competition among health plans, people would see how much these cost. Either way, there'd be more pressure to address the messy conflicts between providing more health services and controlling spending.

Don't hold your breath. These proposals would inflict "pain," and candidates who embraced them would invite political ruin. Most Americans do not want to face the difficult political, economic and moral issues posed by unchecked health spending. There's a consensus for evasion that most politicians echo. The impulse is to blame some unpopular villain (drug companies, insurance companies) and to focus on a simpler problem—say, the uninsured. In some ways, this is less serious than it seems. About 40 percent of the uncovered are young (18–34); most are healthy and don't need much care.

But for all the uninsured, the cost of coverage is a major obstacle; that's still the nub of the matter. Health care is ultimately a political issue of making choices. The present politics of health care aims to camouflage the costs and skew the choices. Until we alter the politics—by exposing ourselves to the system's real costs—our debates will lead to dead ends.