Hillary Health, Again
by John Goodman
Issue 106 - April 23, 2008

Barack Obama had it right from the beginning. Hillary's health plan, he said, would try to force people to buy something they cannot afford and then impose a heavy fine on them when they don't buy it. At the end of the day, they will be worse off than they were at the outset.

Now Hillary has a rejoinder. She says she will limit the amount people have to pay in premiums to, say, 5% or 10% of their incomes.

What's wrong with that? A lot. Here are 10 problems that spring to mind. [To avoid the charge of hypocrisy, let me say upfront: I have always favored a kinder, gentler version of individual pay-or-play, outlined here and elsewhere]

1. Failing to Control Costs. For the past three or four decades, per capita health care spending has been growing at twice the rate of income and there are no signs it is abating. Sen. Clinton has no realistic proposal to change that fact. In fact, no Democratic presidential candidate has had any plausible plan for cost control, unless you count Dennis Kucinich (who implicitly endorsed health care rationing). So no matter what the situation in year one, a mandate will require more of family income in year two. More still in year three.

2. Imposing a Tax. A mandate is a tax. Forcing people to buy something they do want to buy is equivalent to taxing them - at least at the margin. And because of (1), it is a tax that will claim a growing share of income through time.

3. Creating an Entitlement. A pledge to limit an individual's burden to no more than 5% or 10% of income is the equivalent of creating a new entitlement for everyone who reaches the cap. How big would this entitlement be? That depends on how you define income and what health expenses you include. The average household already spends 5.6% of income out of pocket on health care and health spending for all purposes is 20% of personal income for the nation as a whole!

Note: The Medicare Trustees the other day said we have already promised more than $100 trillion in Social Security and Medicare benefits over and above premiums and dedicated taxes. And the Congressional Budget Office finds that on the current path, Medicare and Medicaid will crowd out every other federal government program by midcentury.Hillary's plan would extend this entitlement madness to everyone else.

4. Creating Perverse Incentives for Employers. Our employers pay our health insurance premiums because tax subsidies encourage them to do so. Yet Hillary's cap offers a more enticing subsidy, to be had by shifting more of the premium payment back to the employee. This perverse incentive wouldn't exist if the plan were rational. As Victor Fuchs and Ezekiel Emanuel point out, economic studies show and common sense confirms that the employer premium payment is a substitute for money wages. Employees (not employers) pay for their own health care benefits by accepting less in wages. So in calculating the employee burden, we should always add together the employer and employee premium shares.

5. Perverse Incentives for Employees. Rising health care costs have been crowding out wage increases for low- and middle-income workers. For that reason, cost control is in everyone's self interest. But under Sen. Clinton's premium control cap, employees would no longer have an interest in cost control. They would face the same incentives now faced by Medicare and Medicaid patients - to spend, spend, spend.

6. Paying for Health Care by Taxing Capital. Sen. Clinton estimates that her plan will cost about $110 billion a year. She would pay for about $60 billion of that amount by repealing the "Bush tax cuts for the rich." Which means raising the tax rate on capital gains and dividend income for wealthy people. Which means taxing capital. Which means a lower capital stock and a smaller national income in the future.

Note: It's always bad to tax capital to pay for current consumption. To tax capital to pay for wasteful health care spending that promises miniscule health benefits at the margin is really, really, really bad.

7. Ignoring the Latest IRS Returns. To add to this list of misery and woe, there have been no tax cuts for the rich. Their tax rates are down, but their tax payments are way up. And there is every reason to think that reversing the process and raising rates will cause total tax payments to go down. This gives a whole new meaning to the idea of all pain and no gain.

8. Making Things Up. Sen. Clinton plans to pay for the remaining $50 billion by eliminating waste and inefficiency. Her ideas are all the latest fads: electronic medical records systems (designed in Washington, D.C.), pay-for-performance (bureaucrats telling doctors how to practice medicine), and evidence-based medicine (more bureaucrats telling doctors how to practice medicine). Have similar ideas saved money anywhere before? Not that anyone can verify.

9. Taxing the Poor. Sen. Clinton is not totally unrealistic. She acknowledges that there may be a need for more revenues. In that case, what better source to turn to than, well, poor people. "I'm a big believer in raising tobacco taxes," she says - even though they hit low-income families the hardest. She acknowledges that "at some point there's going to be diminishing returns," by which I think she means there is only so much you can squeeze out of the smoking class. But short of that point, "sure, why not? I don't have any objection to that." http://www.ncpa.org/pub/st/st300/st300.pdf

[This is an amazing admission by the way. Politicians who favor tobacco taxes almost always say the goal is to discourage smoking, not to maximize tax revenue from smokers.]

10. Regulating Insurance Company Overhead. Imagine a law requiring General Motors to spend no more than 15% of its revenues on "administrative overhead." Would that be a good idea? How about for Microsoft? Or Xerox? Forget for a moment that no one knows how to measure "administrative costs." What if we did know what these words mean? Is that something government should regulate? Hillary is willing to consider it for health insurance even as she proposes a laundry list of new administrative duties for insurers - better chronic care management, better preventive care management, electronic medical records, etc.

Is that enough wrong to convince you Hilary Health is not much better the second time around than the first?

John Goodman is President of the National Center for Policy Analysis.