How to fix US healthcare

The US federal government faces a long-term fiscal gap, which exceeds, from all indications, $70 trillion. This gap is the present value difference between all projected future expenditures and all projected future receipts.

Its size reflects the impending retirement of 78m baby boomers and the fact that when retired, they will receive annual benefits from social security, Medicaid (the healthcare scheme for people on low incomes) and Medicare (for the elderly and disabled) that average more than per capita gross domestic product.

The fiscal gap is the true measure of the nation’s net fiscal obligations because it puts explicit and implicit debts on an even footing. Coming up with $70 trillion in present value would require an immediate and permanent doubling of the payroll tax or taking other draconian fiscal measures that will lead to immediate and sustained massive surpluses.

We are not, of course, intending anything of the kind. We are going to run massive deficits over the short term to a) revive the economy and b) introduce a third big government healthcare systemto cover the one-in-six Americans now uninsured. This system, as proposed by President Obama, would not compel participation, but encourage it, in part, via subsidies provided to low-income households.

Initiating another enormous federal healthcare programme when you are already $70 trillion in the hole and have no actual or prospective control over spending on your current healthcare programs (Medicaid and Medicare) is irresponsible, to put it mildly. It verges on the unconscionable when

One realises that employers are likely to shut their health plans and move their workers to the new system, where many of their workers can receive subsidies. Under this scenario, Uncle Sam ends up covering virtually the entire population, but via three different programmes, none of which have any effective means of controlling costs.

It’s time to redesign the US healthcare system from scratch subject to two absolute requirements. First, we need to provide all Americans with a first-rate, basic health insurance plan. Second, we must limit the costs of universal health insurance so that it doesn’t drive the country broke.

The Medical Security System delivers the goods. The MSS is very simple.  Each American would receive a voucher each year. The amount of the voucher will equal the person’s expected annual healthcare costs that are covered under the MSS Basic Plan.  Each person’s voucher amount will be determined based on objective health indicators (e.g., blood tests, X-rays, MRI scans) reported via electronic medical records (now being collected), using individual risk-adjustment software.

Thus an 80-year-old, advanced diabetic male living in Miami might get a $70,000 voucher, while a perfectly healthy 14-year-old girl living in Kansas City might get a $3,500 voucher.

Each American would use his/her voucher to buy the Basic Plan from a health insurance company.  Since health insurers would be compensated via the size of the voucher for taking on customers with pre-existing conditions, they would have no incentive to cherry pick. Nor would they be allowed to do so; no insurance company would be permitted to refuse coverage of anyone.

Insurance companies would, however, be free to offer their clients financial and other incentives to improve their health. Insurers would also be able to establish co-pays and deductibles. These incentives to properly use, but not overuse the healthcare system would be subject to review by the independent panel of medical practitioners set up to oversee MSS.

This panel would also determine what the Basic Plan covers. It would do so subject to a strict budgetary ceiling, namely, total MSS voucher payments would not be permitted to exceed 10 per cent of GDP. Ten per cent of US GDP appears to suffice to finance basic healthcare, including nursing home care and prescription drug coverage, for the population. It is certainly a larger share of GDP than is being spent in every other developed country on basic healthcare.

Since US GDP will grow, total MSS expenditures will grow as well. Hence, the MSS panel will be able to add medications, technology, diagnostic procedures, etc. to the Basic Plan’s coverage.  But the rate at which healthcare spending grows will slow dramatically.

How would we pay for MSS? By eliminating federal Medicare spending, federal and state Medicaid spending, and federal and state tax subsidies paid on employer-provided healthcare. Together these direct and indirect expenditures account for 9 per cent of GDP. The other 1 per cent of GDP would be more than paid for by reducing excessive growth in future healthcare spending; i.e., the real financing question comes down to the present value of future government healthcare spending.

If the government spends somewhat more on healthcare in the short run, but dramatically less over time, the present value of healthcare spending will decline considerably. Indeed, by fixing federal healthcare spending at 10 per cent of GDP, MSS would shave upwards of $30 trillion off the fiscal gap.

This healthcare fix offers other critical benefits to the US. By providing all Americans with a basic health plan, we’ll be able to sleep at night. Those now uninsured will no longer face bankruptcy from an expensive illness. And those now insured, will no longer have to fear the loss of their coverage.

We will also achieve universal healthcare via universal health insurance. We don’t nationalise the healthcare system. Instead, we maintain competitive provision and put health insurers to work in generating the right incentive structure, rather than picking healthcare winners and losers.

Finally, by handing the public their vouchers to spend on a health plan of their choosing, the MSS makes clear that the system is not free and that we all have a stake in ensuring it remain within its fixed 10-per cent-share-of-GDP budget over time.


Originally published at the Financial Times and reproduced here with the author’s permission.

6 Responses to "How to fix US healthcare"

  1. Guest   March 15, 2009 at 9:29 am

    Take a look at Canada’s medicare. Costs as % GNP vs the US. No insurance companies; just a government-issued ID card.

  2. Phil   March 15, 2009 at 11:23 am

    Single payer scheme; nice. Why are there still insurance companies in this plan?I mean, I know why. The problem with single payer schemes is that providers of medical services have an incentive to provide unnecessary services. In Kotlikoff’s scheme, the role of the insurance companies is to prevent this. But why on earth does he think they will? The US has more and bigger insurance companies than anywhere on earth, and US citizens spend more on health than anyone else. Obviously the insurance companies don’t perform the function that K is expecting to. What does he think is going to change if his MSS plan is introduced?Single payer schemes are beautiful because they’re simple. Keep them that way. Cut out the insurers, put some decent oversight and a small copay in place, and you’re done.

  3. GaryD   March 15, 2009 at 6:29 pm

    The US is the only developed (OECD) country that does not have some form of universal public health care. With the exception of Canada, other developed nations have a public/private mix. Public health care in these countries is funded through taxes. The cost to these countries as a percentage of GDP is much less than it is in the USA. i.e. 10% in Canada, 15% in USA. Americans pay more, but have ~50,000,000 uninsured, growing daily. Is that something to brag about?Americans have been brainwashed into thinking that public funded health care is some kind of socialist evil that is fundamentally undemocratic. What a load of crap! Instead, it is preferable to embrace for-profit health care (God bless capitalism) where employers or individuals pay insurance. Get laid off in a recession, no more health care. For profit health care means people with medical conditions are shunned – no money to be made there. Its all about making money, not looking after people. Thanks to this system, Americans are uncompetitive with foreign countries that have public health care.It is funny watching Obama dance around this problem, scared to come out and say that a public system is the solution. For some reason, the promotion of a public health care system in the US is like frying bacon in a synagogue. Maybe the people of the USA could pay higher taxes (and less expensive private premiums) and get free health care. GASP, did I say higher taxes. I smell bacon. For a great superpower, the pinnacle of democracy, its health care system is a huge embarrassment that does a disservice to every citizen.

  4. L MARQUARDT   March 15, 2009 at 10:45 pm

    ONE LARGE COOPERATIVE THAT SERVES ALL IS THE IDEAL I HAVE BEEN HOPING FOR SINCE 1973.PAY FOR IT THREE WAYS:1 A VAT… VALUE ADDED TAX… EVERYONE PAYS SOMETHING2 A SUR TAX ON INDIVIDUAL INCOME TAXES3 A SUR TAX ON BUSINESSESWHEN WE SEE THAT SURTAX AND PAY THE V.A.T WE WILL KNOW THOSE TAXES ARE PAYING FOR OUR HEALTHCARE.SO MUCH MONEY IS SPENT IN OUR CURRENT NON-SYSTEM THAT PROVIDES ABSOLUTELY NO HEALTH CARE. ADVERTISING FOR HOSPITALS AND MEDICINES IS HUGE. THOUSANDS OF PAPER PUSHERS ARE NEEDED FOR HUNDREDS OF DIFFERENT SYSTEMS, FOR HAGGLING OVER PRICES, FOR DENYING PEOPLE HEALTH CARE, FOR FIGHTING LEGAL BATTLES ETC.WE NEED A SYSTEM THAT WORKS FOR PEOPLE’S HEALTH. THE CURRENT NONSYSTEM, FEE FOR SERVICE MESS ENCOURAGES EXCESS EXPENDITURES AND LESS HEALTH THAN IT SHOULD.WE NEED A SYSTEM THAT IS TRANSPARENT AND EFFICIENT.

  5. Josh   March 16, 2009 at 9:34 am

    Right what Phil said: Why are there still insurance companies in this plan? They obviously add no value to our nation’s health. They charge premiums that outpace inflation and wage growth by several hundred percent a year. Every time you turn around there’s a new copay, a higher deductible, not to mention the shell game that is a medical bill. Those bills are like a crap shoot… neither the doctors nor the patients nor the insurers could ever tell you in advance what the bill is likely to be. So Mr. Kotlikoff, how exactly are we to determine people’s expected health costs for an upcoming year for these vouchers? Like I should factor in my “plans” to get cancer or have an aneurism, so I can make sure my voucher is in the six figures? The so called system we have is crazy and the market and the insurance companies will never be able to fix it. Not that they actually want to… sick people are not really that profitable are they? Just a burden on the corporate bottom line.

  6. Josh   March 16, 2009 at 9:44 am

    P.S. The correct answer is a single payer system funded by progressive taxation. Same as the first 4 commenters said.