Health-care options: Solvency through vouchers

From: The Economist

 by W.W. | IOWA CITY

LAURENCE KOTLIKOFF, a professor of economics at Boston University, warns that fiscal doomsday is rapidly drawing nigh

CBO’s baseline budget updates suggest the date for reaching what Carmen Reinhart, Kenneth Rogoff and other prominent economists believe is a critical insolvency threshold—a 90 percent ratio of federal debt held by the public to gross domestic product—has moved four years closer, in just nine months!

Mr Kotlikoff reports that, thanks to the indefinite extension of the Bush tax cuts and the one-year cut in the payroll tax, the critical 90% threshold is now scheduled for 2017, at which point the earth will crack open loosing from the pits of hell soaring interest rates on government debt and a debasing orgy of money-printing to pay for it. Unless! Unless we reform our reckless ways with grim resolve and the utmost speed, especially Medicare—it’s the greying (well, greyed) Boomers and their looming need for colostomy bags and superfluous brain scans that’s set to mug us. Mr Kotlikoff lauds Paul Ryan for including a version of the thrifty Rivlin-Ryan Medicare plan in the exciting Republican budget that’s got everyone talking. But even this is too timid. “Rivlin-Ryan would be a huge step in the right direction,” Mr Kotlikoff concedes, “but what’s really needed is a complete redo that would keep total government health-care spending where it is now, at about 10 percent of GDP.” Forget Obamacare. Forget Paul Ryan. (As if! What a dreamboat.) We need a full-on redo, and Laurence Kotlikoff conveniently has one at hand: the Purple Plan.

Purple is the colour of a Democrats’ face when she hears the word “voucher”, but check this out. Five Nobel laureate economists—George Akerlof, Edmund Phelps, Thomas Schelling, Vernon Smith and William Sharpe—are behind it, so you know it’s good. (By my count that’s three Democrats, one libertarian, and William Sharpe.) And the Purple Plan has something for everyone:

If you’re a Democrat, don’t worry. This system is more or less what’s in place in Germany, Holland, Switzerland and Israel—hardly right-wing bastions. If you’re a Republican, don’t worry. This is a voucher system that’s fair to all and keeps government spending from exploding.

Germany, Holland, Switzerland, and Israel sort of are right-wing bastions, but you know what he means. Here’s the plan, by the numbers:

  1. All Americans receive a voucher each year to purchase a standard plan from the private-plan provider of their choice.
  2. Vouchers are individually risk-adjusted; those with higher expected healthcare costs, based on documented medical conditions, receive larger vouchers.
  3. Participating insurance companies providing standard plans cannot deny coverage.
  4. Each year a panel of doctors sets the coverages of the standard plan subject to a strict budget, namely that the total cost to the government of the vouchers cannot exceed 10 percent of GDP.
  5. Insurance companies providing standard plans contract with private providers to cover their plan participants.
  6. Americans choose doctors and hospitals included in the standard plan they choose.
  7. Plan providers compete and provide incentives to improve participants’ health and limit bad health practices.
  8. Plan providers offer supplemental plans to their participants and cannot deny supplemental insurance coverage to their participants.
  9. The government (federal and state) ends the tax exclusion of employer-provided health insurance premiums.
  10. Like all other Americans, Medicare, Medicaid, and health exchange participants are covered by the Purple Health Plan subject to appropriate transition provisions.
  11. The roughly 10 percent of GDP now spent or allocated by federal and state government on these and related programs, as well as on the tax exclusion of employer-provided health insurance premiums, is reallocated to help finance the vouchers.

I like it lots, but it does strike me that the plan’s potential to rescue us from Zimbabweisation come 2017 relies on #4’s “panel of doctors” to a worrying degree. The explicit aim to keep health-care costs from eating an ever-growing portion of national income seems very necessary. Yet I’m not sure what to expect from the American public and their representatives in Congress when Drs Gawande, Emanuel, Krauthammer, et al. approve coverage chintzier than the lavish medical plan to which the median American has grown accustomed. We are not facing insolvency because of a culture of frugality and self-restraint.

In any case, we must thank Paul Ryan for making the discussion of a wider array of options for health-care reform possible. As David Weigel noted yesterday, Mr Ryan’s plan is

good for Republicans because they get to shift the Overton Window yet again—they’ve been doing quite a lot of this—and start a discussion about privatizing Medicare and turning Medicaid payments over to states in the form of block grants. In the space of a couple days, these have gone from the desks of AEI and Heritage researchers and onto, well, “Morning Joe.”

And now Mr Kotlikoff’s worthy plan seems not so far beyond the pale.

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