Galt, Kerry, the public fisc, and health care innovation

Jane Galt corrects me: her plan isn’t John Kerry’s. And Steve Teles is right: giving health care quality and innovation priority over cost control makes sense only if we can unload the health-care burden from public budgets.

Responding to my assertion (two posts down) that Jane Galt’s health plan is more or less John Kerry’s, Jane Galt writes:

No, it was not John Kerry’s plan, which kept Medicare, Medicaid, and SChip in place, preserving the government price controls which are my primary objection to national health care plans. My plan would not be financed by repealing tax cuts . . . any tax increases should be devoted to close the budget deficit. My plan will be financed by:

a) Ceasing the massive subsidy to people who can afford to pay for their health care. (And making affluent old people in Florida pay the cost if they want to use doctors visits as tedium-breakers)

b) Recouping the current tax subsidy to health care

c) Increased economic efficiency by removing the employer/healthcare link

John Kerry’s plan did none of those things. I do not know if my plan would be self-financing, but I suspect it would.

My objection to nationalized health care is not cost; it is the destruction of innovation that I see as inevitable once the government starts muscling pharmas and medical equipment manufacturers to price at cost-plus. I was vehemently opposed to John Kerry’s plan, which was kludgy incrementalism that kept all the bad features of the current system, while costing a great deal of money and encouraging the government to extend its price controls further into the market . . . exactly the opposite of what I want.

I stand corrected.

Steve Teles (just below) points out that, even if health care costs wouldn’t be very important in a first-best world, in the actual world the opportunity costs of spending politically constrained public revenues on health care is likely to be high. Point taken.

The problem, then, is to design a system that takes pressure off the public fisc, for example through “play-or-pay” rules either on employers or (as Mark Warner has proposed) on individuals. The virtue of the current employer-based system &#8212 the only thing it has to balance off its many faults &#8212 is that it prevents the “adverse selection” problem of healthy people choosing to go uninsured. An individual-level “play or pay” would do that job and thus allow a move away from the employer-based system. That might also encourage a shift from the current system in which the price of health insurance is independent of age to a system where older people pay more, thus eliminating both the cross-subsidy from the young to the old and the incentive the current system creates for companies to shy away from hiring older workers.

Where I agree with Jane is that, if such a move were made, quality and innovation, rather than cost, should be the driving consideration in policy design.

The part of the current health care budget that goes to support innovation ought to be counted as investment, not consumption. And innovation made here, especially the invention of new drugs, produces benefits world-wide. So cost controls that slow the pace of innovation impose costs both on future generations and on the rest of the world. That’s at least a partial offset to our low savings rate and our stinginess with development assistance.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: