Out of Control Policy Blog

The Economics of Obama's Speech

I really hate that we have to be so critical of this president, but the economics of the Obama speech earlier this week just don't add up. There were a lot of good things the president said, but either his interpretation of facts or policy solutions to real problems (or both) were problematic, at best.

First, the president was right in point out the exploding costs of health care, costs that are putting American companies in an uncompetitive situation with international firms. But he neglects to note that this could be easily changed by ending the culture of employer contribution to health care. It wasn't until the government made health benefits tax free that companies began to offer a portion of compensation packages as employer provided health care. This was done to save companies money as they could pay their employees a smaller salary, but the reduced salary (a smaller total number since it wasn't taxable) would be funneled into the insurance. Over time this create a sense of entitlement that employers would provide health care. We forgot that health care was a part of the over all compensation package. Instead of companies paying a portion of health care, there are other options to be thought through, like tax credits for medical expenses.

Second, President Obama argued that "our health care problem is our deficit problem" because the rising costs of health care are putting pressure on Medicare and Medicaid. To a degree he is right. The rising cost of entitlements is fast becoming the budget crisis. The Wall Street Journal reports that "Medicare's unfunded liability—the gap between revenues and promised benefits—is currently some $37 trillion over the next 75 years." The president suggests solving this problem by cutting "abuse and waste" in Medicare without slashing services. In theory, this could be done, given the waste in the program, but it is unlikely it will be carried out properly. Others have tried to curb Medicare's abuses, but apparently Obama is just gonna get it right this time? Unlikely, since his proposed changes are going to be very ineffective:

So no cuts, for anyone—except, that is, for the 24% of senior beneficiaries who are enrolled in the Medicare Advantage program, which Democrats want to slash by $177 billion or more because it is run by private companies. Mr. Obama called that money "unwarranted subsidies in Medicare that go to insurance companies—subsidies that do everything to pad their profits but don't improve the care of seniors."

In fact, Advantage does provide better care, which is one reason that enrollment has doubled since 2003. It's true that the program could be better designed, with more competitive bidding and quality bonuses. But Advantage's private insurers today provide the kind of care that Mr. Obama said he would mandate that private insurers provide for the nonelderly—"to cover, with no extra charge, routine checkups and preventative care."

Advantage plans have excelled at filling in the gaps of the a la carte medicine of traditional Medicare, contracting with doctors and hospitals to coordinate care and improve quality and covering items such as vision, hearing and management of chronic illness.

I don't want to necessarily defend Medicare. I think we should trash the whole program. But, since politically speaking that won't happen, if we're going to reform it, maybe we shouldn't get rid of the program that has seen its enrollment double in the past six years. I doubt that seniors are rushing into the program so that insurance companies can "pad their profits" more.

Third, and this is a continuation of the second point, how will a government run health exchange not run into the same problems as Medicare and Medicaid? Those programs share something in common: they are run by the government. They have incentives aligned with their funding and operational source. When was the last time a government program came in under or at budget? The reality is that the public option/co-op/health exchange will cost more than advertised, and won't be run like a business because you need to be pursuing profit in order to be a business.

Fourth, the President wants to force individuals to get insurance and force companies to offer it... or else! This might be the most egregious attack on individual liberty in his whole term. Why should we force people to get insurance? I am in the crowd of male, between 20 and 30, in healthy condition, in shape, and without need of a doctor for years. What if I want to spend my money on something else? Something I can use? Something I can build? The President claims that I should pay because if I don't then society must cover my emergency room visits. But what he really wants is my money in order to fund programs for the elderly. At the very least, if this requirement is just for my benefit, make me put that money in a health savings account so that only I can have access to it. That won't happen of course because it screws up the idea for funding the Medicare liability gap or the operations budget of the public option exchange co-op.

I also wrote about The Economy in Obama's Speech last week.

Also see Shikha Dalmia's recent piece "President Obama's Plan Will Control Every Aspect of the Medical Transaction" in Forbes.

Anthony Randazzo is Director of Economic Research


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Comments to "The Economics of Obama's Speech":

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