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.