Leading policy-makers and scholars explain how market forces, deregulation, and consumer choice can work to improve health care for all Americans.


David R. Henderson, Wall Street Journal, 1-10-07

Henderson, a senior fellow at the Hoover Institution, dissects Gov. Schwarzenegger's plan for universal health care in California, particularly as it bears on the uninsured.

Mr. Schwarzenegger's solution…would require employers with 10 or more workers to provide health insurance or pay a 4% tax on all wages covered by Social Security: Look for employers with 10 to 12 employees to get creative about outsourcing. And look as well, as Harvard economist Jonathan Gruber has documented, for wages to fall in firms that offer health insurance because of the mandate.

Gov. Schwarzenegger would throw in a 2% tax on doctors and a 4% tax on hospitals to help fund Medi-Cal, California's name for Medicaid. And he would expand Medi-Cal to adults earning as much as 100% above the poverty line and to children, even those here illegally, in poor and middle-income families. He hopes, by doing this, to shift $5 billion of Medi-Cal's annual cost to the federal government.

There are two problems with such solutions. First, they infringe on economic freedom, preventing, in Robert Nozick's phrase, "capitalist acts between consenting adults." Second, government solutions rarely work.

Why doesn't increased government power tend to solve the problem of the uninsured? There are two main reasons. First, when government provides health insurance, many people who take advantage of it drop their own privately provided health insurance. In a 1996 article in the Quarterly Journal of Economics, Harvard economists David M. Cutler and Jonathan Gruber found a 50% "crowding-out effect."

As the federal Medicaid program expanded, for every two people who gained insurance through Medicaid, one dropped private health insurance. Although this is a net addition of one, the costs to taxpayers are much higher than expected because now half of the newly covered, instead of paying their own way as they previously did, become wards of the state.

Second, of the 46 million or so people without health insurance at any given time, about 45% will have health insurance within four months. This is one of the main findings of a 2003 study by the Congressional Budget Office, "How Many People Lack Health Insurance and for How Long?" That shouldn't be surprising in a country where most private health insurance is employer-provided and most unemployment spells last 11 weeks or less. Solutions that involve government mandates on employers or employees will, therefore, miss connecting with about half of the people who are uninsured at a given point in time.

But what if the governor could solve some of the problem by making health insurance cheaper? He can—not by regulating more, but by deregulating.

Project FDA.
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