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Policy Forum: The State of the Union Health Care Proposals
The Dogs That Yawned

Benjamin Zycher, Ph.D.
Medical Progress Today
February 7, 2006

Let us confront first the elephant in the living room: As long as people do not bear the full economic costs of their health care consumption decisions, the “crisis” in the American health care sector inexorably will get worse. This eternal truth flows from the simple reality that health care “needs” are infinite when people are allowed to demand all they want even as the world in which we live is one in which resources are limited, always and everywhere. Accordingly: There is no such thing as “coverage” - that is, consumption - of all or even most health care services desired, and whether that hard reality is consistent with the notions of compassion prominent in the land of Oprah is neither here nor there.

And speaking of strange lands, let us consider the Beltway, where compassion is defined as a willingness to spend unlimited amounts of Other People’s Money. Few institutions can survive the determined exertions of federal compassion, and when it comes to health care, federal exertions are as determined as they get. At the more expansive end of the policy debate, the usual assertion is that everyone ought to be “covered” for almost every medical service imaginable, meaning that such services ought to be free, or almost so. Sadly, few public officials are to be found willing stand up and respond with the obvious truth that, as one wag put it, there is nothing quite as costly as free health care.

That observation is the beginning of wisdom when considering the general policy prescriptions to be found in the latest State of the Union address, about which more in a moment. In the face of the growing “crisis” in American health care, usually defined as an ever-expanding spending share of GDP, only one general policy prescription can work even in principle: People must have efficient incentives to discipline their consumption of health care services, because the weakness of such discipline yields ever-growing demands (oops, “needs”) that cannot be satisfied. That inevitable outcome leads by necessity to constraints imposed from above (or below, depending on your view of government), a harsh reality already institutionalized in Canada and Europe, and beginning to rear its uncompassionate head here at home:

  • Waiting lists.
  • Denial of various services to those deemed too old, too weak, or too politically incorrect.
  • Denial of the latest technological innovations and medicines.
  • A shifting emphasis from the preservation of life toward debates over which “qualities” of life are worthy of bureaucratic favor.
  • Evidence-based medicine, that is, an effort to ignore individual differences among patients so as to limit patient choice, thus purportedly reducing “costs,” but actually reducing spending pressures faced by bureaucrats and politicians.

And so we return to the State of the Union address. The President’s proposals - expansion of HSAs, greater portability of health insurance, improved information efficiency, reductions in the bias toward employer-provided health insurance, medical tort reform, enhanced implementation of medical information technology, and greater assistance for those less fortunate - are useful even as they are unremarkable. They are useful because as a crude generalization they offer the potential for a reduction in the distortions imposed by government upon the health care sector. They are unremarkable because they do far less than necessary to impose the demand discipline discussed above.

The expansion of HSAs is a partial exception, but at best may be a moderate one: To the extent that patients spend more than their HSA accounts in any given year, marginal consumption decisions still will be driven by incentives inherent in the world of Other People’s Money. At present, the data are unclear on the extent to which medical expenditures are concentrated in that way. The proposed reduction in the bias toward gold-plated insurance provided through employers also will prove useful, but again the extent to which this reform proves important on the margin remains to be seen.

Thus are the President’s proposals analogous to Sherlock Holmes’ silent dog, except that these proposed policy dogs merely yawn. Where is the proposal to impose serious co-payment and deductible requirements - particularly upon Medicare beneficiaries not deemed poor - that would yield some significant consumption discipline? Where is the proposal to reduce radically the favored tax treatment for insurance plans that in reality represent pre-payment rather than insurance against financial ruin? And where is there an effort to change the debate from one in which the “crisis” is blamed on various villains - doctors, insurers, pharmaceutical producers, etc. - to one in which the perverse incentives yielded by government compassion are recognized in all their glory? That dog was silent.

Benjamin Zycher is a senior fellow in economics at the Pacific Research Institute. Email:

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