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How Big A Bite Will Health Reform Take Out Of The Paycheck?


Economic Trends

HOW BIG A BITE WILL HEALTH REFORM TAKE OUT OF THE PAYCHECK?

In health-care reform, the political left has struck first on Capitol Hill. The Clinton Administration's plan relies heavily on loose price controls, government regulation, and employer mandates. The House Ways & Means health subcommittee is crafting a bill that would make Medicare--the U.S. version of Canada's single-payer health plan--the fallback insurer for much of the nation. But the final reform will be closer to the center, and conservative groups are staking out positions to pull the debate their way.

The financial centerpiece of President Clinton's reform is the requirement that employers pay the bulk of health-insurance premiums for their workers. The employer mandate may play well with voters, but economists find that most benefit costs are borne by labor through lower wages. The Heritage Foundation, for example, hired Lewin-VHI Inc., the Fairfax (Va.) consultants who did the first independent cost estimates on Clinton's bill, to calculate the plan's effect on wages. Result: The plan would cut household health spending by $26.5 billion in 1998, but the savings would in good part be offset by an $18.8 billion drop in wages.

Estimating that employers would pass on to labor 88% of the mandate's cost, the Lewin-VHI researchers figured that workers who already have insurance coverage would lose little--their annual wages would fall by only $107 per family. But workers who currently aren't insured would pay heavily for health reform: Their wages would fall $1,461.

The National Center for Policy Analysis, a Dallas-based libertarian think tank, is attacking the whole idea of third-party payments for health expenses. NCPA President John C. Goodman argues that insurance has distorted the medical market. First, insurance encourages overtreatment, because patients pay directly on average only 21 for every dollar of medical care they receive. And insurance payments distort doctors' and patients' choice of treatments, biasing them toward services where insurance picks up most of the tab. Patients pay little for hospital stays but bear most of the cost for prescriptions and other treatments (table).

If insurers paid a uniform share of all medical bills, hospital use would fall by almost half, while pharmaceutical sales would rise by a third, Goodman calculates. More important, his model predicts that removing these price distortions could cut total health spending by 8.5%--almost $85 billion--with no effect on the quality of care.

Both Heritage and the NCPA are stumping for "medical IRAs," tax-favored accounts that let consumers direct their own health spending and benefit directly from any savings. They're not likely to prevail. But by focusing on who ultimately pays for health care, the conservatives hope to win a larger place for market forces in the reform plan.MIKE MCNAMEE


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