Fixing America (and the rest, really)

There are four problems in America right now that, if solved, would restore a great deal of America's strength:

1. Exorbitantly priced, patchy healthcare
2. Inequality of opportunity resulting in an undesirably high level of income inequality
3. Energy dependence
   
4. Budget and current account deficits, debt, and America's labyrinthine tax system.
   

These problems all seem nearly intractable, but they're not! Let's start today with the seemingly most incurable of them all: healthcare. The current healthcare bill would solve some of the patchy coverage problem, but it is a band-aid at best and does nothing to address the underlying problems with the system. Part of the problem is that we have been presented with two false options: private health insurance, or one managed by the government. These are NOT the only two options, however. The economist Tim Harford calls attention in his book The Undercover Economist¹ to a system that has been in use in Singapore for two decades. It would cut costs hugely, give control of most of healthcare to individuals, not government OR insurers, would ensure a high standard of care, and would be universal. Sound impossible? It would be if we remained inside of the private/public health insurance box we've been stuck in.

Here's how it works:
Instead of buying health insurance, individual health accounts are set up. Every person in the US gets a $1,500 per year tax break (roughly the amount paid in taxes to public healthcare in the US already) that is deposited into an individual health account. The deposit is obligatory, but the use of the money is optional and at the individual's discretion (as long as it's for healthcare). Those who do not earn enough to pay over $1,500 a year in taxes will be given a subsidy in that amount. Two things will happen here: younger people, who often avoid health insurance because they (usually rightly) think they can save money by betting they won't get sick, can leave the money untouched. Deposited in a high-rate bank account, this money will grow over the years and can be used for health problems later in life. The other thing that happens is that each individual can decide what types of care she would like. Homeopathy? Flu shots? Massage therapy? No one would have to worry about whether insurance would cover it: there's no health insurance!

There's a third effect, and this one is huge: currently, government and private health insurance companies spend unbelievable sums of money on administration (risk assessment, lawyers, etc.) to attempt to provide low-cost coverage to healthy people and predict who will need more care. These costs disappear under this system.

Finally, the point of this personal responsibility is that, when people see how much things cost, they will make decisions about whether to get treatment or not. That is currently not the case in America's employer-based insurance system. Rationing currently occurs by who can pay the most (insurance companies and employers decide who gets what). In a government-run system (think Britain), the government decides who gets what. In this system, the individual decides what he would like. I think we can all see why this is attractive.

I know, I know, I can already hear the objections: a single MRI or a round of cancer treatment can cost significantly more than $1,500! You're right, of course. That was only one part of the picture, although this plan would likely bring those costs more in line with treatment costs in other developed countries because people would choose less treatment knowing the real costs. The other two are catastrophe insurance and government aid for the unfortunate, along with changes to liability laws, which currently lead to high legal and insurance fees for doctors and to doctors prescribing every treatment in the book, making all treatments more expensive.

Catastrophe insurance is cheap, as only really serious events are covered. In addition, there would be some co-pay (maybe $500). This would provide some encouragement for people not to put themselves in dangerous situations or to run down their personal accounts with frivolous spending.

The government aid is for people who don't suffer catastrophes, but rather who are born with bad genes and need to spend more on healthcare. Here, to be fair, the government would simply have to help out.

There's another result not mentioned in Harford's book: this would all serve to increase wages and tax revenues, making the system more than pay for itself. Studies have shown that much of the cause of wage stagnation in the US in the past decades has been due to healthcare cost inflation. Workers' wages were rising, they just didn't know it because the money was flowing into healthcare. With that system eliminated, employees would receive more cash. They would also then pay more in taxes.

In this system, the benefits for nearly all are obvious. The only ones who would not benefit are the insurance companies. For this reason, you can expect this plan to never come up and, if it did, to be heavily lobbied against. The other problem: it takes a while to explain - voters don't like policies that seem complicated up front (although this one would be much simpler in reality than the current healthcare bill!).

That said, something will have to happen eventually. Americans will not be able to afford their healthcare system indefinitely, unless they want to trade everything else. Let's hope they make the right choice...

1. Tim Harford, The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor - and Why You Can Never Buy a Decent Used Car! (New York: Oxford University Press, 2006), 130-135.