Monday, November 5, 2012

How to Replace Obamacare > Publications > National Affairs

Of course, government health-care programs and policies are largely responsible for these rising costs in the first place. To begin, the design of Medicare is terribly flawed: Because the program pays providers of care based on the volume of their services, it creates a massive incentive for inefficiency and overuse. And because Medicare is the biggest payer in most health-care markets in America, that incentive badly distorts the economics of the entire sector. Furthermore, the Medicaid program inflates costs by (among other policies) having states control how the program is run while the federal government pays most of the bills. The result is that neither party has both the incentive and ability to keep costs in check.
The third driver is the tax exclusion for employer-provided insurance: The federal government does not count the amount that employers spend on health insurance for their employees toward workers' taxable income. This tax exclusion inflates costs by effectively rewarding higher-premium plans and by encouraging employer-purchased insurance, thereby preventing a real consumer market in coverage. The people who use the insurance (workers) are not the people who buy it (employers); many Americans thus have no idea how much is spent for the health care they receive. As a result, there is no clear relationship between cost and value, without which there can be no real prices, no real incentives for efficiency and quality, and thus no limitations on the growth of costs.

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