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Graduate Economics: Balancing the Budget Without Benefit Cuts or Tax Increases

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Amid the celebration of Mother's Day and a child's college graduation this past weekend, there emerged a kernel of wisdom that can break the gridlock, preserve our nation's strength, and allow America to continue to lead the world to peace and prosperity.

Dramatic? Admittedly. True? Absolutely.

This powerful insight is simply that incentives work.

Sunday's University of Dallas graduation ceremony was a powerful witness to a wonderful mother on Mother's Day. My wife and I watched our youngest graduate from college, enjoyed the company of all four of our children together, witnessed all four complete college in four years, and paid our last tuition payment! Oh, happy days!

Without taking anything away from my wife's nurturing guidance and the talent and drive of our children, my role also played a vital part: I exercised graduate economics! I have great children. America is full of wonderful people. Yet well-defined and well-intentioned incentives can powerfully and positively impact behavior for even the best people.

I negotiated with my children before they were born (it's easier that way) that if there was no dating before they were 16, Dad would help with the first four years of any college where they were accepted. The fifth year was on them. Amazingly, they all met the criteria and completed their degrees in four years at great schools -- Notre Dame, Michigan, and the University of Dallas.

This approach of clearly defined incentives, if applied to many government services, would go a long way in solving our deficit.

How could incentives break the stalemate in Congress and save the union? The simple answer is in their application to health care. In making the case for health care reform, President Obama said, "Put simply, our health care program is our deficit problem. Nothing else even comes close." As a former CFO, I absolutely agree. California Gov. Jerry Brown recently outlined his budget prescription by warning citizens that he had no choice but to cut spending and raise taxes. I absolutely disagree. Regrettably, like so many politicians, Gov. Brown has ignored the power of incentive in his own state. As a result, many will suffer.

California's Safeway grocery stores estimate that applying incentives to health care could result in a 40 percent reduction of direct health care spending in the United States. This could balance the budget without benefit cuts or tax increases.

How can this be? The problem of rising health care costs could be solved by allowing businesses to apply their well-honed expertise in offering customers the opportunity to have more for less -- in this case, better health at a lower cost. Individuals also must have incentives to make healthy lifestyle choices.

From where do these gigantic savings come? First, benefits would spring from improved transparency. Safeway's study revealed wide differences in the cost of medical care. An easy comparison of providers' cost and quality, combined with an incentive to seek out the best deal, could yield dramatic results for consumers.

Safeway found that substantive savings also would come from better lifestyle choices. By its estimates,

1. 70 percent of health care costs are driven by behavior
2. four chronic conditions are responsible for 74 percent of health care costs, and
3. obesity is a driving factor in all four chronic conditions.

Taken together, this means that the biggest driver of health care costs is obesity, which is largely behavioral and reversible. Kudos to Michelle Obama for shining a light on this priority!

Safeway used these findings to implement a health care plan that rewarded people with incentives and lowered premiums based on progress in four measures:

• Weight
• Tobacco use
• Control of cholesterol levels
• Control of blood pressure levels

Safeway achieved lower health care costs at a time when others were experiencing significant increases. And Safeway employees became healthier over that same period.

Unleashing the power of choices in health care for private companies and government programs could dramatically reduce health care costs while improving the health of the overall population and the competitiveness of the national economy.

Providing incentives to my children helped me to balance my checkbook. By doing the same, America could remain solvent with a lot less pain to beneficiaries and taxpayers. Perhaps Gov. Brown and other politicians need a remedial course in incentive economics.

Mark R. Kennedy leads George Washington University's Graduate School of Political Management and is Chairman of the Economic Club of Minnesota. He previously served three terms in the U.S. House of Representatives and was Senior Vice President and Treasurer of Federated Department Stores (now Macy's).