In the 1990s, it became increasingly clear that General Motors was in gradual decline. Yet, with the right leadership, GM still had time to restructure its staggering pension and healthcare obligations. Feckless leadership chose to pass these problems to the next generation - leading to GM's bankruptcy in 2009. America is in an eerily similar position. Like GM, America is burdened by overwhelming pension and healthcare obligations - over $50 trillion worth. Instead of restructuring these obligations, President Barrack Obama wants to expand America's biggest entitlement program: Medicare.
Like GM, America has a medical system it cannot afford and that allocates medical services poorly. At $34 trillion, future Medicare obligations are over $500,000 for an American family of four. If left unchecked, by 2050, Medicare will consume about 20 percent of GDP -- greater than America's total tax receipts. Not surprisingly, America spends more on health care than any other nation. In some respects, this spending is not in vain. America has the most advanced healthcare system in the world. Yet, America's healthcare system ranks low among developed nations and barely in the top quartile among all nations in terms of overall effectiveness. Accordingly, America should review its healthcare system and devise a better system to allocate medical services under Medicare.
There are two areas that America needs to target. The first is the breadth of Medicare. The second is how our tax system creates an incentive to "overbuy" medical insurance.
Medicare covers the wealthy and poor alike. Accordingly, the first step should be to narrow the focus of Medicare, not expand it. The Medicare/Medicaid system should be revamped to provide catastrophic healthcare for the poor. The change would require two steps. First, Medicare should only cover medical emergencies above a certain dollar amount (say, $15,000). However, to cover the initial $15,000 in costs, people would be required to carry a minimum health-care insurance policy with a private carrier. The federal government would mandate that the states establish a regime that would provide all citizens (particular poorer ones) access to such policies. States would, thus, require their citizens to carry "minimum liability health" (MLH) policies, similar to minimum liability car insurance required by many states. For poorer citizens, Medicare would pay for costs that exceed MLH policy limits; the wealthy would have private policies that provide comprehensive coverage. Thus, Medicare would be means tested and only the poor would be eligible for the catastrophic coverage provided by it. Wealthier Americans would either have to carry insurance above the minimum policy levels or pay for their medical care out of their own resources.
Tennessee currently has a minimum health-care insurance program similar to the one proposed. Tennessee's plan is premised on the idea that the amount of minimum insurance should be low enough that it is not cost prohibitive, but high enough to cover most medical incidents. The CoverTN plan provides $15,000 of insurance ($25,000 for families) and covers a majority of medical incidents in a given year. Doctor visits and many drugs are covered as well, with a modest co-pay. The cost for a young adult in good health (nonsmoker) is about $120 per month; the employee pays less than $40 per month. The remainder is split between the state and the person's employer. My plan would call for all Americans to carry a policy similar to the CoverTN. However, I would also impose a relatively modest deductible. Many might complain that this would be a significant burden on the poor; however, car insurance is less important than medical insurance and almost all auto insurance policies, including the ones bought by the poor, have a deductible to insure that the consumer comes out of pocket for at least something in the event of an accident. In the case of an MLH policy, a modest deductible ensures that every citizen bears at least some portion of the cost of healthcare services directly out of pocket, resulting in a more efficient allocation of medical services. This is something sorely needed in the current system.
The total cost of such a policy would be less than the CoverTN plan, given the deductible. Assuming a similar split between the state, employer, and worker, the total cost to an American earning the minimum wage would be about 6% of his or her pre-tax earnings, including the deductible. The unemployed and very poor would be eligible for further assistance by the state to cover premiums and the deductible, as is the case in Tennessee.
Medicare would thus be converted into a catastrophic regime covering the poor after the $15,000 policies ($25,000 for families) were exhausted. Accordingly, Medicare would be a means-tested entitlement program, designed to provide poorer Americans with a minimal level of catastrophic medical care. The Medicare system would be supported by tax dollars. Congress would establish an annual budget for Medicare that targets a particular percentage of GDP (e.g., 5% of GDP). The government would determine the level of benefits that could be provided based on the Medicare budget, requiring difficult decisions on the part of US policymakers. However, given means-testing and coverage provided by the $15,000 policies, the scope of Medicare coverage for poorer Americans could be quite expansive.
Most Americans, of course, would keep their current medical insurance. This is a positive, since most insured Americans are happy with their medical coverage. But, in addition to providing for their own medical insurance or costs in old age, more affluent Americans would also be taxed on their medical insurance benefits, as suggested by former President George W. Bush.
Under current law, employers can deduct insurance premiums paid on behalf of employees, but employees do not include these benefits as compensation. Thus, the US Treasury loses out on significant tax revenues. Worse yet, by providing this tax subsidy, our tax laws encourage Americans to "overbuy" insurance and arguably overuse medical services.
To encourage a more efficient allocation of medical services, Americans should be taxed on any employer medical subsidies above that of the MLH policy. This would eliminate the incentive on the part of workers to overbuy insurance and raise much-needed tax dollars, which could be used to support a leaner Medicare program.
By re-sizing our Medicare system to one we can afford, targeting Medicare to cover the neediest Americans and eliminating tax subsidies that encourage middle income Americans to overuse medical services, America can avoid the fate of GM and maintain its competitive position for decades to come.