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“We Are Bankrupt”: U.S. Needs to “Start From Scratch” on Healthcare, Says Kotlikoff

Fin - Daily Ticker - US

Congress passed another stopgap budget measure Thursday that will keep the government up and running through April 8th, but both sides of the aisle remain far from a long-term solution.

The problem, says Laurence Kotlikoff professor at Boston University, is both parties in Washington lack the political will to deal with the the crux of the issue: entitlement reform.

"We are bankrupt today," he tells Aaron in this accompanying clip. The cure for the country's ills starts with meaningful and cost effective health-care reform.  Obamacare is not that solution, Kotlikoff argues. "He set that up in a way that can be tremendously expensive," he says referring to the President's plan, "and he also did nothing to stop the explosion of costs in Medicare and Medicaid."

Kotlikoff suggests we "start from scratch" a solution very similar to what Rep. Paul Ryan (R-WI) and Alice Rivlin have suggested for Medicare -- except he would extend it to all Americans, not just seniors.

Editor's note: What follows is drawn from Jimmy Stewart Is Dead (John Wiley & Sons, 2010); published here with the author's permission.

The Medical Security System (MSS), which I proposed in The Healthcare Fix (MIT Press, 2007), to fix our healthcare mess is very simple.  Each American would receive a voucher each year. The amount of the voucher will equal the person's expected annual healthcare costs that are covered under the MSS Basic Plan.  Each person's voucher amount will be determined based on objective health indicators (e.g., blood tests, X-rays, MRI scans) reported via electronic medical records, using individual risk-adjustment software. Thus an 80-year-old, advanced diabetic male living in Miami might get a $70,000 voucher, whereas a perfectly healthy 14-year-old girl living in Kansas City might get a $3,500 voucher.

Each American would use his/her voucher to buy the Basic Plan from a health insurance company.  Since health insurers would be compensated via the size of the voucher for taking on customers with pre-existing conditions, they would have no incentive to cherry pick.  Nor would they be allowed to do so; no insurance company would be permitted to refuse coverage of anyone.

Those who can afford it would be free to buy supplemental insurance from the same insurance company from whom they purchase their basic plan.  This eliminates cherry picking (adverse selection) in the supplemental insurance market. Insurance companies would, however, be free to offer their clients financial and other incentives to improve their health. Insurers would also be able to establish co-pays and deductibles. These incentives to properly use, but not overuse the health-care system would be subject to review by the independent panel of medical practitioners set up to oversee MSS.

This panel would also determine what the Basic Plan covers. It would do so subject to a strict budgetary ceiling, namely, total MSS voucher payments would not be permitted to exceed 10 per cent of GDP. Ten per cent of US GDP appears to suffice to finance basic healthcare, including nursing home care and prescription drug coverage, for the population. It is certainly a larger share of GDP than is being spent in every other developed country on basic healthcare.

Once the vouchers are handed out, Uncle Sam is off the hook.  The insurance industry and doctors, hospitals, and other private providers will be responsible for providing the Basic Plan based on the vouchers provided. Since US GDP will grow, total MSS expenditures will grow as well. Hence, the MSS panel will be able to add new medications, surgical procedures, new diagnostic technologies, etc. to the Basic Plan's coverage.  But the panel will add these new coverages to the Basic Plan at a much slower pace than would occur under the current system.  This will dramatically reduce the growth rate of federal health-care spending, ensuring that the 10 percent ceiling on federal MSS expenditures relative to GDP is never violated.

This plan, to fix our entire health-care system, is not just pie-in-the-sky.  It's essentially identical to the Rivlin-Ryan plan proposed this Fall by former CBO Director and former OMB Director, Alice Rivlin, and House Budget Committee Chair, Paul Ryan, to fix Medicare.  But Medicare is not the only federal health-care system whose spending is out of control or will be shortly.  The others are Medicaid, the new health exchange (whose costs will likely explode due to its induced unraveling of employer-based healthcare), and the implicit tax expenditures (revenue losses) associated with the exclusion from taxation of employer-paid health insurance premiums.  Hence, we need to fix the entire system and to do so from scratch.