My Take on Healthcare Reform

Imagine that you are heading down a path, and there’s a brick wall in front of you—10 feet tall by 10 feet wide. The only way you can get to the path on the other side of the wall—your intended destination—is by going sideways, in a completely different direction.

That sideways move is the Obama healthcare plan. It’s an essential step that doesn’t appear to move you towards your eventual destination.

See, U.S. healthcare actually suffers from two distinct problems.

1. Too many people are uncovered or scared of being uncovered. 2. It costs too much.

The Obama plan does a good job of addressing #1, the coverage problem, but it pushes off #2, the cost problem, to the future. In fact, it may even make problem #2 worse in the short-run.

Adding on more costs may feel like we are going in the wrong direction, but this may in fact be the right strategy in the medium-run. The reason? Trying to solve problem #2, the cost problem, is impossible as long as problem #1, the uncovered problem, exists. When you try to squeeze costs, the easiest response is to drop people from coverage. For example, paying doctors and hospitals per patient, rather than per procedure, gives them an incentive to avoid the sickest patients. Similarly, if you encourage companies to cut costs, the easiest way is to reduce coverage, either in scope or who gets itt.

On the other hand, once the great majority of people are covered, it may become politically and economically easier to get a real grip on healthcare costs. The step to the side makes it eventually easier to go forward.

Caveat: It may not be a Democratic administration that makes the step forward. Politically speaking, it will be easier for the Democrats to expand coverage, and easier for the Republicans to reduce costs. But that’s down the road.

Added 8/5 I see now that Mickey Kaus makes the same point:

First you give everyone security. Then many of the changes necessary to control costs are that much easier to make. They will be less threatening, for one. And even when they are still threatening—as some of the treatment-defunding plans of the Orszaggers arguably are—people will understand that the changes are needed to preserve their benefits, not to pay for extending insurance to someone else.

The two-step approach doesn’t necessarily mean abandoning cost controls, in other words. It might be the only way to actually achieve reasonable controls (though put me down as doubting that the cost curve can or should actually be bent very much).

Before it's here, it's on the Bloomberg Terminal.