Fixing Healthcare

Fixing Healthcare

We are now spending 5.2 percent of GDP on Medicare, Medicare, CHIP (Child Health Insurance Program) and Obamacare. This figure is projected (by the Congressional Budget Office) to rise to 9.1 percent by mid-century and to 13.3 percent of GDP by the end of the century.  To put these figures in perspective, total federal revenues are 17.5 percent of GDP and projected to reach 18.1 percent of GDP in 2025 and remain at that level through 2100.  Consequently, we are on a long-run path to have 4.8 percent of GDP (18.1 percent minus 13.3 percent) available, in terms of tax revenue, for all other spending.  But all that other spending is projected to cost 16.4 percent of GDP. 

Our $199 trillion fiscal gap is in good measure due to the projected growth in federal healthcare spending relative to GDP. Indeed, if we could keep federal spending on healthcare at its current share of GDP, the fiscal gap would fall by three-fifths!

Hence, unless we are prepared to impose dramatically higher taxes on ourselves and our children, we need to get and keep control of federal healthcare spending. But we need to do so in a way that satisfies the following principals.

First, basic health insurance coverage should be provided to all Americans free of charge. Second, all Americans should be free to purchase supplemental coverage from their basic health insurance provider. Third, basic health insurance should be privately provided with people free to choose their doctors and hospitals among those included in their insurer’s network. Fourth, federal healthcare costs must be capped and affordable on a long-term basis. Fifth, the basic health insurance system should provide incentives to prevent overuse of healthcare services. It should also incentivize healthy living. And sixth, medical malpractice reform is needed to limit the costs of defensive medicine.

My healthcare plan satisfies all these conditions. I call it the Purple Healthcare Plan, since, again, both Republicans and Democrats should find it highly appealing. The plan eliminates Medicare, Medicaid, Obamacare and tax subsidies to employer-provided healthcare. As you can see at, the plan has been vetted and endorsed by a long list of top economists, included five Nobel Laureates as well as a large number of non-economists from all walks of life.

Here are the plan’s 11 basic features:

First, all Americans receive a voucher each year to purchase a uniform basic health insurance plan from the private insurer provider of their choice. The voucher pays in full for the policy, and the federal government pays the insurance provider the full amount of the voucher.

Second, the private insurer chosen is responsible, over the course of the year, for all healthcare costs that are covered under the basic plan. The one exception is the co-pay and deductible specified in the basic plan.

Third, Americans can switch insurance providers of the basic plan annually.

Fourth, all health insurers need to offer the uniform basic plan in exchange for the voucher as well as offer supplemental coverage at a uniform price to anyone who takes basic plan coverage (there is no denial of coverage).

Fifth, the vouchers will vary in size, but they will all purchase exactly the same basic health insurance policy with exactly the same set of coverages. Those with higher expected healthcare costs will receive larger vouchers. The purpose of making the vouchers individual-specific is not to provide difference health insurance to different people. The purpose is to keep insurance providers from having an incentive to subtly encourage the sick to go elsewhere. In other words, larger vouchers will directly compensate the insurer for insuring Americans with higher expected medical costs and make insurers just as eager to enroll the sick as the healthy.

Sixth, the size of each person’s voucher will be determined based on electronic medical records that document the person’s objective health indicators. The voucher will incorporate a reasonable profit margin for health insurers.

Seventh, each year a panel of doctors will set the coverages of the uniform basic plan such that the sum total of the vouchers equals, but never exceeds, 7 percent of GDP. The figure 7 percent of GDP reflects the 2015 ratio to GDP of the costs of Medicare, Medicaid, CHIP, Obamacare and the tax subsidy to employer-based healthcare.

Eight, insurance companies will contract with doctors and hospitals to provide the basic plan to all their clients.

Ninth, each year every American will receive a new voucher and be free to choose the doctors and hospitals included in their chosen insurance company’s network.

10th, health providers can offer participants incentives to improve their health.

11th, Congress will pass legislation limiting malpractice claims in order to mitigate the practice of defensive medicine.

Here’s the beauty of this plan. It turns basic health insurance into a basic commodity, like wheat. Since all insurers will compete to provide the same basic insurance plan, there will be intense competition to provide the best quality of care and in order to re-sign the participant at the end of the year. This will squeeze out the excessive costs being paid insurance companies for running their businesses. It will also limit what top insurance company managers can afford to pay themselves.

Even more important, the plan provides basic health insurance to everyone in the country without driving the country broke. In so doing, it makes, as indicated, a massive contribution – 60 percent — to reducing the fiscal gap.

Is the 7 percent of GDP cap realistic given that the population is aging and that medical costs rise with age? I have four responses. First, roughly 16 percent of today’s U.S. population is now 65 and older. By mid-century, that figure will be 22 percent. Hence, the U.S. will be older, but not that much older. Second, the intense competition of insurance providers to supply the basis plan should drive quality up and prices down. If the government says that services of type X needs to be used for situation Y, insurers will seek the least expensive means to provide these services without sacrificing quality. Sacrificing quality will limit the number of repeat customers and, thus, their profits. Third, our economy should begin to grow at a robust rate thanks to the combinations of reforms I’ve outlined. Seven percent of a larger economy means more healthcare can be provided in absolute terms. Stated differently, I expect the economy to grow more rapidly than healthcare costs. Fourth, if the public feels we should spend more on the basic plan, I would propose raising the 7 percent figure, provided we simultaneously raise taxes or reduce other spending to keep the fiscal gap at zero and that any changes to taxes and spending are not differentially targeted at the young and middle aged.

Finally, the plan is progressive. Although everyone gets the same basic health insurance plan, the value of this plan is much greater to those with pre-existing conditions. Since the poor are less healthy on average than the rich, the poor will receive, on average, larger vouchers than the rich. For many of the poor, the size of their vouchers will be dramatically higher.

This may sound like single-payer healthcare. It isn’t. It’s a single-insurer healthcare system with a totally private provision of healthcare services. Yes, the federal government uses tax dollars to pay for everyone’s basic health insurance policy, but unlike, say, the British National Health Service, the government does not own the hospitals, hire the doctors, buy the drugs, etc. In short, the Purple Health Insurance Plan is a much more efficient and affordable version of our current healthcare system in which the federal government pays, either directly or indirectly, for one of every two dollars of healthcare expenditures.

One final benefit from the Purple Health Plan: it will provide our veterans the same choice of healthcare insurers and their associated healthcare providers as everyone else in the country.