Why the U.S. Can't Afford Its Health Care Policy

James Capretta succinctly describes the what is arguably the biggest single problem with American health care policy:

The fundamental problem in American health care is that the federal government is providing open-ended financial support for health insurance coverage. Most Americans get their insurance through Medicare, Medicaid, or employer-sponsored insurance. And in each case, the federal government's support for that coverage increases commensurately with costs. So when costs or premiums rise by an extra dollar, the federal treasury is picking up a sizeable portion of the added expense, thus substantially undermining the incentive for economizing by those enrolled in the coverage or those providing the services.

The solution is an across-the-board move toward more fixed federal financial support for coverage.

This is why our federal government's current health care commitments are unsustainable. If the government is to have a role in subsidizing the provision or coverage of health care, that role cannot be unlimited. Advocates of more expansive service might point to European systems, but even those have limits. Certain expensive drugs and treatments are not included; high-tech, high-cost equipment is more scarce; and even for services that are covered, patients frequently end up paying with their time in the form of extended waiting periods.

So you end up with two choices: Control spending bureaucratically, through some system of essentially centralized decision making about what to cover, or explicitly cap the taxpayer commitment to care in advance and let individuals, providers, and in some cases perhaps local officials, sort the rest out amongst themselves. It's the difference between giving a teenager a fixed allowance and an AmEx.

Capretta's explanation comes in the midst of a piece on a recent proposal by Rep. Paul Ryan and founding Congressional Budget Office director Alice Rivlin, both of whom are also members of the president's deficit commission, that would move the health system toward recognizing, and attempting to manage, its limits.

First, it would shift Medicare toward a voucher system in which the federal government gives each recipient a fixed amount to pay for insurance. This puts the onus on the individual consumer to figure out what level of coverage is best, and what they're willing to pay for.

Second, it would block grant Medicaid money for states. Up until now, the federal government provided matched funds for each dollar a state spent on the program, giving the states little incentive to control spending. Giving states a fixed amount and letting them figure out the best way to use it would both help contain the federal commitment to the program and encourage states to find creative ways to administer the program rather than simply racking up more and more expenses.

That's not to endorse the entirety of the Rivlin-Ryan proposal. As Capretta notes, "It is largely silent on ObamaCare, which would push the health system in precisely the wrong direction by extending open-ended entitlement promises to millions of new people…Moreover, the new law leans heavily on price controls to cut costs, which only distort the marketplace and undermine the quality of American medicine." In other words, the passage of the PPACA will make restructuring these two mammoth entitlements even more difficult than it was a year ago. That's unfortunate, but also a fact of life at this point.

Still, the proposed overhauls of Medicare and Medicaid would at least take a step toward recognizing what current health policy tries so hard to ignore: That there are limits to what federal health care policy can afford to do.