February 2, 1994
"How to Fix Clinton's 'Socialized Medicine'"
San Jose Mercury News
By Timothy Taylor
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"VIRTUALLY any economist would say that Clinton's health care proposal is a disaster," says Rudiger Dornbusch of MIT, a Clinton booster who heaps praise on just about every other economic policy of the administration.

President Clinton made a serious tactical error in turning over control of the health care agenda to Ira Magaziner and Hillary Rodham Clinton, rather than setting up a broad bipartisan commission. Because of loyalty to an old friend and to his wife, he has found himself saddled with a plan that is grandiose.

Clinton has said a number of times in the last couple of months -- and emphasized again in his State of the Union address -- that as long as the result is universal health insurance coverage, he is open to alterations. That's his way of begging Congress to rescue him from a plan that he must suspect is not politically or economically viable.

Alain Enthoven, the Stanford economist who is one of the intellectual godfathers of the "managed competition" approach to health care, says that the Clinton plan has "hijacked managed competition and turned it into socialized medicine." But in a recent luncheon address for the Center for Economic Policy Research at Stanford University, he laid out the five changes that, from his perspective, would make the Clinton plan at least workable.

1. Limit tax-free employer contributions for health insurance. The idea here is that employers would continue to pay for (most of) the basic health insurance package. But if you want a Mercedes-style health insurance plan, with bells and whistles, you pay for 100 percent of the extra cost, out of your own after-tax dollars.

Such a limitation makes people more sensitive to health care costs than if their employer signs the check. Also, since less income would be distributed to workers as untaxed health care, and more as taxed dollars, it would raise some money to help pay for the uninsured.

2. Eliminate all provisions for price controls and spending limits. Clinton's plan says that price controls will be imposed only if health care spending rises too quickly. But the standard for "too quickly" is so stringent that no country would have met it in recent years: not Canada, not Great Britain, not Germany. In Enthoven's words, this is "setting the private market up for failure." More than 500 economists recently signed a letter to the Wall Street Journal in opposition to the threatened price controls. For now, Clinton should excise these lurking price controls; if he still wants them in a few years, he can propose them then.

3. Keep the health purchasing environment pluralistic. Many analysts argue that the incentives and penalties built into Clinton's plan will force almost all private businesses into state-run cooperatives. Instead of relying on competition between different buyers to hold down costs, Clinton's plan relies on the power of a single large buyer.

But federal and state government haven't had much success in holding down costs where they are already enormous purchasers of health care, as in Medicare and Medicaid. In the face of lobbying for expanded health insurance, private business has shown far more ability than government to say "whoa."

4. Keep employers involved in cost containment. Clinton's plan offers employers a guarantee that they won't have to pay more than 7.9 percent of payroll for health insurance. While employers like the idea, it's misguided policy. If employers have their costs capped, they have little reason to try to run corporate fitness programs or take other steps to hold costs down. But corporate pressure has been one of the major contributors to the recent slowdown in rising health care costs.

5. Eliminate the windfalls. Clinton's plan is stocked with goodies, like taking the expense of early retirees off the backs of business, offering new insurance for prescription drugs and nursing home care, and so on. But all these extras cost money and add complications.

Remember, this country is already struggling to hold down its health care costs, which far exceed those of other countries; it's trying to assure coverage for 37 million more people; and it's still running enormous budget deficits.

If this year's proposal can address the finance and coverage problems of the current system, that's plenty.

Expansion of benefits can wait. Of course, this list of changes is not sacrosanct. But it is interesting that while these objections are substantial, they are by no means impossible. Enthoven points out that most of his five points are already incorporated in the health reform package from Sen. John Cooper, which is receiving considerable bipartisan support. Clinton has offered a powerful and persuasive diagnosis of the problems of America's health system. But his vast 1,300-page plan -- or rather, the plan concocted by Magaziner and Rodham Clinton -- is an overdose of the wrong prescription. Henry Aaron of the Brookings Institution, an economist with Democratic leanings who has offered strong support for major health care reform, summarizes his wincing reaction to the overreaching Clinton health plan by telling the story of a man who was standing at the bar when the Titanic hit the iceberg. The man turned to the bartender and said: "I know I asked for ice, but this is ridiculous."

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