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Cutler and DeLong: Obama Can Cure Health Care's Ills

Harvard Kennedy School - David M. Cutler and J. Bradford DeLong commentary: Obama Can Cure Health Care's Ills: October 29, 2008 Forbes.com

Every other North Atlantic country spends less than half what we spend on medicine. Every other North Atlantic country is healthier than America.

This extraordinary gap--between how much we spend on health care and what we get for it--is not because our doctors, nurses and pharmacists are unskilled or undedicated. On the contrary, they are the best in the world. But they are embedded in a poorly designed system that gives us low value for our money.

Taking the long view, the inefficiency of our health system is the biggest threat to economic growth over the next two decades--bigger, even, than the current financial crisis. The doubling of health insurance premiums since 2000 has forced employers to choose between cutting wages, cutting benefits and hiring fewer workers. The result is lost profits and lost wages, in addition to pointless risk, insecurity and a flood of personal bankruptcies. Without serious changes, this problem will only get worse.

Democratic presidential nominee Barack Obama wants to address the health care crisis head-on. Like Franklin Roosevelt, who faced equally large challenges, Obama will try many strategies and be guided by results, not predetermined ideological conviction. The strategies he proposes fall into four general areas.

One element of reform is information: Doctors, patients and administrators simply do not know enough about which treatments work and which are ineffective or harmful. An estimated one-third of medical costs go toward care with no value. Obama proposes to jump-start the long-overdue information revolution in health care with $50 billion to computerize the medical system and spread the word about best practice.

A second element is to fix perverse incentives in medical care. Doctors and hospitals today are paid for performing procedures, not for helping patients. Insurers make money by dumping sick patients, not by keeping people healthy. Obama proposes to base Medicare and Medicaid reimbursements on patient outcomes in a coordinated effort to drive the entire payment system toward paying for improved health rather than just more care.

A third element is to help the small players--individuals and small firms--get the same deals as large buyers. Obama proposes purchasing pools where individuals and small firms get the same low rates as large firms and sick people get coverage the same way as the healthy. Our current system of excluding the sick from coverage does not make their costs disappear but rather assume other, less efficient guises.

A fourth element is prevention. In today's health-care market, less than one dollar in 25 goes for prevention--despite the fact that three-quarters of medical care is for conditions that could be prevented. Guaranteeing access to preventive services will improve health and, in many cases, save money.

As the reforms take hold, costs will drop. As costs drop, insurance will become more affordable. Millions previously priced out of the market will be able to buy insurance. Add on tax credits for those still unable to afford coverage and for small businesses, and everyone will have access to affordable, portable insurance.

By contrast, Republican presidential nominee John McCain believes that the central problem in health care is that people have too much insurance and, because of it, consume too much medical care. McCain seeks to reform the health care system by taxing and punishing businesses that offer employer-sponsored insurance. Once they are forced to drop coverage, he holds, their workers will find themselves in the non-group health insurance market, where they will buy less generous plans and go to the doctor less often. Modest tax credits would help some, but nowhere near all, of the uninsured afford coverage.

We are skeptical of the value of McCain's plan for three reasons. First, the tax increase McCain proposes and the resulting dislocations it creates are the last thing American business needs now, when it's in the midst of a severe economic crisis. Second, the non-group market is nowhere near as rosy as McCain makes it out to be. People who buy insurance in that market now are risk rated, see their pre-existing conditions excluded from coverage or priced higher and are never secure in their coverage. The McCain plan would amplify, not fix, these problems.

Third, the McCain health plan has a huge financing hole--between $1 and $2 trillion over the next decade. Only the most draconian Medicare and Medicaid cuts would make the plan work. But such cuts would be devastating for the very providers that are needed to make health reform work.

It is clear to us that Barack Obama's health care reform plan is much better for the country, and much more likely to be successful, than John McCain's.

David M. Cutler, the author of Your Money Or Your Life: Strong Medicine for America's Health Care System, is the Otto Eckstein professor of applied economics at Harvard's department of economics and Kennedy School of Government. He is also an adviser on health care to Barack Obama. J. Bradford DeLong, who blogs at http://delong.typepad.com/sdj/, is a professor of economics at U.C. Berkeley. Both authors are research associates at the National Bureau of Economic Research.