Ezra Klein has nice things to say about President Bush’s proposal to cap the tax break for employer-sponsored health insurance — while Paul Krugman blows a gasket.

The White House is sending out teasers regarding a health care proposal that President Bush will unveil in his (penultimate!) State of the Union address on Tuesday. By design, such teasers leave out important details. Yet they give the outlines of what could be a damn fine health care proposal.

The president is proposing to limit the currently unlimited tax break for employer-sponsored health insurance. He’d also extend that newly limited tax break to people who don’t get coverage from an employer — in fact, he’d completely break the link between the tax break and employment.

That tax break is behind much of the inefficiency and inequity in America’s health care sector. It encourages almost 200 million Americans to behave irresponsibly, which increases the cost of health care for themselves and everyone else. Economists on the left and right have argued for limiting or eliminating it for decades. The last president to propose such a limit was named Reagan.

It’s going to be a tough sell, of course. The administration estimates that 20 percent of covered workers would face a higher tax burden, and those workers probably will object that their taxes would increase. The fact that reducing government influence over people’s decisions is effectively a tax cut is a much harder point for most people to grasp. Other opponents will scream that the proposal would destroy employer-based health insurance. What those opponents actually mean, however, is that they don’t think workers should be free to choose where they purchase their health insurance.

I have criticisms of the proposal, too. For example, I think we should do more to give workers ownership over the money that employers currently spend on health benefits. (Mike Tanner and I lay out one way to do so in Healthy Competition: What’s Holding Back Health Care and How to Free It.) Unless workers own those dollars, they might have to take a pay cut to exercise their new freedom to choose, which doesn’t seem like freedom at all.

Important details are still missing — details that will determine how helpful, complicated, and politically feasible the proposal will be. I’ll withhold final judgment until I see the final product. But at this point, it appears that President Bush is the only prominent politician who is taking health care reform seriously.

The idea that government should compel people to purchase health insurance is gaining traction among Republicans and Democrats. The idea is called an “individual mandate,” because it would require individuals to purchase coverage (as opposed to a mandate that requires employers to provide coverage to their workers). Former Massachusetts Gov. Mitt Romney (R) put that idea into effect in the Bay State. California Gov. Arnold Schwarzenegger proposes to do so in the Golden State. A number of other states are considering it.

What makes the idea attractive is the fact that many people obtain health care but don’t pay for it. Unless health care providers can (1) collect from, (2) avoid, or (3) deny care to those people (which in many cases is illegal), the costs must fall on someone else. Thus, the reasoning goes, decreeing that everyone must obtain health insurance would solve that “free-rider” problem.

But there are two important reasons why it will not:

1. There would still be people without health insurance. Many will not obey the decree. California mandates that all drivers must carry auto insurance, yet according to the Insurance Research Council, 25 percent of California motorists are uninsured. In fact, the share of uninsured motorists is higher than the share of residents without health insurance (18 percent). Even with a mandate, there will be uninsured people who free-ride at others’ expense.
2. Free-riding by people with health insurance. According to research by the Urban Institute’s Jack Hadley and John Holahan, people who have health coverage account for at least 30 percent of uncompensated care delivered to the non-elderly. Since uncompensated care accounts for just 4 percent of health spending, a mandate could affect at most 2.8 percent of spending.

So an individual mandate could solve at most two-thirds of a very small problem, but chances are it would do even less good than that.

That small benefit must be balanced against the costs. According to The New Republic’s Jonathan Cohn, who is generally sympathetic, “individual mandates … require substantial government intervention in the free market.” Government must monitor yet one more aspect of the citizens’ lives. It must define what qualifies as health insurance, which is an invitation to the sort of special-interest rent-seeking that has made health insurance unaffordable for so many. It must tax some citizens to subsidize those who cannot afford coverage. A final cost of such mandates is that rather than solve the much larger problem of moral hazard, they actually make that problem worse. 

An individual mandate would not fix our broken health care system. It would simply pump more money into that system. 

What is interesting, then, is this. Journalists and left-ish policy wonks explode when special interests try to line their own pockets by supporting, say, ineffective weapons systems. But where is the outrage when this or that group seeks to do the same thing with ineffective health care proposals?

This week’s issue of the New England Journal of Medicine carries a review of the Cato Institute’s latest health care book, Medicare Meets Mephistopheles by Cato adjunct scholar David A. Hyman. Reviewer Peter Jacobson of the University of Michigan School of Public Health writes:

Hyman’s bracing critique reflects the fact that neither Medicare’s problems nor the ascendancy of market-based approaches to solving them can be ignored any longer.

Medicare Meets Mephistopheles provides a good starting point for free-market advocates who are serious about preventing the federal government from imposing price controls on prescription drugs, or otherwise stealing from future generations.

Much has been written about TerminatorCare, Gov. Arnold Schwarzenegger’s (R) plan to guarantee health coverage to all Californians by employing every lousy idea the Left has ever conjured. 

But much of what has been written about TerminatorCare is wrong. Media accounts and even some policy wonks have reported that Schwarzenegger, through the magic of Medicaid, would have taxpayers in other states pay for only half the cost of his plan. Would that that were so.

Instead, Schwarzenegger actually proposes to use an old Medicaid trick that would put non-Californians on the hook for much more than half the cost. First, he would boost state payments to providers, which triggers federal matching funds. But then he would tax the providers so much that he would recover the state’s initial outlay plus most of the federal matching funds, which he would then use to finance the rest of the plan. At the end of the day, California would spend zero extra dollars on provider payments, yet the ruse would net an additional $1.3 billion from taxpayers in other states. 

After one cuts through the budget gimmicks, one finds that Californians would contribute only $1.3 billion to the plan, while taxpayers in other states would contribute $4.5 billion — or over three times as much.

I haven’t seen so many people who couldn’t shoot straight since Commando. 

Ooh, wait, I have another one! The Schwarzenegger health plan brings to mind the tagline from Commando:

Somewhere… somehow… someone’s going to pay!

(Hey, with a dry cool wit like that, I could be an action hero.)

In a sick way, I’m enjoying the debate over price controls for prescription drugs under Medicare Part D. Of course, I don’t want Congress to dry up the stream of drugs that will keep me alive and vigorous when I’m a geezer. It’s just … what were the Republicans and the drug companies thinking when they created Part D? What did they think would happen? Did they really believe that, if they’d create this program, Congress would never impose price controls?

As I argued on TV today, Part D has Congress buying — through the middleman of the private drug plans — a product with high research and development costs and low marginal costs. And Congress buys those drugs for a politically powerful group of citizens (the geezers). That kind of setup cannot last. The temptation for Congress to pay nothing more than the marginal costs will be inexorable, because doing so pleases constituencies that are paying attention (seniors and current taxpayers) and harms only those constituencies that are either unpopular (drug manufacturers) or else aren’t paying attention (future seniors, including those not yet born).

The writing is on the wall. It may not happen this year, but unless we scrap Part D, sooner or later we will get price controls on seniors’ prescription drugs.

So let’s scrap Part D.

What? You’re a Republican who voted for Part D, against conscience and better judgment?? And now you’re afraid to scrap Part D for fear of (gasp!) flip-flopping or offending the geezers?? Then start talking about fundamental Medicare reform, buddy. And start now.

Jacob Hacker writes:

[E]very legal resident of the United States who lacks access to Medicare or good workplace coverage would be able to buy into the “Health Care for America Plan,” a new public insurance pool modeled after Medicare. This new program would team up with Medicare to bargain for lower prices and upgrade the quality of care so that every enrollee would have access to either an affordable Medicare-like plan with free choice of providers or to a selection of comprehensive private plans.

It seems to me that if a plan “bargains for lower prices,” then many providers would prefer not to participate. In that case, “free choice of providers” would require forcing doctors to join.

I was pointed to this plan by Matthew Yglesias, who praised it. I got to Yglesias via Tyler Cowen, who is more skeptical.

I am very pessimistic about the outlook for health care policy. It seems to me that wonks are engaged in a bidding war for politicians, in which the guy with the most hubris (Great health care for all! At half the cost!) wins. 

I think that the best that libertarians can hope for is to see some of these ideas tried in state laboratories and have their outcomes measured against their promises. My fear is that we will get the former but without the latter.