Paul Krugman has a piece in the New York Times today arguing how and why the new health care system we are likely to get will work, he concludes: “This thing will work.” He’s wrong. Its structure makes it much more likely that it will blow up rather than “work.” This brief blog shows why, and the analysis has nothing to do with being “right”, “left,” or “centrist.”
Here are the elements of the blow-up, all individually understandable:
(1) universal coverage;
(2) no preexisting conditions for enrollment;
(3) low premium costs for low income households + low cost painless exemptions from any universal mandate;
(4) taxes on firms, particularly insurers to meet the President’s neutral deficit requirement;
(5) a public option with pricing lower than private sector insurers
(6) the absence of any mechanism that will actually reduce cost growth.
The problem is that there is no combination of these elements that achieves everything the Congress, the President, and all of the various publics want without the health care system in general self-destructing. And so far as I can see, no one is willing to give up anything to achieve a working health care system.
What happens? Costs will rise more rapidly than incomes or GDP. Healthy individuals will opt out of insurance as costs rise. (why not? The penality to opt out will be low, and in the absence of preexisting conditions any person can go back in if they become sick and need the insurance.) Insurance companies and non-profit providers — except of course the public option which has ultimately unlimited access to federal revenues — will cease to provide individual insurance as costs are shifted to them and as their taxes increase. The system will move fairly rapidly toward a single payer system, with no mechanism for controlling cost growth.
To sum up, I believe we are seeing step one of a three stage health care “reform.” Step one is detailed above, the combining of a set of changes that cannot possibly work together. Step two will be the discovery they do not work, leading to a single payer system. This discovery will require about 5 years. Step three will be the realization that we cannot afford the deficits the single payer system makes inevitable. This will begin to happen as the true costs of the system we have lurched into become apparent.
Roosevelt Institute Braintruster Bo Cutter is a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.