“The Tax-and-Spend Health-Care Solution”

That’s the title of a WSJ opinion piece by economist John Cochrane. As he explains in the subtitle, “Honest subsidies beat cross-subsidies. They’d encourage competition and innovation.” Here’s an excerpt:

Why is paying for health care such a mess in America? Why is it so hard to fix? Cross-subsidies are the original sin. The government wants to subsidize health care for poor people, chronically sick people, and people who have money but choose to spend less of it on health care than officials find sufficient. These are worthy goals, easily achieved in a completely free-market system by raising taxes and then subsidizing health care or insurance, at market prices, for people the government wishes to help. 

But lawmakers do not want to be seen taxing and spending, so they hide transfers in cross-subsidies. They require emergency rooms to treat everyone who comes along, and then hospitals must overcharge everybody else. Medicare and Medicaid do not pay the full amount their services cost. Hospitals then overcharge private insurance and the few remaining cash customers. 

Overcharging paying customers and providing free care in an emergency room is economically equivalent to a tax on emergency-room services that funds subsidies for others. But the effective tax and expenditure of a forced cross-subsidy do not show up on the federal budget. 

Over the long term, cross-subsidies are far more inefficient than forthright taxing and spending. If the hospital is going to overcharge private insurance and paying customers to cross-subsidize the poor, the uninsured, Medicare, Medicaid and, increasingly, victims of limited exchange policies, then the hospital must be protected from competition. If competitors can come in and offer services to the paying customers, the scheme unravels. 

No competition means no pressure to innovate for better service and lower costs.

In a recent blogpost, he discusses the somewhat surprising implications for the single payer approach:

Single payer might not be so bad — it might not be as bad as the current Medicare, Medicaid, Obamacare, VA, etc. mess.

But before you quote that, let’s be careful to define what we mean by “single payer,” which has become a mantra and litmus test on the left. There is a huge difference between “there is a single payer that everyone can use,” and “there is a single payer that everyone must use.”

Most on the left promise the former and mean the latter. Not only is there some sort of single easy to access health care and insurance scheme for poor or unfortunate people, but you and I are forbidden to escape it, to have private doctors, private hospitals, or private insurance outside the scheme.   Doctors are forbidden to have private cash paying customers. That truly is a nightmare, and it will mean the allocation of good medical care by connections and bribes.

But a single provider or payer than anyone in trouble can use, supported by taxes, not cross-subsidized by restrictions on your and my health care — not underpaying in a private system and forcing that system to overcharge others — while allowing a vibrant completely competitive free market in private health care on top of that, is not such a terrible idea, and follows from my Op-Ed. A single bureaucracy that hands out vouchers, pays full market costs, or pays partially but allows doctors to charge whatever they want on top of that would work. A VA like system of public hospitals and clinics would work too.  Like public schools, or public restrooms, you can use them, but you don’t have to; you’re free to spend your money on better options if you like, and people are free to start businesses to serve you. And no cross-subisides.

Jon Guze / Director of Legal Studies

Jon Guze is the Director of Legal Studies at the John Locke Foundation. Before joining the John Locke Foundation, Jon practiced law in Durham, North Carolina for over twent...

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