Originally published in THE WALL STREET JOURNAL
Tuesday, October 19, 1999
Dr. Bradley's Bad Medicine
By Martin Feldstein
Bill Bradley is riding high in opinion polls, largely on the widespread perception that he is a man of independent mind and, as he put it, "big ideas". But until recently the substance of those ideas has not been known.
Now, however, Mr. Bradley has begun to lay out his plans, starting with a detailed health-care plan that seeks to reduce the number of Americans without health insurance. Alas, Mr. Bradley's plan suffers from many of the same defects as Hillary Clinton's ill-fated scheme: It would require a massive tax increase, do relatively little to reduce the ranks of the uninsured and significantly worsen the quality of health care for most Americans. Those beguiled by Mr. Bradley's candidacy should therefore take warning.
The Bradley plan has three basic elements. First, it opens the Federal Employees Health Benefits Program (which offers federal employees a broad choice of private insurance plans) to the entire population, including the more than 30 million lower income individuals now served by the state-run Medicaid plans. Second, it promises that the federal government would pay the full cost of those health insurance premiums for low-income households and a partial subsidy for households with incomes up to $50,000. Third, the government would increase health-care regulations and introduce new controls to reduce costs and impose greater uniformity of care.
Mr. Bradley says that the annual cost of his plan would be about $65 billion. With the population growing at 1% a year and health-care prices rising at just 4%, that means that the 10-year cost would be more than $800 billion.
The $65 billion figure, however, substantially understates the actual cost of the plan. Here's why: Mr. Bradley promises that everyone could join the FEHBP and states that the government would pay the full annual premium cost of $1,800 per adult for those in the lowest income groups. But Mr. Bradley's campaign information also notes that the FEHBP fee-for-service premium for a single adult in the year 2000 will be $279 per month, or $3,348 per year, a sum that will rise to about $3,600 by 2002 (the earliest date the plan could kick in). That means that, at a minimum, the true cost of Mr. Bradley's plan would be about $110 billion in the first year, or $1.4 trillion over 10 years.
To put these figures into perspective, note that the $110 billion estimated cost of the Bradley plan in 2002 would exceed 10% of total personal income tax revenue in that year. If this cost were financed by an across-the-board tax increase, a family with $50,000 of taxable income would pay an additional $850 a year in taxes and a family with $75,000 would pay an extra $1,550 a year. In addition, all parents would be required to buy government-approved health insurance for their children and only those with incomes under $32,800 would be fully reimbursed for its cost.
It's important to emphasize that under the Bradley plan most of the subsidies would be paid to individuals who meet the income test, regardless of whether or not they are already insured. Those eligible for a 100% subsidy would undoubtedly accept the free insurance. But the reduced subsidies given to households with incomes between $32,800 and $50,000 would often not be enough to induce them to pay the additional cost to insure. In the income range where only partial subsidies apply, most of the money is likely to go to those who are already insured.
Mr. Bradley's claim that his plan would achieve 95% insurance coverage for the population (up from the current 84%) is also suspect. Of the currently uninsured, 10 million are in families with incomes over $50,000 who would not receive any subsidy and therefore remain uninsured. Nor is there any way that the subsidies could reduce the 35 million uninsured with incomes under $50,000 to just 4 million, especially since many of the uninsured adults have incomes over the $32,800 level at which the subsidy for adults ends.
A more plausible estimate is that the number of uninsured would be cut by less than 20 million, implying a cost of more than $5,000 per additional insured person or some $20,000 per newly insured family of four. That seems an inordinate amount to spend on health care for families whose spending on everything else -- housing, food, clothing, child care, etc.-- may not be much more than $20,000. Surely there are better ways to raise the standard of living of low-income people.
The structure of the plan also sharply increases individuals' marginal tax rates. The subsidy per adult declines from $1,800 and a four-person family income of $16,400 to zero at $32,800. With two adults, that's a reduction of $22 for every extra $100 dollars of earnings, equivalent to raising the couple's marginal tax rate by 22 percentage points. A family of four with $25,000 of income already faces a 51% marginal tax rate (an extra $100 of earnings means $15 of additional personal income tax, $15.30 of employer/employee payroll tax and a loss of $21 of earned income credit). The additional 22% that results from the reduced health insurance subsidy would raise the effective marginal tax rate to 73%.
But the problem with the Bradley plan goes beyond its high budget cost and the higher taxes such costs entail. The enormous cost of the program, including the federal assumption of more than $100 billion of Medicaid costs, would create irresistible political pressure for government constraints on the cost and quantity of medical care. Although the plan does not spell out how costs would be reduced, it speaks of "vigorous steps to help contain health care costs" and of savings from "the appropriate reduction in practice variation".
Such controls and attempts to reduce local differences in the practice of medical care would reduce the quantity and quality of care for millions of Americans, increase patient frustration, and engender a greater distrust between patients and their doctors, hospitals, and insurers. This big step along the road to a welfare state is not, to put it mildly, what America needs.
Martin Feldstein, a former chairman of the president's Council of Economic Advisers, is a professor of economics at Harvard University. He is a member of the Journal's board of contributors.