What big change in health care really looks like

Health care reform is an evergreen topic that keeps thousands of health policy wonks busily wringing their hands. Yet, little meaningful reform ever takes place, while spending continually rises at an unsustainable rate. 

It’s as if we’re watching the famous psychology experiment where participants are so focused on counting basketball passes that they fail to notice a person in a gorilla suit walking through the scene. In health care, we’re so fixated on the minutiae that we miss the big changes needed to tackle the real problems.

There are three big changes to the health care system that would reduce spending for both the government and the private sector, increase efficiency and unleash long-suppressed market forces.

The first involves the tax exclusion for employer-sponsored health insurance, which is the original sin of the U.S. healthcare system. Unlike wages, which are taxed, employer-provided health insurance is excluded from taxation. This subsidy is costly and regressive, disproportionately benefiting high-income individuals with the largest tax breaks.

For those lamenting sluggish wage growth in recent decades, it must be remembered that much of the growth in total compensation has been funneled into health care benefits rather than cash wages. Economically, it’s simple — you get more of what you subsidize. 

To be clear, we’re not subsidizing “health” but rather health insurance, creating weak incentives to control costs. The downstream result is higher prices for health care providers and little focus on improving the health of enrollees—after all, healthy people use less health care.

Over the next 10 years, $2 trillion dollars will be forgone to subsidize a dysfunctional health care system. Incredibly, we’ve been doing this for the last 80 years. It’s no coincidence that family health insurance now costs more than $25,000 annually. 

Who benefits from the status quo? Health insurers, benefits consultants, large hospital systems and pharmaceutical companies.

To those worried I’m proposing a $2 trillion tax increase, fear not. Equalizing the tax treatment of compensation can fund permanent reductions in income tax rates or help fix other inefficiencies, such as bolstering the Affordable Care Act health insurance marketplaces.

Second, we need to end traditional Medicare.

Medicare runs two parallel programs: traditional Medicare, created in the 1960s, and the privately managed Medicare Advantage program. Enrollment is now split roughly 50-50, meaning taxpayers fund two overlapping systems. The waste is staggering.

Traditional Medicare compounds the problem by setting prices for thousands of services with no regard for supply and demand, let alone value or efficacy. Adding insult to injury, this price-setting is overseen by the American Medical Association, which has every incentive to increase physician reimbursement. 

These government-mandated prices ripple throughout the health care system, distorting costs for private insurers and providers alike.

The solution is clear: Transition entirely to Medicare Advantage.

While private insurers will always game the system, focused oversight can replace the current bloated apparatus of 6,700 Centers for Medicare and Medicaid Services employees and thousands of contractors. Consolidation would reduce bureaucracy, unleash competition, and allow market forces to set prices more efficiently.

Third, we should block-grant Medicaid, the insurance program for low-income Americans. Medicaid is another driver of runaway spending. Structured as a federal-state partnership, it shackles states to rigid federal rules while incentivizing overspending. For every dollar a state spends, the federal government matches anywhere from 50 percent to 100 percent. Unsurprisingly, Medicaid spending grows nearly 10 percent annually.

The fix is not new: block-grant Medicaid. By capping federal contributions and giving states full flexibility, we can curb spending while empowering states to innovate. 

States can design programs tailored to their unique needs rather than bending to one-size-fits-all federal mandates. Block grants would control costs, reduce overhead, and most importantly, improve care delivery for the most vulnerable populations.

These three ideas offer a roadmap to truly transformative health care reform. Each would reduce costs, promote efficiency and allow market forces to operate where they have been stifled for decades.

The political obstacles are significant. Entrenched interests in the status quo will resist, from insurance companies to hospital systems to lobbyists benefiting from the current inefficiencies. 

But for policymakers serious about addressing unsustainable health care spending, these big changes offer a starting point.

It’s time to stop tinkering at the margins and address the gorilla in the room.

Anthony T. Lo Sasso is a professor and chair of the Economics Department at DePaul University