What Should be Done about the Fiscal Cliff
Economic analysis of important policy issues.
Critics of the Patient Protection and Affordable Care Act (ACA) claim that it does not do enough to control costs, particularly costs of government health care entitlements. This criticism is not entirely justified. The Affordable Care Act includes several provisions for controlling health care costs. Those provisions to control costs will probably not be fully implemented because of a fundamental contradiction between the healthcare system many Americans want and economic reality.
Many of the goals of health care reform seem laudable. Proponents of health care reform want health insurance to be available to all Americans with premiums unrelated to a person’s health status. In addition, they want to make health insurance affordable for everyone regardless of income or employment status. They hope to lower health care costs through better information and accountability. They also claim that the above goals can be achieved with small increases in government expenditures that can be offset by modest targeted tax increases. If these goals were attainable via the provisions of the Patient Protection and Affordable Care Act (PPACA), it might deserve our support.
One of the arguments for health care reform is that millions of Americans with employer provided health care are underinsured. Proponents of this view are saying that people are underinsured if they are paying too many of their health care costs out-of-pocket. A little reflection on what insurance is and is supposed to do suggests that the problem is really the opposite- many, if not most Americans are overinsured- they have too much health insurance coverage.
Government, as a purchaser of health care, has sought ways to control health care costs. One of the more effective approaches that helped bring Medicare costs down was the prospective payment system (PPS). Instead of paying hospitals for the services that they provide, under PPS, the government pays them per case. Medicare began offering a fixed payment for each patient admitted to a hospital based on a diagnosis related group (DRG) that the patient was assigned to.
A major concern with health care in the United States is that many of those who most need health care are unable to get health insurance- either because they would be charged higher premiums or not fully covered by employer plans, due to preexisting conditions. An important goal of health care reform was to make sure that all, regardless of the state of their health, could get affordable insurance coverage. Accomplishing this while maintaining some semblance of a private health insurance market is difficult.
Since many states face a highway funding crisis, some state governments and the federal government are considering proposals to sell highways to private investors. This goes against the the conventional wisdom that roads should be built and maintained by government and funded by taxes. Conventional wisdom, taught in many introductory economics courses, is that roads are public goods. One definition says a good is public if the cost of excluding people who don't pay for using the good is unacceptably high. If someone builds a road with lots of access points it would be very costly to exclude people who do not pay for it from using the road.