Ten Big Problems with Hillary Clinton’s Health Care Plan

Published June 1, 2008

Senator and presidential candidate Barack Obama (D-IL) had it right from the beginning: The health plan touted by his opponent, Sen. Hillary Clinton (D-NY), would force people to buy something they cannot afford and then impose a heavy fine on them when they don’t buy it. At the end of the day, they will be worse off than they were at the outset.

Now Clinton has a rejoinder. She says she will limit the amount people have to pay in premiums to 5 or 10 percent of their incomes.

What’s wrong with that? A lot. Here are 10 problems that spring to mind.

1. Failing to Control Costs

For the past three or four decades, per-capita health care spending nationwide has been growing at twice the rate of personal income growth, and there are no signs it is abating. Clinton has no realistic proposal to change that fact.

In fact, no Democratic presidential candidate has had any plausible plan for cost control, unless you count Dennis Kucinich (who implicitly endorsed health care rationing). So no matter what the situation in year one, a mandate will require more of family income in year two, and still more in year three.

2. Imposing a Tax

A mandate is a tax. Forcing people to buy something they do not want to buy is equivalent to taxing them. And because of problem 1, it is a tax that will claim a growing share of income through time.

3. Creating an Entitlement

A pledge to limit an individual’s burden to no more than 5 percent or 10 percent of income is the equivalent of creating a new entitlement for everyone who reaches the cap.

How big would this entitlement be? That depends on how you define income and what health expenses you include. The average household already spends 5.6 percent of its income out-of-pocket on health care, and health spending for all purposes is 20 percent of personal income for the nation as a whole.

The Medicare Trustees have said we have already promised more than $100 trillion in Social Security and Medicare benefits over and above premiums and dedicated taxes to people poised to collect on that promise in the coming decades. On the current path, Medicare and Medicaid will crowd out every other federal government program by mid-century, the Congressional Budget Office has found. Clinton’s plan would extend this entitlement madness to everyone else.

4. Creating Perverse Incentives for Employers

Our employers pay our health insurance premiums because tax subsidies encourage them to do so. Yet Clinton’s cap offers a more enticing subsidy, to be had by shifting more of the premium payment back to the employee.

This perverse incentive wouldn’t exist if the plan were rational. As Ezekiel Emanuel and Victor Fuchs pointed out in an article in the March 5, 2008 issue of the Journal of the American Medical Association, economic studies confirm the common-sense understanding that the employer premium payment is a substitute for money wages.

Employees, not employers, pay for their own health care benefits, by accepting less in wages. So in calculating the employee burden, we should always add together the employer and employee premium shares.

5. Creating Perverse Incentives for Employees

Rising health care costs have been crowding out wage increases for low- and middle-income workers. For that reason, cost control is in everyone’s self-interest. But under Clinton’s premium control cap, employees would no longer have an interest in cost control. They would face the same incentives now faced by Medicare and Medicaid patients–to spend, spend, spend.

6. Paying for Health Care by Taxing Capital

Clinton estimates her plan will cost about $110 billion a year. She would pay for approximately $60 billion of that by repealing the “Bush tax cuts for the rich.”

That means raising the tax rate on capital gains and dividend income for wealthy people, and that means taxing capital, which means a lower capital stock and a smaller national income in the future.

It is always unwise to sell capital to pay for current consumption. To tax capital to pay for wasteful health care spending that promises minuscule health benefits at the margin is an exceptionally poor decision.

7. Ignoring the Latest IRS Returns

To add to this list of misery and woe, there have been no tax cuts for the rich, despite Clinton’s claims. Their tax rates are down, but tax payments by the wealthy are way up. And there is every reason to think that reversing the process and raising rates will cause total tax payments to go down.

This gives a whole new meaning to the idea of all pain and no gain.

8. Making Things Up

Clinton plans to pay for the remaining $50 billion by eliminating waste and inefficiency. Her ideas include all the latest fads–electronic medical records systems (designed in Washington, DC of course), pay-for-performance (bureaucrats telling doctors how to practice medicine), and evidence-based medicine (more bureaucrats telling doctors how to practice medicine).

Have ideas like these saved money anywhere before? Not that anyone can verify.

9. Taxing the Poor

Clinton is not totally unrealistic. She acknowledges a potential need for more revenues. In that case, what better source to turn to than poor people?

“I’m a big believer in raising tobacco taxes,” Clinton says–even though they hit low-income families the hardest. She acknowledges “at some point there’s going to be diminishing returns,” by which I think she means there is only so much you can squeeze out of the smoking class. But short of that point, she says, “Sure, why not? I don’t have any objection to that.”

That is an amazing admission, by the way. Politicians who favor tobacco taxes almost always say the goal is to discourage smoking, not to maximize tax revenue from smokers.

10. Regulating Insurance Company Overhead

Imagine a law requiring General Motors to spend no more than 15 percent of its revenues on “administrative overhead.” Would that be a good idea? How about for Microsoft? Or Xerox?

Forget for a moment that no one knows how to measure “administrative costs.” What if we did know what these words mean? Is that something government should regulate?

Clinton is willing to consider it for health insurance even as she proposes a laundry list of new administrative duties for insurers–better chronic care management, better preventive care management, electronic medical records, etc.

John C. Goodman ([email protected]) is president of the National Center for Policy Analysis. An earlier version of this article appeared on his health care blog, http://www.john-goodman-blog.com/, and it is reprinted with permission.

For more information …

John Goodman, “Health Alert: Hillary’s Plan,” with source links and readers’ comments: http://www.john-goodman-blog.com/hillary percente2 percent80 percent99s-plan/