The Choice is Simple: Slow Health Care Spending or Raise Taxes

There’s an election coming up in Britain, and it’s looking very likely that there will be a new prime minister residing at 10 Downing Street come May 7. Some commentators have compared Nick Clegg, the leader of the Liberal Democrats, who is surging in the polls, to President Barack Obama. Like President Obama, Mr. Clegg is young, smart and charismatic. He’s also campaigning to change politics in Britain. But that’s not the only similarity between British and American politics in this election season.

Right now in both countries, there’s a push among most politicians to exhort the necessity of reining in our respective national deficits. Politicians in the U.S. and U.K. have hit the stump and said to anyone who will listen that unless deficits are reduced, the consequences for the economy will be dramatic. Unfortunately, while there’s no lack of tough talk, the political realities make slowing government spending a nearly impossible task in both countries. At the moment, if a politician even begins to define concrete strategies to cut spending in any sector, he or she risks being vilified by their political opponents.

Nowhere is the pressure to slow spending greater than in the health care sector. In England, where the government pays for the lion’s share of medical care, if health care spending is to keep pace with simple demographic changes, there will need to be a 1.1 percent annual increase in outlays. That doesn’t account for other changes, like adopting new medicines or other new technology. So if England is going to continue to modernize the National Health Service, they’ll need to either cut spending in other sectors of the government or raise taxes.

It’s the same story in the United States. Peter Orszag, the Director of the Office of Management and Budget, has presented work which estimates that, left unchecked, government health spending in the U.S. will rise to 12 percent of the gross domestic product in 2050, with health care accounting for about 38 percent of the broader economy.

Rising health care spending wouldn’t be a bad thing if health care delivery were highly efficient. Unfortunately, it’s not. In the U.S., there’s not a clear relationship between spending and quality, and analysts have estimated that nearly 50 percent of health care delivery is simply not appropriate. There’s likely to be a similar situation in the U.K. As a result, there’s not an extraordinary amount of benefit derived from additional health care spending, and rising spending on medical care means diverting resources from other sectors of the economy that could yield more and better returns. Something needs to change, and it needs to change soon.

The problem is that health care spending is the most difficult portion of government spending to cut. In the recent U.K. prime minister’s debate, five minutes after extolling the virtues of fiscal restraint, all three candidates got into a race to spell out who was more committed to continuing to increase NHS spending. In the U.S., President Obama’s critics accused him of bankrupting the country with his health care reforms and, not a moment later, tried to vilify him for cutting Medicare spending. For better or for worse, politicians are getting their cue from the electorate. As renowned Princeton health economist Uwe Reinhardt discussed in his New York Times blog, this is part of a broader problem where most American citizens expect the government to spend more on them than they’re willing to pay to the government in the form of taxes.

But you can’t have it both ways.

The health care reforms in the U.S. were vital, but they are not likely to make a dramatic difference in long-term health care spending. Likewise in England, recent efforts to introduce choice and competition into the health service have improved quality and efficiency, but they also won’t lead to dramatic changes in overall health care spending. If we really want to slow health care spending, we need to be radical.

Radical attempts to slow health care spending in the U.S. or the U.K. would almost certainly need to take either one of two forms. First, both governments, as they’re beginning to do, could focus a great deal of resources on public health interventions. Public interventions yield big benefits, but they’re often not popular with the electorate. For example, government could introduce sin taxes, which make behaviors that are bad for your health, like eating trans fats, more expensive. The government could also introduce what would almost certainly be an unpopular tax on obesity. They could go even further and ban certain activities that are bad for our health. In England, a recent ban on smoking in public places has been estimated to have reduced the number of heart attacks by 20 to 40 percent.

A second option would be to significantly curtail government spending on health care services in both countries. In the U.S., Medicare could continue to increase cost sharing, or cut back the types of care for which it will pay. Medicare could even go so far as to increase the age of eligibility to as high as 70. Similarly, in the U.K., politicians could scale back the NHS to cover only vital services and make individuals begin to pay for added care out of pocket.

Clearly, neither of those “radical” solutions is plausible, desirable or even modestly possible with the electorate in America. The public health interventions required to slow health care spending are far too paternalistic for most to accept, and the cost-cutting measures required to reduce the budge are politically infeasible. And so, because we have to balance the books somehow, while most voters will oppose it, I share Professor Reinhardt’s forecast that what is in store for the U.S. is higher taxes. Within the next decade, I certainly agree that it is highly probable that regardless of whether the president is a Democrat or Republican, we’ll see the federal government introduce some form of a value-added tax—a broad consumption tax applied to most goods and services that we purchase.

How odd is that? This would be yet another example of international policy convergence. England is increasing the role of the market in health care and introducing choice and competition. The U.S. will almost undoubtedly introduce a VAT, which is already in use in the U.K. and commonplace in much of Western Europe. And this is all because health care is simply very, very expensive.


Special Contributor Zack Cooper is a research officer with the London School of Economics. His monthly column for the Health Policy Forum considers health policy from the international perspective. “Special Contributors” are regular contributors to the Health Policy Forum who pose their own opinions and policy positions in the realm of health care and health policy. As a leading nonprofit health care research and consulting institute dedicated to improving human health, Altarum encourages open discussion and debate about the many challenges in health care today. All postings to the Health Policy Forum (whether from employees or those outside the Institute) represent the views of the individual authors and/or organizations and do not necessarily represent the position, interests, strategy, or opinions of Altarum Institute. Altarum is a nonprofit, nonpartisan organization. No posting should be considered an endorsement by Altarum of individual candidates, political parties, opinions, or policy positions.

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