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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, February 24, 2011

Health Care Spending Growth Could Lead to 70% Marginal Tax Rates by 2060

Katherine Baicker (Harvard University, Department of Health Policy & Management) & Jonathan S. Skinner (Dartmouth College, Department of Economics) have posted Health Care Spending Growth and the Future of U.S. Tax Rates on SSRN. Here is the abstract:

The fraction of GDP devoted to health care in the United States is the highest in the world and rising rapidly. Recent economic studies have highlighted the growing value of health improvements, but less attention has been paid to the efficiency costs of tax-financed spending to pay for such improvements. This paper uses a life cycle model of labor supply, saving, and longevity improvement to measure the balanced-budget impact of continued growth in the Medicare and Medicaid programs. The model predicts that top marginal tax rates could rise to 70% by 2060, depending on the progressivity of future tax changes. The deadweight loss of the tax system is greater when the financing is more progressive. If the share of taxes paid by high-income taxpayers remains the same, the efficiency cost of raising the revenue needed to finance the additional health spending is $1.48 per dollar of revenue collected, and GDP declines (relative to trend) by 11%. A proportional payroll tax has a lower efficiency cost (41 cents per dollar of revenue averaged over all tax hikes, a 5%drop in GDP) but more than doubles the share of the tax burden borne by lower income taxpayers. Empirical support for the model comes from analysis of OECD country data showing that countries facing higher tax burdens in 1979 experienced slower health care spending growth in subsequent decades. The rising burden imposed by the public financing of health care expenditures may therefore serve as a brake on health care spending growth.

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The problem of rising medical costs is well beyond taxes. Even if everyone had the capacity to pay for their expenses and government was not involved at all, in about 25 years health care would consume about 33% of our GDP and close to half of our persoanl income, That would leave us with no investment capital coming from individuals and a dramatically reduced retail marketplace. Something has to give.

Posted by: Bill | Feb 24, 2011 12:05:49 PM

If something cannot continue, it will not continue.

The continued increase in health care costs as a percent of GDP cannot continue and so it will not continue.

The problem with health care costs in the U.S. is not that we do not spend enough on health, in fact we spend too much. Health Care costs as a percent of GDP in the U. S. dwarfs other developed nations, yet out outcomes are no better, and in many ways worse then those countries.

The Problem is the Health Care System. With few exceptions, the System is Pay for Procedure. The more treatment that is given, the greater the income to health care providers, and the greater the costs to the economy. However, those paying for Health Care for the most part are paying a fixed cost. As a result the incentives for health care providers are to increase costs and there is a lack of incentive on the part of patients, because their costs are mostly fixed, and hence the marginal cost to patients for additional care is very low.

No amount of legislation, oversight, regulations, price controls or anything else can correct the System. The System must change. Health Care Providers must be compensated on a fixed cost basis, that is, payment of a fixed amount to cover all health care costs of those enrolled in their program. This will shift their incentives from increasing costs to decreasing costs, since there profits will now depend upon lowering costs rather than raising them. In this type of system the incentive is to keep patients healthy, a win-win situation for patients and providers alike. In this system government and insurance companies are not involved in evaluating care, setting price controls, setting fee schedules etc, because their payments for care are not affected.

Competition and some regulatory supervision would prevent Providers from cutting services. Kaiser Permanente is a great example of how this type of system can work. So, the problem is not that we do not know what to do, it is that we do not have the will to do it.

In the long run we will either convert to a fixed payment system, or we will evolve to a health care system where the low and low middle income individuals get only care in life threatening situations, the middle class gets adequate care and the very wealthy get premium care.

Posted by: Sid (real one) | Feb 24, 2011 4:32:11 PM

Tort reform is necessary. I had malpractice done by a doc (severance of the peroneal nerve during routine surgery), leaving me a permanent cripple when I was 11. Even though I got a very small settlement (due to the death of the doc involved and of my father), I still feel that there are too many lawsuits & the judgments are too high.

This RAISES health costs. Period. I suppose this won't be posted.

Posted by: Judy | Feb 27, 2011 7:14:52 AM