Political courage or suicide?

Much has been made of the selection of Paul Ryan (R-WI) as Mitt Romney’s running mate for the 2012 presidential election. Predictably, the Left hates him, and conservatives lionize him. He’s a likeable enough fellow, particularly if one doesn’t get too much into the weeds of his political ideas, and sometimes folks forget that vice presidents don’t make policy – presidents do. For someone who has shown a remarkable flexibility in taking up different sides of the same issue, Mitt Romney is not likely to allow his VP to maneuver him into political cul-de-sacs.

Having said that, it is worthwhile to examine Mr. Ryan’s ideas, for these are the ideas that will be potentially one heartbeat from the Oval Office. Mr. Ryan and I share one important idea and differ on a score of others. I, too, am very interested in reducing the size of the federal government and am willing to entertain diverse views on how to accomplish that. Mr. Ryan’s various budget plans seem to provide a roadmap to getting federal spending under control by addressing the third rail of American politics – Social Security and healthcare spending. Of these two programs, I believe it is more fruitful to focus reform efforts on healthcare.

President Obama’s signature piece of legislation attempts to do this, but I have a major objection to the president’s approach. It constitutes a major expansion of the government’s involvement in healthcare insurance, cobbling together a set of future tax increases with an appropriation of current budgets (Medicare, for instance). The sum effect locks into place current spending levels, with wholly unreliable promises to “bend the spending curve” in the future. The likely outcome is that healthcare spending will increase much as it has, leaving the federal government with tough choices down the road: either ramp up appropriations to keep pace or begin rationing care, or, in a worst-case scenario, do both at the same time. It is easy to imagine that, in such a world, affluent folks will simply set up a shadow healthcare system not unlike the proliferating private schools that educate their children. Obamacare will provide healthcare to all Americans…it just won’t be high-quality care. It will commoditize healthcare, while overpaying for increasingly mediocre outcomes.

Enter Ryanomics. The virtue of Mr. Ryan’s approach to healthcare is that it more or less caps the federal government’s exposure to healthcare costs. While the details have changed and evolved over time, the crux of the conservative side of the argument calls for the federal government to provide either state governments or private citizens an annual lump-sum subsidy with which to purchase services or insurance, especially for the poor and elderly. This in effect washes the federal government’s hands of the problem and provides the federal budgetary process some sanity – we would finally be able to chart a path to fiscally sustainable policies because healthcare would not blow holes in budget projections.

But there are significant problems with the idea. Like the liberal approach, Ryan-like reform proposals really do nothing to address the costs of healthcare. The conservatives merely transfer the problem onto state governments and private citizens. It is a better fate than the one President Obama delivers; however, it is not a solution to the healthcare problem. Under any number of conservative ideas for healthcare, the predictable result will be states and/or thousands — perhaps millions — of Americans running out of funds during the year, forcing them to pay out of pocket. This would be okay were it not for the ridiculous costs of healthcare. Without addressing the costs of therapies and services, the conservative plan ends up producing the same kind of system as the liberal plan – one for the rich and one for everybody else – but at least the conservative plan(s) has the benefit of not bankrupting the country.

The highest quality care for the greatest number can only be achieved by addressing the sources of cost inflation – treatments, diagnostics, facilities, insurance, and physicians. Each of these areas of healthcare expenditure has powerful lobbies in Washington. People have talked up Mr. Ryan’s political courage in proposing budgets that limit federal spending on healthcare, but to me, real courage would mean standing up to the entrenched interests in Washington that protect the profits of those involved in healthcare.

One interesting dynamic in healthcare spending concerns the lockstep manner in which federal spending and healthcare costs escalate. There would seem to be a chicken-and-egg dilemma here: do healthcare costs climb because the professionals and corporations have come to expect ever-greater federal spending? Or does spending climb as a result of the greater costs? In which direction does causality occur?

The answer to this question has important implications. If healthcare, like higher education, has experienced a rapid inflation in costs because of an implicit government guarantee to provide more and more funding, then one could argue that the conservative plans under consideration would bend the cost of care by taking the easy money out of the system. All providers of healthcare services and products would have to accept lower profits and lower margins over time. Those operators who want to hang onto their margins will necessarily have to sacrifice market share to others who are more willing to service the middle and lower ends of the marketplace.

Of course, there is a human toll to be paid for allowing the market to work in this fashion. Liberal sensibilities would be offended by a marketplace where the quality of care is more closely linked to the price one is willing to pay for it. But make no mistake: the same set of lousy circumstances will occur under Obamacare over time.

As I see it, the healthcare challenge is essentially unsolvable, given what appears to be the expectations. What we seem to desire is a system that provides the absolute best care to everyone equally, and we want the government to step in to make up the difference. But the difference cannot be made up unless you’re comfortable borrowing 40 cents of every dollar spent from the Chinese. We could levy taxes to make up the difference, but that gets you right back to the chicken-and-egg dilemma of spending. It’s a death spiral either way – either a spiral of debt that bankrupts the country or a spiral of taxes that sows resentment and stifles economic growth.

In any event, this Frankenstein monster of a healthcare system we currently have cannot continue. What we have now combines the absolute worst of central planning and market capitalism. At the policy level we have signaled to health care operators that there is virtually no limit on what we’re willing to spend, and at the market level, with money flowing the way it does, there is very little incentive for operators, particularly hospitals and doctors, to innovate.