Richard Epstein on Health Reform Crossroads: A Provocative Prescription

This past month, University of Chicago Law Professor and Hoover Fellow Richard A. Epstein spoke at the Stanford Law School on Health Care Reform. One of the most cited law professors in the country, Mr. Epstein’s talk was titled, The Big Choice in Health Care Reform: Guarantee Access or Lower Costs?

This choice produces two distinct paths at the heart of the current debate. Taking the first path, guaranteeing high quality universal coverage, will require increasing subsidies. He calls it an error to call these “government” subsidies, as money does not come from government, but from redistribution. The problem with redistribution systems, he notes, is that increasing subsidies to the poor decreases the “font,” or base, of wealth. That is, there is not only a transfer, but also a loss of wealth associated with each transfer, in his words, a “vicious cycle” of declining wealth.

He began his talk by noting that, on health care, a bipartisan consensus exists, among both “free market types” and “statists.” Both are unhappy with the status quo. But, as he asserted from his libertarian perspective, one cannot blame problems on “excesses of the free market,” as heavy government intervention defines and shapes the current health care system.

Putting the current system into context, Epstein explained that one of the defining features is the tying of health insurance to employment, through the tax-deductibility of employer-purchased—but not individually-purchased coverage. Under this system, the greatest risk to those covered is unemployment. Public policies that lead to increased employment, he notes, lead to decreased demand for government health subsidies.

Unfortunately, he believes that key Obama Administration policies will tend to increase unemployment, Among these new policies are the “anti-discrimination” changes in labor law that will increase the cost of hiring and lead to a decrease in employment. Moreover, the proposed “Employee Free Choice Act,” or “card check,” with its provision for mandatory federal arbitration of labor contracts, will lead to decreased employment. Epstein notes that each 3% increase in unionization leads to a 1% increase in unemployment. In addition, the Obama Health Plan proposal institutes “play or pay” rules, fining employers who do not offer coverage and driving workers from private coverage to the new government “competitor” plan. Finally, state off-budget mandates of private plan features (such as full parity for mental health, which plans cannot monitor as they can physical health) constitute a tax on private employers, decreasing employment.

Together, these policies lead to a decrease in private programs and increased demand for public programs.

During his campaign, Obama asserted that all Americans should have access to the same government health care available to him as a member of the U.S. Senate. Epstein notes that government employees represent a risk-averse population and a good insurance pool. He notes that viable insurance plans depend upon accurate risk-pricing. As the heterogeneity of the covered population increases, there is an increased need for underwriting (rather than “guaranteed issue”). Epstein warns that, as coverage becomes more universal, the costs will increase exponentially, not linearly as projected. Constantly increasing marginal costs will lead to increased taxes, affecting middle income earners as well as those at the top.

Mr. Epstein surprised his audience with his iconoclastic assertion that, “You can’t assume that the best way to improve health care outcomes is to invest in health care.” He reminded us that multiple factors outside of the health system impact health outcomes. For example, the murder rate may have greater impact than Emergency Room management. Likewise, people who drive older cars (unlike most senators) have higher accident rates.

With government investment problems in mind, Epstein prefers the second path to improving healthcare, which, unlike the plans of the Obama Administration and those of some Republicans, begins with addressing the cost side. Decreasing costs leads to decreased demand for subsidies, leading to lower taxes on the transfer side and increased wealth (on the employee-recipient’s side). The result is a “virtuous cycle” that produces the desired increased access.

Epstein identifies several direct ways to decrease costs. He starts with repealing Health Insurance Portability and Accountability Act (“HIPAA”) rules that spend billions in increased recordkeeping and other costs, imposing ex-ante regulation rather than ex-post sanctions to remedy “two or three” incidents of privacy violations. The complex access-level requirements of HIPAA will also delay, complicate, and greatly increase the cost of moving to electronic medical records.

Other “low-hanging fruit” on the cost reduction side include instituting national, rather than state, licensing of physicians, to increase the efficient allocation of medical resources according to demand, permitting a national, rather than state-based insurance market, to increase competition, and eliminating government-mandated health plan features. Epstein notes that a mandate equals a tax on the system. Mandates are “things that people wouldn’t pay for [with their own money].” If a “mandate” is required, then, by definition, its cost is greater than its benefit, hence it constitutes a tax. Medical malpractice insurance mandates have a similar perverse effect. Juries determine damages levels and health care costs increase, reducing access.

Epstein concludes by emphasizing a few core principles for successful healthcare reform. In his view, using “regulatory accelerators” will make things worse, while applying “regulatory brakes” will work. The government should promote competitive markets and make sure that there are no monopolies. Then, if health care profits increase, more competitors will enter the market, reducing costs and increasing access. He observes that the current employer-based system, with health care as an in-kind benefit for which employers, not consumers, receive a tax deduction, is a relic of 1940’s policy that has led to overinvestment.

He expressed support for a plan, like the one John McCain proposed, that replaces employer tax deductions with individual deductions and tax credits for health coverage. In this model, individuals would create voluntary (not employer-tied) groups to purchase health coverage. In Epstein’s view, understanding the effectiveness of voluntary sorting mechanisms is “the beginning of political wisdom.”