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Obama's biggest health care issue: His plan can't work

There are many reasons why U.S. President Barack Obama's signature health care reform plan is in deep trouble.

Scaremongering by opponents. Fear among lawmakers they'll be punished by voters. Concern about the price tag. And the inability of those with health insurance to see what's in it for them.

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There is a more fundamental problem: The President's plan is based on dubious economics.

Mr. Obama has set two conflicting objectives. He wants to rein in health care costs. At the same time, he wants to extend coverage to most of the nearly 47 million Americans who don't have insurance, without affecting everyone else.

Speaking to a group of doctors yesterday at the White House, he repeated the assurance that his reforms would "offer security to those Americans who have insurance and insurance to those who don't."

He can't possibly do both.

The United States already has the most expensive health care system on the planet. This year, the country will spend roughly $2.5-trillion (U.S.) on health care, accounting for nearly 18 per cent of gross domestic product. And that share has been rising by a full percentage point every four years since the 1960s.

Even then, the system leaves nearly 16 per cent of the population without any coverage.

Most other developed countries, including Canada, spend about 10 per cent of GDP to provide health care for everyone.

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And yet the United States can't afford not to fix its system.

Goldman Sachs chief economist Jan Hatzius points out in a recent report that doing nothing also has consequences. The soaring cost of health care is crowding out other consumption in the economy.

"If left unchecked, health spending will continue to constrain non-health consumption," Mr. Hatzius argues. "This may be acceptable to a degree. As real incomes increase, individuals may choose to spend a greater amount of those gains on health care. But there is likely to be a limit to how much of a decline in non-health consumption consumers will tolerate."

Rising premiums are causing distortions in the workplace, where employers typically subsidize health insurance for employees. Health care is eating up an ever-larger chunk of the gains in compensation paid to workers - as much as 30 per cent over the past decade, according to one study.

That means that workers are seeing their pay eroded and employers have an inherent disincentive to hire full-time workers.

The employer-based system also distorts where people work, according to Mr. Hatzius. Workers with families or costly medical conditions are more likely to seek work at large companies, which offer better insurance. Younger, healthier workers may be content to take jobs with little or no insurance.

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Another significant challenge that Mr. Obama faces is the rapidly growing, but bankrupt public system - Medicare for retirees and Medicaid for the disabled and the poor. Both programs are badly underfunded, forcing the government to borrow more to pay benefits to the 100 million people who use them.

The reforms now on the table would raise the government's health care bill - by up to 1.1 per cent. Unless the private sector picks up a greater share, total health care expenses are likely to rise, not fall, as Mr. Obama says they must.

So how's it all going to work? The bills now in the House of Representatives and the Senate have several common elements. They would reform insurance markets in order to lower the cost of insurance for those without company plans. The legislation would also make health care mandatory for companies and individuals (not unlike auto liability insurance). And most significantly, the bills provide subsidies to encourage lower-income families to get insurance and small employers to provide insurance.

The House version of the bill contains a controversial public insurance option to provide cheaper insurance for those without. But a key Senate committee has already rejected the idea, making it unlikely that it will survive in the final version.

There is a solution to Mr. Obama's health care paradox, but it's a political minefield: tax health care plans, curtail Medicare benefits, and divert those savings to the uninsured population.

That isn't likely to please the people who typically vote in this country, and there's nothing in this for them because they typically have insurance.

But Mr. Obama can't have it both ways. Vastly expanded health care will cost everyone more, and he should say so.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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