The federal government released data this month showing the United States spent $1.4 trillion on health care in 2001, or $5,035 per capita. This year, spending will increase to nearly $1.7 trillion. Yet all around us the health-care system is falling into chaos. The headlines tell the story.

Physicians have staged a walkout in West Virginia over skyrocketing malpractice insurance premiums. More doctors are refusing to see new Medicare patients and some are opting out of the program altogether. And the number of uninsured Americans continues to rise, prompted by employers dropping coverage and states cutting back on their Medicaid programs.

At the same time, the Bush Administration and Congress are looking for ways to expand a lukewarm economy. But these problems are not unrelated. Done correctly, health-care reform will simultaneously promote economic growth and improve our health-care system. Recall the HMO revolution of a decade ago.

HMOs didn’t provide the level of care they promised but they did restrain costs, which gave an important boost to the economy during the 1990s. With managed care now on the decline, the solution lies in finding new ways to eliminate waste and redundancy from the financing of health benefits and promote the efficient use of health-care dollars among individuals and their families. Let’s start with senior citizens.

Currently, many seniors must obtain a second plan if they want coverage for prescription drugs and other benefits not covered by Medicare. Some are fortunate enough to have supplemental coverage from a former employer, and this has been an important source of drug coverage for seniors. Prescription drugs account for roughly half of employers’ health expenses for Medicare retirees. Seniors without this option must buy their own “Medigap” policy if they want supplemental coverage. But Medigap plans cost thousands of dollars and provide little or no coverage for prescription drugs.

Thus, a guiding principle for Medicare reform should be enabling beneficiaries to purchase one private health insurance plan for all their needs. The most immediate benefit is that employer-sponsored Medicare supplement plans and Medigap plans would become obsolete. For businesses, the elimination of Medicare supplement plans would free up resources for hiring and capital expenditures. For seniors with Medigap, the ability to purchase a single Medicare plan would be like a tax cut. Some of the thousands of dollars previously spent on Medigap premiums could be put toward the extra cost of a single comprehensive plan, with the remaining funds available for other savings and consumption.

Another long-overdue reform is the expansion of medical savings accounts. When they were first debated in the mid-1990s, opponents proclaimed that MSAs would be the end of civilization as we know it. Not only has civilization survived, but health care is moving away from managed care toward consumer-driven health plans. Yet tax-free Archer MSAs remain a limited demonstration project that is set to expire on December 31, 2003. This year Congress should make MSAs available to all citizens on a permanent basis. MSAs will empower patients to become selective, cost-conscious consumers in the health-care marketplace. The increase in savings from the expanded use of MSAs will benefit the economy as well, helping to keep interest rates low and investment high.

Tax credits for health insurance provide the most effective way to help those who have been left out of the employment-based health insurance system. The uninsured are mostly low-income workers and those working for small businesses. Because tax credits are portable, they promote economic growth by putting an end to “job lock” and by encouraging entrepreneurship. Workers who wish to start their own business or join a small start-up firm will no longer have health insurance fears to dissuade them.

Finally, tort reform for medical malpractice insurance is essential to bringing down the cost of doing business for physicians. California’s MICRA law provides a model for the nation. It caps non-economic damage awards for pain and suffering at $250,000, and places limits on attorney’s fees. Since MICRA’s passage, malpractice insurance premiums in California have gone from among the highest in the nation to among the lowest. This has helped keep health-insurance premiums in California below the national average.

However, there are dangers in pursuing health-care reform. Lawmakers must guard against proposals that rely on massive new government spending. Such spending diverts funds from the private sector that would otherwise be used towards savings or consumption – the real engines of economic growth. Large spending proposals also tend to reflect bad health-care policy.

The good news is that there is no conflict between good health-care policy and sound economic policy. Federal lawmakers should recognize this and act accordingly.

Chris Middleton is the Senior Policy Analyst for Health Care Studies at the Pacific Research Institute in San Francisco. He can be reached via email at cmiddleton@pacificresearch.org.