|Obama’s plan would put an even larger slice of health services under price controls – which inevitably lead to shortages
Barack Obama recently announced a two-pronged plan to help small businesses cope with the rising cost of health insurance. First, his proposal would institute a refundable tax credit to offset up to 50 percent of a small business’s health insurance expenses. Second, it would extend public health insurance to small-business employees with high health care costs.
Obama’s goal is worthy; small businesses have been hit especially hard by escalating health care costs. But his plan likely would exacerbate many long-standing problems in the health care market – and create some new ones as well.
These new tax benefits would further entrench the employer-based health insurance system. But that very system is partially responsible for rising insurance rates and the persistently high number of uninsured Americans.
Employer contributions to employee health insurance premiums are exempt from payroll taxes. Because individual Americans don’t receive any sured through their employer.
Since most people depend on their employer for health care, insurers don’t have to compete for individual customers. So they’re insulated from the market pressures that drive down prices in other industries.
And because workers don’t directly pay for their own health care, they often lack a clear understanding of how much their coverage costs. They tend to think they’re getting insurance for free, when in reality they’re just paying for it indirectly in the form of smaller paychecks. So health care providers also are insulated from price competition.
Consequently, the cost of the average employer-provided family health insurance plan has jumped a whopping 78 percent since 2001, according to the Kaiser Family Foundation. That’s much faster than inflation or wage growth.
A new small-business tax benefit would lock even more Americans into this arrangement, further driving up insurance rates.
As for Obama’s plan to offer public insurance to high-cost employees, that too would do more harm than good. Under his proposal, the government would cover a small business’s particularly expensive employees once the company’s health care costs passed a preset threshold.
But moving high-cost patients from private coverage to public insurance would put the government in charge of an even greater percentage of the nation’s health care expenditures.
Because the government tightly restricts the prices of the services it would put even larger slice of health services under price controls.
And price controls, as any Economics 101 student can attest, inevitably lead to shortages. If you lower the selling price of a good, fewer people want to sell it. In this case, that means fewer cutting edge pharmaceuticals, doctors and advanced medical technologies.
Finally, the funding mechanism for Obama’s plan is problematic. He has promised to cover his proposal’s $6 billion annual price tag by rushing copycat versions of biologics to the market.
Produced by using biotechnology, biologics have proven incredibly effective in treating an array of diseases, including cancer. Currently, there isn’t a regulatory pathway for the approval of copycat biologics. By creating one, Obama hopes to drive down drug prices, much like generics have done for conventional pharmaceuticals.
Unlike conventional drugs, however, biologics can’t be replicated exactly – they’re too complex. As clinical researchers recently wrote in the Journal of Pharmacy& Pharmaceutical Sciences, “Biologics require hundreds of specific isolation and purification steps. It is thus impossible to produce an exact copy of a biopharmaceutical.”
Even the slightest chemical difference between a biologic and its copy could cause an unexpected reaction. Obama should be wary of rushing copycat biologics to the market.
Further, if it’s too easy to produce and sell these inexact copies, the market for research into the next round of biologics will dry up. That’s bad news for those waiting for a cure that hasn’t yet been invented. So Obama’s small-business plan for health care is fundamentally flawed. Instead. he should work to empower individual health care consumers and enhance market competition.
The writer, Sally C. Pipes of San Francisco, is president and CEO of the Pacific Research Institute and author of a forthcoming book, “The Top Ten Myths of America”.