The Problem of Healthcare Costs

Many argue that the Affordable Care Act (often referred to as Obamacare), is better for patients.  Those who do not have healthcare will be forced to purchase health insurance.  This mandate provision in the law that requires the uninsured to purchase health coverage gives those under certain income levels a subsidy to buy their insurance, and all others will pay for their insurance out-of-pocket.

The Congressional Budget Office (CBO) recently reported that the number of Americans who will face tax penalty unless they purchase insurance is 50 percent higher than originally estimated when the bill was passed.  One of the unintended consequences of this new law is that many who must purchase health insurance (or face a penalty) are increasingly those in the middle class that President Obama promised to protect.

One question that arises is what criteria determine the best system for patients?  In any country, there will not be enough healthcare to provide all citizens unlimited care.  Healthcare is a scarce resource and must be allocated as such.  Yet, one of the most prominent problems with healthcare allocation is that costs have climbed at a much faster rate than inflation and the rapidly changing technological improvements in healthcare don’t lower costs as in most industries.  Thus, the myriad challenges with government spending and huge deficits for entitlement programs such as Medicaid and Medicare.  Costs continue to rise, and the Affordable Care Act does little to deal with this cost problem and patients suffer because they cannot afford care.

New York University economist William Baumol, recently published the book Cost Disease where he addresses this issue.  The subtitle of the book “Why Computers Get Cheaper and Health Care Doesn’t” gets right to the heart of the issue.  In it, Baumol explains this disease where in the service sector (and particularly in government) productivity tends to stagnate while costs rise over time.  In healthcare for example, it takes the same amount of time for a nurse to perform a basic task, such as bandaging a wound, today as it did 20 years ago.  So, healthcare workers’ wages rise overtime yet productivity tends to remain flat (or flatter).  Presumably then we should experience lower costs in healthcare on the capital intensive/technological side of the industry.

Why does technological advancement in healthcare fail to reduce costs?  The answer here is not that a MRI scan and a personal computer are fundamentally different in terms of their technological development, but the pricing system for these products and services is profoundly different.  It is estimated by the CBO that half of all healthcare costs are driven by advances in technology, and while patients are the primary beneficiaries of this technology third parties pay for them.  Insurance companies and government programs approve a specific payment for a particular medical procedure and this procedure becomes available at the mandated price.  The supplier now has no incentive to lower its price because there is no competitive pressure to do so, and there is little prospect of increasing sales and market position by reducing prices.

Consequently, in healthcare both the cost disease problem explained by Baumol and the third party payment system create an industry where prices rise unchecked and there is no market-based means of cost reduction.  The Affordable Care Act fails to address the most basic problem with the U.S. healthcare system, which is uncontrollable costs

Should We Be Talking About a Flat Tax?

The economy has most certainly become the central discussion point for both the Obama and Romney campaigns during this election year.  With the addition of Congressman Paul Ryan to the Romney ticket in August, discussions of the Ryan Plan have reemerged.  Ryan has largely shied away discussing a flat tax option, although he did suggest a flat tax plan in the past, and found some merit it candidate Rick Perry’s optional flat tax plan last October.  On Tuesday, Ryan appeared on GMA where he argued with anchor George Stephanopoulos that a reduction of tax rates was necessary for economic growth.  With all the tax reform talk, it’s left me wondering if the Eastern European model of flat taxes will affect the political rhetoric before the November elections.

Since 1994, 24 countries (the bulk in Eastern Europe) have adopted a flat tax system.  This spread of the flat tax has been quite remarkable during the past 15 years, and it has contributed to the widespread economic growth throughout Eastern Europe.  Additionally, the flat tax in many of these countries has helped create a simple system of revenue collection that saves millions in implementation and collection costs.

Is the European model the ticket to U.S. financial recovery?  Let’s first consider the complexity of the U.S. tax code.  It is estimated that taxpayers and firms spend over 6 billion hours per year attempting to correctly file tax returns.  Not only does this figure represent the equivalent of millions of workers, but it also pulls billions of dollars out of more productive uses.  According to the IRS Taxpayer Advocates, who reported to Congress in 2010, the complexity of the American tax code is driven in part by the continual changes to the system as the federal government attempts to squeeze more and more out of taxpayers.  In the past decade there have been approximately 4,400 tax code changes resulting in an additional 3.8 million words to document the U.S. tax code.

It is clear that this complexity costs billions of dollars each year just for taxpayers to comply with the laws, yet it also costs the Federal government billions in tax fraud and avoidance.  Again, Eastern Europe provides a lesson here where compliance of Russian taxpayers increased by over 30% after the adoption of a flat tax system.

In addition to the massive waste of resources due to complexity, the American tax code is a drag on economic growth and progress.  U.S. households and firms make decisions with their resources that are based not on market returns but on tax sheltering and loopholes.  Foreign firms weigh the costs of locating in the U.S. based on a tax rate that is the second highest in the world.  Congress and the White House are continually using the tax code to regulate.  The tax code has become the primary means of legislation, and the continual additions and changes imposed on the tax system contribute to uncertainty and fear among firms which eventually lead to decisions that hinder economic development.

Objections to a flat tax almost always hinge on fairness rather than economic efficiency or outcomes.  A progressive tax is deemed “fair” because higher income earners pay a higher marginal tax rate, and thus any talk of a flat tax is immediately rejected by those who see unnecessary benefits to the rich.  Yet, with a flat tax the more you earn the more you pay (as with a progressive tax system) and with a true flat tax you no longer have the countless loopholes and deductions to hide behind.  A flat tax system is more “fair” by any economic measure as taxpayers do not have to spend time and resources gaming the system in order to shelter their income (a practice that certainly benefits the rich).

If America wants to move past the stagnation of the previous four years and begin to see consistent economic growth again, tax reform is necessary.  The examples in Eastern Europe demonstrate that flat tax reform is possible and can have a significant economic impact.  What these examples also show, is that strong executive leadership is a crucial component of any successful tax reform.  The Romney-Ryan ticket has a clear opportunity to set the agenda early and champion the necessary reforms to unburden American individuals and firms with an outdated, inefficient, and costly tax system.

Dr. Peter Frank is co-author of a recent study entitled “The Flat Tax: Has its Time Come?” which can be read in its entirety at  Frank is also the Jesse Helms Free Enterprise Fellow at the Jesse Helms Center and a professor of economics at Wingate University.  You can reach him by email at

Obamanomics or Reaganomics?

My newest op-ed was just published by  In it, I discuss the ways in which government needs to “back out of the system” in order to stimulate real growth-much as Reagan did during his years of Presidency.  The op-ed is based on my latest Jesse Helms Fellows white paper  “Research on Reaganomics: Past Contributions and the Future of Economic Growth Policy.”

You can read the Obamanomics or Reaganomics op-ed at World Net Daily’s site or you can read it in its entirety below.


Exclusive: Peter Frank advocates reversal
of ‘government is the solution’ mentality

Published: 12/16/2011 at 1:49 PM

Economic growth is of primary concern for policymakers and the Obama administration as the president continues to tout policy designed at stimulating job creation. The mantra continues that in order to get the economy growing again, and move people into the labor force, government needs to spend more. A jobs bill, a stimulus package, a bridges bill, etc. – all that is needed is more government spending. Congress has all but forgotten, or so it seems, about the growing national debt with a $1.3 trillion budget gap this year alone. So the spending proposals continue. To what end? And has this solution proved effective in the last series of major economic challenges of the late 1970s and ’80s?

The Obama administration recently approved a half-billion-dollar federal loan guarantee to an electric-car company that has decided to manufacture its first line of automobiles in Finland. Is this the path to growth and continued prosperity for Americans? The problem here is not a question of intentions. Surely all legislators and the president desire to put Americans back to work. The problem resides in the basic limitations of government. There is no agency, politician, or bureaucrat that has enough information to efficiently direct resources in order to ensure a particular outcome. Decision-making by market participants informed by the specific knowledge of their complex circumstances is the only way forward. Washington lawmakers are unable to predict U.S. tax dollars fleeing to Finland and employing Finish autoworkers.

Instead of pushing spending bills and stimulus packages, instead of inciting protesters to blame American firms for all the evils in the world, the president should shift his focus to policy of which government can actually predict the beneficial outcome. Tax reform is the solution. Ronald Reagan demonstrated in the 1980s that when government gets off the backs of the people economic change will follow. Reagan pursued radical tax reform for two primary reasons: to lessen the burden of government while promoting the founding ideals of economic and political freedom, and to promote incentives that generate economic growth.

Optimal tax policy is not that which maximizes revenue to the federal government. Government has a limited function to perform, primarily a protective one, yet it is clear that for too many in Washington that the reach of government should have no bounds. Thus, when policymakers view government as the first solution to all economic problems, spending decisions are made irrespective of revenue – which leads to the massive deficits.

In addition to promoting liberty, the unprecedented tax reform ushered in by Reagan set a course for economic growth that was unparalleled in U.S. history. Cutting marginal tax rates for all wage earners and for the highest earners by 42 percent in six years, Reagan changed the incentive to work and earn and thus unleashed frenetic economic activity. This type of leadership and this scale of reform is what America needs today.

The solutions offered by the Obama administration to the economic stagnation that persists in the U.S. economy all reside in a failed ideology. Unlike during the 1980s, the belief in Washington today is that government is the solution and the real problem is tax policy that fails to generate enough revenue for the government to spend. Pulling dollars out of the market economy for government to spend on stimulating the market economy is backwards, yet this is exactly what the president is pushing for.

The time has come for politicians in Washington to pursue radical tax reform in the model of Reagan 30 years ago. Incremental changes in marginal tax rates will not provide the stimulus needed to jump start a sluggish economy, and raising rates on any level of income will only increase (albeit temporarily) the ability for government to spend more using the failed approach of “more spending” as the only solution. A complete change of the tax code will usher in a new decade of prosperity as occurred in the 1980s, but this will only happen if new leadership in Washington governs with the conviction that less government will lead to more “public” prosperity.