South By North Strategies, Ltd.

Simon Johnson and James Kwak offer four steps for improving the nation’s fiscal health. The most important step: controlling the cost of health care.

There are two ways to reduce the government’s health-care outlays: reduce the amount of health care the government buys, or reduce the cost of health care. The simplest solution is to mandate that the government buy less health care – by raising the eligibility age for Medicare, capping benefits for high-income beneficiaries, and so on.
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The problem with this approach is that Medicare is not particularly generous to begin with. If the eligibility age were to increase, responsibility for health care for many people would simply be dumped back onto their employers, resulting in higher health-care costs for all working people. A better solution is to figure out how to reduce health-care costs.
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This year’s health-care reform legislation, the Affordable Care Act (ACA), is a starting point. According to CBO data, the ACA will reduce the long-term fiscal deficit by two percentage points of GDP per year. A top priority should be to preserve and expand its cost-cutting provisions. Another obvious step to consider is to phase out the tax exclusion for employer-sponsored health plans, which would not only increase revenue, but also end the distorting effects of employer subsidization of health care.