The U.S. health care system, although in many ways the envy of the world, suffers from persistent problems of high cost, significant rates of uninsurance, and gaps in quality and efficiency. In a new AEI Press book, Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System, AEI’s R. Glenn Hubbard joins John F. Cogan and Daniel P. Kessler of the Hoover Institution to answer these challenges with a plan to overhaul five specific areas within health care: taxation, health market regulation, consumer information, anticompetitive behavior by health care workers, and the medical malpractice system.

The authors argue that the current tax preference for employer-provided health insurance, by giving consumers an incentive to buy low-deductible, low-copayment health plans rather than paying for medical expenses out of pocket, has created a health care market “in which cost unconsciousness and wasteful medical practices are the norm.” With employers paying the bulk of health care costs, consumers pay little attention to runaway expenses and wasteful treatment options. While the authors see little chance of an outright revocation of the tax preference, they propose instead to allow Americans to deduct health care expenditures and out-of-pocket medical expenses from their taxes.

Expanding tax deductibility will have two important effects, according to Cogan, Hubbard, and Kessler: it will reduce the overall price of health care relative to other goods and services, and more importantly, it will induce health care consumers to purchase plans with higher deductibles and coinsurance rates, thereby reducing health care spending. Further, the authors predict that this measure will reduce rates of uninsurance by creating a tax incentive to purchase insurance and will make the tax system more progressive, because lower-income people have higher out-of-pocket spending. Additionally, the authors would allow individuals and households to contribute $1,000 and $2,000 respectively to health savings accounts to make it easier to save for medical expenses not covered by high-deductible plans. For very-low-income households, the authors would add a refundable tax credit to offset their health care expenses.

While expanding tax deductibility, the authors seek to limit the regulation of health insurance markets in an effort to control costs and make health insurance markets more competitive. One way to reduce unnecessary regulation is to allow insurance companies that meet certain federal standards to offer their plans to individuals “on a nationwide basis free from costly state mandates, rules, and regulations”--a provision currently restricted to large corporations.

The authors likewise seek greater public access to health information by expanding the number and scope of report cards on hospitals and doctors to help with decisions regarding care and to improve the performance of the doctors and hospitals being graded. Additionally, the authors contend that controlling anticompetitive behavior by providers and insurers and reforming the medical malpractice system can lower the costs of care, increase the rate of insurance coverage, and reduce medical errors.

Cogan, Hubbard, and Kessler estimate that implementing such reforms, even on an incremental basis, will lead to an additional 6 to 20 million Americans obtaining insurance coverage and to a 9 percent reduction in health care expenditures. They urge lawmakers to act as quickly as possible to reform the health care system, predicting that failure to do so will “exacerbate the problems of wasteful cost growth and uninsurance, while increasing the pressure for more public intervention, with adverse consequences for innovation and flexibility.”