Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System.

• Author: Cannon, Michael F.
• Position: Book review

Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System John F. Cogan, R. Glenn Hubbard, and Daniel P. Kessler Washington: AEI Press/Hoover Institution, 2005, 150 pp.

Two stumbling blocks typically thwart good health policy. The first is the pervasive belief that the focus of health policy should be ensuring that all individuals have health coverage. The second is the tendency of many who understand the importance of markets to argue that for markets to work, government must grow.

Healthy, Wealthy, and Wise is a new book by the distinguished economists John Cogan, Glenn Hubbard, and Daniel Kessler. Cogan and Kessler are professors at Stanford University. Hubbard is dean of the Graduate School of Business at Columbia University and a former head of the president's Council of Economic Advisers. Their book deftly clears the first stumbling block, but is regrettably tripped up by the second.

The desire to "expand coverage" is deeply ingrained in the psyche of most health policy wonks, and for good reason. Though the United States is supposedly a bastion of free-market health care, we pay a larger share of our medical bills (86 percent) through third parties (governments, employers, and insurers) than 17 other OECD nations. That includes Canada, where the government is supposed to pay for everything.

When most health expenditures are financed by someone other than the patient, it seems logical and compassionate to extend "coverage" to those who do not have it. And there are plenty who don't. Depending on the meaning of "uninsured," there are 21 million, 45 million, or even more uninsured Americans.

However, expanding coverage does not reduce the cost of health care. For that you need markets, which reduce costs at the same time they improve quality. Health coverage shifts costs from the patient to workers or to taxpayers. If patients are too heavily insured, the market's ability to reduce costs can actually be defeated, making health care less affordable.

In a world of so much quackery, Cogan, Hubbard, and Kessler examine the health care sector and deliver a precise diagnosis. "The problem," they write, "is not that market forces cannot work in health care. Rather, public policies have prevented health care markets from functioning properly" (p. 25). The chief culprits are the tax code's distortion of health care prices, overregulation of health insurance, a lack of information on health care quality, a lack of competition among hospitals, and malpractice liability rules that encourage waste and error. (In a bow to the zeitgeist, the...