Thursday, January 15, 2009


The current SCHIP expansion recently passed by the house and now being considered by the senate is a SCHIPwreck. While the prospect of millions of poor children having increased access to health care sounds great at first glance, in actuality this proposal is a lot like sending a kayak out to rescue passengers on a sinking ship.

While SCHIP is being touted as a program to aid the poor, in actuality SCHIP is aimed more squarely at the middle class. Families with incomes below the poverty line are not eligible for SCHIP, but rather go into Medicaid. SCHIP covers families with incomes between 100% and 300% of the poverty line: Depending on which state one lives in, 300% of the poverty line implies a household income (for a 4 person household with two children) of between approximately $60,000 and $72,500. When one compares this with the US median income in 2007 of roughly $50,000, it becomes evident that the SCHIP expansion is not a program for the poor, as it has the potential to apply to well over half of all households in the US. Moreover, the SCHIP expansion explicitly prohibits states from subjecting applicants to an assets test, meaning many people who can legitimately afford health care (e.g. people living off inheritances, retired dot-com millionaires, and the like) will be eligible for SCHIP.

In addition, this piece of legislation has a nice fat pork clause in it, as pointed out by Forbes, which attempts to reduce the competition faced by hospitals by banning physicians from opening specialty hospitals. This pork is quite emblematic of one of the key underlying causes of rising health care costs--a serious lack of competition within the industry. Licensing laws severely restrict the entry of medical practicioners to provide service, leading predictably to higher prices. The morass of state-level insurance regulation makes it impossible to provide the same insurance plan in two different states, which ultimately harms consumers by depriving them of hundreds of insurance options. The safety and efficacy tests mandated by the FDA cost nearly a billion dollars per drug and can take over a decade, cutting significantly into the patent life of a drug--these huge fixed costs deter many new entrants into the pharmaceutical industry.

It is true that the health care industry needs an overhaul to help improve the access of Americans to quality care. Rather than concoct pork-laden legislation, a better route is though the liberalization of many of the highly regulated health-related markets.

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