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Trade in Health Care: When “Free Traders” Become Protectionists

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Dean Baker
Truthout, October 12, 2009

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In Washington policy circles, being called a “protectionist” is only slightly better than being called a criminal. Everyone agrees that protectionists are uneducated people who would do harm to the economy by reducing international trade. And everyone in Washington policy circles knows that trade is good, except when it comes to health care.

If the free traders understood economics, they would be outraged by the enormous gap between the cost of health care in the United States and the cost in other countries with comparable life expectancies. People in the United States pay on average more than twice as much for their health care than people in countries like Canada and Germany, yet people in other wealthy countries enjoy longer life expectancies.

Even worse, the gap in costs is projected to grow enormously in coming decades as the rate of health care cost growth in the United States is projected to exceed the rate of growth of costs in other countries. This implies that the benefits from trade in health care will grow through time.

While health care may at first blush not seem suitable for international trade – since the delivery is place specific – on closer inspection there are ways that the United States could benefit from the more efficient health care systems of other countries. The most obvious mechanism is by allowing Medicare recipients to buy into the health care systems of other countries.

The logic of a globalized Medicare program is very simple. Since most Medicare beneficiaries are retired, they don’t need to be close to their workplace. Many beneficiaries have family or emotional ties to other countries and may welcome the opportunity to spend their retirement years in Germany, France, Canada, or some other country. If the government gave beneficiaries a Medicare voucher that would allow them to buy into the health care systems of these other countries, there would be enormous savings that could be split by the government and the beneficiary.

Of course, it would be necessary for the government to negotiate the mechanics of this deal country by country. This would be comparable to negotiating a trade deal like NAFTA, although it would be far simpler and the potential economic gains would be much larger. In fact, we could even pay the receiving country a premium to ensure that they benefit as well from globalized Medicare.

The potential gains from trade in health care are enormous. We calculated that the savings to the government would be $1,700 per beneficiary per year in 2020. This would rise to $7,200 in 2045, and $28,000 per beneficiary per year in 2085. (All numbers are in 2008 dollars.)

If 30 percent of beneficiaries opted to take part in the program, then annual savings would be $25.9 billion in 2020, $161.8 billion in 2045, and $866.8 billion in 2085. This is real money in anyone’s book.

The savings to beneficiaries would also be enormous. A beneficiary who moved to Canada would be able to pocket $5,600 in 2020. If they moved to Spain, they would be able to get $10,900 a year to supplement their retirement income. By 2045, the gain to beneficiaries moving to Canada would rise to $22,600 and to $26,700 for those moving to Spain. The numbers for 2085 are $77,500 and $74,700 for Canada and Spain, respectively.

The last set of numbers is almost twice the projected Social Security benefit for a medium wage earner in 2085. The gains would be even larger if we included a voucher for the Medicaid benefits for which many seniors also qualify.

This voluntary mechanism would allow for enormous savings to the government and could allow tens of millions of seniors to enjoy a far more comfortable retirement than would otherwise be the case. This measure alone would eliminate much of the long-term deficit that causes the Washington policy wonks to whine endlessly.

Unfortunately, globalized Medicare is not likely to advance far in Washington because the “free traders” only support trade when it reduces the wages of autoworkers and textile workers. They hate trade when it jeopardizes the profits of pharmaceutical and insurance companies or the pay of doctors. These are the people that pay the salaries of the Washington policy crew.

So, the Washington policy crew will be insisting that we do things like cut Medicare and Social Security benefits and impose a regressive sales tax. The protectionist Washington policy elites may get their way, not because they are right, but because the system is so damn corrupt that they will prevent obvious alternatives from even being considered. If we can’t win, we should at least start identifying them as the protectionists they are.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.