If Health Care Reform Fails, America’s Innovation Gap Will Grow

Greg Woock is the chief executive of Pinger, a fast-growing Silicon Valley company that makes iPhone applications. So Mr. Woock spends a fair amount of time interviewing job applicants. In almost every interview, he told me recently, the applicant asks about Pinger’s health insurance plan.
Now think about that for a minute.

In the cradle of American innovation, workers are making career choices based on co-payments, pre-existing conditions and other minutiae of health insurance. They are not necessarily making decisions based on what would be best for their careers and, in turn, for the American economy — that is, “where their skills match and where they can grow the most,” as another Silicon Valley entrepreneur, Cyriac Roeding, says. Health insurance, Mr. Roeding adds, “is distorting the decision-making.”

It is impossible to know how much economic damage these distortions are causing, but they clearly aren’t good. Economic research suggests that more than 1.5 million workers who would otherwise have switched jobs fail to do so every year because of fears about health insurance. Some of them would have moved to companies where they could have contributed more, and others would have started their own businesses.

This link between insurance and innovation isn’t relevant merely for the obvious reason that Congress is in the late stages of debating health reform. It is also relevant because the United States is suffering from an innovation deficit.

Even before the financial crisis, the decade that will end later this month was on pace to have the slowest economic growth of any since before World War II. The No. 1 reason, I’d argue, was our innovation deficit.

For most of this decade, the rate at which companies eliminated jobs was actually lower than in the 1990s (despite the stories you sometimes hear about the United States having entered a new era of economic instability). The problem was that companies weren’t creating enough new jobs. The rate at which existing companies added jobs declined 14 percent from the end of the 1990s to 2007, according to the Labor Department. The rate at which start-up companies created jobs fell even more: 24 percent.

Given the consequences of the innovation deficit — slower growth, fewer jobs, lower living standards — you would want to look for every possible solution, wouldn’t you?

You’d want to allow more talented immigrants to become citizens, so that the next Sergey Brin, Liz Claiborne or Andy Grove, immigrant entrepreneurs all, didn’t end up starting their companies elsewhere. You would want to clean up the tangled corporate tax code. You would want to finance more basic research.

And you would want to make people feel confident that they could take risks — start a new company or join a young one — without worrying about whether they would still receive adequate medical care.

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Congress is now close to passing a very promising health reform bill. Neither the bill that the House passed last month nor the bill being debated in the Senate is good enough yet. But they are close.

Ultimately, health reform will be judged by two yardsticks. The first will be whether it begins to shift medicine away from the corrosive fee-for-service system that leads to uneven results and soaring costs. The second will be whether people can easily buy insurance even if they don’t work for a large company or qualify for Medicare or Medicaid.

Silicon Valley, with its network of venture capital backers, figures out a way to get most of its workers some kind of health insurance. But many other entrepreneurs have a harder time of it. Only 46 percent of companies with three to nine employees offer health insurance, down from 56 percent a decade ago, according to the Kaiser Family Foundation.

Why? The administrative costs of insurance are high when they aren’t spread over a large group of workers. Insurers also know that the individuals and small companies who sign up for health plans tend to be the ones with the most medical problems, pushing premiums for such plans even higher.

So unless the government steps in to create a large pool of workers who can then buy insurance more cheaply, many small companies will go without it — and some workers will find themselves tethered to the safety of a big company.

As Eric Schmidt, Google’s chief executive, told me, “There clearly are people who choose to stay in their jobs due to the fact that they don’t have insurance portability.” Just consider the economic research showing that people married to someone with health insurance are more likely to work at small companies than people who aren’t so lucky.

The path to a health bill that begins to solve both core problems — access and cost — is fairly clear, numerous health economists say. It involves combining the Senate provisions on cost and quality control (and, ideally, strengthening them) with the House provisions on insurance access. Ezra Klein, the blogger and health policy writer, refers to it as a “health care reform fantasy draft.”

The House bill does a good job of creating affordable insurance plans for the uninsured but does little to attack fee-for-service medicine. As a result, medical costs are likely to stay high for everyone.

The Senate bill, by contrast, has the “essential elements of a successful, fiscally responsible reform strategy,” according to a recent letter from 26 economists, including four Nobel Prize winners and two former directors of the Congressional Budget Office. But the Senate plan is too rough on the newly insured. It would force many of them to pay thousands of dollars a year out of pocket, on top of their premiums, for care.

“Take the Senate on cost control and the House on affordability,” Jonathan Gruber of M.I.T. argues, “and you’ve the best possible bill.”

And what if Congress — distracted by hot-button issues like drug imports, government-financed abortions and the so-called public option — produces something short of best? Should we then hope that it gives up and take another crack at health reform in, say, 2025?

Well, remember that this process was never going to be easy and was always going to be messy. But in the coming days and weeks, the choices before Congress will be straightforward: How can the bills still be improved? And once all the negotiating is over, will the final package seem likely to do more good than harm?

Last week, Medicare’s chief actuary came out with a report that offered some useful guidance on that second question. The report became fodder for critics of the bills because it estimated that the current Senate plan would raise national health spending slightly. Without health reform, the country would spend $4.67 trillion on medical care in 2019. With it, we would spend $20 billion more, a total of $4.69 trillion.

If you dug into the report, however, you discovered the main reason for the projected increase. Vastly more people — about 33 million — would have insurance if the Senate plan passed. “There are more people insured, and more people getting treatment,” the actuary, Rick Foster, said.

Yet health spending would rise by just 0.5 percent. The cost of insuring a given individual would be significantly reduced, in other words, and millions of people would no longer have to worry about whether they were insured.