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TERRY GROSS, host: This is FRESH AIR. I'm Terry Gross. One of the obstacles that's holding up health-care reform is how to pay for it. My guests are two economists who have been thinking a lot about that question. Paul Krugman is a Nobel Prize-winning economist, a columnist for the New York Times, and a professor at Princeton University. Stuart Butler is Vice President of Domestic and Economic Policy Studies at the conservative think tank, The Heritage Foundation. Paul Krugman, Stuart Butler, welcome to FRESH AIR. Let's start with something I think you both agree on, which is that we need to reform the system. So let's start with the reason why. Stuart Butler, let's start with you. You've been writing about the economics of the health-care system for decades.

Mr. STUART BUTLER (The Heritage Foundation): Yes, and I think there are some basic problems that we've got to solve. One is, of course, that there are millions of Americans who literally don't have adequate access to the health- care system because they don't have insurance coverage. Even those with insurance in the United States are often very nervous that they are going to lose that insurance if they change their jobs, maybe if their child graduates college and doesn't have a job, then they can't be a dependent, so they're not under the family plan. So even people with insurance are nervous. And I'd say thirdly that the cost of coverage, the cost of medical care in this country is enormous, compared with what we spend on other things and what other countries do, and yet we don't seem to get the value for money. So I think it's value for money, I think it's uncertainty for people who've got coverage, and gaps in coverage. Those are the three big things that we've got to solve.

GROSS: Paul Krugman, why do you think we need reform?

Professor PAUL KRUGMAN (Princeton University): First of all, I'm shocked that Stuart didn't say anything I can disagree with right there. We do have an extremely expensive system by international standards, and one that leaves a lot of people without health-insurance coverage, and it leaves a lot of people who do have it worried. And there's something else, which is that those defects are getting worse. Our system is kind of held together with Scotch tape and chewing gum, by a variety of regulations, tax breaks and so on, which worked when health care was relatively cheap. But now as the cost of health care keeps on rising, mainly because of medical innovation, it is gradually coming apart. You see a declining number of employers offering health insurance to their workers. You see the defects of the system growing worse. And of course the cost, which was, you know, around five percent of gross domestic product when John F. Kennedy was president, is now 16 and rising. So all of the problems we have, which were possibly tolerable 20 years ago, are intolerable given where we are right now.

GROSS: Stuart Butler, your views are based, in part, on spending the first 30 years of your life in England under the National Health Service. I should mention you're now an American citizen. What are some of the lessons you think we should learn from England's National Health Service?

Mr. BUTLER: Well, I think there's some very important lessons, actually, and one of the most profound, in a way, is that Britain, as a society, made some very basic decisions about things like putting a budget on health care, making it open and virtually free to everybody. Also in Britain, when I was brought up there, we didn't worry about the cost of health care to us. Also, it wasn't affected by which job my father was in or I was in as to what kind of coverage we got. Those are the good things. Of course, on the other side of the equation, somebody made decisions about what health care we would get and continue to do so. My brother, for example, right now - my older brother in England has congestive heart disease. He gets pills, but he won't get surgery for that. He won't get a heart transplant or anything like that. A decision has been made about limiting. And so I think that it's important to kind of understand all the features of a system where somebody makes major decisions for you about what health care you get, and that's something that Americans have just not quite got to grips with, in terms of should somebody else make decisions for them. Who's going to make decisions about that?

GROSS: If you're just joining us, my guests are Paul Krugman, Nobel Prize- winning economist, Princeton professor and New York Times columnist; and Stuart Butler, Vice President of Domestic and Economic Policy Studies at Heritage Foundation, and we're talking about reforming the health-care system. We have an employee-based system now for health insurance. Most people get their health insurance where they work, and if you don't, then you have to pay really high fees because you're not in a group plan, unless you have some kind of alternative for a group plan. Should we be transitioning out of an employee- based system? Paul Krugman?

Prof. KRUGMAN: Ideally, yes, but you really have to be careful about what the alternative is. The employee-based system is a, very much, a second-best arrangement. It's not the way you would have set up a health-care system if you could have designed it from scratch, but it does have some desirable features. Under employee-based plans, there's no discrimination based on pre-existing medical conditions. The administrative costs of the employee plans, the ones that are run through a company to an insurance company, are relatively low compared with individual insurance, because the insurance company is just making a deal with the company as a whole. It's not screening each individual applicant to see whether they're a high-risk client and so on. So yeah, I don't think it's a system we should have, but it's not something you want to ditch until you have a well-established, well-functioning alternative.

GROSS: Stuart Butler, what do you think?

Mr. BUTLER: Well, I actually do agree with Paul on this very much. I think, like a lot of people who look at the American system, who come from another country, especially, they scratch their head, wondering why anybody's health care should depend on where they work. And there are many features about the employment-based system, which - there are good features, as Paul said, and I think those of us who want to reform the system want to look at group insurance in a different mode, dealing with pre-existing conditions and so on. But I think it's important to understand the features of the employment-based system that is the root of much of the problem. Clearly, if you move from one job to another in America, then your insurance does change, or you lose it if you go to an employer that doesn't provide coverage. So that's clearly a problem. There's also a problem - the cost of health care and the decisions made are hidden in the employment-based system. When I went to see a doctor in Britain, decisions were made about whether I went to see a specialist and so on based on budgets and so on. In the United States, when I go see a doctor here, and the doctor says maybe you ought to go and get a certain test, or maybe you ought to go and see a specialist, the cost of all that is hidden within the employment system. What actually then happens is, the cost of that insurance in the employment- based system squeezes down my cash earnings. It's all part of my compensation. So part of the problem here is we have a sort of an open checkbook via the place of work, so you have employers trying to hold their costs down, squeezing down on earnings for their employees, and that sort of compounds the whole problem that people see in America. So I think the employment-based system, quite frankly, has got to go. It's got to go in stages, I think for the very reasons that Paul mentioned. I think we ought to start with smaller firms and say let's create a different way of getting group insurance with the same kind of subsidies, no pre-existing condition, and gradually allow people to migrate into that over time - larger and larger firms. But I certainly think that the employment-based system is one of the fundamental problems with the existing system here, which will always make it impossible to solve unless we ultimately move away from that system.

GROSS: So briefly, do you think the proposals being discussed now in the House and the Senate are a way of transitioning out of the employer-based health- insurance system?

Mr. BUTLER: Well, I think they are a way. They are certainly, I think, a very problematic way. But I think part of the thing which troubles me about so much of the conversation here is that the profound changes, the things that we've got to get to grips with as a country - which they did in 1947 and 1948 in Britain; we had a national conversation in Britain about what should the health-care system look like - that is buried in the existing system. You have the president getting up and saying oh, this is an issue between blue pills and red pills, and the red pill is cheaper and does the same thing. What a facile way of trying to talk about what are profound decisions. If we're going to move away from the employment-based system in this country, we ought to be discussing that with Americans. If we're going to have a different system that says, just because you and your doctor want you to get this test or that test, and it isn't really that cost-effective, we're going to have a system to basically make it not possible for you to have that test. We've got to discuss that with Americans. My concern is that we are sort of moving towards making profound decisions yet actually not having a national discussion, a true national discussion, about what the basic questions are we've got to resolve.

Prof. KRUGMAN: There actually has been an extensive discussion among health reformers, among health-care economists, of what the possibilities are. It's not being articulated very well on the national stage, but that's not something I think you can lay, or certainly can't lay primarily, at the feet of President Obama. It's very hard - Bill Clinton tried to have a national discussion, tried to lay out a comprehensive reform that would control costs and guarantee coverage, and the response of opponents of reform was a tremendous amount of fear-mongering, a tremendous amount of, you know, Harry-and-Louise-type ads. This time around, Democrats have decided that their best bet is something that's a very incremental reform, something that allows people to keep a lot of what they have, that tries to allay the fears by promising not too much change, at least in the short run. You have to say: Can you blame them? Is it even conceivable that we can do a major reform all at one giant leap into a completely different system? I guess I'm in the camp of pragmatists here. I think that what we have on the table will not be the end of the story, but it is, at least, a beginning on (unintelligible) the transition to a better system.

GROSS: We're talking about how to pay for healthcare reform. My guests are Paul Krugman, Nobel Prize-winning economist, Princeton professor and New York Times columnist; and Stuart Butler, Vice President of Domestic and Economic Policy Studies at the conservative think-tank, the Heritage Foundation. We'll talk more about the economics of health-care reform after a break. This is FRESH AIR.

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GROSS: We're talking about how to pay for health-care reform. My guests are Paul Krugman, Nobel Prize-winning economist, Princeton professor and New York Times columnist; and Stuart Butler, vice president for domestic and economic policy studies at the conservative think-tank, the Heritage Foundation. Well, since we've been talking about employer-based health insurance, let's look at the employer mandate, which is under discussion in the proposed legislation, and this means employers would have to either provide health insurance for their employees, or they'd have to pay basically a fee or a tax if they didn't provide insurance, and that money would go toward the larger pool for health insurance. Do I have that right?

Prof. KRUGMAN: Yeah, and let me say why this is essential. We actually already know this because we've been having a series of scorings by the CBO, estimates of the budget impact of different bills, and the CBO actually scored some incomplete bills that didn't have the employer mandate. So we have an idea, at least, of what the Congressional Budget Office thinks is the impact. If you're going to try to do the other things that are part of the proposed health reform, which is to provide subsidies to lower-income families to help them buy insurance and at the same time put regulations on insurance companies so that they can't deny insurance based on medical history, if you don't have the employer mandate, what happens is that a lot of employers who are currently offering coverage drop it, pushing a lot more people into the pool that have to be recipients of federal subsidies, have to be covered, in effect, at taxpayer expense - which means that the on-budget cost of health-care reform escalates enormously. A lot of this money you're spending at the federal level is simply replacing insurance that was previously provided by employers. Now, from a national point of view, that may not be such a bad thing. Does it really matter whether an employer is coughing up the money or someone is, you know, paying a tax that ends up paying for the health care? But given the politics of it, given the concern about what does this do to federal spending, it becomes tremendously important. And you know, in the end, if we believe that everyone should be covered, that means that everyone has to make some contribution to the cost of paying for coverage. So in the end, the employer mandate, one way or another, everybody, including small businesses, is going to be paying for national health care.

GROSS: Stuart Butler, does that sound fair to you?

Mr. BUTLER: Well, I think it sounds very problematic to me. For one thing, as we've said before, this idea of a mandate on employers continues the employment-based system with all its problems, rather than actually making a decision to really move away from it. Secondly, if an employer is required to provide certain coverage, then the question arises, sort of, who makes decisions about what coverage they're going to provide and what's going to influence that? And my fear about that is that kind of mandate, you will see the various interest groups pressing Congress to make sure they're included in the mandated benefits. We see that at the state level already all over the country. So you start to add costs, essentially, to employers, and you also restrict their flexibility about looking for good ways to cover people. The other thing, if it's a mandate to provide coverage or pay a tax, in both cases, let's be aware - and I hate to argue or at least to sound like I'm arguing with a Nobel economist here, but - employers, when they are required to pay for something for their employees, a tax on their employees or providing benefits, I can assure you that they are not the ones who are ultimately paying it. It's showing up in terms of the cash income of their employees. The more benefits grow, the more those requirements are there, the more they're imposed, the less cash that means that goes to their employees. So it's not a free lunch. I mean, I think there's this illusion that you can just sort of pass costs to the employer, tell the employer to pay something, and then the employees, then, don't pay it. So that, then, raises all sorts of questions about fair is that, how regressive is it? Low-income people end up finding their salaries, their hourly earnings, slow down if you impose these kinds of mandates. So I want to get away from this completely. I think we ought to be systematically moving away from the employer-based system.

GROSS: Are you confident that if employers didn't have the mandate, and they didn't have to pay health insurance, that that extra money would show up as higher wages for employees, as opposed to just profits?

Mr. BUTLER: Well, I think for two reasons I am. One is I think, you know, markets generally do operate that way. Remember that no employer has to provide coverage today, yet most do. And there's a reason for that, and that is that employees demand it, unions demand it and so on. So I don't think it's a question of saying that just, it's suddenly going to disappear, and even if you thought that, you could have what you call in the trade a maintenance-of-effort requirement. You can say if you're going to reduce or eliminate a package as an employer, then you are required to cash that out to the employee, at least for the first year or so, so that you can't just sort of surreptitiously do that.

Prof. KRUGMAN: I mean, I do agree that someone will pay, and it won't be, in the end, for the most part, the businesses that are obliged to extend coverage to their employees. It will show up possibly in lower wages, possibly in higher prices for the products that these firms produce. We're not talking big numbers here. We're talking relatively small numbers, and the really important thing to understand is that if our goal is to provide insurance coverage to everyone, then we're going to have to pay for that somewhere, whether it's through higher - essentially an employment tax that will be extended more broadly or through other taxes. So it's going to be paid by someone. To complain about the fact that, well, this is going to cut some wages or raise some prices is basically saying you want this expansion of coverage without it being paid for anywhere. I would just also add that yes, of course, there will be lobbying. There will be interest groups. If you can come up with any kind of reform in the real world that will not produce lobbying, will not produce influence of interest groups, I'd like to see it.

GROSS: Let's get to the question of whether medical benefits should be taxed, which is again one of the questions on the table now in the reform bills. So Paul Krugman, explain what the issue is.

Prof. KRUGMAN: Okay, right now, if your employer provides an insurance plan to all of its employees, the benefit, the premiums that are paid by the employer, are not considered taxable income, which is one of the reasons we have an employment-based system. It's a system in which there's a big tax advantage to getting insurance through your employer rather than buying it yourself because if you buy it yourself, you have to go out, earn the income, you get taxed on that, and then you have to spend the money buying an insurance policy. This is not something that would ordinarily make sense. You would say, you know, this is a form of compensation. Why shouldn't it be taxed like other forms of compensation? In fact, it's worked to our advantage for much of the past 50 years because by encouraging employment-based insurance, the tax break encourages insurance that's delivered under the rules under which employment- based insurance has to work, which is that you offer the same plan to all of your employees, you do not discriminate based on pre-existing medical conditions. You can't offer a deluxe plan for a few employees and no insurance for the rest, because if you do that, you lose the tax break. So in a way, we've channeled this employer-based system into being something closer to the way a health-insurance system ought to operate, through the tax break. And on the specific issue of should we be willing to tax gold-plated insurance plans, should we put some limit on the tax deduction, I'm okay with that. I don't think there's a problem, as long as we maintain, while we are still in this world of imperfect systems, while we are still trying to transition to the ultimate system, we need to retain the basic tax deductibility of employment-based plans.

GROSS: Stuart Butler, what do you think about the issue of medical benefits being taxed?

Mr. BUTLER: I agree that there ought to be a limit on the tax-free status of employment-based coverage. The fact is that when something is tax-free without limit, people tend to want a lot of it, particularly if they don't really see a direct connection between what they're getting and the cost of that. You know, I don't think almost anybody - well, nobody is required in America, no employer is required to actually even show people on, say, their W-2 forms they get at the end of the tax year, how much of their compensation was in the form of health insurance. So there's a terrible sort of inflationary pressure as a result of the system. So I agree in limiting it, in the same way, say, that we limit contributions to 401(K) plans, at least the tax-free status of that. I think that's critically important to get people to start to question how much their health insurance is that they get from their employer.

GROSS: My guests are Stuart Butler, Vice President for Domestic and Economic Policy Studies at the conservative think-tank, the Heritage Foundation; and Paul Krugman, Nobel Prize-winning economist, Princeton professor and New York Times columnist. We'll talk more about the economics of health-care reform after a break. This is FRESH AIR.

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GROSS: This is FRESH AIR. I'm Terry Gross. Let's get back to our conversation about how to pay for health care reform. My guests are Paul Krugman and Stuart Butler. Krugman won the Nobel Prize in economics last year. He's a New York Times columnist and a professor at Princeton University. Stuart Butler is the vice president of domestic and economic policy studies at the conservative think tank the Heritage Foundation. Let's get to something I suspect you might disagree on, and that is should there be a public option for health insurance. Stuart Butler, what do you think?

Mr. BUTLER: I think that's a very, very disturbing piece of the equation, particularly in terms of what it means in order to get a consensus to take the important steps forward, and also because the details of what people mean by a public plan is very different depending who you talk to. Some people clearly see a public plan as a sort of a thin end of the wedge or a Trojan Horse, as some people say, towards getting essentially a single pay type of system like we have in Britain or like the VA here. And I think that's clearly causing an enormous backlash, not just from insurers, but also from people, quite frankly, like myself, who are very worried about that kind of system, how it would operate and whether Americans really want that kind of system.

Prof. KRUGMAN: Well, just to weigh in - single payer is not the same as socialized medicine, it is always important to say. We have a single payer system in this country. It's called Medicare. That's a single payer system. The government is the sole provider. And it's true, some people see the public option as an eventual route towards a Medicare-like system for everybody. I don't think something that looks like British NHS is on the table at all, so your relevant comparison should be do you want a Medicare-like system for all of America?

Mr. BUTLER: Well, I'm not sure that that is the case, I mean that that's necessarily the right way of looking at what's going on. The debate over exactly what the single payer system should look like is a pretty vigorous debate, as you know, Paul. I mean there are people who look at the Canadian system, there are people who look at Medicare in particular and have quite different views. But my point is that it's clear that strategically some people see a single payer with that purpose, and those same people want to have rules, the rules of the competition in terms of how a public plan might compete with others. They want to have the Congress of the United States both designing the public plan and also designing the rules by which public plan competes with other plans. And I know enough about American sports, having been here for 30 years, to know that if the umpire of a game is also the team manager of one of the teams, then you don't really have a true competition taking place on that ball field. And so I think it's very - there's a lot of concern about both what is the purpose of the public plan and also whether you can in fact have a level playing field between that government-sponsored plan and other plans in a true competition. And that's why there is so much pushback on this idea of a public plan. Not because people necessarily hate Medicare or anything like that, but because they don't - because they envision a gradual trend, a gradual change in the system which is very much in contradiction to how it's being advertised.

Prof. KRUGMAN: Let me describe how I see the public plan's role. What we're heading towards, if anything like the health care reform that's on the table succeeds, what we're heading for is a system in which private insurers will deliver most of the health insurance in this country, but they will do so heavily regulated by the federal government in terms of who they, you know, not being allowed to discriminate based on medical history. We'll have a bunch of subsidies to help people afford it. We'll basically have private insurers operating with a lot of federal oversight, which is fine. Then you - the obvious question you have to ask is, what exactly are the private insurers doing? What role are they playing? Is this going to be something like the student loan program where we know that we've been subsidizing private lenders to provide student loans and they don't actually add anything? It's actually taxpayer money anyway, so - and it turns out that the private insurers are doing nothing but, and this is the case of student loans, the student loan providers are adding no value. They're just collecting fees along the way. Now, the defenders of the private insurance industry will say, no, we do add value, we manage costs better, we actually provide oversight. My answer to that is: prove it. And how do you prove it? You prove it by having a level playing field in which they compete with a simple plan offered by the federal government that people can buy into that does not involve the private insurers. Now, we have some experience. We have Medicare Advantage, which is the possibility of people getting their Medicare run through a private insurance company rather than directly from the U.S. government. And the history of that is that the Medicare Advantage plans are unable to compete against the straightforward government option unless they are in effect subsidized, so right now they're paid around 13 or 14 percent more per recipient than straight Medicare recipients are. This is at least a suggestion that maybe the private insurers don't add value. But all that the advocates of a public option are calling for is let's have that public option on the table. Let's offer people the choice between buying insurance through the government or buying it through a private insurer and let's see if the private insurers are actually delivering the social value they claim to be delivering.

GROSS: So are you saying, Paul Krugman, you're asking the question, do we really need the big insurance companies, and if we do, let them prove it? Is that what you're saying?

Prof. KRUGMAN: Yeah. Exactly. I mean I - now, notice that the, that I'm offering the choice here. I'm not saying, look, we're going to decree from the beginning that the private insurance industry will go away. I'm not even sure it will, because I think there is some question about whether the private insurers do have a significant amount to offer. But I'm saying let's have the choice. Whereas the opponents of a public option are saying, well, we're going to decree that even though ultimately taxpayers are going to be on the hook to make sure that everybody has insurance, even though we're going to heavily regulate to make sure that insurance is not denied to anybody, nonetheless - essentially we're going to take the decision about who's going to have insurance, whether they're going to be able to afford it, out of the hands of the private insurance companies, but nonetheless we're going leave the private insurance companies in there actually running the system, actually administering it. Why should we make that a necessary condition? Why not actually have a genuine competition to see whether the private insurance industry is worth what we pay it?

GROSS: Isn't it likely that the public option would be a very bare bone insurance plan and if you wanted more than that, you'd be buying through one of the private companies?

Prof. KRUGMAN: Well, that's up in the air, but you know, if that's the way at least initially it comes out, that's fine. I mean America's situation is so bad, we have so much - if I can say - sheer brutality in our system with insurance coverage entirely denied to large numbers of people, that even having a bare bones basic insurance plan that is available to those people who are currently excluded from our system would be a big improvement on where we are now.

GROSS: Now, President Obama has said for those of you who like your plans, you can keep them. What do you think the odds are that once the insurance, once the health care and insurance industry is reformed to some degree, that the health insurance plan that I have or that you have will stay the same?

Mr. BUTLER: I think it's very questionable as to what will happen. Indeed, in order to try to get costs down - I mean part of the equation here is how do we get these long run cost down? One strategy, of course, is to have a public plan out there which pays lower rates to people, which Medicare does, and has various restrictions on it and so on, but anyway is a bare bones operation, and then try to push people into it in some way, to try to get them to do that. Well, the fact is, if you're an employer and there's a very low cost public plan out there and you can make decisions about who's going - what kind of coverage you're going to be in, a lot of employers are going to start to say, well, if I can just sort of put my employees into that plan, I can really get my costs down. That, of course, then it means that a lot of people who are happy with coverage that they have today could easily end up finding things changing quite dramatically and they end up in a bare bones public plan. Indeed, estimates vary about how many employers would do that, but most recent estimates that we've seen from Lewin Group show that maybe as many as 80 to 85 million Americans might wake up, as it were, and discover their employers have basically decided that they should go into the exchange system and the public plan is going to be the option that they will actually end up in. So this change in the system is part of the equation that we've got to get right if were going to start to say to people, if you're happy with what you have, nothing's going to change. You cannot then simultaneously have a powerful public plan that is bare bones and low cost that employers then start moving their people into. And as I said before, I think a lot of this boils down in any case as to whether you can have a level playing field, fair competition and so on, when the Congress and the government is both setting the rules and designing one of the plans.

Prof. KRUGMAN: I think it's almost certain that if we look two or three years out, you or I, you know, the three of us who are all presumably covered by employer-based large organization systems, will be able to keep basically what we have right now. There isn't going to be any change. If we look 10 years out, nobody's going to able to keep the coverage they have. The very important thing in all of this is to understand that the system we now have is tottering towards extinction. Health insurance premiums have doubled over the last decade. They are now - a family insurance policy of employer-based is now - now costs about 30 percent of the earnings of the average worker in America. Take that forward another decade and it's just going to fall apart for very large numbers of people. So sure, if we look ahead to the year 2019 and ask what it's going to be like, a lot of people are not going to have the same kind of coverage they have now. The only question is whether they're going to have any form of coverage, decent coverage at all. The public option makes it more likely that they will.

GROSS: My guests are Paul Krugman, Nobel Prize-winning economist, Princeton professor and New York Times columnist; and Stuart Butler, vice president for domestic and economic policy studies at the conservative think tank, the Heritage Foundation. We'll talk more about the economics of health care reform after a break. This is FRESH AIR.

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GROSS: If you're just joining us, we're talking about the economics of health care reform. My guests are Stuart Butler, vice president of domestic and economic policy studies at the Heritage Foundation, and Paul Krugman, a Nobel Prize winning economist, Princeton professor and New York Times columnist. We're hearing a lot about how fee-for-service should be changed because a lot of doctors do procedures maybe the patient doesn't need but it's profitable for the doctor. So the idea is to, you know, cut back on or eliminate fee-for- service and have it more be a salaried position, where doctors are paid a salary so that there aren't financial incentives to do MRIs or extra colonoscopies or whatever. Now, I'd like to hear both of your opinions about whether you think - you're economists, you're not doctors. Do you think financially that this would actually be an effective way to reform the system?

Mr. BUTLER: Well, I think, you know, we're economists who know doctors and actually go to doctors, so I suppose in that sense we have some understanding of how doctors are. I think over the long run, and I suspect Paul would agree with me on this, that both as a business model and as a way of getting cost- effective medicine, the simple fee-for-service system is really almost the last system you would set up. You're right. It pays doctors to do more, to repeat tests, and so on. Some doctors do that to maximize their earnings, other doctors do it because maybe they can spend, they can order a test that might just increase the probability of getting the diagnosis a little bit more and they feel that they should do that for their patient. But this fee-for-service system, I think it's going to gradually evolve into a much team-based system. We can loosely call it managed care, but I think teams of doctors operating together and being paid in that way - now, whether they're on salary, which is true at some places like the Mayo and others, or whether it's a different kind of reimbursement system - the Geisinger system has a combination of salaries and really payments for good performance. They are all kinds of ways of doing this. But I think we do have to move towards a system where, when I as an individual get health care, I do it through an organized group, an organized system in some way that is making internal decisions. And I think ultimately my choice should be between those competing groups, competing to show good value for money to me, and I do that rather than individual doctors charging me fees and me going from one to the other. So I think moving in that moving in that direction is absolutely the right way to go. Moving towards teams of doctors, which is really where we are seeing the system moving.

Prof. KRUGMAN: You don't want to be too hard-line about this. I mean if you look at the world right now, France has a largely fee-for-service system that is - nonetheless delivers excellent care at much, much lower cost than the U.S. system. Canada is a fee-for-service system. It has its problems, but actually seems to deliver an overall level of care roughly comparable to that of the United States at little bit more than half the cost. So fee-for-service is not at this point an absolutely terrible useless system. But clearly their big disadvantages to fee-for-service that are growing over time. The direction of change in medical practice has been towards more use of technology, more kinds of things where it's all too easy for the personal financial motives of the physician to distort the nature of care. And, yeah, I think we're agreed that one way or another a generation from now there won't be a lot of fee-for- service medicine in America.

GROSS: Paul Krugman, in a column, I think a couple of months ago, you gave two pieces of advice to Congress. Don't trust the insurance industry and don't trust the insurance industry. When you look at the medical industrial complex, as you call it, you say they're trying to shape health care reform rather than block it, because they know it's going to happen, so they want to shape it. So when you look at the lobbies for various parts of the medical industry, what are you most concerned about?

Prof. KRUGMAN: Well, first of all, although I was pretty confident there, I'm not entirely sure they're going to get health reform, alright? It might fail, though I still think probably something will be passed this year. And what I think we have to worry about is that we have a deal that locks in the inefficiencies, that we have a system which does not have a public option, which gives very little ability to do cost saving. And you know, it's in some ways, I guess what we're concerned - we have a kind of role model, which has got both good and bad features, which is Massachusetts. Massachusetts passed a health reform a few years ago which in some ways is a dress rehearsal for what we're looking at in the national level. Does not have a public option but it does have the other stuff. It does have mandates, it does have subsidies. It's supposed to achieve universal coverage, though - and it's getting a significant part of the way there. It has no cost control. And it has no cost control because the insurance companies more or less made sure that it didn't. And as a result, it is turning out to be expensive. I still think it was worth doing because among other thinks the fact that it's running ahead of projected costs is now forcing Massachusetts to look very seriously at real measures to bring in costs, including trying to move away from fee-for-service medicine. But that's what I'm afraid of right now, that we'll get a national plan that is more expensive, less effective than it should be, because we're busy protecting the interests of the insurance industry.

GROSS: We're kind of out of time, but I would just like to squeeze this in. If what Congress passes, if indeed they pass anything, is basically a series of half-measures, is that still a good thing because it gets us a step closer to more meaningful reform? Or do you fear that half measures will be expensive and get us nowhere and be a dead end?

Mr. BUTLER: I think it depends on which half you get. If you get an avoidance of all the important things we have to do, the decisions we have to make, and you simply just increase the cost, then I think we will be in a worse situation in the future. If on the other hand they do take some steps down the right road and begin to make some important changes, I think it could be helpful.

Prof. KRUGMAN: I think, again, on the words I agree with Stuart. It does depend on which half. But look, I'm willing to accept a very, very imperfect health care reform because I think it will, first of all, it's just an outrage that we've these large numbers of Americans without insurance. And so anything that makes a big dent in that population of uninsured is important to do, even if it's not done in the ideal way. And I think if we do establish the idea of health care reform, the idea that we're going to cover everybody, that we're going to try to tackle costs, then over time we will gradually do it better. The important thing is to get, take a step along the way. The next step will be easier if we can step that first step.

GROSS: I want to thank you both very much for talking with us. Paul Krugman and Stuart Butler, thank you.

Prof. KRUGMAN: Thank you.

Mr. BUTLER: Thank you.

GROSS: Paul Krugman is a professor of economics at Princeton University, a New York Times columnist, and the winner of last year's Nobel Prize in economics. Stuart Butler is the vice president of Domestic and Economic Policy studies at the Heritage Foundation.

Originally broadcast, 7.28.09