A Plan for Real Health Reform

Published May 1, 2008

Excerpted from The Handbook on State Health Care Reform, by John C. Goodman, Michael Bond, Devon M. Herrick, and Pamela Villarreal. Part 3.

Five reforms could solve the problems of cost, quality, and access in health care.

Care, Not Insurance

The conventional wisdom among health experts across the ideological spectrum is that people need health insurance to get good health care. But among people who seek care (actually see a doctor), RAND researchers found virtually no difference in the quality of care received by the insured and uninsured.

In addition, innumerable studies have claimed the uninsured get less health care than the insured. The most recent and well-known is an Institute of Medicine (IOM) study that claimed 18,000 people die every year because they do not have health insurance. However, the IOM study failed to make the crucial distinction between people who seek care and those who do not.

Of the 47 million people who are uninsured at any one time, more than one-in-four–or about 14 million people–are eligible for free health care through Medicaid or SCHIP. Their unwillingness to seek insurance is not necessarily evidence of negligence on their part, but evidence that they see no value in enrollment. All of this suggests what matters most (especially to low-income families) is access to care, not insurance.

One reason households forgo public health insurance is discontinuous coverage. Two-thirds of the children in the United States were eligible (based on family income) for Medicaid or SCHIP at some point from 1996 to 2000. Yet public coverage is available only sporadically as family income rises and falls, leading to significant discontinuities in coverage.

Instead of attempting to enroll all the uninsured in state insurance programs, a better strategy is income support. Under this approach, the state offers a subsidy to be applied to private insurance that adjusts with fluctuations in family income.

Entrepreneurship, Not Bureaucracy

Health care should be provided in a competitive marketplace. In the United States, third-party payers pay for some services and do not pay for others. For the services that insurers reimburse, large, impersonal bureaucracies set the prices.

A consequence of this system is that doctors and patients still interact in the same way they did in the horse-and-buggy era. Although medical science has progressed by leaps and bounds, the doctor-patient relationship has not. Doctors rarely consult with their patients by telephone or e-mail, and no more than one in five physicians or one in four hospitals keep electronic records.

At last count, Medicare pays for about 7,500 specific tasks, but not telephone consultations, e-mail consultations, or electronic record-keeping. In general, when third parties pay by task there will always be incentives for physicians to perform only those tasks for which they are paid and avoid those for which there is no payment.

By contrast, in those health care sectors where third-party payment is rare or nonexistent, the market is vibrant, entrepreneurial, and competitive, and tends to exhibit three characteristics.

First, innovations in these markets invariably originate on the supply side. As in any normal market, new ideas arise from people who provide patient services, not from those who pay the bills. Second, providers are free to repackage and reprice their services in order to meet patient needs. Finally, providers compete for patients based on price and quality.

A notable example is cosmetic surgery. Unlike most other forms of surgery, patients in this market can typically find and compare package prices covering all services in advance. Yet, despite tremendous growth and technological change, the real price of cosmetic surgery has declined over the past 15 years. Lasik surgery is another example. Here too, patients can find package prices and can compare prices. Over the past decade the real price has fallen by 30 percent.

Finally, retail walk-in clinics are small clinics located in large retail stores or shopping centers. No appointment is necessary, and most visits take only 15 minutes. MinuteClinics post their prices, which often are about half those of a traditional medical practice.

Tailored to Needs

Despite what current health care policy assumes, the real purpose of health insurance is not to provide access to health care but to protect assets from unforeseen medical costs. Since the assets that need protection differ from family to family, the nature and extent of appropriate insurance will also differ.

Most middle-class families, for example, might opt for catastrophic insurance because they can easily afford the cost of primary care but might be priced out of the market if they had to pay for expensive care from their own resources. Low-income families, by contrast, may have difficulty affording even primary care physician visits. Sadly, the current public health care system is not designed to allow these insurance choices.

One solution is to establish health savings accounts (HSAs) that allow patients to manage their health care dollars and purchase medical care in the marketplace just as they purchase other goods and services. Already more than half the states have set up cash accounts for disabled Medicaid enrollees to manage their own health care dollars and directly purchase needed services.

Personal, Portable Insurance

One of the strange features of our health care system is that most health insurance is not guaranteed to last any longer than 12 months. In an ideal system health insurance would travel with employees from job to job, and renewal rates would be independent of health status.

Such a system could be implemented by giving employees ownership over their health insurance. Employers could pay some or all of the premium, with payroll deductions for the balance, and insurance would be guaranteed renewable indefinitely into the future.

Unfortunately, many states have tried to remedy the absence of portable and renewable insurance with unwise legislation–including laws making it increasingly easy for people to obtain insurance after they get sick. This perversely encourages people to remain uninsured while healthy, confident they will always be able to obtain insurance once they get sick.

Instead of mandating health insurance companies enroll sick people, governments should empower individuals to buy their own insurance and free the insurance market to compete for business. People cannot make rational choices about risk if they do not face real market prices. For that reason, risk should be freely priced in the marketplace, with government intervening to help specific individuals only in special cases.

Private, Not Taxpayer-Funded

The current public health care system offers a vast array of free services (often of uneven quality) to indigent patients. By one estimate, each person who is uninsured for a significant period of time receives an average of $1,500 in free medical care annually, or $6,000 for a family of four.

However, two big problems arise with this system. It entices families to discontinue private insurance for seemingly free public insurance, and it penalizes families that do not buy health insurance through their employer.

Private insurance should be at least as attractive as health care provided at taxpayer expense.

A better approach would be to offer every individual a uniform, fixed-dollar subsidy of $1,500. If the individual obtained private insurance, the subsidy would be realized in the form of a tax credit. The credit would be refundable, so that it would be available even to those with no tax liability.

An individual choosing to be uninsured would pay extra taxes for a subsidy to be sent to the safety net agency in the local community. For those who chose to move from being uninsured to insured, the subsidy they would receive to buy their own health insurance could be funded by the reduction in expected free care that person would have consumed if uninsured.

Better Incentives

As the proposal above demonstrates, giving consumers more control over public health care dollars would provide individuals with incentives to buy private coverage. Unfortunately, public policy overwhelmingly encourages people to drop private insurance and enroll in public programs instead.

Economists David Cutler and Jonathan Gruber found that for every additional dollar spent on Medicaid in the early 1990s, private-sector health care spending was reduced by 50 cents to 75 cents, on the average. If government is spending $1,500 a year per person enrolled in Medicaid, it ought to be willing to spend an identical sum on private insurance instead.

After all, this forces health insurance companies to compete for buyers; and where there is greater competition and freer markets, lower prices usually follow.

John C. Goodman ([email protected]) is president of the National Center for Policy Analysis. His health care blog is at http://www.john-goodman-blog.com/.

For more information …

For more information about the State Health Care Handbook, see http://www.ncpa.org/pub/special/20071112-sp.html.

To read the Handbook online, see http://www.ncpa.org/email/State_HC_Reform_6-8-07.pdf.