Market-based Health Care Reform Can Spur the Economy

Published May 1, 2003

The federal government released data in January showing the United States spent $1.4 trillion–$5,035 per capita–on health care in 2001. This year, spending could increase to nearly $1.7 trillion. Yet all around us, the health care system is falling into chaos.

Headlines Tell the Story

Physicians have staged a walkout in West Virginia over skyrocketing malpractice insurance premiums. Doctors are refusing to see new Medicare patients, and some are opting out of the program altogether. And the number of uninsured Americans continues to rise, prompted in part by employers dropping coverage and states cutting back on their Medicaid programs.

At the same time, the Bush administration and Congress are looking for ways to stoke the fires of a lukewarm economy.

These problems are not unrelated. Done correctly, health care reform can simultaneously promote economic growth and improve our health care system. Consider the HMO revolution of a decade ago.

HMOs didn’t provide the level of care they promised, but they did restrain costs, which gave an important boost to the economy during the 1990s. With managed care now on the decline, the solution lies in finding new ways to eliminate waste and redundancy from the financing of health benefits and promote the efficient use of health care dollars among individuals and their families.

Reform Begins with Seniors

Given their influence, large and growing, over the country’s health care system and its cost, senior citizens are the audience that will benefit first from reform.

Currently, many seniors must obtain a second health insurance plan if they want coverage for prescription drugs and other benefits not covered by Medicare. Some are fortunate enough to have supplemental coverage from a former employer, and this has been an important source of drug coverage for many seniors. Prescription drugs account for roughly half of employers’ health expenses for Medicare retirees.

Seniors without this option must buy their own “Medigap” policy if they want supplemental coverage. But Medigap plans cost thousands of dollars and provide little or no coverage for prescription drugs.

Thus, a key aim of Medicare reform should be enabling beneficiaries to purchase a single private health insurance plan for all their needs. If reform can achieve that goal, employer-sponsored Medicare supplement plans and Medigap plans would become obsolete.

For employers, the elimination of Medicare supplement plans would free up resources for hiring and capital expenditures. For seniors with Medigap, the ability to purchase a single Medicare plan would be like a tax cut. Some of the thousands of dollars previously spent on Medigap premiums could be put toward the cost of a single comprehensive plan, with the remaining funds available for other savings and consumption.

Expand MSAs

Another long-overdue reform is the expansion of medical savings accounts (MSAs). When the MSA pilot program was first discussed in the mid-1990s, opponents proclaimed MSAs would destroy the U.S. health care system. Not only has the system survived, but MSAs have encouraged a very healthy trend away from managed care and toward consumer-driven health plans. Nevertheless, tax-free Archer MSAs remain a limited demonstration project set to expire on December 31, 2003.

Before that deadline is reached, Congress should make MSAs available to all citizens on a permanent basis. MSAs empower patients to become selective, cost-conscious consumers in the health care marketplace. The cost-conscious shopping encouraged by MSAs will slow the growth of health care spending, making funds available for other purposes, benefitting the economy by helping to keep interest rates low and investment rates high.

Reforms for the Uninsured

Tax credits for health insurance provide the most effective way to help those who have been left out of the employment-based health insurance system. The uninsured are mostly low-income employees and those working for small businesses. Because tax credits are portable, they promote economic growth by putting an end to “job lock” and encouraging entrepreneurship. With tax credits available for their own purchase of health insurance, workers who wish to start their own business or join a small start-up firm will no longer be dissuaded from doing so by the threat of losing coverage.

Key Reform for Providers

Tort reform for medical malpractice insurance is essential to bringing down the cost of doing business for physicians. California’s MICRA law provides a model for the nation. It caps non-economic damage awards for pain and suffering at $250,000, and places limits on attorney’s fees.

Since MICRA’s passage, malpractice insurance premiums in California have gone from among the highest in the nation to among the lowest. This has helped keep health insurance premiums in California below the national average.

Dangerous Waters Ahead

While the benefits of real health care reform would be many, the pursuit of reform is not without risk. Lawmakers must guard against proposals that rely on massive new government spending. Such spending diverts funds from the private sector that would otherwise be used towards savings or consumption–the real engines of economic growth. Sound health care reform need not be costly, and proposals that are costly almost invariably reflect bad health care policy.

There is no conflict between good health care policy and sound economic policy. Federal lawmakers should recognize this and act accordingly.

Chris Middleton is the senior health and tax policy analyst for the Center For Entrepreneurship at the Pacific Research Institute in San Francisco. His email address is [email protected].