Reforms to Avoid

Published August 1, 2007

This is the season for health insurance reform, and that’s dangerous. The odds of doing something bad are much higher than the chances of doing something good.

At the National Center for Policy Analysis, we are producing a handbook on state health reform. The final document will soon be ready. However, we don’t want to be like the FDA and deny people lifesaving remedies. So here is the Web address for the latest draft.

In the meantime, here are four things for policymakers to avoid.

Entitlement Creep

1. Do not turn a tax subsidy for health care into an entitlement.

The primary way the government encourages private insurance is through tax subsidies. Many reform proposals would completely change the nature of the subsidies; for example by creating a refundable tax credit. The risk is that the new tax subsidy could become an entitlement.

Medicare and Medicaid entitlements are already on a course to crowd out every other government program. We cannot survive creating more health care entitlements.

That means government’s commitment must be a defined contribution, not a defined benefit. Tax subsidies are going to grow roughly at the rate of growth of national income. Health care spending is growing at twice that rate. The new system of tax subsidies must also grow with national income, not with health care costs.

Coverage, Benefit Mandates

2. Avoid mandated insurance coverage and mandated benefits.

Proposals to require everyone to have health insurance increase the likelihood that the government subsidy will become an entitlement.

It makes no sense to mandate a benefit package if the cost of the package is going to grow at twice the rate of the subsidy. By keeping the subsidy restrained, you will force health plans to curtail costs somehow–with Health Savings Accounts, restricting payments to evidence-based medicine, health maintenance organizations, etc.

Pay-or-play is much better than a mandate. Since you will never be able to enforce the mandate anyway (and rigorous attempts at enforcement would cost far more than they are worth), let people choose whether to be insured or not. Under pay-or-play, if they choose to be insured, you give them a subsidy; if they choose not to be insured, you make them pay a tax penalty and put the unclaimed subsidy (or the tax penalty) into the safety net program.

Also, with pay-or-play you do not have to define a mandated benefit package, vulnerable to cost-increasing special interest measures.

Perverse Incentives

3. Don’t create perverse incentives for health plans.

Insurance pricing restrictions create perverse incentives. If people can switch plans annually at premiums that are unrelated to expected costs, the plans will seek out the healthy and avoid the sick. Once people are enrolled, the plans will over-provide to the healthy and under-provide to the sick.

A much better idea is to give plans an incentive to compete for the sick.

Crowding Out

4. Don’t encourage people to forgo private coverage by expanding public coverage.

There should be no expansion of Medicaid or the State Children’s Health Insurance Program in a way that encourages people to drop their private coverage in order to get free public coverage.

Instead, the incentives should work the other way. We should use the public money to encourage private insurance.

John Goodman ([email protected]) is president of the National Center for Policy Analysis in Dallas.

For more information …

“Does Public Insurance Crowd Out Private Insurance?” by David M. Cutler and Jonathan Gruber, National Bureau of Economic Research, April 1995,

“Crowd-Out Ten Years Later: Have Recent Public Insurance Expansions Crowded Out Private Health Insurance?” by Jonathan Gruber and Kosali Simon, National Bureau of Economic Research, January 2007,