The Weekly
Standard/ December 27, 2004
Bush's
Unheralded Health Care Agenda
It's less modest than you think
by merrill matthews*
President Bush has proposed what appears at first glance to be a
relatively modest agenda of health care reforms. But if passed by Congress in
its entirety, the administration's plan would fundamentally restructure the
health care system. It would turn upside down—actually, rightside up – almost
all of the current perverse economic incentives that plague the U.S. health
care system.
And that's why the president will get nothing but hand-wringing,
nay-saying, and eye-rolling from the liberals and elitists.
Make no mistake: The battle over health care reform is a battle of competing visions about markets, individual responsibility, and accountability. Can people make good, value-conscious decisions in the health care marketplace? Or must we all rely on someone—a bureaucrat, politician, academic, or clerk—to make health care decisions for us?
Will President Bush's ownership society extend to patients and the health care system, or will the nannies seek to undermine the president's plan and resume their drive toward government-run health care?
To understand the problems inherent in the U.S. health care system, you
must first understand that it is fraught with perverse incentives. Fix the
incentives and you will largely fix the system.
In a normal market, buyers and sellers enter voluntary
agreements that each believes make him better off. Sellers cater to
buyers—providing them with information, reasonable prices, package deals, and
emphasizing quality and service. Why? Because buyers control the money that
sellers want.
Not so in health care. In the vast majority of cases, patients – the
customers – don't control the money, their insurance does. As a result, health
care providers – doctors, hospitals, clinics, etc.—don't know who their
"customers" are. Are they the patients who use the service or the
insurers, employers, or government programs that pay for the service? In short,
the normal buyer and seller roles that make markets work are dysfunctional in
the health care system, and no one is very happy.
The system wasn't always so convoluted. But years of ever-increasing
insulation from the cost of health care and health insurance have brought us to
this point.
It all started in 1943, when the IRS allowed businesses to provide
health insurance as a tax-free benefit to employees. Employers were looking for
a way to attract good workers during wartime while operating under
government-imposed wage and price controls.
The growth of employer-provided health insurance after World War II
insulated workers from the cost of both health care and health insurance. As a
result, most workers have no idea how much either costs. Because someone else
is paying the bill, workers want access to virtually any procedure or product
available. And because employers pay for most or all of the cost of coverage,
workers (who are actually paying the cost of coverage in the form of lower
wages) want the most comprehensive and expensive policies.
The result is a health care entitlement mentality in the United States
such that the majority of Americans seem to think they should be able to walk into
any hospital, doctor's office, or pharmacy, get whatever they want or need, and
pass the bill along to someone else.
Consider the four-day strike last spring by the Communications Workers
of America (CWA) against SBC Communications, Inc. One of the primary issues was
health care benefits. Mercer Human Resource Consulting recently reported that
the average per employee cost of health care rose to $6,679 in 2004.
How much do CWA workers pay in monthly premiums at SBC? Zero. The
company covers the entire cost of the premium for CWA workers and their
families, and it had not passed on any of the double-digit health care cost
increases over the several years preceding the strike.
So in contract negotiations, the company proposed to increase the
employees' copayments from an average of.about $35 a month to about $70 a
month. Even though the average CWA worker at SBC Communications was earning
more than $60,000 a year with overtime, the union would not tolerate the extra
$35 a month.
Economics teaches that when people are insulated from the cost of
something, they will use more of it. In every other sector of the economy,
people bear the marginal costs of their decisions; in health care, a third
party (the insurer, employer, or government) usually bears the marginal costs.
That, in a nutshell, is why health care costs are growing much faster than
inflation.
As health insurance premiums rise to cover exploding health care costs,
many employers and individuals drop their coverage, especially in economic
downturns. As a result, the number of uninsured grows.
As the number of uninsured rises, politicians, with the help of the media, see a "crisis" that must be fixed. Ironically, the fixes have almost always made matters worse, because so many politicians think the solution is to further insulate people from the cost of health care.
There is only one way to fix this system: Change the economic
incentives. That is what the Bush plan does.
President Bush has identified six areas to be reformed. Each proposal is
a relatively modest legislative change, but taken together they will
fundamentally restructure the incentives in the system.
(1) A Tax Credit for the Uninsured – Nearly 90 percent of the population under 65 with private health insurance get it from an employer. Workers like this arrangement because the money employers spend on health insurance is tax-free to the employees. In addition, the self-employed now get a 100 percent tax deduction for what they spend on health insurance.
The journal Health Affairs estimates that, all together, the
government "spends" – that is, forgoes—about $188 billion each year
on those tax breaks. However, workers whose employers do not provide health
coverage get no tax break.
To level this playing field, President Bush has proposed a
means-tested, refundable tax credit of $1,000 per adult and $500 per child, for
a maximum of $3,000 per household, for anyone who buys health insurance and
does not get a tax break on health insurance through his employer. The tax
credit effectively lowers the cost of health insurance, making it more
affordable and reducing the number of uninsured.
Critics of a capped tax credit complain that it is not enough money to
help families buy a comprehensive health insurance policy, which might cost
$10,000 a year. But that is exactly the point. Most families would buy a
less-expensive, high-deductible policy – which is what the self-employed
usually buy. Such a policy would cover major health care expenses, while
leaving smaller, routine expenses to be paid out of pocket or out of a
tax-deferred account such as a Health Savings Account.
This limited tax credit gets the incentives right. Families would begin
to use health insurance the way we use most other kinds of insurance: to cover
large, unforeseen, catastrophic costs. Reinstalling this notion in the public
mind would go a long way toward countering the country's health care
entitlement mentality.
(2) Health Savings Accounts –
President Bush has already opened the door for the expansion of consumer-driven
health care by championing the new, improved Health Savings Accounts in the
Medicare bill that took effect in January 2004. These HSAs are tax-free,
personal accounts that are used for everyday health care expenditures and must
be combined with high-deductible health insurance coverage. They replace the
older, restricted Medical Savings Accounts enacted in 1996. Health Savings
Accounts put health care dollars back in the hands of patients. With the
consumers controlling the money and the decisions, health care providers are
more alert to patients' needs.
Patients, meanwhile, get to keep any money in their HSAs that they don't
spend on medical bills, and thus have a reason to be value-conscious shoppers
for health care. Golden Rule, an insurance company that made a point of
promoting the old MSAs and has hit the ground running with HSAs, announced
recently that its customers had saved more than $110 million in their health
accounts, and that the number of applications for such accounts was up 133
percent since the new law took effect. With the administration promoting HSAs
for federal employees (see www.opm.gov/hsa/), the new accounts may take
off.
Now President Bush wants to expand on that reform by allowing people to get a full, above-the-line tax deduction for the cost of a high-deductible health insurance policy linked to an HSA.
(3) Tort Reform
– Liability reform may top the president's health care priority list, in part
because it would have such a far-reaching impact across
the economy. The president's primary proposal has been to cap noneconomic
damages, which would deprive the trial bar of the muhibillion-dollar revenue
stream it uses to fund liberal politicians who have protected trial lawyers
from tort reform.
California has had such legislation in place for 30 years, and it Js
well known that trial lawyers seeking to file frivolous lawsuits or game the
system have to look elsewhere. Texas passed a similar reform a year ago, and
the Dallas Morning News recently reported that "the rate of
malpractice filings has decreased at least 80 percent in most major Texas
counties."
(4) Buying Health Insurance Across State
Lines – If an individual living in New Jersey buys health
coverage for himself, his average annual premium is about $4,044, according to
a recent survey by eHealthlnsurance, an Internet health insurance site. That's
the highest health insurance premium in the country, with neighboring New York
running a close second at $3,996.
The average annual premium in Iowa and Wyoming, however, is only $1,188,
the lowest in the country, and the average for the nation as a whole is $1,812.
So why is health insurance roughly 3.5 times more expensive in New
Jersey and New York than in Iowa and Wyoming? A lot of the difference has to do
with regulations imposed by the states. To address this problem, the president
proposes giving people the freedom to shop across state lines to find the best
rates for their health insurance needs.
Legislation to that effect has been introduced by Rep. John Shadegg, a
Republican from Arizona. It would increase competition and vastly expand consumers'
health insurance options. People are allowed to buy virtually anything over the
Internet. Why not health insurance?
(5) A Tax Break for Long-Term Care Insurance – State budgets
are strained by Medicaid costs, and one of the reasons is that so many middle-
and upper-middle-income retirees who need to go to a nursing home "spend
down" their assets or hide them outright so as to qualify for Medicaid.
To encourage more people to protect themselves from nursing home costs,
the president supports allowing people to get a tax break for buying long-term
care insurance. One way to do that is with an above-the-line deduction. In
addition, Rep. Lee Terry, a Nebraska Republican, has
introduced legislation that would allow people to pay their long-term care
premiums with tax-deferred funds from their IRA or 40l(k) accounts. Either way,
providing the tax incentives up front so that people buy the coverage will save
both the federal and state governments billions of dollars in the future.
(6)
Association Health Plans — Millions of Americans buy health insurance through
some association with which they are affiliated. The Bush proposal would put
insurance sold through associations under federal oversight. As a result,
states could not control the policies and practices of the associations or
mandate who and what insurance covered. States would, however, monitor
financial solvency and enforce consumer protections for insurers selling
through associations. The legislation has been around for several sessions but
has been blocked in the Senate because of some controversial provisions that
would let associations self-insure – act as their own insurer – just as most large
companies do.
This legislation does, however, recognize an important trend: The workforce is becoming more mobile as we move to an information economy. That trend may eventually undermine the employer-based health care system. As a result, Americans may increasingly look for other ways to join an insurance pool, such as a trade association or an affinity group like the National Rifle Association, the Sierra Club, or a church.
If President Bush does nothing more than reverse the decades-long trend of thinking that health insurance .should pay for every health care need, he will have achieved a huge victory.
As it is currently structured, the U.S. health care system is struggling
because the economic incentives are distorted. Liberals think that is just fine
because they believe health care cannot and should not be part of a market
system.
The administration is out to prove them wrong. Each of these proposals
seeks to alter the current incentives. If the president is successful, we will
see dramatic changes in the health care system.
If he isn't, the health insurance market will continue
to deteriorate, maybe to the point that the majority of Americans will finally
throw up their hands and accept a government-run system like Canada's. And the
only question then will be: Where will Canadians go to get the quality health
care they need?
Why is health insurance roughly 3,5 times more expensive in New Jersey
and New York than in Iowa and Wyoming?
* Merrill Matthews is director of the Council for Affordable Health Insurance and a resident scholar with the Institute for Policy Innovation.