The Right Prescription

Health Reform: Where to Go From Here

Republicans and conservatives now have their first chance to be heard.

By 1.27.10

The Scott Brown political earthquake has had more far-reaching implications than anyone anticipated. With the public admission of Nancy Pelosi that she does not have the votes in the House to pass the Senate health bill, President Obama's government takeover of health care appears to have stalled out, at least for now.

What this means is that Republicans and conservatives now have the first real opportunity to be heard on alternative health reform ideas. To prevent the return of socialized medicine to center stage, we should move aggressively with reforms that will solve what the public is really concerned about.

Cover the Uninsured

The well-kept secret of health policy over the past year is that the uninsured can be covered for little additional net cost, without the government takeover of health care, rationing, new health care bureaucracies, or any of the other central components of Obamacare.

No one wants to see anyone suffer or worse because they can't get essential health care. The lack of a clear safety net for the uninsured is what gives Democrats the political lift to keep coming back for socialized medicine. Reform now should focus on the modest changes necessary to establish a true safety net that will ensure that no one will be denied essential health care. Only that will permanently protect the health care of the American people from government takeover and control.

Real health reform should begin with Medicaid, which already spends over $400 billion a year providing substandard health care coverage for 50 million poor Americans. Congress should transform Medicaid to provide assistance to purchase private health insurance for all those who otherwise could not afford coverage, ideally with health insurance vouchers. This one step would enormously benefit the poor already on Medicaid. The program today pays doctors and hospitals only 60% of costs for their health care services for the poor. As a result, close to half of all doctors and hospitals won't take Medicaid patients. This is already a form of rationing, as Medicaid patients find obtaining health care increasingly difficult, and studies show they suffer worse health outcomes as a result. Health insurance vouchers would free the poor from this Medicaid ghetto, enabling them to obtain the same health care as the middle class, because they would be able to buy the same health insurance in the market.

Ideally this would be done by reforming Medicaid financing to provide the federal assistance to the states for the program through finite block grants, which do not vary by matching increased state Medicaid spending as under the current system. With finite block grants, states that innovate to reduce costs can keep the savings. States that operate programs with continued runaway costs would pay those additional costs themselves. Such reforms worked spectacularly to stop the runaway costs of the old AFDC program when Congress adopted welfare reform in 1996.

Give states the incentive to embrace such reform with a block grant formula that would provide states with increased funding sufficient to provide assistance to all those who truly cannot afford health insurance, counting continued state Medicaid funding, along with broad flexibility to redesign their Medicaid programs. The voters of each state can then decide how much assistance for the purchase of health insurance to provide each family at different income levels. This would rightly vary with the different income and cost levels of each state.

This would not cost much because only about 12 million Americans arguably cannot afford health insurance without some public assistance. Out of the 47 million uninsured we keep hearing about, 9.7 million are already eligible for current government programs like Medicaid or SCHIP but haven't signed up. Another 6 million are eligible for employer sponsored insurance but have not signed up for that either. Another 9 million are in families earning more than $75,000 per year. Another 10.2 million are immigrants, legal or illegal, and not U.S. citizens.

Just give the assistance necessary, counting what they can reasonably pay based on their income, to that 12 million to buy private health insurance. That is the key to avoiding a multitrillion-dollar new entitlement involving government rationing, which would trash the best health care in the world the American people now enjoy. With broader welfare reforms involving positive incentives, we could end up with less total government spending than today. 

Completing the Safety Net

But a second step is necessary as well to ensure a complete safety net. Federal funding should also be provided to help each state set up an uninsurable risk pool. Those uninsured who become too sick to purchase health insurance in the market for the first time, perhaps because they have contracted cancer or heart disease, for example, would be assured of guaranteed coverage through the risk pool. They would be charged a premium for this coverage based on their ability to pay, ensuring that they will not be asked to pay more than they could afford. Federal and state funding would cover remaining costs.

Such risk pools already exist in over 30 states, and for the most part they work well at relatively little cost to the taxpayers because few people actually become truly uninsurable. This works far better than forcing insurers to cover everyone regardless of pre-existing conditions, or regulation such as guaranteed issue (forcing insurers to cover everyone who applies regardless of health condition) or community rating (forcing insurers to charge the same or nearly the same to all regardless of health condition). Such regulation has been proven beyond dispute to cause health insurance premiums to soar. That is because it is like requiring insurers to provide fire insurance for houses that are already on fire. With the above reforms, those cost increases are completely avoided, while ensuring that everyone has someplace to go to get essential coverage and care.

The law already provides that insurers cannot cut off already existing policyholders, or impose discriminatory rate increases, because they become sick while covered. That would be like allowing fire insurers to cut off coverage for houses once they catch on fire. If this law needs to be modernized, it should be.

With these reforms, those who have insurance can keep it, those who can't afford it are given help to buy it, and those who nevertheless remain uninsured and then become too sick to buy it have a back up safety net in the risk pools. Notice that this completely solves the problem of the uninsured without any individual or employer mandate, which are unnecessary gateways to enormous trouble. Once the government adopts such mandates, it is inexorably led down the path to socialized medicine.

Controlling Costs

A few, simple, additional reforms would help greatly to reduce health costs as well. Insurers should be allowed to sell health policies nationwide across state lines, subject to the regulation of their home states. This would reduce costs through increased competition, as well as greatly expand consumer choice.

Medical malpractice reform would also reduce costs. Non-economic damages, such as compensation for pain and suffering, should be sharply limited. Punitive damages should apply only in criminal proceedings, not in civil trials. Traditional tort standards for medical liability should be strictly enforced. Doctors and hospitals should be responsible only for damages for which they were the proximate cause.

Health Savings Accounts (HSAs) involve health insurance with high deductibles in the range of $2,000 to $6,000 per year, which reduces the cost of such insurance by 25% to 40%. These cost savings are kept in the HSA to pay health expenses below the deductible, growing beyond the deductible amount in a year or so. This gives patients incentives to control costs, as they keep unspent funds in their accounts for future uses, such as health care, retirement income, or others. With this new patient interest in controlling costs, which they don't have with traditional health insurance that pays for almost everything, doctors and hospitals would increasingly compete to control costs in serving patients.

The American Academy of Actuaries released a report last year on experience with consumer driven health care plans, such as HSAs or the quite similar Health Reimbursement Arrangements (HRAs). It showed that these are the only plans that are controlling and even reducing health care costs, and that patients with such coverage are using more chronic and preventive care. That's why employers and health insurers are increasingly turning to these products.

Greg Scandlen provides more detail in a new study from the Heartland Institute, "Ten Ways Consumer-Driven Health Care Is a Proven Success." He reports that experience with HSAs and HRAs shows:

Once people have control of their own money and are able to make their own choices, they suddenly become very interested in seeking out information about costs and quality. They are more likely to listen to their doctor and look for ways to lower their own costs. They are more likely to change their lifestyles because it is their money on the line, not an insurance company's.

He adds that those covered with these plans choose lower cost health options, sharply reduce visits to hospital emergency rooms, and are more likely to participate in wellness programs and to use preventative services.

Scandlen further reports the powerful effect of the incentives in such plans in slashing the growth of costs, saying:

The Mercer Company found that the annual rate of increase for consumer-driven health plans was about half that for PPOs and HMOs. Wellpoint looked at the experience of 8,000 of its group accounts in 2008, and found that PPO and HMO rates rose between 7 percent and 10 percent from the previous year while rates for its consumer-driven plans actually dropped from 2007 to 2008….[S]imilar programs offered by the Postal Workers Union and the Government Employees Health Association had no increase in premiums for four years running.

Finally, Scandlen explains that these plans provide patients with more power and control over their own health care, saying:

Traditional health insurance means the insurance company picks and chooses what providers it will recognize. These providers may be very good for the insurance company, by accepting lower fees, but not so good for the patient. With a consumer-driven plan, and especially with an HSA, patients may go to any health provider they choose so long as the provider is duly licensed and providing a service recognized as a health care expense by the IRS.

Federal and state governments should consequently promote such HSAs as much as possible. HSA options should be allowed for the above Medicaid vouchers. Seniors should be allowed an HSA option in Medicare Advantage. And consumers should be allowed to contribute at least as much to their HSA savings account each year as the deductible on their health insurance.

The Medicaid vouchers discussed above would also reduce the cost of health insurance by transferring Medicaid patients to the private insurance market, ending the cost-shifting to private insurance that currently results from the steep underpayment of doctors and hospitals under Medicaid. In other words, you will see your health insurance premiums go down under such reform because part of what you are paying today is being used to cover the services provided to Medicaid patients, which the government is not paying for despite its promises.

No Rationing

Republicans should move quickly to join together behind this common sense reform package, and communicate it to the public. They should aggressively seek to join with moderate Democrats who want to solve problems rather than promote government power. Conservative and grassroots activists should support such Republicans and Democrats in truly bipartisan collaboration, and help to communicate the message of real, constructive reform.

But Republicans and these new Democrat reformers must stay away from any reform component of any kind providing for health care rationing. These include fixed health care budgets, accountable care organizations, pay for performance, comparative effectiveness dictates, or "cost effectiveness" regulations, among others. This was the main source of grassroots revolt over health reform, and any new reform proposals will be closely monitored by grassroots watchdogs to raise a new angry revolt if they continue to be included. Republicans in particular are vulnerable to third party challengers if they cross the grassroots over this.

Instead, government policy should seek to maximize incentives for investment to maintain the most advanced, cutting edge, high-tech health care system in the world. Americans rightly want access to the latest possible miracle cure drugs and medical technology. Policymakers should tend carefully to maximizing incentives for health care innovation and breakthroughs, taking maximum advantage of rapidly advancing modern medical science. This is a central component of the high standard of living Americans expect, and demand. 

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About the Author

Peter Ferrara is a Senior Fellow for the Heartland Institute, and Senior Policy Advisor on Entitlement Reform and Budget Policy for the National Tax Limitation Committee. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General under President George H.W. Bush.