An Agenda for the 105th Congress

Commentary by John C Goodman

Three major health care crises are developing:

A funding crisis, an insurance crisis and a quality crisis. All three require fundamental changes in federal policy.

Funding Crisis. Until recently, the American health care system paid for indigent care through a system of cost shifting. Some patients were overcharged so that others could be undercharged, or given free care. Today, with 40% of the hospital beds empty, the hospital marketplace is becoming fiercely competitive. So is the market for physician services. Such competition is eliminating the ability to fund care for some by overcharging others.

Insurance Crisis. The number of uninsured Americans has been steadily rising over the past decade and now totals more than 40 million people, nearly 10 million of which are children. One reason for the rise is federal tax policy. Each year the federal government "spends" about $100 billion in subsidies for private health insurance by excluding employer-paid premiums from the employee's taxable income. We get what we subsidize. About 90 percent of all citizens with private health insurance get it through an employer, and those who do not have the opportunity to obtain tax-subsidized insurance often go without. Another reason for the problem: federal and state policies are encouraging people to go without health insurance when they are healthy by making it increasingly easy for people to obtain health insurance after they get sick.

Quality Crisis. Why are there so many stories about HMOs abusing sick people? One reason is that HMOs often compete in artificial markets, in which they face perverse incentives. Many employees (and, increasingly, many Medicare and Medicaid enrollees) have the opportunity to choose among several plans. But the premium the chosen plan receives is the same, regardless of the applicant's health status. This gives HMOs an incentive to attract the healthy and avoid the sick. They do that by overproviding services to the healthy and underproviding to the sick.

Solution. We could go a long way toward averting these three crises by adopting a fairly simple solution: a system of health insurance tax credits for people who are not insured by employers or by government. The tax credits would be refundable, so that people could file a tax return and receive a refund even if they owe no taxes. The credit would be larger, the lower a person's income, in a manner similar to the current Earned Income Tax Credit (EITC). In fact, EITC funds could be used for this purpose. The tax credit would be used only for the purchase of insurance and deposits to Medical Savings Accounts (MSAs) and the check could go directly to an insurer rather than to the "taxpayer." Unclaimed tax credit funds (for those who decide to remain uninsured) would be sent to local communities as part of a safety net for indigent health care.

Under this proposal, everyone would be insured. Those without private insurance would be covered by a public system. Local communities would have a guaranteed source of income to fund indigent care - one which would grow or shrink with changes in the number of uninsured. And people in such programs as Medicaid managed care would receive reasonable help from government if they chose private, fee-for-service insurance and MSAs instead.