NCPA Commentaries by John C Goodman

Dr. John C. Goodman, President and founder of the NCPA, is known as the father of Medical Savings Accounts and was dubbed by National Journal as "A winner of the devolution derby." He is an expert on tax, welfare, Social Security and health care reform. Dr. Goodman has testified before Congressional committees and regularly briefs member of Congress on these issues.

  • Jul 01, 2008

    Health Insurance an Irrational World, Thanks to Government

    In a rational world, deductibles and copayments serve an economic purpose.

    In the health insurance market, however, those principles are increasingly being turned upside down as a result of government interference and providers' attempts to cope with it.

    Click to read more about the irrational world of health insurance.

  • Oct 16, 2007

    Will The Democrats’ Plans For Universal Healthcare Actually Reduce America’s Soaring Medical Bill?

    America's health care system has three fundamental problems: cost, quality and access.  Why do we have these problems?  What do the Democratic presidential candidates propose to do about them?

    Health care spending per capita is growing at twice the rate of growth of national income.  If that trend continues, health care will crowd out every other form of consumption by the time today's college students retire.  The reason for this dilemma is that patients are rarely forced to choose between health care and other uses of money.  No one is ever asked to decide whether one more knee replacement or one more MRI scan is worth the money it costs.  No one ever has to decide whether it is worthwhile to spend one-third of Medicare's budget on patients who are in the last year of life.

  • Sep 18, 2007

    Hillary Offers Everything but the Kitchen Sink

    Thirty years ago Michael Dukakis campaigned for president with the boast, "I have insured everybody in Massachusetts." Of course he hadn't, and three decades later, everybody in Massachusetts is still not insured. Along the way there have been many other plans to create "universal coverage." They haven't worked either.

  • Jul 27, 2007

    Health Care for Children

    The state children's health insurance program (SCHIP) was originally a Republican program to provide health insurance to children in near-poor families who did not qualify for Medicaid. Democrats now want to expand SCHIP to children of the middle class. Their efforts to do so are rightly being resisted by the White House, but Senate Finance Committee Republicans have already caved on an unwise compromise - agreeing to raise the eligibility to 300% of the poverty level ($62,000), up from the current 200%. House Democrats will now see if they can get the GOP to cave some more. House Democrats want to push coverage to 400% percent ($83,000 annual income).

    On the surface, congressional Democrats appear to be rescuing children from the scourge of uninsurance. The reality is quite different. If they get their way, millions of children will have less access to health care than they do today, and the same will surprisingly be true for many low-income seniors. On top of all this, Democrats would also impose highly regressive taxes.

    Studies by MIT economist Jonathan Gruber show that public insurance substitutes for private insurance and the crowd-out rate is high. In general, for every extra dollar spent on Medicaid, private insurance contracts by 50 cents to 75 cents. For SCHIP, depending on how it is implemented, private insurance could contract by about 60 cents.

    These findings make sense. Why pay for something if the government offers it for free? Under congressional proposals to expand SCHIP, the crowd out would likely be much worse. The reason: almost all the newly eligible beneficiaries already have insurance.

    Yet almost eight of every 10 children whose parents earn from 200%-300% more than the poverty level already have private health-care coverage, according to the Congressional Budget Office (CBO). At incomes between 300% and 400% more than poverty, nine of every 10 children are already insured.

    What about the eight to nine million children currently uninsured? Nearly 75% of them are already eligible for Medicaid or SCHIP, according to the CBO. So the main result of the Democrats' proposal to expand SCHIP will be to shift middle-class children from private to public plans.

    Why is that bad? One reason is that most SCHIP programs pay doctors at Medicaid rates-rates so low that Medicaid patients are having increasing difficulty getting access to health care. Anecdotal evidence suggests that U.S. Medicaid patients already must wait as long for specialist care and hospital surgery as in Canada.

    Many doctors won't see Medicaid patients. Among those that do, many will not accept new patients. As a result, children who lose private coverage and enroll in SCHIP are likely to get less care, not more.

    There is also the issue of who exactly will be covered. Republicans want to restrict SCHIP to children. The Democrats want adults covered as well. Even under the current system, children's health insurance is increasingly a ruse to cover adults. Minnesota spends 61% of SCHIP funds on adults. Wisconsin spends 75%.

    Seniors will suffer from SCHIP expansion too. When millions shift from private to public coverage, not much happens to the overall rate of uninsurance. But the government's cost soars. Where's the money to come from? One idea popular with some house Democrats is to reduce federal payments to Medicare Advantage plans. These plans provide comprehensive coverage to low-income seniors who can't afford supplemental insurance to fill all the gaps in Medicare. One in five seniors has enrolled in these plans and one in four of those is a minority. In the House of Representatives, health care for this group is a great risk.

    The proposal to expand SCHIP comes at a time when health-care spending already poses a serious threat to the federal budget. The Medicare trustees tell us that the program's unfunded liability is six times that of Social Security. The CBO predicts that on the current course, income tax rates paid by the middle class will reach 66% by midcentury and the top marginal rate will reach 92%.

    So what do congressional Democrats plan to do about this problem? Ignore it.

    A key provision of the 2003 Medicare modernization act says that when Medicare's finances deteriorate to a certain level (that level is already reached), the president must propose an appropriate reform and congress must fast-track the proposal. Yet one senior Democratic legislator-as yet unidentified-wants the SCHIP bill to repeal that provision.

    In a way, repeal makes a certain sense. If the ship is going down anyway, why spoil the fun?

  • Jul 16, 2007

    Moore’s “Sicko” Could Put Lives at Risk

    Michael Moore's documentary "SiCKO" opened to wide release and much fanfare on June 29th.  Generally lauded as "thought-provoking" and "affecting" by movie reviewers, Moore's new opus has gained attention for "asking the right questions." But the "right questions" is a subjective term, and is defined far differently by those familiar with the issues Moore is attacking.

    The film is actually full of errors and omissions, but that is almost beside the point.  Since the stated purpose of the film is to compare the worst features of American health care with the best features of health care in Britain, Canada, France and even Cuba, who can complain about a few errors here and there?

    "SiCKO" isn't a movie about health care and how to fix it. It is a one-sided attempt to drive a very specific agenda - single-payer, government-run health care.

    Moore recently told ABC's Good Morning America that in Britain and Canada people "have a basic core belief that if you get sick, you have a human right to see a doctor and not have to worry about paying for it."  By contrast, according to Moore, "people are dying in this country as a result of the decisions that get made by [private] health insurance companies."

    If you have never tried to see a doctor in Britain or Canada, you might even believe it.  People who actually live there, however, know they have no right to any particular health care service.  A Canadian, for example, has no "right" to an MRI scan or heart surgery.  There is not even a right to a place in line.  Far from enjoying a "right to health care," people in other countries often wait for needed care.  For example:


    • In Britain, about 1 million are waiting to be admitted to hospitals at any one time.
    • In Canada, more than 876,000 are waiting for treatment of all types.
    • In New Zealand, the number of people on waiting lists for surgery and other treatments is more than 90,000. 

    Patients who wait are often waiting in pain.  Many are risking their lives.  People have to wait for care because of a conscious decision by the government to limit health care resources.  When Moore boldly asserts that Britons "wouldn't trade their NHS cards for his Blue Cross card," he could not be more wrong. In fact, people in other countries often have to pay out-of-pocket for care that has been denied them by the government.

    Why then, is national health insurance in other countries as popular as Moore says it is?  One reason is that people do not realize how much they pay for it in taxes.  Even mediocre care looks good if you think it is free.  A second reason is that doctors in other countries often don't tell their patients their care is being rationed.  Instead, they say, "there's nothing more we can do."  A third reason is that most people are healthy.

    Relative to U.S. levels of provision, countries with national health insurance routinely underprovide to the seriously ill and overprovide to patients with minor ailments.  Thus, the scene where patients in Canadian waiting room are asked how long they had to wait, and they all reply with times under an hour.  Moore didn't bother to revisit these patients and ask how long they would have to wait to see a specialist. Seventeen and half weeks would definitely add to the average wait time.

    In a typical U.S. private health care plan, 4 percent of the enrollees spend more than half the money.  In a government-run, universal health care system, politicians cannot afford to spend half of the budget on 4 percent of the voters, many of whom are probably too sick to vote anyway.  The temptation is always to take from the few who are sick and spend instead on the many.

    So what are we to make of Moore and his "documentary?"  Economists, like other scientists, study reality in order to adapt to it.  Artists, by contrast, selectively focus on some facts and ignore others in order to recreate reality.  For some, this subjective recreation doesn't cease just because the camera has stopped rolling.

  • Apr 05, 2007

    Perverse Incentives in Health Care

    Originally Published in: The Wall Street Journal

    Our public-school system and our health-care system may seem as different as night and day. Yet both systems share something in common: Mediocrity is the rule and excellence, where it exists, is distributed randomly.

    In both cases the reason is the same. There is no systematic reward for excellence and no penalty for mediocrity. As a result, excellence tends to be the result of the energy and enthusiasm of a few individuals, who usually receive no financial reward for their efforts.

    Research by John Wennberg and his colleagues at Dartmouth Medical School suggest that if everyone in America went to the Mayo Clinic, our annual health-care bill would be 25% lower (more than $500 billion!), and the average quality of care would improve. If everyone got care at Intermountain Healthcare in Salt Lake City, our health-care costs would be lowered by one-third.

    Of course, not everyone can get treatment at Mayo or Intermountain. But why are these examples of efficient, high-quality care not being replicated all across the country? The answer is that high-quality, low-cost care is not financially rewarding. Indeed, the opposite is true. Hospitals and doctors can make more money providing inefficient, mediocre care.

    In a normal market, entrepreneurs in search of profit would solve this problem by repackaging and repricing their services in order to make customer-pleasing adjustments. Yet in health care, contracts and prices are imposed by large impersonal bureaucracies. The individual physician has virtually no opportunity to offer a different bundle of services for a different price. As a result, very little entrepreneurship is possible.

    Sometime in the early 20th century, lawyers, accountants and most other professionals discovered that the telephone was a useful instrument for communicating with clients. Yet even today, consultations with doctors by telephone are quite rare. Sometime in the late 20th century most other professionals discovered email. Yet only 21% of patients exchange email with their physicians; of these, slightly more than 2% do so on a frequent basis.

    One would be hard-pressed to find a lawyer in the U.S. today who does not keep client records electronically. Ditto for accountants, architects, engineers and virtually every other profession. Yet although the computer is ubiquitous and studies show that electronic medical record systems have the capacity to improve quality and greatly reduce medical errors, no more than one in five physicians or one in four hospitals have such systems.

    Why has the practice of medicine (as opposed to the science of medicine) changed so little in the modern era? The reason is because of the way we pay for medical care, particularly the way we pay doctors. At last count, there were about 7,500 specific tasks Medicare pays for. Telephone consultations are not among them. Nor are email consultations or electronic record keeping. What is true of Medicare is also true of Blue Cross and most employer plans.

    Things are made worse by the fact that patients do not usually pay for health care with money; they typically pay with their time instead. As in Canada and most other developed countries, health care in the U.S. is mainly rationed by waiting, not by price.

    When the doctor's time is rationed by waiting, the primary care physician's practice is usually fully booked, unless the practice is new or located in a rural area. As a result, there is very little incentive to compete for patients the way other professionals compete for clients. Because time -- not money -- is the currency we use to pay for care, the physician does not benefit very much from patient-pleasing improvements and is not harmed very much by an increase in patient irritations. Bottom line: When doctors and hospitals do not compete on the basis of price, they do not compete at all.

    Where third-party payment is the norm, markets tend to be bureaucratic and stifling. But in those health-care sectors where third-party payment is rare or nonexistent, the market is vibrant, entrepreneurial and competitive.

    Take cosmetic and Lasik surgery, for example. In both markets, patients pay with their own money. They also have no trouble finding what is virtually impossible to find for other types of surgery -- a package price covering all aspects of the procedure. People can compare prices, and in some cases quality. Providers are competing on price and quality and competition pays off. Over the past decade and a half, the number of cosmetic procedures grew sixfold along with numerous technological innovations of the type that are blamed for rising costs everywhere else in health care. Yet despite tremendous growth and technological change, the real price of cosmetic surgery declined. Over the past decade the real price of Lasik surgery fell by 30%.

    The market for prescription drugs is another area where a great many people are paying out of pocket. In response, was the first online outlet that began competing based on price and quality (they make fewer mistakes than local pharmacies). Wal-Mart's new policy of offering a month's supply of generic drugs is yet another example. Can anybody imagine Wal-Mart offering the same deal to Blue Cross?

    Perhaps the most spectacular instance of a health-care product developing outside the third-party payment system is the walk-in clinic. These can be found in shopping malls and drug stores in the upper Midwest and they are spreading like wildfire around the country. They post prices. There is very little waiting. They maintain records electronically. The quality of service is comparable to traditional primary care at half the cost.

    I know what you're probably thinking. Markets may work for certain specialized services; but can they work for run-of-the-mill hospital surgery? Medical tourism is proving that the answer is yes. If you're willing to leave the country you too can have access to efficient, high-quality health care. In India, Thailand and elsewhere around the world, facilities are offering U.S. citizens virtually every kind of procedure for package prices, covering all the costs of treatment, and sometimes airfare and lodging as well. These prices are often one-fifth to one-third the cost in the U.S. and care is often delivered in high-quality facilities that have electronic medical records and meet American accreditation standards.

    One part of our health-care system (the part where third parties are absent) is teeming and bristling with entrepreneurship and innovation. In the other part (where third parties pay the bills), entrepreneurship has been all but extinguished. How can we make the latter more like the former?

    Public and private efforts to reform the health-care system have been actively underway for the past two decades. The results have been disappointing, to say the least, and they all have one thing in common: They focus on the demand side of the medical marketplace.

    Managed care, practice guidelines, pay-for-performance -- each of these short-lived fads involves buyers of care telling the providers how to practice medicine. Does no one notice how strange this is? In normal markets, buyers do not instruct sellers on how to efficiently produce their products. Even the HMO movement is a demand-side reform in this context. The HMO doctor is just as trapped as the fee-for-service physician and just as unable to rebundle and reprice his services in innovative ways.

    Some believe that health savings accounts (HSAs) will radically reform the health-care system. Yet this is also a reform that focuses on demand, not supply. Even with an HSA plan in hand as you approach the doctor's office, you should know that your insurer has already spelled out what services will be paid for, which ones will not and how much will be paid. HSAs, therefore, will not free doctors to take advantage of telephone, email, computerized records or any other truly innovative service. Like school vouchers, HSAs create new freedom on the buyer side without loosening the shackles on those who produce. The reform is commendable. But real innovation must come from the supply side of the market.

    One would think that health insurers and employers would find it in their self interest to break the mold. To the extent that entrepreneurs raise quality and lower price, the insurance product itself should become more attractive to potential customers. The trouble is that the entire third-party payment system is completely dominated by government (principally through Medicare and Medicaid). Private insurers tend to pay the way the government pays and providers who break Medicare rules in order to better serve the patient risk being barred from the entire Medicare program.

    A possible way out of this morass is to start with government. Under the current system, Medicare and Medicaid stifle entrepreneurial activity and financially punish efforts to lower costs or improve quality. Why can't these agencies reward improvements instead? Suppose an entrepreneur offered to replicate the Mayo Clinic in other parts of the country -- potentially saving Medicare 25% of costs and improving quality of care along the way. Medicare should be willing to pay, say, 12.5% more than its standard rates in order to achieve twice that amount in lower total costs. That would leave the entrepreneur with a 12.5% profit -- an amount that one would hope would encourage other entrepreneurs to enter the market with even better ideas.

    Once government agencies jump-start the entrepreneurial process in this way, private insurers are likely to follow suit. In this way, government could promote entrepreneurship, instead of stifling it.

    Mr. Goodman is president of the National Center for Policy Analysis.


  • Mar 26, 2007

    Journal of Legal Medicine

    Applying the "Do No Harm" Principle to Health Policy

    For article:  20070326JCG.pdf

    Author Posting. (c) Taylor & Francis, 2007.
    This is the author's version of the work. It is posted here by permission of Taylor & Francis for personal use, not for redistribution.
    The definitive version was published in Journal of Legal Medicine, Volume 28 Issue 1, January 2007.

  • Jan 23, 2007

    Applying the "Do No Harm" Principle to Health Policy

    "First, do no harm."  This principle is well-known to physicians as part of the Hippocratic Oath.  No similar oath is taken by politicians, of course.  But suppose they did.  Suppose that before they pass any new health legislation, our political representatives were required to reexamine existing laws and make sure that government is not the cause of the very problems it attempts to solve.  What would our health care system look like? 

    Health economists at the National Center for Policy Analysis set out to answer that question recently. They began by identifying five major choices people make and isolating five ways in which public policies interfere with those choices—perversely encouraging people to make socially undesirable decisions. They then sought to determine what our health care system would look like if government policy were at least neutral. What follows is a summary of that analysis, along with some rather surprising conclusions.

    Click here to read the entire commentary.

  • Jan 11, 2007

    Testimony Before the Senate Health, Education, Labor and Pensions Committee

    Mr. Chairman and members of the committee, I welcome the opportunity to testify this morning about the challenges and opportunities related to health care coverage and access.  I am John Goodman, President and CEO of the National Center for Policy Analysis, a nonprofit, nonpartisan public policy research organization dedicated to developing and promoting private alternatives to government regulation and control, solving problems by relying on the strength of the competitive, entrepreneurial private sector.

    An Unsustainable Path

    Government at all levels in the United States currently spends about 7.2 percent of gross domestic product (GDP) on health care, mainly on Medicare and Medicaid.  Yet Christian Hagist and Laurence J. Kotlikoff have shown that if benefits expand at the rate of the past 30 years and if the population ages the way demographers predict, government health care spending will equal one-third of national income by mid-century, when today's college students reach the retirement age. 1  If that is not immediately alarming, note that one-third of GDP is about equal to all government spending for all purposes today.  If private spending on health care keeps up with public spending, the nation will devote about two-thirds of national income to health care by mid-century - an amount roughly equal to the total consumption of all goods and services today. 

    So in the public sphere, health care is on a course to crowd out every other government program - from education and roads and bridges to Social Security and national defense.  And for the economy as a whole, health care is on a course to crowd out every other form of consumption, including food, clothing, housing, etc. 

    Clearly we are on an impossible path.  And the longer we stay on it, the more painful it will be to get off of it.  Yet it is impossible to get off of it unless someone is forced to choose between health care and other uses of money.  The question is:  who will that someone be? 

    Choosing Between Health Care and Other Uses of Money

    Busy people are often unaware of how easy it is to spend other people's money on health care.  Let me give you a few examples.  The Cooper Clinic in Dallas offers an extensive checkup (with a full body scan) for about $2,000 or more.  Its clients include Ross Perot, Larry King and other high-profile individuals.  Yet if everyone in America took advantage of this opportunity, we would increase our nation's annual health care bill by almost one-third.  More than 1,000 diagnostic tests can be done on blood alone; and one doesn't need too much imagination to justify, say, $6,500 worth of tests each year.  But if everyone did so we would double the nation's health care bill.  Americans purchase nonprescription drugs almost 12 billion times a year and almost all of these are acts of self-medication.  Yet if everyone sought professional advice before making such purchases, we would need 25 times the number of primary care physicians we currently have. 2  Some 1,100 tests can be done on our genes to determine if we have a predisposition toward one disease or another.  At a conservative estimate of, say, $1,000 a test, it would cost more than $1 million for a patient to run the full gamut.  But if every American did so, the total cost would run to about 30 times the nation's annual output of goods and services.

    Notice that in hypothetically spending all of this money we have not yet cured a single disease or treated an actual illness.  We are simply collecting information.  If in the process of searching we actually found something that warranted treatment, we could spend even more. 

    One of the cardinal beliefs of advocates of single-payer health insurance is that health care should be free at the point of consumption, regardless of willingness or ability to pay.  But if health care really were free, people would have an incentive to obtain each and every service so long as it had any value at all to them.  In other words, everybody would have at least an economic incentive to get the Cooper Clinic annual checkup, order dozens of blood tests, check out all their genes and consult physicians at the drop of a hat.  In short order, unconstrained patients would attempt to spend the entire gross domestic product on health care even though, as a practical matter, that would be impossible.

    To control the growth rate of health care spending, someone must choose between health care and other uses of money.  That is, someone must decide that useful, beneficial health care procedures are not as valuable as other goods and services that could be purchased with the same funds.  How can those decisions be made? 

    In principle there are only a limited number of ways choosing between health care and everything else.  Three especially interesting approaches would have these choices made by:  (a) government (national health insurance), (b) employers and insurers (managed care) or (c) patients in consultation with their doctors (consumer-driven health care).

    Given the large number of devotees of all three approaches, you would think there would be a rich literature on how each allocates resources by comparing the costs and benefits of different types of care.  In fact, the reverse is true.  The very subject is virtually taboo. 3  Take positron emission tomography scanners, for example.  At last count there were more than one thousand in the United States, but only three in Canada. 4  So how did Canada decide that the benefits of the 4th PET scanner (in terms of lives saved, diseases cured, etc.) was not worth the monetary cost?  Is there some cost-benefit comparison in a paper or official document somewhere?  None that I can find.

    The PET scan example is not unique.  Around the world, managers of government-run health care systems rarely discuss rationing decisions and how they are made. 5  The advocates of single-payer national health insurance are even worse.  Scan their literature and you will search in vain for any discussion of how we should trade off health care benefits against monetary costs. 6

    The advocates of managed care are not much better.  Think how many trees have been felled to support the huge volume of literature on this subject.  But where in all this text is there a discussion of how managed care organizations are suppose to make cost-benefit tradeoffs?  I have yet to find it. 7

    Surprisingly, the advocates of consumer-driven health care (CDHC) are also reluctant to broach this subject.  In fact, some of the most ardent supporters of Health Savings Accounts (HSAs) on Capitol Hill flatly deny that their purpose is to facilitate choices between health care and nonhealth care consumption.  Indeed, this is the main reason why the law discourages people from removing their end-of-year HSA balances for nonhealth purposes. 8 

    There is, however, this difference:  Whether the supporters admit it or not, the United States is the first developed country to set up a formal, institutional mechanism that allows people to choose between health care and other uses of money on a rational basis. 9  As such, HSA accounts have the potential to revolutionize the health care system.  Yet they will succeed in doing so only if they free patients to perform consumer functions that they have not been hitherto performing: (1) make tradeoffs between health care and other goods and services; (2) become savvy shoppers in the medical marketplace; and (3) become managers of their own care.

    Patients as Choosers

    Critics of CDHC are fond of pointing out that there are times when patient choice is not desirable or appropriate.  They are, of course, correct.  We don't want a parent to choose not to have her child vaccinated, or an at-risk expectant mother to avoid prenatal care, or a heart patient to eschew aspirin or beta blockers.  The reason:  there is overwhelming evidence that the social benefits of the care exceed the social cost. 10  Yet instances where we can be absolutely sure that we know which alternative is the right choice are rarer than one might suppose.  At the other extreme, there are literally thousands of cases where only the patient can make the right choice.

    Take arthritic pain relief.  The annual cost of brand-name drugs runs about $800 more than over-the-counter substitutes and they are riskier (Vioxx and Bextra, for example, have been removed from the market).  Is the extra cost and risk worth the marginal improvement in pain relief offered by a prescription drug?  Since drugs affect different people differently, we cannot determine for someone else whether the tradeoff is worthwhile.  So it is appropriate and desirable for people to make these decisions themselves and reap the full benefits and bear the full costs of decisions they make.

    The problem with the current system is that all too often patients have no opportunity to make such choices.  The reason:  most of the time they are buying health care with someone else's money.  Ironically, most of the people who were taking Vioxx should not have been taking it; and the best predictor of whether a patient was taking it was whether a third-party was paying the bill. 11  This example is far from unique.  For the health care system as a whole, patients pay only 14 cents out of pocket every time they spend a dollar, on the average.  So the economic incentive is to spend on health care until its value to the patient is only 14 cents on the dollar.  It's hard to imagine a more wasteful incentive structure.

    With HSAs, people will not spend a dollar on health care services unless they get a dollar's worth of value.  In this respect, HSAs greatly improve patients' incentives.  If there is a problem, however, it is that the law is too rigid - requiring an across-the-board deductible for all services, other than preventive services.  The answer to the critics is to allow plans to create high deductibles where the exercise of patient discretion is both possible and desirable and create low deductibles where discretion is not possible or, in any event, not desirable. 

    How do patients react when they are asked to manage their own health care dollars?  We actually have far more experience with consumer-directed health care than many scholars realize.  For example, we have more than a decade of experience with Medical Savings Accounts (MSAs) in South Africa, and in this country seven years experience with the MSA pilot program, four years of experience with Health Reimbursement Arrangements (HRAs) and two and a half years with HSAs.  The problem is: the data mainly resides with insurers who regard it as proprietary and, therefore, the results are reported by entities with a financial self-interest in the outcomes. 

    Even so, reported results of MSAs in South Africa (Discovery Health) 12and HRAs in the United States (Aetna) 13are consistent with common sense.  Patients cut back in areas where there is presumed to be a lot of waste and substitute less expensive treatment options for more expensive ones.  That is, there are fewer trips to primary care physicians; brand-name drug purchases are down; generic purchases are up, etc.  These findings were also evident in an Employee Benefit Research Institute study. 14  Consumers were more cost-conscious - about one-third of consumers with high-deductible or consumer-driven health plans avoided or delayed seeking care.

    A McKinsey study (based on a year's experience with HSAs) found that CDHC patients were twice as likely as patients in traditional plans to ask about cost and three times as likely to choose a less expensive treatment option.  Further, chronic patients were 20 percent more likely to follow treatment regimes very carefully. 15  A South African study suggests that CDHC patients can control drug costs as well as managed care, but without the cost of managed care. 16 

    Early critics of CDHC worried adverse selection of young, healthy workers would destroy traditional risk pools. Yet there is no evidence that CDHC attracted disproportionate numbers of young people.  When adjusted for retirees who were not eligible, a recent GAO report of government workers found those joining CDHC plans were about the same age as enrolling in more traditional plans. 17Two additional GAO reports came to similar conclusions. 18  A recent survey by the health insurance industry trade group found adult enrollees evenly distributed with nearly one-quarter between the age of 40 and 49 and one quarter above that age group and one-quarter below. 19

    Assurant Health (formerly Fortis) reported on its enrollees with health savings accounts in 2005.  It found: 20

    • Nearly one-third (30 percent) had less than $50,000 annually in family income.
    • About 44 percent had previously been uninsured shortly before obtaining an HSA.
    • More than half (61 percent) were older than age 40.
    • More than two-thirds (69 percent) were families with children.

    The results on enrollee satisfaction have been mixed.  A recent GAO report found strong satisfaction 21as did reports by Lumenos 22and Aetna. 23  However, reports by McKinsey and EBRI reported lower satisfaction than those enrolled in traditional health plans. 24  It's not clear what this means.  A study in the Annuals of Internal Medicine found satisfactions is not related to quality. 25  In fact, this phenomenon is not uncommon among consumer goods.  Satisfaction is generally more closely related to good communication and met expectations. 26  Moreover, surveys where enrollees rate their CDHP lower than managed care may be sampling unrepresentative enrollees or people who perceived they've lost benefits when switched to a full-replacement CDHC plan. 27  Or it may point to the need to have better consumer education and about the merits and uses of the plans in addition to greater price transparency. 28

    What about preventive care?  McKinsey, Aetna, National Center for Policy Analysis (Discovery Health) and Humana 29all report an increase in preventive care - even as they report other, significant cost-reducing changes in patient behavior.  Note, however, that many CDHC plans contain extra incentives to seek and obtain preventive care.  Discovery Health tried to determine whether skimping on care in the short run caused higher costs in later years and found no evidence to support the claim. 30

    Creating Opportunities for the Chronically Ill

    The chronically ill are responsible for an enormous amount of health care spending.  In fact, almost half of all health care dollars are spent on patients with five chronic conditions (diabetes, heart disease, hypertension, asthma and mood disorders).  This is where HSAs have the greatest potential to reduce costs and improve the quality of care.

    Healthy people tend to interact with the health care system episodically. Once in awhile they go to the emergency room or take a prescription drug.  On these occasions, they gain knowledge that improves their skills as medical consumers.  But it may be several years before they use that knowledge again, by which time it may be obsolete.

    The chronically ill are different.  Their treatments are usually repetitive, requiring the same procedures, visits and/or medicines, week after week, year after year.  Consequently, cost-saving discoveries by these patients are not one-time events.  Rather, they pay off indefinitely.  Suppose a diabetic patient learns how to cut the costs of her drugs in half, by comparing prices, shopping online, bulk buying, pill splitting or switching to a generic brand.  Such a discovery could be financially very rewarding to a patient who must pay these costs out of pocket.

    Numerous studies have found the chronically ill can reduce costs and improve quality by managing their own care.  But health care management is difficult and time-consuming.  So patients should reap both health rewards and financial rewards from making better decisions. Insurers should be able to create versatile HSA accounts for patients with differing chronic conditions.  They should be able to adjust the accounts' funding to fit specific circumstances.  A typical Type II diabetic, for example, might receive one level of HSA deposit from his employer; a typical asthmatic patient another.

    The problem is:  The HSA law requires employers to deposit the same amount to each employee's HSA account, irrespective of medical condition.  This is a strange requirement because employers who give employees choices of health plans are risk-rating their premium payments whether they are aware of it or not.  If the sickest employees all choose Plan B and the healthiest choose Plan A, then the employer will invariably pay more premiums per employee to Plan B.  Although employers risk-rate their premium payments, they are not allowed to risk-rate HSA deposits. 

    I have attached two articles for your benefit that also address the challenges and opportunities related to health care coverage and access.  The first is "Solving the Problem of the Uninsured" from Thoracic Surgery Clinics.  The second is "What Is Consumer-Directed Health Care?" from Health Affairs Online.

    1Christian Hagist and Laurence J. Kotlikoff, "Health Care Spending: What the Future will Look Like," National Center for Policy Analysis, NCPA Policy Report No. 286, June 2006. 

    2Simon Rottenberg, "Unintended Consequences: The Probable Effects of Mandated Medical Insurance," Regulation, Vol. 13, No. 2, Summer 1990, pages 27-28.

    3An exception is John C. Goodman, Gerald L. Musgrave and Devon M Herrick, Lives at Risk: Single-Payer National Health Insurance Around the World (Lanham, Md.: Rowman & Littlefield, 2004). 

    4Of the 12 PET scanners in Canada, two are owned by private providers and seven are available only for research and clinical trials.  See Laura Eggertson, "Radiologists, physicians push for PET scans," Canadian Medical Association Journal, Vol. 172, No. 13, June 21, 2005.  Also see ; "What is PET?" Society of Nuclear Medicine, 2006. 

    5An exception is the Oregon Medicaid program, which prioritized 300 services and pledged to provide only those that the budget would allow.  See Martin A. Strosberg, Joshua M. Wiener, Robert Baker and I. Alan Fein (editors) Rationing America's Medical Care: The Oregon Plan and Beyond, edited by (Washington, D.C.: The Brookings Institution, 1992). 

    6See Marcia Angell and the Physicians' Working Group, "Proposal of the Physicians' Working Group for Single-Payer National Health Insurance," Physicians for a National Health Program, August 13, 2003.

    7There is of course a large and growing literature on cost effectiveness (e.g., how much does a procedure cost in terms of years of life saved?).  These studies can serve as the basis for decision-making but they do not tell us how to make decisions. 

    8Withdrawals for nonhealth purposes are subject to income taxes and a 10 percent penalty (before age 65).  As a result, the tradeoff is not on a level playing field.  For a family in the 25 percent tax bracket, $1 of health care trades against 65¢ of other goods, at least in the current period. 

    9Note, however, that South Africa's Medical Savings Accounts were introduced more than a decade ago and Singapore's medisave accounts are now two decades old.  See Shaun Matisonn, "Medical Savings Accounts in South Africa," National Center for Policy Analysis, NCPA Policy Report No. 234, June 2000; Thomas A. Massaro and Yu-Ning Wong, "Medical Savings Accounts: The Singapore Experience," National Center for Policy Analysis, NCPA Policy Report No. 203 April 1996. 

    10See Tammy O. Tengs et al., "Five-Hundred Life-Saving Interventions and Their Cost-Effectiveness," Risk Analysis, Vol. 15 No. 3, 1995; and David M. Eddy (editor), Common Screening Tests, (Philadelphia: American College of Physicians, 1991).

    11A recent study found that two-thirds of patients on Cox-2 inhibitors were not at risk for gastrointestinal conditions like ulcers or bleeding, and most of them had not tried cheaper alternatives.  See Emily R. Cox et Al., "Prescribing COX-2s for Patients New to Cyclo-oxygenase Inhibition Therapy," American Journal of Managed Care, Vol. 9, No. 11, pp. 735-42, November 2003.  A separate study found that seniors with generous drug coverage but moderate risk of gastrointestinal problems were more likely to be on a COX-2 inhibitor than seniors with high gastrointestinal risk but no drug coverage.  See Jalpa A. Doshi, Nicole Brandt and Bruce Stuart, "The Impact of Drug Coverage on COX-2 Inhibitor Use In Medicare," Health Affairs, Web Exclusive W4-94, February 18, 2004.

    12Matisonn, "Medical Savings Accounts in South Africa." 

    13"Aetna HealthFund First-Year Results Validate Positive Impact of Health Care Consumerism," Press Release, Aetna, June 24, 2004.

    14Paul Fronstin, and Sara R. Collins, "Early Experience with High-Deductible and Consumer-Driven Health Plans: Findings from the EBRI/Commonwealth Fund Consumerism in Health Care Survey," Employee Benefit Research Institute, Issue Brief No. 288, December 2005.

    15"Consumer-Directed Health Plan Report - Early Evidence Is Promising," McKinsey & Company, North American Payor Provider Practice, June 2005. 

    16Shaun Matisonn, "Medical Savings Accounts and Prescription Drugs: Evidence from South Africa," National Center for Policy Analysis, NCPA Policy Report No. 254, August 2002.

    17GAO, "Federal Employees Health Benefits Program: Early Experience with a Consumer-Directed Health Plan," U.S. Government Accountability Office, Publication GAO-06-143, November 2005.

    18GAO, "Federal Employees Health Benefits Program: First-Year Experience with High-Deductible Health Plans and Health Savings Accounts," US Government Accountability Office, Publication GAO-06-271, January 2006; GAO, "Consumer-Directed Health Plans: Early Enrollee Experiences with Health Savings Accounts and Eligible Plans," US Government Accountability Office, Publication GAO-06-798, August 2006.

    19Hannah Yoo and Teresa Chovan, "January 2006 Census Shows 3.2 Million People Covered By HSA Plans," America's Health Insurance Plans, AHIP Center for Policy and Research, 2006. 

    20"Who's Taking Advantage of Health Savings Accounts (HSAs)? Who's Taking Advantage of Health Savings Accounts (HSAs)?" Assurant Health Quick Facts, 2006.  Available. Internet.  Accessed September 22, 2006.

    21GAO, "Consumer-Directed Health Plans: Early Enrollee Experiences with Health Savings Accounts and Eligible Plans," US Government Accountability Office, Publication GAO-06-798, August 2006.

    22"Survey Reveals Lumenos Customers More Satisfied than Members of Traditional Health Plans," Press Release, Lumenos, 2004.

    23About 90 percent of enrollees said plan met expectations and would enroll again.  See "Aetna HealthFund Fact Sheet," Aetna, 2006.  Available at  Accessed September 22, 2006.

    24Paul Fronstin, and Sara R. Collins, "Early Experience with High-Deductible and Consumer-Driven Health Plans: Findings from the EBRI/Commonwealth Fund Consumerism in Health Care Survey," Employee Benefit Research Institute, Issue Brief No. 288, December 2005.  "Consumer-Directed Health Plan Report - Early Evidence Is Promising," McKinsey & Company, North American Payor Provider Practice, June 2005. 

    25John T. Chang, "Patients' Global Ratings of Their Health Care Are Not Associated with the Technical Quality of Their Care," Annals of Internal Medicine, Vol. 144, No. 9, May 2, 2006. 

    26Holman W. Jenkins, "No, Consumer Theory Isn't a Cure-all for Health Care," Wall Street Journal, September 20, 2006.

    27Devon Herrick, "Experts Doubt Survey Findings on Health Plan Owners' Satisfaction," Health Care News, February 1, 2006.

    28"Brokers Predict Massive Change: Results from the 2006 NAHU/Chapter House Benefit Buying Trends Study," National Association of Health Underwriters/Charter House, 2006.

    29"Healthcare Consumers: Passive or Active?" Humana, June 28, 2005. 

    30Refuting the criticism that the reduction in spending reflects MSA holders' tendency to forgo appropriate health care would require a randomized longitudinal study with far more clinical data than is currently available. However, a comparison of catastrophic claims under the two different health plans did not show more catastrophic claims under the MSA plan than under the non-MSA plan.  Apparently MSA-holders are not healthier as a group.  See Shaun Matisonn, "Medical Savings Accounts in South Africa," National Center for Policy Analysis, NCPA Policy Report No.  234, June 2000

    31John C. Goodman, "Making HSAs Better," National Center for Policy Analysis, Brief Analysis No. 518, June 30, 2005. 

  • Nov 14, 2006

    Employer-Sponsored, Personal, And Portable Health Insurance (PDF)

    Employer-Sponsored, Personal, And Portable Health Insurance (PDF)

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