Those who think government can achieve them favor health care reform legislation that would create huge new bureaucracies and government controls. Those who think the market can achieve them support legislation that would allow all forms of health care and health insurance to compete on a level playing field, while at the same time providing for those excluded from the current system due to poverty or preexisting medical conditions. [See the sidebar on Achieving the Goals.]

Controlling Health Care Costs

When health care is virtually "free," there is almost no limit to how much we can spend on it - even if we are not sick. In recognition of this fact, other countries limit access to technology and force hospitals and doctors to ration health care. In the United States, we are moving in the same direction, as third-party payers attempt to limit physician choice and hospital access, increasingly dictate the practice of medicine and interfere in other ways with the doctor-patient relationship. Yet experience shows that no country has succeeded in controlling health care costs from the top down without severely reducing the quality of patient care.

If we want to solve the problem of rising costs without decreasing the availability or quality of care, we must change the government policies that have bureaucratized the medical marketplace and impeded market competition. Medical Savings Accounts, also called Medical IRAs and Medisave Accounts, are the most important part of this solution. [See Questions and Answers on MSAs.]

How Medical Savings Accounts Work.

Medical Savings Accounts would give individuals a new way to pay for health care. Under traditional health insurance, people make monthly premium payments to an insurer such as Blue Cross, and the insurer pays medical bills as they are incurred. Under the new system, people could confine health insurance to catastrophic coverage (say, expenses above $3,000), reduce their monthly insurance premium payments and make deposits to a Medical Savings Account instead. Insurance would pay for expensive treatments that occur infrequently, while individuals would use their MSA funds to pay small bills covering routine services.

Employer Experiences With MSAs.

• Until the IRS forced a change in the plan, Quaker Oats had a high-deductible policy and paid $300 annually into the personal health accounts of employees, who got to keep any unspent balance; the result: over the past decade the companyís health care costs grew at an average of 6.3 percent per year, while premiums for the rest of the nation grew at double digit rates.
• Forbes magazine pays each employee $2 for every $1 of medical claims they do not incur up to a maximum of $1,000; the result: Forbes' health costs fell 17 percent in 1992 and 12 percent in 1993.
• Dominion Resources, a utility holding company, deposits $1,620 a year into a bank account for the 80 percent of employees who choose a $3,000 deductible; the result: the company has experienced no premium increase since 1989, while other employers faced annual increases of 13 percent.
• Golden Rule Insurance Company deposits $2,000 a year into a Medical Savings Account for each employee who chooses a $3,000 family deductible; the result: in 1993, the first year of the plan, health costs were 40 percent lower than they otherwise would have been.

Advantages of MSAs: Lower Costs.

• According to a computer model constructed by Milliman & Robertson for the Council for Affordable Health Insurance, the U.S. health care system would save almost $588 billion over five years.
• According to a study for the Cato Institute, MSAs would lower the nationís annual health care bill by $300 billion and reduce administrative costs by $33 billion.

Advantages of MSAs: Higher Quality.

Advantages of MSAs: More People Insured.

Insuring the Uninsured

Creating Tax Fairness: Equal Treatment of Equals.

Equity in taxation requires that all Americans receive the same tax encouragement to purchase health insurance, regardless of employment. Accordingly, the self-employed, the unemployed and people who purchase health insurance on their own should be entitled to a tax deduction or tax credit that is just as generous as the tax treatment they would have received if their policies had been provided by an employer.

Creating Tax Fairness: More Help for Lower-Income Families.

• Families in the bottom fifth of the income distribution get an average benefit of $270 a year from federal tax subsidies for health insurance.
• Families in the highest fifth of the income distribution get an average benefit of $1,560.
• Thus the tax law benefits high-income families almost six times more than it benefits low-income families.

A better approach is to offer everyone a tax credit for the purchase of health insurance, with higher credits for lower-income families. For individual purchases of health insurance, a tax credit can be entered on individual income tax returns. The cost of employer-provided insurance can be included in the gross wages of employees and tax credits entered on their tax returns. For those with very low incomes, there can be refundable tax credits - with government providing most of the funds for their health insurance premiums through a system of vouchers.

Creating Freedom of Choice in Health Insurance.

In 1970, there were only 30 mandated health insurance benefits in the United States. Today there are more than 1,000. They cover ailments from AIDS to alcoholism and drug abuse and services from acupuncture to in vitro fertilization. Mandated benefits cover everything from the life-prolonging procedures to purely cosmetic devices: heart transplants in Georgia, liver transplants in Illinois, hairpieces in Minnesota, marriage counseling in California and pastoral counseling in Vermont. These laws reflect the fact that special-interest groups now represent virtually every disease, disability and health care service.

Collectively, the mandates have added considerably to the cost of health insurance, and they prevent people from buying no-frills insurance at a reasonable price. We estimate that as many as one out of every four uninsured people lacks health insurance because state regulations have increased its price. This means that as many as 10 million people lack health insurance because of current government policies. Employees of the federal government, Medicare enrollees and employees of self-insured companies are exempt from these costly regulations under federal law. Often, state governments exempt Medicaid patients and state employees. Thus the full burden falls on employees of small businesses, the self-employed and the unemployed - the groups that are increasingly uninsured.

Freedom of choice in health insurance means being able to buy a policy tailored to individual and family needs. Accordingly, insurers should be permitted under federal law to sell federally qualified health insurance that would be free from state mandated benefits.

Insuring the Uninsurable

To solve this problem, a number of states make subsidized insurance available through high-risk pools to people who canít purchase conventional coverage for a reasonable price. These states are directly solving the problems of the unfortunate few without imposing costly regulations on everyone else. How big is the problem? According to the Agency for Health Care Policy and Research, a branch of the Public Health Service, only 0.7 percent of the U.S. population (about 2 million people) has been denied health insurance due to a medical condition. And while we do not know how many people must pay excessively high health insurance premiums, it could not be very many. Only about 3 percent of the population say they are in fair or poor health.

Solving the Problem With High-Risk Pools.

Most risk pool insurance provides benefits comparable to those offered by traditional health insurance policies within the state. Major insurers such as Blue Cross usually manage and underwrite the risk pool. Almost all pools offer fee-for-service insurance, which gives people free choice of doctors, rather than managed care or health maintenance organizations.

To join a risk pool in most states, individuals must prove they have been rejected by at least one of the state's insurers. Moreover, to discourage people from waiting until they are sick to get insurance, most of the pools can impose a preexisting condition exclusion period on individuals who enter the pool.

Case Study: Nebraska.

• There are 3,309 people in the stateís risk pool, about 0.2 percent of the state's population.
• A family of four can join the pool for about $400 a month.
• Partly because of other reforms implemented by the state, a family risk-pool policy in Omaha costs about the same as or less than a standard health insurance policy in many comparable cities - $532 per month in Miami, $403 in Dallas and $376 in Boston.

Making Risk Pools Work Better.

Other changes are also needed. While increases may be small, the practice of subsidizing risk pools with a tax on other premiums drives up the cost of insurance for healthy people and could encourage them to become uninsured. Similarly, subsidizing risk pools with a tax on hospital revenues imposes a tax on the general public only to the degree they get sick. A better solution would be to follow the example of California, Illinois and Utah ó fund risk pool subsidies from general revenues and keep hospital fees and other health insurance premiums as low as possible.

Extending Risk Pools Nationwide.

Regulating health insurance premiums " as most health care reform proposals attempt to do " would only result in higher health insurance premiums and fewer people being insured. Risk pools, by contrast, would keep premiums low for most people while helping the others obtain affordable health insurance. Solutions for the uninsurable do not require the destruction of the market for health insurance. Properly established, risk pools can meet the needs of those who have been denied health insurance, while allowing the free market to work for everyone else.

Other Reforms.

• Medical Savings Accounts (MSAs) would give people a store of funds to make premium payments and continue insurance coverage while they are between jobs at which they receive employer-provided coverage.
• Tax fairness would give tax relief to people who currently must buy their own insurance with aftertax dollars - the self-employed, the unemployed and employees of small businesses who do not receive employer-provided coverage.
• Refundable tax credits would provide the poor with the funds to purchase essential health coverage.
• Guaranteed renewability would prohibit insurers from canceling people's policies or imposing sharp rate hikes if policyholders got sick.
• Portability would assure that people would not lose their coverage when they switched jobs.

Achieving Universal Coverage Without Mandates

An Alternative to Mandates.

The Tax Penalty for Being Uninsured.

• On the average, uninsured families pay about $1,018 more in federal taxes each year because they do not have employer-provided insurance.
• Collectively, the uninsured pay about $17.1 billion in extra taxes each year because they do not receive the same tax break as insured people with similar incomes.
• If state and local taxes are included, the extra taxes paid by the uninsured exceed $19 billion per year.

How Much Free Care Do the Uninsured Receive?

Creating a Social Safety Net.

Creating Personal and Portable Benefits

In general, the tax law prevents employees from choosing between wages and health insurance and insists that all employees be offered the same coverage on the same terms. As a result, employers often provide an expensive group policy with a package of benefits that no single employee may want. To make matters worse, the employer is forced to adopt a health care plan in which benefits are individualized, but costs are collectivized. Although large employers have a few more options, they too are forced into a system which has two devastating defects.

First, under the current system there is no direct relationship between health insurance premium costs and individual employee wages. In many cases employees do not know what the premiums are. In those cases where they are made aware (e.g., when employees are asked to pay part of the premium), each employee typically is charged the same premium - regardless of age, sex, place of work, type of work or any other factor that affects real premium costs. The upshot is that the individual employee sees no relationship between the cost of employer-provided health insurance and personal take-home pay. Small wonder that employees of large companies demand lavish health care benefits.

Second, there is no relationship between wasteful, imprudent health care purchases and salary under conventional employer health plans. Under most policies, it is as though the employee has a company credit card to take to the hospital equivalent of a shopping mall. The employee will find many interesting things to buy, all chargeable to the employer. Under this system, employees have no personal incentives to be careful, prudent buyers of health care.

In the face of constraints imposed by federal policy, employers are trying to hold down health care costs by taking actions that have very negative social consequences. Unable to adopt a sensible approach to employee health insurance, many large firms are asking employees to pay (with after-tax dollars) a larger share of the premium. Often, employers will pay most of the premium for the employee, but ask employees to pay a much larger share for their dependents. These practices result in some employees opting not to buy into an employerís group health insurance plan. More frequently, employees choose coverage for themselves but drop coverage for their dependents. Indeed, three million people who lack health insurance are dependents of employees who are themselves insured.

"Federal tax law and employee benefits law are encouraging many people to be uninsured."

Because employee benefits law prevents smaller firms from adopting a sensible approach to employee health insurance, many are responding to rising health insurance premiums by canceling their group policy altogether. Often, employers will give bonuses or raises in an attempt to pass on to employees the gain from eliminating the health insurance benefit. Employees are then encouraged to purchase individual health insurance policies (with after-tax dollars) on their own. Many, of course, do not.

One of the great ironies of employee benefits law is that, although it was designed to encourage the purchase of health insurance, its more perverse provisions are increasing the number of people without health insurance. Because employers cannot individualize health insurance benefits, many are turning to other practices that are increasing the number of uninsured people.

The federal tax law has created yet another problem. It has encouraged an employer-based system under which people lose their health insurance when they leave a firm. Employers often can cut back coverage even after an employee gets sick. And when employees with a preexisting illness leave, they may find it impossible to obtain insurance coverage elsewhere.

To remedy these problems we recommend that: (1) health insurance benefits be made personal and portable; (2) health insurance premiums be included in the gross wages of employees, with tax credits for those premiums allowed on individual tax returns; (3) individual employees be given the opportunity to choose between lower wages and more health insurance coverage (and vice versa); and (4) individual employees be given freedom of choice among all health insurance policies sold in the marketplace. [See the sidebar on Solving Health Insurance Problems for Small Employers and their Employees.]

These recommendations would have several advantages:

• Rising health care costs would no longer be a problem for employers - health insurance premiums would be a direct substitute for wages.
• Employees would have opportunities to choose lower-cost policies and higher take-home pay.
• Employees would have the opportunity to select policies tailored to their individual and family needs.
• Employees would be able to retain the tax advantages of the current system, but avoid the waste inherent in a system in which benefits are collectivized.
• Employees would be able to continue coverage at actuarially fair prices if they quit work or switched jobs.

Creating A Workable Market for Health Insurance

These reforms solve the most serious problems in the markets for individual and small group insurance. With them, people could enjoy all of the advantages of a competitive insurance market. Individuals entering the market would face actuarially fair prices, and when entering a new insurance pool, each would pay a premium reflecting the expected costs that person brings to the pool. Because risk would tend to be priced fairly accurately in such a market, people would be able to make rational decisions about how much risk to transfer (through third-party insurance) and how much to retain (self-insuring through Medical Savings Accounts).

In this way, the market for health insurance could be made to work at least as well as the market for life insurance - perhaps even better.

Source: This section was adapted from John C. Goodman and Gerald L. Musgrave, Patient Power: Solving Americaís Health Care Crisis (Washington, DC: Cato Institute, 1992). Patient Power may be ordered directly from the National Center for Policy Analysis.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.