THE GREAT HEALTH CARE DEBATE:
Market Solutions to a Problem

Introduction

Over the next few months the already heated debate over health care reform will intensify even more. President Clinton has evidently decided to pull out all the stops in his effort to persuade Congress to pass the health care plan crafted under the First Lady's guidance.

By now the drawbacks of the Clinton plan are well known. Under the president's proposal, an additional one-seventh of the nation's economy will immediately come under government control. Fifty-nine new federal programs or bureaucracies will be created, and 20 others would be expanded. Seventy-nine new federal mandates will also be imposed. Alain Enthoven, the noted Stanford economist and health care reform pioneer, has stated bluntly that "the Clinton plan puts the federal budget at enormous risk and will result in huge tax increases."

Public support for the Clinton proposal has fallen as more and more details of the plan have become known. Yet, despite the opportunity presented by this decline in public enthusiasm for the Clinton plan, there has been no consensus among pro-market advocates as to which steps should be taken aside from simple opposition to the president's proposal. As former Delaware Governor Pete du Pont recently noted, simple opposition is simply not enough.

As an effort to rectify this situation, this paper will examine several alternative strategies and make recommendations.

The Clinton Health Care Bureaucracy: 

The California Experience

Two years ago in California, three health care reform proposals competed for public approval. The first, a ballot initiative backed by the California Medical Association, would have mandated that virtually every employer in the state purchase for his or her employees a basic health-care benefit package from private insurers. The second, a proposal by State Insurance Commissioner John Garamendi, would have created a modified single-payer scenario with government corporations acting as purchasers of health insurance for all Californians. The third, proposed by Governor Wilson, looked to create a voluntary "pool" for small employers to make insurance premiums for these businesses.

In the end, voters rejected the physicians' initiative, and state lawmakers approved the Wilson proposal. Now that it has been operating for just under a year, it is possible to make some early judgments about how successful the governor's plan has been, and what lessons it should teach other states and decision-makers in Washington.

Under the Wilson plan, small business owners can choose to join a small-employer insurance purchasing pool. The underlying rationale of the pool is that by joining a purchasing pool with other small employers, the high risks of a particular employee could be spread, not among four or five other employees, but among hundreds or thousands of people. Many small employers, therefore, would be able to purchase affordable health insurance through the pool that was previously available only to large employers. In addition, because insurers would be dealing not with countless small businesses but with one large entity, administrative costs would be reduced resulting, it was hoped, in lower premium rates. The pool was to be run by the California Major Risk Medical Insurance Board.

When the Wilson plan was approved by the Legislature, there were some prominent question marks. First, would premium rates for pool participants really drop from previous levels? Although a single large grouping has better purchasing power than an unconnected diaspora of small entities, some experts issued important cautions. For example, the Wilson plan required health insurance vendors to provide benefits without asking employers about the medical history of their employees. In the past, groups such as the Council for Affordable Health Insurance (CAHI) warned that:

Under guaranteed issue, insurers are mandated to accept all applicants, including those with active illnesses such as cancer, tuberculosis, or AIDS. These individuals are no longer just "high risk" - their use of health care services is certain and immediate; and expensive. Including them in an insurance pool will increase the cost of insurance for all small groups by as much as 50%.¹

Furthermore, CAHI predicted that businesses would save their money and not buy insurance until their employees got sick. This would result in raising the cost of coverage to the whole pool.²

Have these predictions come true in California? So far the answer is a flat: "No." Under the Wilson plan, premium rates for the pool are guaranteed through July 1, 1994. At that time all carriers participating in the program must have the opportunity to change their rates, i.e., increase them if needed. However, the Wilson administration announced in March 1994 that the rates for the pool were to be reduced by an average 6.3%. This rate reduction is projected to save participating small businesses $3.2 million.

For some small companies, the savings under the Wilson plan have been substantial. For example, the administration points to one firm, Cornerstone Metrology, and notes that it was quoted a rate of $3,000 per month for its seven employees prior to participation in the pool. After joining the pool, the company now pays $789 per month for employee health insurance coverage.

That's just one firm. But is it part of a trend? In fact, the rates for the pool have been as much as 23% lower than those charged to the giant CALPERS system (the state employees' retirement fund).

If rates are low, has this meant that only a few low-priced insurers have decided to sell coverage to the pool? Once again, results are in stark contrast to expectations. Choice has not been sacrificed for price. Currently, 23 health plans, including many large carriers, offer coverage to the pool.

Another worry about the pool was that because it was voluntary few businesses would choose to join. The Commonwealth of Virginia, for instance, found that only a tiny handful of businesses decided to purchase low-cost basic benefit coverage that was made available by insurers after passage of a state law requiring that such coverage be offered.

Under the Wilson plan, however, a large number of small businesses have joined the pool in its less than one year of existence. So far, approximately 2,500 businesses with 44,000 employees are covered by insurance bought through the pool.

Although it is still too early to dismiss the concerns expressed by CAHI and others about pool-type arrangements, so far market forces seem to be achieving the success that the governor had envisaged.

What More Needs To Be Done?

The success of the Wilson plan is important for market advocates because it shows that at least some of those individuals who presently have no health insurance coverage can receive coverage without the need for a government-run universal health plan. Also, since a number of market-oriented health care alternatives (such as proposed by "The Project for the Republican Future's" William Kristol) include small employer pools, the success of the Wilson plan becomes an important weapon in the health care debate at the national level.

Despite the initial success of the Wilson plan, it must be noted that the governor's program is only one element of a comprehensive market-based health care reform strategy. Although rates have been kept affordable under the Wilson plan, the plan itself does not attack the main reason why health care costs have been rising so fast over the past years. That reason is the third party problem, ie., third parties such as employers, insurance companies, and government entities pay nearly 80 percent of all medical bills in America. When third parties pay these bills, users have every incentive to overuse services, increasing demand over supply, and causing prices to rise. John Goodman of the National Center for Policy Analysis argues that only when patients pay for medical services will one see lasting price reductions.

To solve this fundamental problem, Goodman and others advocate medical savings accounts (MSAs) that allow employers and their employees to put aside up to $3,000 per year, tax-free, to pay for employees' small medical bills. Inexpensive catastrophic insurance would be used to pay for major expenses.

Since these MSAs would be the personal property of the individual, employees would have the incentive not to overuse medical services for trivial matters and to shop around for the best price values. This would put downward pressure on the current health care price spiral.

MSAs, because they are the personal property of employees, have the added advantage of being portable. If an individual leaves a job, the MSA would leave with him. Thus, an MSA would allow even a person who became unemployed to continue to pay for medical services. This is one of the great advantages of MSAs over employer-based health reform measures.

(In California, MSA legislation was introduced last year by State Senator Bill Leonard, R-Redlands, but failed to win passage).

However, what about low-income families that may not be able to afford to put money in an MSA? The appeal of government-centered universal health plans is that they will cover the working poor. Jersey City Mayor Bret Schundler, William Kristol, and others have proposed that the working poor get a tax credit that may then be used to finance MSAs. By giving the working poor the same opportunity as other workers to make decisions about which medical services they want to pay for, tax credits would work to reduce costs.

Welfare recipients would receive a health-care voucher. As people move from the welfare rolls to a job, these vouchers would be transformed into tax credits avoiding a perverse incentive not to work.

Delivery of medical services to the poor should also be reformed through the overhaul of Medicaid. The federal government should create a fast-track waiver process for states that wish to administer their Medicaid programs in different ways (similar waivers have been granted to some states to reform welfare). One of Mr. Kristol's recommendations is to give priority to states that intend to use voucher systems to give Medicaid patients greater access to private health care or that create managed-care systems as has been done in Massachusetts and Wisconsin. With explosive growth in California's Medicaid and Medi-Cal expenses, flexibility from mandates would be one of the most useful reforms Washington, D.C. could enact.

Just as Governor Wilson and Democratic legislative leaders were able to come to an agreement on reform of the state's overly litigious workers' compensation system, so lawmakers on the federal level can come to agreement on reform of the overly litigious medical malpractice system. Monstrous malpractice awards are part of the reason for higher health care costs (malpractice insurance rates for physicians have skyrocketed). One useful reform would be to effectively eliminate pain and suffering awards if an early offer is made by the defendant to assume the full economic cost of the malpractice claim.

These reforms, in addition to small employer insurance pools, constitute a full alternative to both the Clinton plan and single-payer plans.

Summary and Conclusion

A comprehensive market-oriented health care plan should therefore have the following elements:

• A purchasing pool arrangement for small businesses and at-risk populations that makes coverage affordable for groups that previously could not afford coverage.
• Tax-free medical savings accounts that allow individuals to pay for their own medical bills and that are portable with the individual.
• Tax credits for the working poor and vouchers for welfare recipients so that they may also take advantage of medical savings accounts.
• Waiver of federal Medicaid regulations so that states may reform the administration of Medicaid.
• Medical malpractice reform to reduce unrealistic award amounts and malpractice insurance rates.

This briefing answers all of the questions the Clintons have raised - universal coverage, portability and cost containment.

It is up to market advocates to ensure that a plan based on these points actually makes it into the health care debate. The stakes are too high to settle for a government-centered plan that Beltway decisionmakers "can live with."

--By Lance T. Izumi
Fellow in California Studies

Endnotes

1. "Guaranteed Issue: Guaranteed to Make the Problems in the Small Group Market Worse", Council for Affordable Health Insurance, November 1992, page 3.

2. Ibid., page 3.