There is no question that there were—and are—serious problems in our health sector that need reform. But after a year-long battle to enact the Affordable Care Act and more than three years of efforts to implement it, it is becoming ever more clear that its top-down, government-centric approach does not work. The law is no more popular today than the day it passed, and many of those who originally supported passage are finding that it is doing much more harm than good, with ripple effects throughout the economy.
The cost of insurance that will be offered to the uninsured and others applying for coverage under the law is higher than in the private marketplace before it passed; businesses have put workers on part-time status to avoid huge fines under the employer mandate, and patients across the country are finding it more and more difficult to find a doctor to see them.
It is clear we need to begin planning a step-by-step approach to sensible, sustainable, and responsible reform.
The key to health reform is to empower patients, not the government. We need to move to a truly market-driven health care economy that puts consumers in charge of choices. “ObamaCare,” a term President Obama has approved, is governed by hundreds of new boards and commissions, thousands of regulators, and tens of thousands of pages of regulation.
The central pillar of free-market reform is a vigorously competitive health insurance market. Many of the problems the country is facing involving health costs could be addressed by encouraging much more competition and empowering consumers to have greater control over decisions involving their care and coverage. Price transparency and a larger choice of options would drive out insurers who price their products too high, rather than having government officials throw rhetorical stones at them in the public square. Why on earth would we want a system, especially with something as personal as health care, where all of these market signals are lost, and insurers are responding to regulators, not to us?
While health care is different from other sectors of our economy and requires special consideration, there are many areas where consumers can and want to have more control over health care choices – especially around the kind of health insurance policy they want and how much they are willing to pay.
Competition could work if we truly engage consumers as partners in getting better value for their health care dollars.
This starts with a new vision, one aligned with a 21st-century economy in which consumers, rather than government bureaucracies, have control over resources. The idea is to build on a process that switches existing health benefit to “defined contribution” programs, a concept that can be applied to taxpayers financing for all three major insurance coverage platforms in the United States—Medicare, Medicaid, and private health insurance.
This shift to defined contribution is beginning, but federal tax policy is a barrier. The current tax treatment of health insurance has largely put consumers to sleep because it robs them of choices and price visibility.
Here’s how it works: If you work for a company that provides health insurance, you get a generous tax break if your employer writes the check for your health insurance. The value of those health insurance premiums are a form of non-cash income to you, but they are taken off the top, or “excluded,” from your income before your employer calculates the taxes you owe. No matter how big the check your employer writes for your health insurance, you don’t pay taxes on that part of your income. (The insurance is not a gift from your employer; it is part of your pay package. The more it costs, the less you have in take-home pay.)
Incentives to economize, among employers as well as workers and consumers, are muted because the spending—and tax breaks—are invisible and without limit. Today, if you earn a salary of $75,000, and your employer also enrolls you in a $13,000 family health insurance policy, your actual income is $88,000. And you get a tax break worth about $5,200 by not having that $13,000 counted as part of your taxable salary.
But people pay a high price for this generous health insurance. Take-home pay has risen modestly over the last decade—just 38 percent on average—because so much of your compensation has been gobbled up by expensive health insurance, which has gone up 131 percent over the same period. Your employer isn’t paying for the bulk of your policy; you are. Your employer has been taking the money out of your overall compensation package to pay your health insurance premiums. Many people believe they could get a better deal for health insurance if they received that health insurance stipend as a defined contribution and if there were a more vibrant market for them to purchase insurance that better meets the needs and resources of their family.
How It Could Work
Moving toward a fixed dollar tax credit would represent a different, but real, alternative to the new health law that could actually get health insurance to everyone. (ObamaCare will leave 30 million uninsured, even under best estimates.) From a public policy perspective, a key pillar is reform of the tax treatment of health insurance.
Every American household would get a health credit. The credit could only be used to purchase health insurance and health care services. Any household that didn’t buy coverage would lose the entire value of the credit. The number choosing to do so would likely be very small. The credit would replace the employer tax “exclusion” that workers get today, described above, and it would be available to millions more people who don’t get health insurance at work.
Further, the credit would be portable so people would not be forced to get their insurance at work or through the government-run health insurance exchanges under ObamaCare. Employer who choose to do so could still provide a “defined contribution” toward the cost of health insurance to supplement the tax credit their employees would receive. If people choose a more expensive plan than that, they would be free to do so but would be paying the extra costs on their own.
This Works For Medicare And Medicaid, As Well
A similar policy could and should be done in Medicare. In fact, it’s already been done in a part of Medicare—the prescription drug benefit, Part D, which was added to the program starting in 2006. Under Part D, Medicare beneficiaries decide for themselves what kind of drug insurance they want to purchase each year. The government’s contribution is based on the average price charged by participating insurance plans in a region, and it remains the same regardless of which plan the beneficiary selects.
Seniors selecting more expensive plans than the average bid pay the additional premium out of their own pockets. Those selecting less expensive plans get to keep the savings. Scores of insurers compete aggressively with each other every year. The result is that costs have been far below expectations, and federal spending is some 30 to 40 percent below initial projections.
As new retirees turn age 65 and enter Medicare, they should be given the same control they now have over drug coverage for their entire Medicare benefit. The resulting competition among insurers and those providing services to the beneficiaries would work far better than government regulation to hold down costs and premiums. It would also make insurers much more attentive to the needs of their patients, as seniors who were dissatisfied with how they were treated could take their business elsewhere at the next available opportunity (which would be occur at least annually).
Medicaid—the health insurance program for low-income Americans—locks participants into a system of insurance that is largely separate from everyone else. Medicaid’s payments to doctors and hospitals are so low that many physicians cannot afford to see but a few patients with Medicaid coverage. Medicaid is also not coordinated with employer insurance, so when a low-income person gets a higher paying job, they often lose Medicaid without the guarantee of getting coverage at their job.
All of this could be fixed by giving able-bodied Medicaid recipients the same tax credit given to all other working age Americans. That would serve as their base of insurance to help them get private coverage. What is now spent on them in Medicaid could be then be used to provide additional help with premium expenses as well as out-of-pocket costs when they need health care. This would allow Medicaid participants to get the same kind of insurance—and thus access to the same doctors and hospitals—as everyone else. It would also mean that they could keep the same insurance even when they move up to higher paying jobs with new employers.
Building an effective marketplace for health care requires some additional steps beyond reforming how employers, Medicare, and Medicaid pay for insurance. We need more transparent information about prices and quality, better state regulation of insurance markets, and further assistance for beneficiaries making choices about what will be best for them. Nevertheless, it’s clear that the key reform that is needed is one that puts individuals in charge of their own money. That’s the way to slow rising costs while also improving, not compromising, quality.
Ensuring Sick Americans Aren’t Left Out
Even if American health care can be improved by putting consumers in charge, there will still be a problem with making sure those who are especially sick can get good insurance too. Today, there are an estimated 4 million Americans who have a “pre-existing condition.” This makes it hard for them to get affordable insurance because insurers must take the added risk—and cost—of those ailments into account when setting premiums.
ObamaCare included a poorly conceived version of what is needed to actually ensure sick Americans can get affordable insurance. ObamaCare created a $5 billion “high risk pool” program that is poorly-designed, hastily-constructed, and severely-underfunded. Because the benefits that must be offered are so expensive, the premiums are very high. Even at that, the program ran out of money early and closed its doors to new applicants.
The lessons to be learned from ObamaCare early experience is not that “high risk pools” don’t work. It’s that they won’t work if they are built to fail. They should provide assistance to people who find themselves, through no fault of their own, looking for insurance as an individual even though they have a history of high medical costs. And they should be run by the states which are closer to the needs of their citizens. The pools need to be coupled with stronger protections for those maintaining continuous insurance coverage so that they don’t find themselves needing high risk assistance at all.
In short, we can do more by doing less and the solution can be transparent, targeted, and adequately funded.
Adequately-funded, state-run, high-risk pools that deliver what they can promise will require an investment of taxpayer dollars. But compared to the sweeping burdens of ObamaCare, they will cost much less and do less damage to the rest of the private healthcare market that many Americans prefer and from which they still benefit greatly. They can represent the foundation for what it means to “replace,” and not just “repeal,” its flawed prescription for health policy change.
Additional Important Reforms
Putting consumers in charge and protecting those with pre-existing conditions are the crucial steps needed to broaden coverage and slow the pace of rising costs.
But some other steps are needed as well. Consumers should be given new opportunities for finding and purchasing the coverage they need. In that regard, states should be given the authority to put in place consumer-friendly market mechanisms which would give consumers accurate and comprehensive information about their options, as well as simplify the process of enrollment. These marketplaces should not emphasize regulation, but consumer assistance.
States should also open the sale and purchase of health insurance to consumers in other states. This would help those residents in states with costly and excessive regulation to find affordable coverage elsewhere, and would drive down costs.
Finally, and most importantly, states must reform their medical malpractice laws to remove the distortions associated with arbitrary and unlimited awards from some juries. Today, lawyers shoot for the sky and hope they come up winners. The limited number of cases where they do hit the jackpot is causing doctors to do whatever is necessary to avoid the same fate. The result is billions and billions of dollars in unnecessary medical treatment. Sensible tort reform would allow doctors to practice sound medicine and still protect patients from genuine malpractice.
The Path Forward
Leaders in Congress must start to work on reform that is compatible with our political culture and values of the genius of our free market economy.
The challenges are enormous—even without the upheaval of ObamaCare. Millions of Baby Boomers will soon be signing up for Medicare, putting new pressures on the system. The costs of government entitlement programs threaten to squeeze out other public services provided by federal and state governments. Millions of people continue to lose their health insurance when they lose or change jobs. And the cost of health care and insurance coverage continues to rise.
It is not possible for a government bureaucracy to know how to solve all of these problems, or to address the diverse needs of 300 million Americans. What’s needed is reform that puts individuals in charge of their health care dollars. That’s the way to ensure your needs are addressed, with better health care at less expense for all of us.
Grace-Marie Turner is president of the Galen Institute, a non-profit research organization focusing on free-market ideas for health reform. This article is adapted from a chapter in a book she co-authored, Why ObamaCare Is Wrong for America, (HarperCollins, 2011). Co-authors are James Capretta, Thomas Miller, and Robert Moffit.
