Forging a New Plan For Health Care: Principles and Priorities for Sustainable Reform

The U.S. stands poised to enact dramatic and far-reaching changes to health-insurance markets in the name of expanding insurance coverage to the more than 45 million uninsured and controlling rapidly rising health-care costs in both the public and private sectors.

Early signals from Congress and the administration indicate that many of these changes will involve expansions of existing government programs like Medicare and Medicaid, massive new regulation of private insurance providers, and trillions of dollars in new federal spending that will have to be financed through new taxes or substantial rationing of patient access to health-care goods and services.

In this paper, former CBO director Douglas Holtz-Eakin makes the fiscal and political case for bipartisan health-care reform that: addresses dysfunctions in the existing health-care-delivery system; expands access to affordable private health insurance in an incremental and fiscally responsible manner; and improves market-based options for consumer access to information on health-care quality.

Principles and their matching reforms:

Principle 1: It’s about value (stupid). Any reform that does not address low-value care and cost growth will fail. Suppose, for example, that the “reform” consisted of a mandate to purchase insurance, thereby achieving “universal” health insurance. In the absence of changes to the growth in health-care spending, this insurance would become increasingly expensive and ultimately force families to evade the mandate as a matter of economic necessity. At the same time, those dollars that were devoted to health care would purchase care that was of no greater overall effectiveness than at present. In short, the reform would fail to address the policy problems.

Anticipated reform: Medicare and Medicaid payment reforms to pay for prevention, bundle payments to accountable care organizations, reduce payment for readmissions and other low-quality care, and reduce the subsidy in Medicare for high-income individuals; medical malpractice reform; and the development of a pathway for follow-on biologics. The reforms recognize that the federal government has a powerful lever to reform the practice of medicine in the United States: Medicare payment policies. Recent reports also suggest that Medicare fraud may be approaching $60 billion per year—roughly 10 percent of total Medicare expenditures—and a similar situation exists with Medicaid. This fraud is unacceptable, and stopping it should be a top priority that will help finance targeted private insurance coverage expansions.

Principle 2: A rising tide of quality insurance. Health insurance is a valuable financial product that protects families against the financial devastation of costly medical expenses. A steady rise in insurance is very different, however, from an immediate move to universal coverage or other massive expansion. Assuming a round number of 50 million uninsured for simplicity, providing coverage at the typical level (say, $7,000) would cost $350 billion per year. Reforms to the delivery system could generate system-wide savings that could be funneled to expanding coverage, and opportunities within government programs could generate savings as well. But it is implausible that these savings would be sufficient for an immediate, large-scale coverage expansion. Instead, the focus should be on a process that leads to increasing insurance.

Principle 3: Private money, private insurance. Increasing coverage does not mean larger government programs. Instead, it should mean better and broader private health insurance for the U.S. population. Accordingly, there should be a firewall that does not permit new taxes or other private resources (fees, costs of complying with mandates, etc.) to be devoted to a “tax and spend” government-centric health-care reform.

Anticipated reforms for Principles 2 and 3: The federal government should reform the subsidy for private health insurance. In a policy dating back to World War II, the value of insurance that employers provide to employees is not treated as taxable income for the employee. (In contrast, if the employee were given cash to buy health insurance, the cash would be taxed.)

This subsidy—referred to as the employer exclusion—has several defects. It is fundamentally unfair because it provides a subsidy to those who receive their insurance from their employer but no subsidy to those who purchase their own health insurance. Moreover, the subsidy is of greater value to the more affluent (who have a higher tax rate and thus avoid more taxes) than to the less affluent. It also distorts decisions about health insurance and, by implication, health care. Subsidizing additional coverage can lead to overuse of insurance and medical services.

With appropriate attention to phasing in the policy to avoid disruptions, the exclusion should be eliminated and replaced with a flat credit of $4,500 (indexed for CPI inflation) for those who have private health insurance, regardless of its source. This credit will preserve existing health insurance for those in the employer system and provide incentives for coverage to those outside it.

However, it will not be a panacea. In particular, the credit would not be refundable, so those with no tax liability would require other sources of assistance. As detailed in this paper, for states that sign “Health Insurance for All” (HIA) agreements, the federal government would provide the income-tax resources to each state that was meeting its coverage objectives in proportion to the uninsured population, using sliding-scale, income-based subsidies for private insurance. This would provide additional resources to meet coverage objectives. Also, states should be permitted to allow Medicaid funds to be used for enrollment in private health insurance. Many eligible individuals do not participate in Medicaid because of the personal stigma, an outcome that could be avoided by including private health insurance as an option.

Principle 4: No more blind leading the sick. Families, providers, device manufacturers, hospitals, drug companies, and other participants in the U.S. health-care system interact in a complex and often baffling fashion. We must ensure that all participants understand their options, the cost implications of their options, and the likely health or economic consequences of their decisions.

Anticipated reform: Information should flow more smoothly and inexpensively through the system. There is now a wide appreciation of the potential to increase the penetration of health information technologies throughout the system. Indeed, the recently passed “stimulus” bill contained funding for such an initiative. However, unless there is a business model that supports the use of such technologies, no amount of funding (and the amount to date is modest) will succeed. Transforming the payment system to reward coordination, quality, and low cost will create a business model for health information technology, for private-sector incentives to invest in these technologies, and for greater diffusion of information throughout the system.

These reforms will gradually expand access to affordable, private health insurance; reduce waste and improve access to high-quality health care; and commit policymakers to fiscally sustainable health-care reforms.

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