Heritage Foundation Leadership for America

State officials committed to reforming health care must make a threshold decision: whether to use existing government health care funding to help individuals and families buy their own health insur­ance or to continue funneling taxpayer dollars into existing health care institutions to defray the costs of caring for the uninsured in emergency rooms.

The Role of Public Hospitals. American public hospitals have long served a critical community role by providing a health care safety net for low-income and uninsured individuals. In addition, they pro­vide specialty and trauma services and stand as symbols of civic pride and accomplishment in their local communities. However, their financing has become increasingly dependent on discrete sources of federal funding, particularly from Medicaid.

Indeed, these hospitals' very survival often depends on preferential federal and state policies. Without these policies, some of these institutions could not survive, much less compete in delivering high-quality care and first-rate service to low-income patients, especially if these patients could choose from a broad range of health care options. A sound health policy reform would prioritize the interests of patients over the interests of institutions.

The long-term financing for these public institu­tions is in flux. Currently, 42 states are moving for­ward with plans to expand health insurance coverage to low-income and uninsured populations while simultaneously trying to control costs.These state efforts, combined with the increasing govern­ment subsidies required to support community "safety-net" facilities, will jeopardize these hospitals' traditional sources of revenue. In pursuing state health care reform, state legislators should seriously consider a new approach to financing that would transform these institutions from regular beneficia­ries of taxpayer funding to active competitors for taxpayer dollars in a new and improved state-based health insurance market.

Rising Costs. By design or default, policymakers have gradually shifted their focus from delivering health care to providing health insurance. During the 1940s and 1950s, this trend was strongly encouraged by major changes in the federal tax treatment of health insurance. Persons who have private health coverage through their employers can take advantage of an unlimited tax break to pur­chase health insurance. They can use this group insurance to finance their care at hospitals and doc­tors' offices with limited restrictions. Not surpris­ingly, the existing third-party payment arrangement has helped to fuel rising health care costs.

More recently, this trend has been driven by the government's growing and now-dominant role in health care spending. Seniors receive their health coverage through Medicare, the huge entitlement program serving senior and disabled citizens. Medi­care provides not only hospitalization benefits, but also fee-for-service supplemental coverage for patients to secure medical services from physicians under a set of specified federal rules and guidelines. Low-income citizens without insurance through their employers or the much smaller non-group market must rely on Medicaid, assuming that they are eligible under state and federal law. In Medicaid, government acts as the financier, purchaser, and regulator in the health care sector and even com­petes with private-sector institutions.

Finally, the federal and state governments reim­burse hospitals and other health facilities, primarily through federal and state supplemental payments, for most of the uncompensated care provided to patients who cannot or choose not to purchase pri­vate health insurance. These two groups of citizens are the primary customers of public and safety-net hospitals.

A New and Better Policy. Government's role in health care is rapidly expanding and not likely to end in the foreseeable future. Because government will likely continue to subsidize the purchase and provision of health care for a large number of citi­zens, its focus should shift from subsidizing health care institutions to subsidizing people. Policymak­ers could accomplish this in a variety of ways: by taking advantage of federal waivers and demon­stration projects, converting Medicaid dollars into funding pools for premium support to enable bene­ficiaries to purchase private health insurance, and redirecting federal and state supplemental pay­ments to safety-net hospitals into a funding pool to expand private insurance coverage for the poor and the uninsured, thereby easing the burden on already overcrowded emergency rooms.

This policy of propping up public hospitals with supplemental payments creates a two-tiered health care system that diminishes individuals' freedom to choose the best health care at an affordable price. Further, subsidizing public health insurance pro­grams increases the likelihood that individuals, especially low-income citizens, will substitute pub­lic coverage for private health insurance.

What State Policymakers Should Do.Federal regulatory changes and authorizations have encour­aged several states to enact reforms. To its credit, the Bush Administration has begun to crack down on how states pool dollars to apply for federal matches of Medicaid supplemental funds. Recent audits have led nearly 30 states to dial back controver­sial financing practices. The Congressional Budget Office estimates that more formal rules prohibiting certain intergovernmental transfers and payback arrangements would save taxpayers and the Med­icaid program nearly $18 billion over five years and more than $42 billion over 10 years. However, Congress has twice blocked implementation of these regulations.

Beyond these proposed rules and state rollbacks, two other major policy options would refocus reform on patient care instead of buildings:

• Transform Medicaid supplemental funding (potentially billions of dollars) into a fund for personal health insurance coverage.
• Use federal waivers to create premium assis­tance for private health coverage.

Conclusion. Most state officials sincerely want to improve health care access and quality for their citizens. The most effective way to achieve health care equality is to enable their citizens, including low-income individuals and families, to access superior private health insurance coverage instead of depending on substandard public programs or obtaining routine care in hospital emergency rooms. By transferring Medicaid dollars to help poorer individuals and families access solid private cover­age and thereby reducing the overcrowding in emergency rooms, innovative state officials can begin to change the broader health care system in America.

Christopher J. Meyer is a Health Policy Fellow in the Center for Health Policy Studies at The Heritage Foundation.