State legislators are increasingly focused on health care
reform. Escalating health care costs, state deficits, rising
numbers of uninsured, and federal inaction have forced them to take
up the challenge of changing state law, restructuring flawed state
health insurance markets, and overhauling existing health care
financing and delivery. This often requires a special level of
technical expertise and experience with health care policy.
Many state legislators are committed to introducing free-market
principles of consumer choice and competition into the health care
system. Because the circumstances in each state are radically
different, there is no neat nationally applicable formula for
There is, however, one overarching policy goal that should unite
legislators seeking to develop and implement conservative or
free-market reform: The legislative changes would shift the locus
of decision-making to individuals and families, and
they-not insurers or the government or employers-should control the
flow of health care dollars.
Criteria for Change
Reformers merit the approval and support of those who favor
market-based reform to the degree that they accomplish that
transfer of control to individuals and families. Serious reform
would meet the following tests:
- It is system-based, not product-based. It is
focused on changing the existing system, not merely promoting a
specific insurance product or change in the delivery of medical
- It makes individuals and families the key
decision-makers in the system. They control the
- It creates continuous dependable coverage for
individuals and families. The coverage is designed to fit
the changing conditions of modern American life.
- It limits the role of government. It expands
private insurance options and reduces dependence on government
health programs such as Medicaid and the State Children's Health
Insurance Program (SCHIP).
- It maximizes value to the consumer as a
patient. The value to the patient overrides the value to
other players in the system.
- It complies with existing federal law. It does
not, therefore, delay possible change.
The Federal Role
Federal inaction is in many ways a blessing in disguise. It
would be folly for Washington, D.C., to force radical changes
across the entire health care sector-which comprises roughly a
sixth of the American economy-without experimenting and discerning
what proposals work best in expanding coverage, controlling costs,
and increasing patient freedom and satisfaction.
Congress could encourage this process by advancing legislation
that would allow differing policy proposals to compete "head to
head" in various states. Such contests would highlight successful
programs that could be adopted in other states as public approval
increases. This could also break the health policy impasse at the
national level and encourage action on specific reform measures
that are successful and enjoy broad bipartisan support.
Advocates of free-market reform should welcome such a competition
Six Tests for Reform
State officials have a large task ahead of them that is
aggravated by the unfunded liabilities of their own state retiree
health costs. Competing approaches, sharply different in
nature, scope, and objectives, currently dominate state reform
Many conservative and centrist legislators aim for private,
insurance-based health reform that encourages competition, expands
access to private coverage, and strengthens the market as a way to
discipline health care costs.
Many liberal and leftist legislators are motivated by a belief
that health care should be a public utility. They often embrace
what they believe to be the superiority of government-run or
single-payer health systems, centralized government power over
purchasing, government benefit-setting, and price controls for
insurance and medical services.
Every state regulates its own insurance industry and thus has
its own unique health care infrastructure. Although one "standard"
health reform proposal cannot meet every state's needs, state-based
reform proposals can and should be evaluated on the basis of
whether they would move a state's health care system toward
patient-centered health care, which would maximize value to the
The six tests for meaningful reform are as follows:
1. The reform is system-based, not product-based, and is
focused on expanding ownership of private insurance
coverage. System-focused reforms look toward a
restructuring of the financing and delivery of medical services,
such as changing the delivery of existing government health care
subsidies. Product-based reforms attempt to enact the proverbial
"silver bullet" to control costs or improve quality. The temptation
is to focus on designing specific products, such as new government
programs, new managed-care arrangements, or health savings accounts
for discrete subpopulations while leaving the flaws of the current
system firmly in place.
The right approach is to pursue system-focused reforms and
implement policies based on private insurance that would enable
individuals and families to buy, own, and keep health insurance
from job to job-without losing the tax advantages of
employment-based coverage. There is no free-market reform worthy of
the name in which individuals are denied control over their own
health care dollars, are denied a property right in the health
insurance policies purchased with those dollars, or are directly
penalized by the government's tax or regulatory regime for choosing
the health plan they want.
2. As a result of reform, individuals
and families are the key decision-makers. If state
officials put individuals and families at the center of
health care decisions, the results would be profound. Until
individuals and families have meaningful choice in their health
care coverage, most Americans will have little more control over
their health care dollars than a dog taken to a veterinarian
Reform should not displace employers from the health care
equation; it should change their role. Employers should become the
facilitators of health insurance coverage for employees rather than
the exclusive owners of their employees' health insurance
Employers and managed-care executives control most of the
dollars in the current system. If the government were to control
these health care dollars, it would decide what is funded and what
is not. Giving individuals and families control
over their health care dollars would enable patients to choose care
appropriate to their beliefs and needs, paid through an insurance
company that they have personally chosen. Owning one's own permanent,
dependable, portable health insurance would give Americans the
freedom to choose the health care they trust and help to provide
the economic security they need.
3. The reform creates dependable, continuous coverage
that fits the dynamics of modern American life. Americans
know that the problem of health insurance is not simply getting
access to coverage; it is also keeping that coverage, regardless of
where one works or lives. Modern health care coverage should work
with the major transitions in modern life and should eliminate the
predictable threats to health care-the "health-care cliffs."
Every American should be free to meet life's challenges without
its endangering their health coverage. Without putting their health
care at risk, young adults should be able to head off to college or
work without worrying that they are leaving their family's health
plan. Workers of all ages should be able to pursue better
opportunities, start new businesses, and retire before they are
eligible for Medicare. Without putting their own health care at
risk, parents should be able to stay home to take care of their
children or their own elderly parents. Modern health care coverage
would eliminate the existing chasm between public health care
assistance and private insurance.
To achieve this goal, health care coverage must be portable: It
must stick to the individual, not the job. Coverage must be owned
and controlled by the person it covers. Two basic aspects of our
employer-based health care system-tax treatment and
sponsorship-must be addressed to allow the growth of a truly modern
health care system. Favorable tax benefits associated with
employer-based health insurance must be unshackled from employer
selection, control, and ownership. Americans may access coverage
through employers, but they also must be allowed to get coverage
through a trusted agent or sponsor other than their employers.
4. The reform limits the role of government and avoids
government-run health care. There is no market without the
rule of law. The state government's role, therefore, is limited to
making and enforcing the common set of rules that allow free-market
forces to operate on a level playing field. This is especially true
for the rules that govern the health insurance markets. Though the
government should play the role of watchdog-enforcing rules against
fraud, for example-it should not be in the business of picking
winners and losers.
The government should work to reduce dependence on government
programs such as Medicaid and SCHIP. This can best be
accomplished by expanding private health insurance options,
especially for low-income individuals and families, and
mainstreaming them into the private health insurance market just as
their fellow citizens are.
5. The reform maximizes value to the patient.
Real patient-centered, system-focused reform must demand and reward
both improvements in health care benefits and reductions in costs.
Better care at lower cost results in value for the patient. Value
for the patient is secured by personal choice and competition among
health plans and providers. Competition controls costs
and drives innovation and productivity in the health care system.
It is essential for state reformers to keep in mind the objective
of their reform efforts: value to the patient, not to the
"health care system," managed-care executives, health insurance
executives, or government program officers. State health reform
that falls short of being patient-focused falls short as meaningful
6. The reform complies with existing federal
law. Health care is governed by a complex and often
overlapping set of federal and state laws. State officials need to
be mindful of the federal statutes that govern the health insurance
markets. Chief among these are the Employee Retirement Income
Security Act of 1974 (ERISA), which governs the provision of
coverage for self-insured firms; the Consolidated Omnibus
Reconciliation Act of 1985 (COBRA), which establishes rules for
maintaining group coverage during specified periods for employees
who leave employment; the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), which establishes rules for a
limited guaranteed-issue of coverage of health insurance; and the
Internal Revenue Code, which provides for a generous tax exclusion
on the value of health benefits provided through
employment-sponsored coverage. Federal tax law has a tremendous
effect on health insurance markets, disfavoring those who do not or
cannot get health insurance through the place of work.
Federal laws set parameters for innovative state reform. In
crafting state health reform legislation, state officials must be
creative if they want to accomplish significant change, but they
must also be sure that their proposals comply with existing federal
laws and regulations. Otherwise, they risk a derailment, a delay,
or judicial obstruction of their efforts. For example, state
officials cannot redefine individual insurance as group insurance
for the purposes of circumventing the existing provisions of
federal laws that govern group health insurance.
Most working-age families who have health insurance receive
their coverage through their workplace as group coverage. Group
coverage is governed by federal and state law. Though state
officials must navigate federal laws, they can nonetheless make
significant headway in changing the dynamics of the system by
changing the health insurance regulations that are within their
Free-market reform would transfer control of health care dollars
to individuals and families and enable them to be the key
decision-makers in the system. This reform would be system-focused.
It would not promote specific products, goods, services, or "silver
bullets." It would improve the health insurance market and allow
continuous coverage for individuals and families throughout changes
in their lives. Real reform would limit the role and the power of
government and expand private health care options and
opportunities. Above all, it would maximize value to individuals
and families as patients.
State health reform is a challenge. But with political will and
imagination, it can be done.
Robert E. Moffit,
Ph.D., is Director of the Center for Health Policy Studies at
The Heritage Foundation.
response to requests from many state officials over the past two
years, Heritage analysts have greatly increased the amount of
technical assistance and educational outreach to state policymakers
and stakeholders on ways to expand health care coverage while
maximizing health care value for individuals and families.
Edmund F. Haislmaier, "Health Care Reform: Design Principles for a
Patient-Centered, Consumer-Based Market," Heritage Foundation
Backgrounder No. 2128, April 23, 2008.
a discussion of how this can be done, see Robert E. Moffit, "The
Rationale for a Statewide Health Insurance Exchange," Heritage
Foundation WebMemo No. 1230, October 5, 2006, at www.heritage.org/Research/Healthcare/wm1230.cfm.
See also Robert E. Moffit, Ph.D., "State-Based Health Reform: A
Comparison of Health Insurance Exchanges and the Federal Employees
Health Benefits Program," Heritage Foundation WebMemo No.
1515, June 20, 2007, at www.heritage.org/research/healthcare/wm1515.cfm.
a discussion of the costs and consequences of government rationing
of care, see Kevin C. Fleming, M.D., "High-Priced Pain: What to
Expect from a Single-Payer Health Care System," Heritage Foundation
Backgrounder No. 1973, September 22, 2006, at www.heritage.org/research/healthcare/bg1973.cfm.
With the inevitability of sensitive decisions over end-of-life care
and beginning-of-life care, this will become an increasingly
serious concern for ordinary Americans. For a broader discussion of
this issue, see Robert E. Moffit, Jennifer Marshall, and Grace V.
Smith, "Patients' Freedom of Conscience: The Case for Values-Driven
Health Plans," Heritage Foundation Backgrounder No. 1933,
May 15, 2006, at www.heritage.org/Research/healthcare/bg1933.cfm.
See also Connie Marshner, "Health Insurance Reform: What Families
Should Know," Heritage Foundation WebMemo No. 1739,
December 13, 2007, at www.heritage.org/research/healthcare/wm1739.cfm,
and Connie Marshner, "The Health Insurance Exchange: Enabling
Freedom of Conscience in Health Care," Heritage Foundation
WebMemo No. 1377, March 1, 2007, at www.heritage.org/static/reportimages/BEBD545BFF114ECDB51C64EFF9AC56CD.pdf.
On this point, see Nina Owcharenko, "The Future of SCHIP: Family
Freedom or Government Control?" Heritage Foundation
WebMemo No. 1464, May 21, 2007, at www.heritage.org/Research/healthcare/wm1464.cfm.
See also Greg D'Angelo, Michelle Bucci, and Marcus Newland,
"Expanding SCHIP Will Challenge State Finances: A State by State
Analysis," Heritage Foundation WebMemo No. 1586, August
14, 2007, at www.heritage.org/research/HealthCare/wm1586.cfm.
Nina Owcharenko, "Health Insurance for Uninsured Children: Doing
Health Care Right," Heritage Foundation WebMemo No. 997,
March 5, 2007, at www.heritage.org/Research/HealthCare/hl997.cfm.
See also Nina Owcharenko, "Reforming SCHIP: Using Premium
Assistance to Expand Coverage," Heritage Foundation
WebMemo No. 1466, May 22, 2007, at www.heritage.org/Research/HealthCare/wm1466.cfm.
For an elaboration of this theme, see Haislmaier, "Health Care
Reform: Design Principles for a Patient-Centered, Consumer-Based