The Heritage Foundation

Backgrounder #902 on Health Care

June 17, 1992

June 17, 1992 | Backgrounder on Health Care

Why the Maryland Consumer Choice Health Plan Could Be a Model forHealth Care Reform


While the federal government seems paralyzed at the prospect of trying to reform America's $800 billion dollar health care system, several states are beginning to experiment with promising alternatives to meet the pressing problems of rising health care costs and the growing number of the uninsured.

One revolutionary proposal is based on the principles of consumer choice and market competition. This is the Consumer Choice Health Plan (House Bill 376), introduced in the Maryland state legislature by Delegate Casper Taylor, a Democrat from Allegany County, and the House Economic Matters Committee. Taylor is Chairman of the committee. The Maryland Consumer Choice Health Plan would dramatically change health care insurance in the state and control costs through market forces.

If the legislature enacts the bill, which has the support of key physicians and business leaders who favor a market-based approach, Maryland would launch an imaginative demonstration project that would require the Bush Administration to waive existing federal regulations in the Medicaid program and in the application of the ERISA law, (ERISA is the acronym for the Employee Retirement Income Security Act of 1974.) which, among other things, governs self-insurance by private firms. Waivers often are granted to states, and the Bush Administration has declared that it favors such exemptions as a way of fostering state-based health care reform.

The Taylor legislation would establish a new health care delivery system in Maryland that would build upon current private medical practice and private insurance, but would enhance consumer choice, assure access, and control costs. Among the key features of the proposal:

Every Marylander must enroll in a health plan

Under the Consumer Choice Health Care Plan, all individuals and heads of households are required to enroll themselves and their dependents in a health care plan. Even Maryland citizens receiving Medicaid benefits would receive a voucher to pay for acute care. The only exception to this legal requirement is for individuals covered by Medicare, the huge federal program that provides health care services to elderly and disabled American citizens.

All Marylanders would be assured at least a basic, comprehensive health benefits package

Under the legislation, all qualified health care plans would have to offer a comprehensive set of benefits that are "comparable" to those found in typical employer-based insurance, including well-child care and preventive medical services.

Tax credits and vouchers would offset the cost of a family's health plan

Every Maryland citizen would receive state tax credits or vouchers to help buy insurance. Families normally would receive a tax credit, but low-income people below the tax threshold would receive vouchers. These credits and vouchers would be income-based on a sliding scale. The credits or vouchers would cover the full cost of the standard insurance plan for low-income Marylanders with an annual family income of $13,359 or less, declining to 50 percent of the cost of the basic plan for households with a family income over $100,000 per annum. Marylanders could choose to purchase supplemental insurance, but this extra insurance would not be eligible for voucher or tax credit assistance.

Medicaid would be "voucherized"

The entire acute care Medicaid program in Maryland would be replaced with the comprehensive voucher program for low-income Maryland citizens. The new vouchers would pay 100 percent of the premiums of the standard insurance plan for a family of four below the official poverty threshold of $13,359. In other words, current Medicaid beneficiaries would have access to the same basic health care plan as every other citizen in Maryland. Under the federal waiver, the state share of Medicaid spending, plus the current matching funds provided by the federal government, would be used to help finance the vouchers for low-income people.

The tax treatment of health costs would be radically reformed

In return for tax relief in the form of tax credits or vouchers, health insurance benefits provided by employers henceforth would be treated as taxable compensation for the purpose of state income tax. Furthermore, to ensure budget neutrality for the entire program, Maryland would institute a payroll tax, to be paid by employers, to be set at an estimated four percent. (The payroll tax is estimated because it is set as the amount needed to make the entire program budget neutral. Thus it will depend on the program's outlays.) The authors of the proposal also expect some savings from reduced Medicaid costs, increased use of managed care or programs which impose some controls on the use of medical services, and sharp reductions in the costs of treating previously uninsured residents. Funds from these sources would keep the necessary payroll tax to a modest level.

Employers would have new responsibilities

While employees could choose a health plan offered by their employer, they would not be required to do so to enjoy the tax credits or vouchers. Under the legislation, they are free to choose other health care plans that meet basic state requirements. For example, they might choose a plan offered through an employee organization or a trade or business association. The employer's new role is to arrange for the availability of group insurance plans that meet Maryland's new specific benefit standards. This means employees could choose any plan they wished, or a plan brokered by their employer. Besides acting as a broker for employees, employers also could supplement state tax credits with a financial contribution to improve the employee's benefit plan.

Insurance rules would be reformed

Maryland insurance carriers today normally underwrite large group insurance on the basis of experience. This means rates each year are based on the previous medical costs of the group. For small groups, insurance usually is written on the basis of geography, industry, age, sex, family status, and experience, including medical condition. Under the Taylor bill, insurers would have to institute "modified community rating" categories, adjusted for age and sex. Thus insurers would be prohibited from charging different premiums, or rates, to different groups within a given area or community, except for variations in insurance premiums based on age and sex. In addition, insurers could not drop coverage for individuals or groups because they had been costly to insure. Further, all participating insurers would have to meet specific financial solvency requirements and incorporate managed care programs. This means that insurers in Maryland would be required to demonstrate their ability to manage both the cost and the quality of care, and use "common" billing forms. The proposed use of electronic billing to process claims is designed to reduce the cost of cumbersome health insurance paperwork.

The debate in Maryland mirrors that now taking place in many other states and in Congress. There is a national consensus emerging on what is wrong with America's health care system: soaring costs, gaps in coverage and the fact that over 35 million people are without even basic insurance protection. And like most lawmakers, Maryland's state legislative leaders believe that only fundamental reform will deal with the health care system's problems and so are examining the very foundations of the system. Supporters of the leading health care reform proposal in the Maryland state legislature, the Consumer Choice Health Plan, also believe that the key to radical reform is to introduce strong consumer choice and genuine market competition by changing an unfair and inequitable tax code that limits the access to health care by low-income working families and that discourages families from seeking cost-effective health plans.

While there are some significant differences, the Maryland Consumer Choice Health Plan broadly resembles the Heritage Foundation's Consumer Choice Health Plan. (See Stuart M. Butler, Ph.D., "A Policy Maker's Guide to the Health Care Crisis, Part II: The Heritage Consumer Choice Health Plan," Heritage Foundation Talking Points, February 12, 1992.) Both propose universal coverage for every family through a package of basic health care benefits. Both would reform existing tax support for health insurance, replacing current tax breaks for employer-provided insurance with a comprehensive system of tax credits or vouchers. Both would target the greatest degree of tax relief or public assistance to individuals and families who need it most. Both would stimulate intense competition within a reformed insurance market, requiring insurance companies to seek the allegiance of consumers rather than merely the consumers' employer. And both would finance universal coverage and tax relief in a "budget neutral" fashion.

While Congress seems unwilling or unable to tackle America's continuing health care crisis, reform already is underway in several states. A variety of approaches are being proposed or enacted, ranging from "single payer" government insurance systems, to "play or pay" mandates on employers, to small group insurance market reform initiatives. In the unique federal order that characterizes America's political system, the states are thus fulfilling a traditional role as laboratories of democratic government. Maryland, in particular, has a rich tradition of innovative social and economic policy, and is setting the pace for health care reform based on spurring consumer choice and competition. Indeed, if Maryland's leading proposal is enacted into law, it could become the model for national health care reform.

The Maryland Health Reform Debate

In February of this year, the Maryland State Legislature's House Economic Matters Committee held three days of hearings on the three major proposals for reforming the state's health care system: a single-payer health insurance model, along the lines of the Canadian system; a "play or pay" proposal, which would require Maryland businesses either to provide their employees with a private insurance policy or pay a tax to support a public plan for families not in an employer-sponsored plan; and a market-based consumer choice plan, which would give tax credits to help Marylanders buy a plan. At the conclusion of these hearings, the Committee voted down the "single payer" option and "play or pay" proposal, and unanimously reported out an amended version of H.B. 376, "The Consumer Choice Plan," for consideration on the floor of the House of Delegates. In commenting on the extensive debate and deliberation in the House Economic Matters Committee, the Baltimore Sun called the hearings an "eye opener" for state legislators, adding that only one of the three plans being discussed by the Committee had any chance of advancing. Said the Sun editors:

The enormous price tag of the Canadian-style "single payer" plan remains its major impediment. This proposal, which would provide universal health care coverage with a state board setting an annual budget for all healthcare spending in Maryland, has only a few advocates. Nor is there much enthu siasm building for the "play or pay" program, in which employers would provide basic health insurance coverage or be taxed heavily to pay for a state- run insurance package. A drawback to this approach is that it wouldn't lower health care costs, only shift the payment burden to businesses. ("Health Care in Annapolis," editorial, The Baltimore Sun, February 18, 1992. See also, "Consumer Choice Health Plans Worth Discussing," editorial, The Capital (Annapolis), February 4, 1992.)

The amended version of H.B. 376 passed the Maryland House of Delegates unanimously in March. The bill does not call for the immediate implementation of the Consumer Choice Health Plan. Rather it orders a comprehensive study by a special joint committee of state legislators to explore the issues involved in introducing a program based on the plan. The Maryland State Senate has yet to act on the measure.

Thus while the Maryland state legislature has not completed its work, the market-based proposal has emerged as the leading proposal. The reason, say House lawmakers supporting that plan, is that Marylanders want to decide for themselves what plan will cover their families and they are skeptical of government-run health plans.

The Problems of the Current Maryland Health System

If Maryland mirrors the nation in debating the three major approaches to comprehensive health care reform, the state also wrestles with the same problems animating the health care debate elsewhere. While Maryland is blessed with many fine hospitals and skilled physicians, for instance, access to these medical services is a problem for many Maryland citizens. And just as in other states, there are large gaps in insurance coverage, with more than 570,000 individuals in the state lacking any health insurance coverage. As in other states, the uninsured are concentrated in the work force of small firms. Because of high costs, 43 percent of Maryland's small businesses do not offer health insurance to their workers. In addition, costs are rising rapidly for businesses providing insurance and families paying directly for their care or insurance. Maryland businesses generally are seeing premium increases of between 15 percent and 20 percent, and Maryland workers fear the loss of company- based health insurance. At the same time, the cost of uncompensated care given by Maryland's hospitals is rising steeply, along with costs of the Medicaid program. (See Preamble to House Bill No. 376, as amended and passed by the Maryland House of Delegates, March 17, 1992. According to Nelson Sabatini, Secretary of the Maryland Department of Health and Mental Hygiene, the Medicaid rolls in Maryland are growing by 5,000 to 6,000 per month. See Joyce Frieden and Eric Zicklin, "Maryland Considers Shift on Cost Shifting," Business and Health, March 1992, p. 76.)

Arguably the major reason for both gaps in coverage and skyrocketing costs is that federal and state tax laws give Americans generous tax relief for their health insurance on one condition -- they must secure their health insurance through their work place.

According to Lewin/ICF, a leading economic modeling firm in Washington, D.C., the revenue foregone by the federal government alone through the exclusion from taxable income of employer-based health benefits nationally was $66.6 billion in 1991. The equivalent state tax exclusion for employer-paid insurance amounted to $8.3 billion nationwide.

This tax treatment leads to several perverse effects. Among them:

1) Benefits are not "portable"

The current federal and state tax laws favor only one type of insurance -- employer-provided plans. So Americans have a strong incentive to obtain insurance through their employers. The result of this is that health insurance, unlike life insurance, auto insurance, or homeowners insurance, typically is tied to a worker's job. If a worker changes jobs or loses his or her job, the family's health benefits are terminated. If the worker is not offered health benefits from the next employer, or if severe illness strikes between jobs, the result can be financial catastrophe for the worker and his family.

2) Uninsurance is common among workers in small firms

Since many small businesses do not offer insurance, and since tax breaks in effect are available only for employer-provided plans, many employees of small businesses are without any insurance protection.

3) Employees do not question costs

Because most health care coverage is "paid for" by the employer, workers have the tendency to treat health care coverage as the equivalent of a "free good." (In fact, any money contributed by an employer to an employee's health insurance really is part of the worker's compensation, which in practice means that the worker's wages are reduced by the employer's decision to offer health insurance.) As a result, insured workers have little or no incentive to question the bills they receive from physicians or hospitals and thus little incentive to seek the best value for money in the purchase of a health care plan. This lack of consumer interest in cost is a recipe for escalating costs. (See Stuart Butler, Ph.D., "A Policy Maker's Guide to the Health Care Crisis, Part I: The Debate Over Reform," Heritage Foundation Talking Points, February 12, 1992, pp. 4-7.)

Promoting Consumer Choice and Market Forces

The Maryland proposal tackles these problems by changing the system of incentives and subsidies operating today. This change would make it possible for Marylanders to choose from a wide range of plans -- not just from the plans, if any, offered by employers -- and give them a financial incentive to seek the best value for money in making their selection. Proponents argue that this consumer choice system not only would make it possible for the uninsured to obtain coverage, but would do a better job at keeping costs under control than the existing system, with its perverse incentives, or a government-run health care system using price and budget controls.

This method of reforming the health care system is similar to consumer choice proposals at the national level. One of these has been advanced by Heritage Foundation scholars.

Like Maryland's H.B. 376, the Heritage Foundation Consumer Choice Health Plan seeks to:

Assure access to at least a basic level of health care for all Americans;

Create a system in which Americans keep their health plan from job to job, a feature known as "portability";

Introduce cost-conscious consumer choice, a feature now virtually absent from the system, as the driving force to keep costs in check;

Empower consumers with tax credits or vouchers, through a change in the tax treatment of health benefits and health purchases, to afford care; and

Reform the health insurance market to make it more sensitive to the needs of consumers. (See Butler, "A Policy Maker's Guide," Part II. See also Stuart M. Butler, Ph.D., and Edmund F. Haislmaier (eds.), A National Health System for America (Washington, D.C.: The Heritage Foundation, 1989); Stuart M. Butler, "A Tax Reform Strategy to Deal with the Uninsured," The Journal of the American Medical Association, Vol. 265, May 15, 1991. Other market based proposals include: Mark Pauley, Ph.D., et al., Responsible National Health Insurance (Washington, D.C.: The AEI Press, 1992); John Goodman, Ph.D., et al., An Agenda for Solving America's Health Care Crisis (Dallas: The National Center for Policy Analysis, 1991); and Regina E. Herzlinger, Ph.D., "Healthy Competition," The Atlantic Monthly, August 1991, pp. 68-81.)

The Heritage Foundation Consumer Choice Plan would phase out the tax breaks now available to Americans for their company-based health plan. The total federal revenue cost of this tax exclusion alone was $66.6 billion in 1991. (By adding revenues from state and local tax and other changes, the total amount of revenues available for tax credits would be nearly $88 billion in 1991 dollars. See Butler, "A Policy Maker's Guide," Part II, p. 16.) This same revenue would be used, dollar for dollar, to finance a system of tax credits for all families to offset part of the cost of their purchase of health insurance, or out-of-pocket medical costs, such as deductibles or copayments or direct payments to physicians. All families not enrolled in Medicaid or Medicare would be required by law to purchase at least a basic health plan.

If a company provided insurance with the Heritage proposal in effect, it could do so, and keep the tax deductibility it now enjoys as cost of doing business for the cost of that insurance. If a company were to discontinue its insurance plan, it also could do so, but it would be required by law to add the monetary value of the firm's contribution to its health insurance plan to the paycheck of each employee in the form of wages. If the company did not have a plan, the employee would buy his or her own coverage. In each case, the employee would receive a tax credit of the value of the plan -- either the plan provided by the employer or the family's chosen alternative plan.

Under such a consumer-based system, workers previously enrolled in a company-based plan could decide instead to take the cash value of their health benefits and buy a plan they felt was better value for money.

The Maryland Consumer Choice Health Plan

The Maryland Consumer Choice Health Plan includes many of the same features as consumer-driven, market-oriented proposals at the national level. It would assure access to at least a basic health plan for all Marylanders. It sets down a basic package of benefits that must be offered by insurance carriers operating in the state. It includes a sliding scale system of tax credits, related to household income, to help families pay for coverage. It requires all individuals and heads of households to enroll in a health plan. And it finances the benefits out of funds generated from three sources: a new employer payroll tax of four percent; the elimination of the current tax exclusion of employer-provided benefits; substantial monies generated from reductions in the cost of uncompensated care for the uninsured and changes in Medicaid. The financing is arranged in such a way that there is no net impact to the state budget. (Analysis of Carl J. Sardegna, Chairman and CEO of Blue Cross and Blue Shield of Maryland, Inc., in a lecture at The Heritage Foundation, May 27, 1992. According to an analysis done for Blue Cross and Blue Shield by the Center for Health Policy Studies in Columbia, Maryland, the revenue form lifting the income tax exclusion on health care benefits would amount to $1 billion and the 4 percent payroll tax would yield $2.6 billion. Increased employer tax revenues, plus changes in Medicaid and the elimination of uncompensated care in Maryland's hospitals would yield slightly more than $1 billion. The total revenues from Maryland's tax changes and additional savings would provide over $4.7 billion for funding tax credits and vouchers.)

Specifically, the proposal:

1) Requires all heads of households in the state to enroll themselves and their families in a health insurance plan

The plan would require all Marylanders, including Medicaid beneficiaries, to enroll in a health insurance plan offering a standard benefits package. A basic benefits package would be determined by the state of Maryland.

Proponents of Maryland's Consumer Choice Health Plan defend this mandate on two related grounds. First, they say, it reinforces the basic principle that health care primarily is a responsibility of each head of the household, not of business or the government.

Second, the requirement recognizes implicitly that there is a "social contract" between the individual and the rest of society when it comes to health care. Government assumes an obligation to make it possible, through financial assistance, for each citizen to be able to afford what society considers a level of health care that should be available to all. In return, the individual must assume a corresponding obligation to devote a reasonable share of the household income to purchase basic care and insurance, rather than being a "free rider" on society. Thus requiring individuals to purchase health coverage protects other citizens from having to pick up the tab when severe illness strikes, just like requiring drivers to purchase automobile insurance is to protect other drivers and pedestrians.

2) Establishes a system of health insurance tax credits and vouchers

Under the Maryland Consumer Choice Health Plan, all citizens of Maryland would receive tax credits or vouchers to help them purchase insurance. Low-income Marylanders who do not pay taxes would be eligible for a voucher. All other Maryland citizens filing income taxes would be eligible for a tax credit, which they could receive by an adjustment in their tax withholdings at the place of work. The amount of the credit would be based on the household's income. In the case of families at or below the official poverty level ($13,359 for a family of four), the voucher would be equal to $3,400 per year for a family of four. This is based on an estimate of the premium cost of a standard plan. For those families above the poverty line, a sliding scale credit would apply. Specifically: A tax credit equal to 90 percent of the cost of insurance (with a maximum credit of $3,060) for families earning between $13,360 and $26,718;

An 85 percent tax credit ($2,890 maximum) for families with incomes between $26,719 and $49,999;

A 65 percent tax credit ($2,210 maximum) for families with incomes between $50,000 and $99,999.

A 50 percent tax credit ($1,700 maximum) for families with an income of $100,000 or more.

3) Changes the health insurance market

The Maryland plan changes the state tax code radically to finance access to health care for low - and middle-income Maryland workers and their families and to introduce genuine market incentives into a health insurance system where today they are virtually absent. The plan thus has profound implications for Marylanders. If enacted, the plan would mean:

Tax relief for a health care plan would no longer be tied inextricably to an employee's place of work. This means that the tax relief for health insurance would be neutral; that is, it would not favor only employer-provided insurance. Thus if a family chose a plan sponsored by an organization other than the employer that family would receive a tax break. Today it does not. Moreover, if a family is not enrolled in an employer-based plan, the only alternative is to purchase individual insurance with after-tax dollars, which makes the cost prohibitive for most middle-class families. But giving tax relief to families to purchase health insurance, regardless of where they work, creates a level playing field for all kinds of insurance. Employer-based plans in Maryland, which now enjoy exclusively favorable tax treatment, would have to compete with alternative plans. Workers could, of course, take their money and credits and spend them on company plans if they wished, or a plan made available to them by their employer. But they could also spend it on a plan sponsored by their union, a trade association, an agricultural, commercial, or fraternal society, or any other group. Even religiously-based organizations in Maryland could offer health insurance options to Maryland workers and their families.

This change would allow the wide range of options now enjoyed exclusively by members of Congress and federal workers, who today can choose from among plans offered from many organizations such as unions. (Currently more than 35 percent of all of the enrollees in the Federal Employees Health Benefits Program (FEHBP) are enrolled in health plans sponsored by unions or employee organizations. See Robert E. Moffit, "Consumer Choice in Health: Learning from the Federal Employees Health Benefits Program," Heritage Foundation Backgrounder, No. 878, February 6, 1992.)

The available credit would be refundable, making it a voucher for low-income families. Any individual could claim a tax credit to use in purchasing a qualified health care plan. But persons with no tax liability would be eligible for a voucher, in effect a refundable tax credit, to cover their health insurance costs.

More tax relief would go to the needy rather than simply to high- income individuals with more generous company-based plans. The current tax-free status of company-based health insurance is very regressive. The higher an employee's income, and the larger his or her health insurance benefits, the bigger the tax break. According to Lewin/ICF calculations, the average federal tax break for American families with household incomes above $75,000 per year is $1,427. But a working family earning under $10,000 gets an average of just $50 in tax relief. (See Butler, "A Policy Maker's Guide," Part II, p. 20.)

If the breadwinner in the family works for a small firm with no health plan at all, which is common among lower-paid workers, then that family typically gets no tax relief at all for medical bills or the health insurance it buys.

The Consumer Choice Health Plan rectifies this stark inequity in the tax code, at least at the state level. Because it replaces existing tax relief with a sliding scale tax credit that is larger for the lower-paid and is refundable, it targets the greatest tax relief to those who need it most.

4) Reforms the Insurance System and Protects Consumers

The Consumer Choice Health Plan establishes ground rules for health insurance companies operating in Maryland. All "qualified" plans must include catastrophic coverage, must sell insurance to any Maryland citizen, and guarantee the renewability of the policy. Also, plans no longer can deny coverage to an individual or a family because of a "pre-existing" medical conditions.

The bill also sets up a State Health Insurance Commission to review Maryland's health care costs and quality of qualified health plans. Plans meeting state requirements would be eligible to participate in the demonstration program, receiving payment of premiums in the form of tax credits or vouchers. Insurers also would be required to operate in a fiscally sound fashion and keep administrative costs, including the costs of claims processing, under control. To help accomplish this, the bill requires each health insurance carriers to use a common claim form within one year of enactment, and to issue a standard "benefit card" to policyholders that can be used in electronic billing. This would cut both cost and volume of paperwork in Maryland's health insurance system.

Making a Good Plan Even Better

The deliberations in Maryland have helped change the course of the national health care debate. When policy makers at the state or national level consider models for health care reform, the choice no longer is restricted to a government single-payer system or employer- based mandatory insurance, each replete with a stiff regimen of tough controls on prices, procedures or medical services. The Maryland Consumer Choice Health Plan now offers a third model for state lawmakers -- a universal health plan based on consumer choice and competition. This approach attempts to combine the best features of private medical practice and insurance with universal access and direct tax assistance to individuals and families that need it the most.

There are features of Maryland's existing health care delivery system that are inconsistent with a market-based approach, such as the state's policy of comprehensive price setting for hospitals and mandatory benefits for insurance policies. But the bill takes the most important step towards a consumer-driven market by addressing the financing of the health care market. In this respect, the proposed Maryland Consumer Choice Health Plan is a major step toward a state version of the consumer-driven, tax-based universal health care system now being proposed at the national level by such organizations as The Heritage Foundation. Moreover, the Maryland Consumer Choice Health Plan is a model for reform that can easily be adopted by other states.

Some states already are considering similar plans. In a plan developed by John Garamendi, the Insurance Commissioner for the State of California, for instance, all Californians would be guaranteed comprehensive health care benefits. Plans would be certified by the State of California as qualified plans and all residents would have the right to enroll in any certified plans of their choice. They would receive the equivalent of a voucher for the cost of a basic managed care plan, and would pay out of pocket for the difference in cost if they chose a more generous plan. The Garamendi proposal incorporates insurance reforms and finances the system with premiums paid by both employees and employers. While employers would be required to pay into a central fund for financing the system, they no longer would need to offer insurance to employees themselves.

While the Maryland Consumer Choice Plan is a solid plan for guaranteeing universal access to health care, there are certain refinements that could make it even more effective, and that should be considered by any other state contemplating a similar plan. For example:

1) Expand tax relief to include the direct purchase of medical services

If tax relief were available for out-of-pocket medical expenses for both individuals and families, not just for insurance, this would encourage consumers to pay directly for routine medical services. With such tax relief available, consumers would be more likely to forego insurance options with high "front end" coverage of routine medical services, like teeth-cleaning and routine office visits, in favor of insurance options with stronger "back end" coverage for more costly services.

According to a recent Gallup survey conducted for the American Medical Association (AMA), most doctors do not even discuss fees with their patients before treating them. (Some 63 percent of the respondents in a 1992 AMA patient poll revealed that cost of care was not discussed before treatment, and 57 percent of the respondents said they would prefer their doctor to discuss his fees. The Capital (Annapolis), May 30, 1992. The same situation applies to hospital charges. A survey of hospital charges in northern Florida, for example, showed that these costs vary widely for the same procedure. "Total average costs for seven of the 12 most common hospital procedures varied from $27,851 to $58,084, a difference of 110 percent," noted the editors of The Florida Times-Union. The insulation of consumers to these radical variations of price aggravate health care cost increases. See "Value of Hospital Cost Figures Should Be Determined by Users," editorial, The Florida Times-Union, April 15, 1992.) With more direct purchasing of routine medical services, this would change for at least minor, routine services. With tax relief for the purchase of routine out-of-pocket medical services, workers and their families would shop around for the best value for their money. There would be a greater opportunity for the patient to act as a genuine consumer and enter into a relationship with the doctor as an engaged patient, rather than as a merely passive recipient of third party payment decisions. In such a relationship, patients would have an incentive to at least question the costs of the services that doctors now provide and doctors will have incentives to look at the services they provide to patients more in terms of their direct and immediate medical benefit to a patient, unbiased by whether or not those procedures are paid for by a third party. This would make for a healthier doctor-patient relationship.

Furthermore, just as in other forms of insurance, such as automobile coverage, higher deductibles, copayments, or coinsurance invariably means lower premiums for health insurance. For both of these reasons, tax relief for the purchase of routine medical services would help to control health care costs.

2) Base tax credits or vouchers to family health care costs compared with income

The Maryland bill is very generous. It would give low-income families a voucher or credit to pay for the entire value of their health insurance. But that discourages comparison shopping among alternative plans for the best value. Paying a percentage of the cost, however, encourages families to seek good value. In addition, a flat credit means middle-income families with very high medical bills could still face crippling costs. But, it is necessary to give generous help to lower-income families to help them obtain care, so that price is not a barrier.

A way to achieve each of these objectives would be to set the tax credit or voucher at a percentage based on the amount of gross family income consumed by health care costs. The credit system might, for instance, give every family a basic credit or voucher of 30 percent of the cost of health care. But if health care costs were to exceed, say, 5 percent of gross family income, the credit would be raised to 50 percent. If the high risk and cost of insuring the family, or high and unforeseen out-of-pocket expenses, meant health costs exceeded say, 10 percent of family income, the credit or voucher could be increased to 75 or 80 percent of the costs. In this way, any family -- including middle-class families -- facing very high costs would receive a high percentage credit. Families with low costs compared with their incomes would get a low credit.

3) Require employers to make payroll deductions for employees' health insurance

Under the Consumer Choice Health Plan, Maryland employers will serve as a clearinghouse for health insurance options. If the plan is enacted, employees will be able to purchase either the employer's plan or any other qualified plan. If an employee chooses an alternative plan to that offered by the employer, the employee must take responsibility for making timely payments to the insurer.

One way to make sure workers made regular payments -- and did not risk losing coverage -- would be to require employers to make a payroll deduction for payment of the employees' premiums and transmit these premiums to the health insurance carrier of the employees' choice. Many companies do this now, as a matter of course, for retirement investment programs chosen by employees, such as 401(k) plans. This could be done for health insurance in Maryland and in other states adopting a consumer choice health care reform program.

4) Replace state mandated benefits provisions with annual basic benefits setting

In order to make the Maryland Consumer Choice Plan budget neutral, the authors have proposed a 4 percent payroll tax on the employer. This tax will help to pay for health insurance tax credits and vouchers at current benefit levels. But these benefit costs are artificially high today because state law requires insurance to include in their plans a wide range of "mandated benefits." Over the past two decades, more than 800 state laws have been passed in various states, mandating that private insurance cover specific benefits. Maryland ranks second, behind Connecticut and just ahead of California, in the number of specific insurance mandates applying to insurers in the state. Maryland mandates 33 different medical services, including alcoholism treatment, drug abuse treatment, in vitro fertilization, chiropractic services, nurse midwives, optometrists, psychologists, and even social workers. While mandated benefits are often politically popular, they drive up unnecessary utilization of such services and thus the costs of private insurance. For example, according to 1991 report of the national Office of Government Relations of the Blue Cross and Blue Shield Association, Maryland's "... outpatient mental health care visits rose dramatically once they were mandated, from 448,000 in 1983 to almost 800,000 in 1986, an average growth rate of 21 percent per year." ("State Health Benefits and Provider Mandates," Blue Cross and Blue Shield Association, Issue Review, July 1991.) Donald Hillier, senior vice president of the Maryland National Financial Corporation, notes that Maryland's mandated benefits laws contribute an estimated 17 percent to 27 percent of the costs of a health care plan in Maryland. (Frieden and Zicklin, op. cit., p. 76.)

Before resorting to new taxes to cover the high cost of elaborate mandated benefits for the uninsured, state lawmakers should consider elimination of the mandated benefits, especially since the most important objective is to provide the uninsured with a basic level of protection, such as catastrophic protection for themselves and their families. A state has an interest in the benefits to be included in a basic plan, such as hospital and surgical benefits, physician services, and well-baby care. But rather than the state legislature mandating detailed levels of benefits and specific specialty services, a better approach, which would ensure both control and flexibility, would be to have the state negotiate a basic set of benefits each year with insurance companies. Maryland could reserve that function to the proposed State Health Insurance Commission, as outlined in H.B. 376. This would more easily accommodate periodic changes in clinical medical practice and assure quality control over plan offerings. This approach has worked well at the federal level in the Federal Employees Health Benefits Program (FEHBP), administered by the U.S. Office of Personnel Management (OPM). Instead of Congress legally mandating a set of specific benefits for the federal program, OPM enters into sensitive discussions with private insurance carriers and determines benefit levels each year, assuming that any increase or decrease in benefit levels has a direct bearing on the price of insurance premiums for federal workers, retirees, and members of Congress. A similar approach could be pursued in Maryland.

Without detailed state mandates, the proposed Maryland Health Insurance Commission, or a similar body in another state, could exercise its authority in meeting the basic needs of the uninsured, such as major medical hospital and catastrophic coverage, and allow consumers to pay extra for other services, such as chiropractic care or nurse midwives, if they so desire.

5) Intensify market competition by allowing Federal Employee Health Benefit Plans to compete in the state on the same basis as for federal workers

The heart of the Maryland Consumer Choice Health Plan is the right of an employee to choose a plan other than that provided by his or her employer. This is a key not only to the empowerment of Americans to make fundamental decisions about their health, but also to the engine of market-driven cost containment. And consumer choice in health care, while a novel idea for most Americans, is already a fact for those Marylanders who are federal employees.

A model for consumer choice already exists. It is working and it is working well. It is called the Federal Employees Health Benefits Program (FEHBP). (See Moffit, op. cit.) Initiated in 1959, this program is based on the twin principles of consumer choice and competition. Nationwide, the FEHBP covers nearly ten million Americans and has over 400 competing plans, with about two dozen in any particular area. These range from traditional fee-for-service carriers, like Blue Cross and Blue Shield, to 310 health maintenance organizations (HMOs) like Kaiser Permanente, to employee organization plans, like the popular Mailhandlers Plan. The program is open to every member of Congress, every congressional staffer, some 750,000 members of the postal service, the entire federal civil service, all 365,000 blue-collar federal employees -- indeed every federal worker from a messenger to a Cabinet Secretary, from the White House janitor to the President of the United States.

Many of the desirable, small group insurance reforms embodied in the Maryland Consumer Choice Health Plan -- such as guaranteed renewability, a prohibition on exclusions for pre-existing conditions, and open enrollment for anyone who wants to join a plan -- already are available to employees enrolled in the FEHBP. The FEHBP is not burdened by state mandated benefits laws or state premium taxes, and the precise level of benefits each year changes only after negotiations between the federal government and private insurance carriers. But the final decision over price and benefit packages is determined by the market -- plans must satisfy the consumer if they are to survive.

Unlike many private company-based plans, FEHBP also includes 1.5 million retirees, plus their spouses and survivors, who tend to use far more services than the average American. What is remarkable is that even with such a large number of retirees, including retirees who are ineligible for Medicare, this system generally has outperformed the private sector in holding down the rate of increase of premium costs. During the period 1980 to 1988, for instance, FEHBP premiums increases averaged 12 percent per year, while typical private sector plans -- which generally do not include retirees -- ran at 14 percent. This year, premium increases in the FEHBP will be 8 percent, while the estimated increase in all private plans nation wide will average 20 to 25 percent. (Michael Schachner, "Health Care Costs Will Be Boiling Over Again in 1992," Business Insurance, December 16, 1991, cited in Medical Benefits, Vol. 9, No. 2 (January 30, 1992), p. 1.) The main reason for this effective cost control in the federal system is that employees shop for the best bargains for their money.

Over 30 FEHBP plans already operate in the Maryland suburbs, and in most cities across the nation there are well over a dozen plans for federal employees. These plans already are certified by the federal government. As part of its demonstration project, Maryland could seek a waiver or some other form of agreement with the federal government to permit these plans to market insurance to all Maryland citizens who wish to purchase them, not just federal workers. Other states interested in promoting competition in the insurance industry could do likewise.

What the Federal Government Should Do

The Bush Administration has declared its intention to issue waivers, or administrative exceptions to the rules and regulations that govern federal programs, to promote state level experimentation in key areas of health and welfare reform. Indeed, as part of the President's own "Comprehensive Health Reform Program," states are encouraged to experiment with Medicaid by designing ways to deliver health care more efficiently. Indeed, the Bush Administration health care reform plan encourages vouchers for low-income citizens covered under the Medicaid program. When the Maryland state legislature reconsiders health care reform, the Administration can do three things to assure the success of Maryland's Consumer Choice Health Plan:

Offer to grant waivers

The Bush Administration can offer the State of Maryland a waiver of the Medicaid rules in order to assist Maryland in turning its current Medicaid program into a full- scale voucher program as envisioned in Chairman Taylor's original bill. This would eliminate the current acute care Medicaid program and allow low-income Maryland citizens to get basic health care like every other Maryland citizen.

Offer to guarantee insurance competition

The Administration could make arrangements with Maryland to allow any of the plans competing in the Federal Employees Health Benefits Program in the Washington, D.C., and suburban Maryland areas to participate in any demonstration project authorized as part of Maryland's Consumer Choice Health Plan. This immediately would assure Maryland citizens strong competition and a wide range of options -- particularly for those Marylanders who now are uninsured. Moreover, it would give all Maryland citizens the right to choose from the same menu of good health care benefits and competitive prices that is offered annually to Maryland's congressional delegation and to federal workers.

Urge Congress to reform the federal tax code

The Maryland Consumer Choice Health Plan would make much-needed reforms in the tax code -- but only at the state level. To make state-sponsored consumer-choice plans more successful, Congress should amend the tax code to introduce individual tax credits for health insurance and the purchase of services, in place of the current tax break for only employer-sponsored plan. Such a proposal has been advanced by The Heritage Foundation. (See Butler, "A Policy Maker's Guide," Part II.)

By reforming the federal tax code in this way, the Congress would make it easier for states to experiment with health care reform. In any case, there can and will be no complete reform of America's health care system, including the removal of the perverse incentives that are now relentlessly driving up costs in the system, without a reform of the perverse incentives in federal tax code.

The current federal tax breaks for employer-based health insurance are grossly inefficient, in that they favor employer-based insurance options to the exclusion of all other types of insurance. They are also grossly unfair, in that the larger a family's personal income, the larger are the available tax breaks. The current federal tax system discriminates in favor of highly-paid executives in large companies with expensive, tax free health insurance packages, and discriminates against lower-paid workers and Americans who work for small companies with little or no health insurance benefits.


Maryland has a rich tradition of policy experimentation. It was an early model for religious toleration in colonial times, and has since been an innovator in social and economic policy. In 1902, for example, Maryland was the first state to enact a workers' compensation law. With serious legislative deliberation on a demonstration project of consumer choice and competition in the health care delivery system, targeting tax relief to those who need it most and promoting affordable care among every income category of her citizens, Maryland once again is in the forefront of innovative social and economic policy.

Other states also are exploring innovative ways to deliver health care more efficiently and more widely. Some, such as California, are considering consumer-choice proposals.

While the focus of the debate over health care reform has been on federal policy, the states actually have been reforming health care within their own borders. (See Michael Tanner, "As Washington Dithers, States Reform Health Care," Heritage Foundation Backgrounder No. 868, November 27, 1991.) Major initiatives are underway in states ranging from Florida to Minnesota. Vermont and Maine have enacted significant insurance market reforms. Hawaii is already a model for employer mandates. And Oregon may prove to be America's first real test of explicit government rationing of health care in the Medicaid program; providing treatment for patients with government-approved diseases and reimbursing doctors for government approved procedures, while withholding care and reimbursement for unapproved diseases or procedures.

The State of Maryland has an opportunity to lead the nation in a new direction. If Maryland's innovative reform proposal becomes law, it will create a state health system based on consumer choice and market competition -- applying the same economic forces to health care that have assured Americans efficient and economical services in the rest of the economy.

About the Author

Robert E. Moffit, Ph.D. Senior Fellow
Center for Health Policy Studies