Members of Congress once again are
embroiled in a debate over managed care reform legislation that
attempts to address some of the symptoms plaguing America's health
care system rather than the underlying causes of its disorders.
Instead of changing federal policies that restrict competition and
patient choice, the Patients' Bill of Rights Act of 1999 would
burden the health care sector with even more federal regulation.
And a growing body of evidence indicates that adding new layers of
regulation will (1) increase the cost of health insurance for many
Americans and (2) add to the number of people who are
uninsured.
Today, nearly 44 million people will go
without health insurance at some point during the year; this number
continues to grow at the astonishing rate of 100,000 each month. The proposals in
the managed care reform legislation before Congress--despite being
called a "patients' bill of rights"--would allow politicians, not
patients, to decide what procedures and medications health
insurance policies would cover and restrict, and would do little to
expand choice and access to affordable coverage. Specifically:
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Managed care reform proposals would
increase health insurance costs for America's workers and their
families.
According to recent Congressional Budget Office (CBO) estimates, if the provisions
of the Patients' Bill of Rights Act of 1999 were fully phased in,
insurance premiums would rise by an average of 4.8 percent. The
private-sector mandates in Title I of the bill would cost about $3
billion in 2000 and about $13 billion in 2004. The costs in 2004
would represent about 3.4 percent of total private-sector health
insurance expenditures.
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In driving up the cost of coverage, the
proposed legislative reforms also would throw more people off
insurance rolls.
The CBO, as well as several private economists, estimates that
each 1.0 percentage point increase in the cost of health insurance
drives 200,000 to 300,000 additional Americans off the insurance
rolls.
The
imposition of regulation, without considering cost or consequence,
is not unlike the 18th century practice of "bleeding" patients to
drain off mysterious "humours." Increasingly, empirical evidence
shows that legislative cuts into the normal functioning of a health
care market--a practice that has accelerated in recent years
following the enactment of numerous state regulations, the federal
Health Insurance Portability and Accountability Act (HIPAA) of
1996, and the Balanced Budget Act of 1997--have the same
debilitating effect on consumer choice and competition as the
primitive medicine practiced by physicians 200 years ago. Today's
politicians, in directing the practice of medicine, may feel they
are doing something to help, but, ultimately, patients are the ones
who suffer.
THE HIGH COST OF GOOD INTENTIONS
The
data show that well-intended health care legislation enacted during
the past 10 years has done little to improve the prospect of
providing adequate health care for all Americans. In 1987, 32
million Americans under age 65 went without health insurance at
some point during the year, or 14.8 percent of the population. A
decade later, the number had risen to nearly 44 million
uninsured--or 18.3 percent of the population under age 65. Instead of
attending to the needs of the millions of Americans who lack health
insurance, Congress and the White House now argue over legislation
that addresses the legitimate concerns of a relatively small
percentage of people with health insurance who are unhappy with
it.
The
fact that most Americans are satisfied with their health coverage
is lost in the shuffle. In October 1998, Roper Starch Worldwide
reported that only 7 percent of Americans polled were "not at all
satisfied" with their health plan. In late January and early
February 1999, 88 percent of Americans polled by ICR/Associated
Press expressed satisfaction with the quality of their health
insurance coverage. A survey by Princeton Survey Research
Associates in late 1998 showed only 23 percent of Americans polled
believed that patient protection legislation should be the top
priority of the health care debate in Washington, D.C. A 1998 poll by
Charlton Research Company found that 66 percent of respondents said
health care is regulated enough already. Only 25 percent said more
regulation is needed, but the majority of these people changed
their minds when they learned regulations would increase government
bureaucracy or health care costs.
Instead of arguing over new mandates for a
relatively small number of Americans, Congress should focus on the
root causes of the health care problems facing America--the growing
burden of regulation on the health care industry, which is
increasing the cost of health insurance and swelling the ranks of
the uninsured. The health industry is perhaps the most heavily
regulated sector of the U.S. economy. Most Americans recognize that
regulation of an industry drives up prices, restricts innovation,
dries up competition, and forces businesses to cater to regulators,
not consumers. This clearly is the case in the health care sector.
Each new mandate and regulation passed at the federal and state
level may increase costs by a percentage point or two, or by much
more. And even though each regulation or benefit mandate can be
justified individually, often by a constituency that argues
passionately for its merits, the cumulative effect of adding more
regulation is that more and more people are forced to forego health
coverage.
The
problem of over-regulation is exacerbated by the fact that patients
do not control either their money or their choices in obtaining
health care and medical coverage. For the vast majority of insured
Americans, health services and insurance products are purchased for
them by private- or public-sector bureaucracies. The majority of
Americans who receive their health insurance through their
workplace is offered only one health insurance plan. These
Americans do not have the opportunity to choose medical services or
coverage that best suits their individual or family needs and
cannot play the balancing role of consumers in forcing diversity
and price competition in the health care market. Doctors, care
providers, and patients alike find themselves on the receiving end
of decisions made by third and fourth parties, including employers,
managed care network bureaucrats, and, increasingly, government
officials.
The
solution to consumer dissatisfaction with their health plans is to
give consumers greater flexibility to choose the benefits and plans
that satisfy their needs. Consumers who were able to exercise their
power in the health marketplace and select from among competing
health plans would have much less need to march to Capitol Hill for
an act of Congress to protect them whenever they were unhappy with
their health plans. Instead, they could vote with their feet and
move to another plan. In a properly functioning
health market, in which consumers could choose and own their health
insurance policies, companies would be forced to shape insurance
products to meet their needs for services, quality, and price.
Companies that did not do so quickly would lose customers and
revenue. Sellers of health insurance policies would be bound by the
contract agreements they had made, which would be enforceable
through the existing legal system.
The
way to achieve a consumer-driven market for health insurance is to
change federal tax policy so that individuals can select and choose
their own health coverage arrangements and obtain direct tax relief
when they do so. Congress could begin the process by giving
uninsured Americans tax credits to purchase their own health care
coverage while lifting regulatory barriers to a properly
functioning health insurance market with alternative purchasing
mechanisms. Congress should place a moratorium on mandates and
regulation until their costs and impact are examined in full.
Taxpayers could facilitate the process by holding federal and state
officials and bureaucrats accountable for the consequences of their
policies. In the meantime, the rule that governs the practice of
medicine also should govern efforts to reform health care: First,
do no harm.
WHY THE UNINSURED ROLLS ARE GROWING
For
decades, policymakers at all levels of government have searched for
ways to help families to gain greater access to affordable health
care. At the state level, legislators have imposed thousands of new
rules and regulations with the intent of forcing health insurers to
offer coverage with good benefits at reasonable costs and with
protections for the policyholders. Additional insurance regulations
and benefit mandates were passed at the federal level with much the
same intent. Yet, despite these efforts and a sustained period of
economic growth, the number of Americans without health insurance
continues to rise--reaching nearly 44 million today.
Who Are the Uninsured?
The
uninsured are disproportionately young, minority, lower-income
Americans who work for small companies or are their dependents. Hispanics and
minorities are the most likely to be uninsured: Among working-age
Americans, 14 percent of whites, 24 percent of blacks, and 38
percent of Hispanics are uninsured. The numbers of
uninsured are even higher for lower-income minority group members,
reaching 52 percent for Hispanic families whose incomes fall below
the federal poverty level.
Individuals and families who are on the
tightest budgets must make the most difficult choices in allocating
their limited resources. After paying the rent or mortgage and
putting food on the table, millions of Americans simply do not have
enough money to buy health insurance. The most recent
Kaiser/Commonwealth Fund survey highlighted this fact; the majority
of uninsured Americans polled cited cost as the primary reason they
do not having health insurance.
Rising Costs
Over
the past decade, health insurance costs rose much faster than
overall consumer prices. The U.S. General Accounting Office (GAO),
the financial investigating arm of Congress, reported in 1997 that
the average annual premium for employment-based family health
insurance coverage increased by 111 percent from $2,530 in 1988 to
$5,349 by 1996. During this same period, overall consumer prices
rose by 33 percent. The GAO study
concludes that the continued erosion of health insurance coverage
is linked explicitly to cost pressures.
A
direct relationship exists between increases in health insurance
costs and the number of uninsured. The CBO estimates that a 1.0
percentage point increase in the cost of health insurance forces an
additional 200,000 Americans off the insurance rolls. In recent
testimony before Congress, economist John Sheils explained that his
estimates show that 300,000 people lose health insurance for every
1.0 percentage point increase in costs. The result of
increases in health care costs is clear: Those who can afford
premium increases least are the ones who are most likely to lose
their health insurance or, in the case of smaller, more marginal
businesses, to drop coverage altogether.
According to the CBO, employers respond to
premium increases in a variety of ways in order to reduce the
financial impact on the bottom line: They drop health insurance
coverage for employees, reduce the generosity of their benefits
package, increase cost-sharing for medical bills by employees, or
increase each employee's share of the premium.
The Effects of Regulation
The
direct link between imposing regulations and mandates on the health
insurance market and the number of uninsured is well-established in
the research. For example:
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Even before the veritable explosion in
state-mandated benefits in the 1990s, a 1989 study for the Urban
Institute reported that health care mandates significantly raised
premium costs. The study found that health insurance was from 4
percent to 13 percent more expensive as a direct result of benefit
laws.
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Using data from 1989 to 1994, Duke
University researchers Frank A. Sloan, Ph.D., and Christopher J.
Conover, Ph.D., found that the higher the number of coverage
requirements placed on plans, the higher the probability that an
individual would become uninsured and the lower the probability
that a person would have any private health insurance coverage,
including group coverage. Their research, based on more than
100,000 observations, demonstrates that the probability an
individual will become uninsured increases with each mandate
imposed by government.
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Professor Gail A. Jensen of Wayne State
University and Professor Michael Morrisey of the University of
Alabama-Birmingham reported that as many as one in four Americans
lacks health insurance because of benefit mandates. Each additional
mandate significantly lowers the probability that a firm or an
individual will have health insurance.
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Professor William S. Custer of Georgia
State University found that state guaranteed issue requirements,
coupled with either community rating or rate bands in the
small-group insurance market, increase the probability that a
person will become uninsured by nearly 29 percent. These laws hit
small firms and individuals purchasing insurance in the open market
the hardest.
The
number of state-imposed health benefit mandates has increased
25-fold over the past quarter-century, with more than 1,000
state-mandated benefit laws on the books today. Most are attempts
by state lawmakers to correct inefficiencies or inequitable
practices in the market. Unfortunately, the mandates have the
unintended effect of increasing the numbers of uninsured.
Professors Jensen and Morrisey note, "Mandates are not free. They
are paid for by workers and their dependents, who receive lower
wages or lose coverage altogether."
The Impact on Small Business. Small
businesses and individuals attempting to purchase health insurance
are hit with the full force of these mandates and insurance
regulations.
The small-group and individual insurance markets are more fragile
and expensive as a result. Most large companies are protected under
ERISA--the Employee Retirement Income Security Act of 1974, which
allows companies that self-insure to escape the reach of state
insurance laws and regulations and benefits mandates. Few small
businesses can afford to self-insure and therefore are subject to
all of the mandates and regulations imposed by the states.
Surveys conducted by the National
Federation of Independent Business (NFIB) show that health
insurance and health costs are the top concern of small businesses.
In recent congressional testimony, the NFIB's Victoria Caldiera
said that, in NFIB surveys over the past 10 years, small business
owners rank the cost of health insurance as their number one
problem--higher even than taxes. Moreover, the NFIB's members
respond in surveys that they believe providing health insurance is
the right thing to do, but costs too often prohibit them from doing
so. Many are family-run
businesses in which the employees are the spouses, sons, daughters,
brothers, sisters, nieces, or nephews of the owners. Many want to
offer health insurance but find its high costs prohibitive. About
40 percent of businesses with fewer than 50 workers do not offer
health insurance. An employee of a company with fewer than 10
employees is three times more likely to be without health insurance
than is someone working for a company with more than 1,000
employees.
Even
small companies that do offer insurance often must choose between
keeping the business going and offering health benefits. Many walk
the line by offering insurance but requiring employees to pay a
larger share of the premiums. Unfortunately, an increasing number
of people decline such coverage because of rising costs.
For
this and other reasons, the number of people with private health
insurance has been on the decline for nearly two decades. Since
1980, the number of people with private health insurance coverage
obtained either through the workplace or purchased individually
declined from 79.5 percent in 1980 to 70.5 percent in 1995. And it is those who have
private health insurance who would be hit the hardest by the
mandates of the current managed care reform legislation.
State Efforts Magnify the Problem
State efforts to regulate their health
insurance markets have had a dramatic effect on the numbers of
uninsured. For example, using data gathered in two GAO studies, a
1998 study conducted by the Galen Institute showed that, between
1990 and 1994, 16 states aggressively passed laws regulating their
health insurance markets. By 1996, the
uninsured populations in these states grew an average of eight
times faster than in the 34 states that did not pass the
comprehensive regulations identified by the GAO. Before the
blizzard of state health care legislation began, both groups of
states showed nearly equal rates of growth in their uninsured
populations.
Critics of this study claim the increase
in the number of uninsured in these 16 states was caused by factors
other than regulation, or that this high level of state regulation
had only minimal impact. The range of employment and income
characteristics of these 16 highly regulating states was similar,
however, to those of the other 34 states; their distinguishing
factor was their similarity in passing sweeping health insurance
regulations.
Kentucky was one of the most aggressive
states in regulating the health care system. In 1997, Governor Paul
Patton conceded in a speech to the state legislature that, "In
spite of good intentions and noble purpose, it didn't work....The
entire cost of the system went up." In 1996, 107,500
fewer Kentucky citizens had health insurance than in 1990, and only
one company still offered health insurance in the state. "In my
opinion," Patton concluded, "most of the general assembly believes
that we in Kentucky have experimented enough for the time
being."
In
addition to Kentucky, the other states identified by the GAO as
imposing sweeping insurance regulations were Idaho, Iowa,
Louisiana, Maine, Minnesota, New Hampshire, New Jersey, New Mexico,
New York, North Dakota, Ohio, Oregon, Utah, Vermont, and
Washington. New laws included: mandates on insurers to sell
policies to anyone who applies and agrees to pay the premium--even
if they wait to buy insurance until they already are sick
(guaranteed issue); prohibitions on excluding coverage for some
medical conditions (pre-existing condition exclusions);
requirements that insurers charge the same price to everyone in a
community, regardless of the differences in risks posed by the
individuals (community rating), plus others.
Maryland also has a highly regulated
health care system. It leads the country with nearly 50 specific
state-required health benefit mandates that dictate what products
or services must be covered by policies sold in the state. A 1996
report by the GAO concluded that Maryland's mandates add 22 percent
to the cost of a typical health benefits package.
Unfortunately, Members of Congress joined
the regulatory bandwagon of the states when they enacted the Health
Insurance Portability and Accountability Act of 1996, imposing at
the federal level some of the same insurance rules already enacted
in the states, including guaranteed renewal. As a result, it is
more difficult to conduct differential comparisons of the GAO's 16
most regulating states. Nonetheless, even today, 11 of the 16
states still see the number of uninsured individuals increasing
faster than the other 34 states; and in all but 2 of the remaining
5 of the 16 states, the growth in the insured population is 1.0
percent or less.
WHY TAX REFORM, CHOICE, AND COMPETITION
ARE NEEDED
As
costs and the number of uninsured continue to rise, a different
approach clearly is needed. By injecting patient choice and
competition into the health care sector, many of the problems the
political community is attempting to solve through legislation and
regulation would be addressed by consumers in a competitive
marketplace.
Consensus is growing among policy analysts
across the ideological spectrum, including members of the Health
Policy Consensus Group, that the key to health care reform is tax
reform. The Consensus Group is a bipartisan group of health policy
experts from the major market-oriented think tanks. It includes
analysts from the American Enterprise Institute, the Cato
Institute, The Heritage Foundation, the Progressive Policy
Institute, the National Center for Policy Analysis, the Urban
Institute, the Pacific Research Institute, the Center for Strategic
and International Studies, the Institute for Research on the
Economics of Taxation, the Galen Institute, the Wharton School of
Business at the University of Pennsylvania, Brown University School
of Medicine, and others. Despite their
differences, these analysts agree on one core point: The central
structural defect impacting the private health insurance market is
the discriminatory tax treatment of health insurance.
Inequity and Inefficiency in the Tax
Code
The
federal tax code heavily favors those workers fortunate enough to
get health insurance through their employers. Workers do not pay
taxes on the portion of their compensation package that includes
health benefits so long as the employer purchases the policy for
them. This generous subsidy, worth an estimated $111 billion a
year, is the cornerstone
of the system in the United States that ties private health
insurance to the workplace. But this system works against the
increasing number of people in today's information-age economy who
work part-time, are contract workers, or have started their own
businesses. These people are disproportionately more likely to be
uninsured.
Federal tax law governing employment-based
health insurance distorts the efficiency of the health care market
in a number of ways:
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It restricts employees' choices to the
selection offered by the employer, and frustrates employees because
they have little control over their policies and access to medical
services;
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It undermines cost-consciousness by hiding
the true cost of insurance and medical care from employees;
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Because the full cost of coverage is not
known by employees, it artificially supports increased demand for
medical services and more costly insurance and subsidizes
inefficient health care delivery;
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It suppresses cash wages; and
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It discriminates against the
self-employed, the unemployed, and those whose employers do not
offer health insurance because they will receive a much less
generous subsidy, if any, when they purchase health insurance on
their own.
Individuals in the very lowest income
categories are likely to qualify for taxpayer-supported health
programs, such as Medicaid. As people move up the income scale from
poverty into the lower-middle income range, the likelihood they
will qualify for those public health benefit programs drops. But as
people continue even further up the income scale, they are more
likely to have the good jobs and higher incomes that allow them to
qualify for generous, tax-subsidized, employment-based health
insurance.
Working Americans with annual incomes of
less than $25,000 are most likely to be caught in the trough and
uninsured. They earn too much to qualify for public programs but
are less likely to have jobs that provide health insurance as a
tax-free benefit. In a study published in Health Affairs, analysts
for the Lewin Group estimate that families earning less than
$15,000 per year reap just $71 in tax benefits from job-based
health insurance, while families making $100,000 or more get a
$2,357 tax break for the purchase of health insurance. This is a highly
regressive subsidy, which drives many of the problems with cost and
access that people experience in the health sector today.
What Policymakers Can Do
Some
policymakers try to fill this "gap" in health coverage by creating
and expanding government programs, such as the $48 billion State
Children's Health Insurance Program ("S-CHIP"), and by trying to
expand Medicare to middle-age Americans. But these programs send
politicians and consumers deeper into the quagmire of regulation.
Real solutions, however, will come from focusing on consumer
choice, competition, and tax policy reforms. Many more people would
gain access to the medical services and health insurance that they
desire and could afford if the tax treatment of health insurance
were reformed.
Specifically, Congress should
consider:
- Targeted Tax Credits.
Federal legislators could build incentives for creating a better
system and undo some of the damage done by federal and state
regulation by providing targeted tax credits to the uninsured to
purchase their own health insurance.
A number of innovative tax credit bills
are being introduced by legislators on both sides of the political
aisle, including Representatives Richard Armey (R-TX), Pete Stark
(D-CA), Jim McDermott (D-WA), Nancy Johnson (R-CT), Charles Norwood
(R-GA), John Shadegg (R-AZ), and Gene Green (D-TX). In the Senate,
support for equitable tax treatment of health insurance as a way to
expand access has been expressed by Senators Jim Jeffords (R-VT),
John Breaux (D-LA), Barbara Boxer (D-CA), Richard Durbin (D-IL),
Robert Kerrey (D-NE), and Joseph Lieberman (D-CT). Many others have
bills that would allow individual tax deductions for the purchase
of health insurance. Tax deductions could ease the burdens of
self-employed individuals, but they would not roll back the
regressive nature of the current system, which provides more tax
relief for those with higher incomes and a higher tax break for the
purchase of more expensive health insurance policies. Tax credits
would be more equitable, and they could be made refundable and
targeted to those who are most likely to be uninsured. Tax credits
would empower consumers to shape the health insurance market
through competition rather than regulation.
State officials could do their part by
taking advantage of an immediate opportunity to provide tax credits
and vouchers for uninsured children and their families through
S-CHIP.
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Alternative Purchasing
Mechanisms.
There is a need to provide alternative grouping mechanisms for
individuals in purchasing health insurance to receive the benefits
and protections large groups enjoy. A number of mechanisms are
being debated today, such as voluntary choice cooperatives,
HealthMarts, and association health plans.
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A Moratorium on Regulation and
Mandates.
A moratorium on passing more insurance regulations and health
benefits mandates should be imposed until their costs and impact
can be examined thoroughly. Consumers are denied health coverage
best-suited to their needs when government forces health plans to
provide an array of benefits designed by politicians, not
consumers. Such regulations and mandates drive up health care costs
and make insurance more costly for individuals and families who
have no choice but to purchase the policies prescribed by
politicians.
CONCLUSION
As
Members of Congress once again debate health care policy, the focus
is on managed care reforms that will add new levels of regulation
to the health care system and provide new avenues of litigation.
Clearly, Congress is responding to dissatisfaction with the current
system, but it is failing to factor in the likely consequences of
its actions. As the Congressional Budget Office and others warn,
the major bills containing managed care regulation virtually
guarantee increases in consumers' premium costs. And increased
premium costs virtually guarantee that more Americans will lose
health insurance coverage for themselves and their families.
Congress should try a new approach. The
very best patient protection is patient choice. There is no greater
restraint on the behavior of a firm than the power of consumers'
dollars. Insurance companies should satisfy the wants and needs of
consumers first, not those of their employers or government
purchasers. Patients should be able to fire poorly performing
health insurance companies, instead of being resigned to suing them
in court.
Various studies illustrate that
regulations at the state and federal level are counterproductive in
trying to increase access to quality care in the health insurance
market. The health care delivery system--at all levels--should be
held directly accountable to the individuals and families being
served. If increasing access and lowering costs are genuine goals
of Congress, a far better approach would be to empower individuals
and families to make health care choices to suit their own needs,
restore the doctor-patient relationship and the independence and
integrity of the medical profession, and force the health care
industry and insurance companies to compete for consumers'
dollars.
Grace-Marie Arnett is
President of the Galen Institute, Inc., a not-for-profit
organization located in Alexandria, Virginia, that specializes in
health and tax policy research.