The Heritage Foundation

Executive Summary #1357es on Health Care

April 7, 2000

April 7, 2000 | Executive Summary on Health Care

Executive Summary: Lessons From Tennessee's Failed Health Care Reform

When President Bill Clinton ran for office in 1992, he made health care reform a major domestic policy issue. Although his massive proposal did not become law, several states soon adopted variations of his plan to make health insurance more accessible and affordable for their citizens. Among the most ambitious of these plans is TennCare, which Tennessee officials proudly described as a less ambitious version of the Clinton plan.

TennCare covers almost one-quarter of Tennessee's population and serves a higher percentage of adults, who on average require more health care, than children. Yet since its inception, it has failed to achieve its foremost goals. Although the state may have reduced the number of uninsured, it also has dramatically increased costs. Moreover, reimbursement rates have been kept so low that no new managed care organizations have joined since it started, several have left, and Blue Cross Blue Shield, which covers about half of the TennCare population today, recently noted that it intends to exit the program at the end of 2000.

Rather than provide a model for how government can improve health care, Tennessee's experience offers legislators in other states lessons on what they should and should not do.

Broad Benefits.
Not only have state officials expanded eligibility far beyond the standard that applied when Medicaid began, but they also have made the benefits package rich and comprehensive. TennCare covers inpatient and outpatient services, physician services, prescription drugs, and medical supplies, as well as services such as lab tests and x-rays. It also covers home health care, hospice care, and ambulance charges and contracts with behavioral health organizations to provide comprehensive mental health benefits. Out-of-pocket expenses are limited for low-income participants. Others, such as the uninsured, the uninsurables unable to purchase health insurance because of a pre-existing medical condition, and those who have lost coverage, pay premiums based on a sliding scale.

Costs and Cuts.
With expanded eligibility and a comprehensive benefits package, TennCare's costs have soared; the state has appropriated $4.3 billion for the program in the current budget. According to a new study, health care expenditures increased 69 percent between 1992 and 1999, while personal income increased only 38 percent.

Predictably, when faced with soaring costs, state officials adopted restrictive reimbursement policies for the plans. A March 1999 actuarial review by PricewaterhouseCoopers found that managed care reimbursement rates were about 10 percent below the level considered actuarially sound. The report estimated that managed care organizations needed a capitation rate increase of between 5 percent and 35 percent; their best estimate was 20 percent. At the close of the 1999 session, the legislature authorized $190 million in additional state and federal matching funds, most of it for providers.

An Invitation to Abuse.
TennCare's rich benefits package and ease of entry made it a magnet for abuse. According to new reports, TennCare spent $6 million covering 14,000 dead enrollees; 16,500 enrollees lived out of state; of 98,000 enrollees studied, 20 percent were found ineligible to be in the program; and 450 of those who were ineligible were state employees who had access to the state's health insurance plan.

TennCare's Lessons.
While state legislators may be able to implement reforms that reduce such fraud, incremental steps will not solve TennCare's systemic financial problems. Before legislators in other states pass comprehensive health care reforms aimed at providing universal coverage, they would do well to look at Tennessee's struggle. Among the key lessons:

  • Don't rush to "do something" for health care without considering the inherent limits of state policymaking and the damaging impact of higher health care costs, which would result from their changes, on individuals and families and on the number of uninsured.
  • Recognize that managed care is not a panacea for saving money and that one cannot cut reimbursement of doctors or hospitals without compromising the quality of care.
  • Acknowledge that "comprehensive" health benefit packages will not also be "affordable." In any case, if the legislature wants to provide government assistance, efforts should focus on those who most need the help.
  • Realize that the only way to achieve high-quality care at a lower cost is to assure consumer choice so that patients have a reason for being prudent health care shoppers.

The Need for Tax Equity.
The major problems of health insurance markets stem not from inadequate government regulation, but from an outdated set of federal and state tax policies that provide unlimited tax relief for persons who have health insurance through their jobs but deny equal treatment to those who buy health insurance on their own. Such tax policies unfairly and profoundly distort the market. They encourage workers to remain in employment-based plans, and thus frustrate consumer choice of plans and benefits. They also undermine the access of millions of Americans to alternative forms of insurance coverage, such as coverage obtained through their associations, trade and professional groups, and religious and fraternal organizations.

What to Do.
Instead of trying to adapt portions of the ill-conceived Clinton plan to address differing conditions in state-based health insurance markets, the states should urge their federal representatives to change the tax code to enable a truly competitive market to flourish. In such a market, individuals and families would enjoy real consumer choice as health insurance companies competed directly for consumers' dollars. In a real market, state legislators' role would be to review outdated rules and regulations and redesign state insurance laws to promote, not inhibit, consumer choice and competition.

Merrill Matthews, Ph.D., is a health care policy analyst who specializes in federal and state health care policies. He is currently a visiting scholar at the Institute for Policy Innovation in Lewisville, Texas.

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