The Heritage Foundation

Executive Summary #2128 on Health Care

April 23, 2008

April 23, 2008 | Executive Summary on Health Care

Executive Summary: Health Care Reform: Design Principles for aPatient-Centered, Consumer-Based Market

State and federal lawmakers are focusing increas­ingly on health care reform, and a growing number are expressing serious interest in "patient-focused" or "consumer-centered" approaches. This is certainly a positive development. Lawmakers of both parties are now more inclined to advocate making the patient the focus of America's health care system.

However, the vocabulary of health care policy is often elastic, and different people use the same terms to express significantly different concepts. This elasticity adds to the general confusion among the public and policymakers that seems to plague this area of public policy and often results in legis­lators and taxpayers talking at cross-purposes or past one another.

Consequently, clarifying the rationale, objectives, and principles of consumer-centered health care reform is important so that participants in the discussions, particularly the taxpayers, accurately comprehend the concepts and implications of this approach and are better equipped to evaluate the var­ious proposed reforms at the federal and state levels.

Key Principles. The fundamental objective of a patient-centered health care system is to maxi­mize value for individuals and families so that they receive more benefit and better results for their health care dollars, both as patients and as con­sumers buying health insurance. Only when indi­viduals choose and own their own health insurance will the other actors in the system-health plans and providers-have the right incentives to deliver better value in the form of improved results at lower prices.

If policymakers are serious about real patient-centered, consumer-driven health care reform, they should ensure that their legislative proposals embody six key principles:

  • Individuals are the key decision makers in the health care system. This would be a major departure from conventional third-party pay­ment arrangements that dominate today's health care financing in both the public and the private sectors. In a normal market based on personal choice and free-market competition, consumers drive the system.
  • Individuals buy and own their own health insurance coverage. In a normal market, when individuals exchange money for a good or ser­vice, they acquire a property right in that good or service, but in today's system, individuals and families rarely have property rights in their health insurance coverage. The policy is owned and controlled by a third party, either their employers or government officials. In a reformed system, individuals would own their health insurance, just as they own virtually every other type of insurance in virtually every other sector of the economy.
  • Individuals choose their own health insur­ance coverage. Individuals, not employers or government officials, would choose the health care coverage and level of coverage that they think best. In a normal market, the primacy of consumer choice is the rule, not the exception.
  • Individuals have a wide range of coverage choices. Suppliers of medical goods and ser­vices, including health plans, could freely enter and exit the health care market.
  • Prices are transparent. As in a normal market, individuals as consumers would actually know the prices of the health insurance plan or the medical goods and services that they are buying. This would help them to compare the value that they receive for their money.
  • Individuals have the periodic opportunity to change health coverage. In a consumer-driven health insurance market, individuals would have the ability to pick a new health plan on predict­able terms. They would not be locked into past decisions and deprived of the opportunity to make future choices.

Conclusion. The current debate over health care reform is usually framed in terms of addressing cost and access problems, accompanied by occa­sional discussions about the need to improve qual­ity and outcomes in the system. Yet those issues are all manifestations of a more fundamental dissatis­faction with the status quo. Implicitly, both policy­makers and the public are motivated by a sense that health care today is not living up to their expecta­tions for value at either the individual or the soci­etal level.

While America's current health system has clear strengths, it also has significant weaknesses. For all the benefits that it provides in helping people to live longer and healthier lives, America's health care sys­tem seems too costly, confusing, inefficient, and uneven in its results, and it leaves too many people without adequate access to its benefits. Fundamen­tally, Americans as individuals and as a society intu­itively recognize that the present health system could do a much better job of delivering value.

Put simply, Americans rightly sense that either they are paying too much for their present health system or the system should be delivering better results given what they are already paying.

The solution and the challenge for policymakers is to undertake the reforms needed to transform the present system into one that does a much better job of seeking and rewarding the creation of better value. As the experience of other economic sectors shows, health care need not be a zero-sum game in which costs can be controlled only by limiting benefits or benefits can be expanded only by in­creasing costs. Rather, a value-maximizing system will simultaneously demand and reward continu­ous improvements in benefits while continuously reducing costs.

Such a value-maximizing result can be achieved in health care only if the system is restructured to make the consumer the key decision maker. When individual consumers decide how the money is spent, either directly for medical care or indirectly through their health insurance choices, the incen­tives will be aligned throughout the system to gen­erate better value-in other words, to produce more for less.

All Americans should be able to agree with the goal of creating a value-maximizing health care sys­tem. Consumer-centered health care reforms are the only effective means for achieving that goal.

Edmund F. Haislmaier is Senior Research Fellow in the Center for Health Policy Studies at The Heritage Foundation.

About the Author

Edmund F. Haislmaier Senior Research Fellow, Health Policy Studies
Center for Health Policy Studies