Covering the Uninsured: How States Can Expand and Improve Health Coverage

Report Health Care Reform

Covering the Uninsured: How States Can Expand and Improve Health Coverage

March 14, 2003 32 min read

Innovative governors and legislators in every state of the Union can take specific steps to increase health insurance coverage and improve the range of choice and quality of that coverage for individuals and families.

State officials' range of action is constrained severely by federal law because America's health insurance markets are shaped--and distorted--by the federal tax treatment of health insurance. But while state officials obviously cannot change the federal tax code, they can still take major steps to create more expansive and efficient consumer-based health insurance markets.


State officials can work directly with the Bush Administration and Congress to increase access to health care coverage for millions of Americans, including those who have difficulty obtaining coverage because they cannot get it at their places of work, are low-income working people, or have lost their health coverage with their employment. Moreover, states can do it right by creating new structural arrangements that would give millions of Americans more choice and control over their health care decisions.

Specifically, the states can:

  • Cooperate with the Bush Administration in expanding private health insurance coverage and improving public programs. This means making changes in state law and regulation to accommodate proposed federal changes in the tax treatment of health insurance and medical care. These include new health care tax credits, tax-free rollover of funds in existing flexible spending accounts, and the expansion of tax-free medical savings accounts.

    State officials can also take advantage of U.S. Department of Health and Human Services (HHS) waivers, particularly the new Health Insurance Flexibility and Accountability (HIFA) demonstration waivers.1 These federal waivers encourage state officials to develop innovative coverage options using existing federal funds and incorporating private coverage options. Seven states have already sought and obtained expedited waiver authority from HHS. The Administration is proposing to build on this model by giving states even greater flexibility in improving the function of their Medicaid and State Children's Health Insurance (SCHIP) programs.2

  • Create a state-based information system of health plans available in the state. Individuals and families who do not get health insurance at the place of work or do not have Internet access to health plans often do not know how or where to secure affordable coverage. State officials should break the "awareness barrier" and make that information, including consumer information on quality care, available in an easy and accessible way through agencies that routinely contact working families, such as the motor vehicle administration, the revenue department, or even local hospitals.
  • Allow displaced workers who are eligible for new federal assistance for health coverage to enroll in private plans offered to state employees. Under the Trade Adjustment Reform Act of 2002, an estimated 260,000 American workers displaced by international trade can now qualify for a 65 percent federal tax credit for the purchase of health insurance. While such displaced workers are found in all states, they are particularly numerous in Florida, North Carolina, Ohio, Pennsylvania, Texas, and Washington. State officials can make available a variety of congressionally authorized options for these workers, but they could secure quick coverage for these workers by allowing them to enroll in the private health plans routinely offered to state government employees.
  • Allow state and municipal employees to use the new health reimbursement arrangements (HRAs) to secure the doctors and medical services of their choice. In 2002, the U.S. Department of the Treasury issued a major tax policy ruling allowing employers to deposit funds in tax-free health care accounts for employees and roll over the unused funds year after year in these accounts. Combining a wellness program with this new account, the Louisiana State University Healthcare Network (LSUHN), for example, experienced a 9.6 percent increase in physician office visits and a 28 percent decrease in total health costs.3 Under the Treasury Department's ruling, employers can also make the accumulated funds in these accounts available to employees when they retire to help them offset retirement health care expenses. State officials can now make the HRA option available to their employees, just as it is available to federal employees and their families.
  • Create preventive care accounts for Medicaid beneficiaries. While Medicaid, the huge federal-state program for the poor and indigent, is in desperate need of reform, state officials should seek waivers to improve the program for the 44 million people enrolled in it. To improve access to physicians, states could establish state-based cash accounts for Medicaid recipients with a PIN number and debit card. Payments for routine medical and preventive care services such as doctors' visits and checkups could be paid directly out of the preventive care account. Not only would doctors get quick, hassle-free reimbursement for their services, but Medicaid beneficiaries could avoid emergency rooms and roll over the unused funds in the Medicaid account each year. When Medicaid beneficiaries leave welfare or get a job in the private sector, the unused funds in their account could be transferred to pay for private insurance or put into a medical savings account. Using a federal waiver, Florida officials have already created a consumer-driven option for disabled Medicaid beneficiaries.4
  • Make health care coverage more affordable for individuals and families through state regulatory reforms. Benefits are mandated nationwide. A 1999 study of state-mandated benefits, conducted by the Health Insurance Association of America, found that as many as one out of four Americans who are uninsured lack coverage because of the costs of state-mandated benefits.5 State officials should review the continuing and accumulating costs of state-mandated benefits and health insurance regulations, and scale back or repeal those that exceed their regulatory benefits.
  • Enact serious medical malpractice reform. In several states, including Texas, Pennsylvania, and Nevada, soaring medical malpractice costs have made the practice of medicine increasingly difficult for doctors and other medical professionals. Beyond encouraging doctors to practice roughly $50 billion worth of defensive medicine annually to avoid litigation,6 flawed medical malpractice laws are also causing doctors to leave their states or even quit medicine altogether. This is creating serious access problems for patients in several states. At the very least, state officials should give malpractice relief to all doctors who treat Medicaid patients or dispense charity care to the poor.
  • Create a statewide voluntary purchasing cooperative. Unlike other forms of insurance, health insurance is routinely insulated from consumer choice. According to Alain Enthoven, a professor at the Graduate School of Business at Stanford University, 77 percent of all employees with employer-based coverage do not have a choice of health insurance carrier.7 State officials can reverse these dynamics by creating a structure that gives individuals and families easy access to health plans and allows private health plans to compete directly with each other for consumers' dollars. This is, in effect, what the federal government does today for federal employees and their families in the popular and successful Federal Employees Health Benefits Program (FEHBP). The components would include a state "clearinghouse" for comparative information, the enforcement of minimum benefit requirements and consumer protection rules, a service center for enrollment and the collection of premiums, a reinsurance pool for companies to cope with adverse selection, and a system of premium subsidies or state-based tax credits for insurance coverage. The best way to establish an infrastructure for consumer choice and competition would be to fold state employee health plans into the new system.
  • Study the cost of the uninsured and create a system of state-based tax credits or premium subsidies for private health insurance. Faced with tight budgets, many state officials are understandably reluctant to create a new system of health care tax credits or premium subsidies for low-income persons to purchase private health plans. But the cost of expanding coverage must be balanced against the cost of not expanding coverage. According to Jack Hadley and John Holohan of the Urban Institute, a prominent Washington public policy institution, Americans today pay $34.5 billion, mostly through government spending, in uncompensated care costs on behalf of the uninsured.8 State officials should emulate the Texas Comptroller's Office and undertake a similar analysis of the total cost of the uninsured to state taxpayers. The Texas Comptroller estimated that in 2002, Texans paid roughly $1,000 for each uninsured Texan, or the same amount that President Bush has proposed for his $89 billion program of health care tax credits for eligible uninsured adults.9


Policy analysts at the Institute of Medicine, reflecting a growing consensus among health policy analysts, have suggested that the states, in cooperation with the federal government, undertake innovative demonstrations to find out what works best in expanding coverage for the uninsured.10 As one example of "creative federalism," Congress could specify a "menu" of changes available for federal funding, including various consumer choice alternatives, a set of "performance goals" for the states to meet as a condition for federal funding, and a bonus program to reward states that meet the agreed-upon goals of expanding patient choice, insurance coverage, quality improvements, and patient satisfaction.11

In the 1990s, innovative state welfare initiatives helped to drive the overhaul of national policy to fix the crumbling welfare system. Governors and other state officials can pattern their health care reform efforts after the success in welfare reform. To assist states, Congress has already created a new source of federal funding to create pooling arrangements to cover the uninsured under the Trade Adjustment Assistance Reform Act of 2002.


Securing health insurance coverage for millions of Americans is both a federal and a state problem. State officials should engage in a continuing dialogue with officials at HHS and take advantage of new opportunities to expand choice, control cost, and reduce the number of the uninsured.

To advance this agenda, state officials can take a variety of steps:

STEP 1: Cooperate with the President in reducing the number of uninsured.

Over the past two years, the Bush Administration has outlined an ambitious and fairly comprehensive health care reform agenda.12 It includes an $89 billion program of refundable tax credits for the uninsured, an annual rollover of up to $500 of unused funds in employer-based flexible spending accounts (FSAs), and a lifting of existing statutory restrictions on medical savings accounts (MSAs).13

In concert with congressional action on these items, or even in anticipation of such changes, state officials could start changing state law and regulations to accommodate these federal initiatives in order to facilitate increases in patient choice, control, and coverage. For example, the Bush tax credits would be available not only for private health insurance on the individual market, but also for individuals and families who purchased health plans through "private purchasing groups, state-sponsored insurance purchasing pools and state high risk pools."14

After December 31, 2004, under the Bush proposal, the states could permit eligible individuals and families to buy into state employee purchasing groups using the new federal health care tax credits.15 Moreover, states could supplement federal health care tax credits for individuals and families with incomes at or below 200 percent of poverty with additional state contributions ranging from $500 to $2,000 per adult, depending on their income levels.16 State officials should start planning for such changes.

STEP 2: Take a statewide inventory of private plans and design a consumer-friendly information clearinghouse for individuals and businesses on available health plans.

Most Americans easily access the health insurance system through the place of work; but for those who do not get health insurance through their places of work, the task of securing affordable coverage can be formidable. The 41.2 million uninsured Americans are a dynamic population, uninsured largely because of a change in employment. According to a special report on the uninsured produced by researchers at the University of Michigan, "Half of the uninsured go without coverage for six months or less, while more than 40 percent are uninsured for at least 18 months."17

While expanding Internet access has helped make better information available to consumers, states could do more to make that information more readily available for those without Internet access or those who just do not know where to secure health care coverage. According to a 1999 study by the California Health Care Foundation, 53 percent of the "non-poor" uninsured said that they would be more likely to buy insurance coverage once they knew the true cost of available plans.18

Breaking down barriers to awareness becomes increasingly important if Congress or the state legislatures start providing individual tax relief or creating a system of premium supports for individuals and families to purchase health insurance. If Congress or state legislators enact a health care tax credit, the mere existence of that assistance is of little help if the persons who would benefit most from it are unaware of the health plans available to them. State officials could establish information centers or clearinghouses for individuals and families seeking health insurance and make comparative information available at state offices, including the revenue department and the motor vehicle administration.

There is precedent for the provision of consumer information in a consumer-driven health care system at the federal level. The U.S. Office of Personnel Management (OPM) and the personnel offices of all federal agencies provide comparative plan information for federal employees and retirees enrolled in the consumer-driven FEHBP. These enrollees can choose from many private health plans and receive useful comparative information on the available health plans, including premium costs, co-payments, the levels of benefits, and solid comparative information on health plan performance.

STEP 3: Make sure that health plans available to the uninsured are affordable.

A key advantage of group health insurance is that group coverage makes premiums affordable, but individual health care policies can also be affordable for millions of Americans without coverage. A national on-line source of health insurance policies,, has reported that the average premium for an individual policy purchased through their Internet service was less than $1,500, with a typical deductible of $500 or less.19

Studies conducted by the National Health Underwriters and the Health Insurance Association of America (HIAA) report similar findings. HIAA, for example, found that of its members who sell individual policies, the average premium was $2,070 for single coverage and $4,000 for family coverage.20

Policy costs vary from state to state, reflecting differing economic conditions, demographics, and patterns of medical practice. However, health plan costs also reflect the cost of state rules and regulations governing individual policies.

For example, states impose benefit mandates on individuals and families that purchase health insurance, regardless of whether they want or need such benefits. In a recent analysis of the factors driving health care costs, PricewaterhouseCoopers estimated that, nationwide, government mandates and regulations contributed 15 percent of the total increase in health care premiums for 2001-2002.21 In 2001, Maryland led the nation with 54 such mandated benefits, including legislative requirements to cover politically favored medical specialties, treatments, and procedures.

For various political reasons, state officials might hesitate to reduce or eliminate all such benefit mandates, but they could at least reduce or eliminate such mandates for those who are uninsured or have endured a spell of uninsurance for a specified period of time. Such a policy could make health plans more affordable for those young families who desperately need coverage.22 A young family with two children needs a health plan that gives them access to physicians and hospitalization services; they should not be forced to buy a health plan that incorporates dozens of benefits they do not want or need, some of which--like alcohol and substance abuse treatments or coverage for in vitro fertilization--are very expensive.

Mandated benefits are often popular with provider groups and medical specialty societies, which battle ferociously to make sure that state legislators include their treatments or procedures in all state-regulated health plans. Research shows that health mandates increase health costs, pricing many individuals and families out of the private market. According to a 1999 HIAA study, as many as one in four of the uninsured are without coverage because of state health benefit mandates.23

Some states have begun to change their benefit mandate policies. North Carolina, for example, has imposed a moratorium on any new benefit mandates.24 Hawaii, Texas, Louisiana, and Vermont require a cost assessment before imposing new benefit mandates.25 Some states have considered "mandate-lite" plans, and others are taking similar steps.26

State officials should also order an independent econometric review of state health insurance regulations, including a cost-benefit assessment and an assessment of their impact on the affordability and accessibility of private health plans. This type of analysis should be performed by a top-ranked, private econometrics firm, not by a state agency or any other political institution that has a vested interest in maintaining the regulatory status quo.

In many states, the health insurance market is heavily regulated, and this raises the cost of insurance and prices many lower- and middle-income families out of coverage. In a state-by-state price comparison of insurance policies, analysts for found significant price differences between states that have differing levels of insurance regulation. Two of the most significant insurance rules include community rating, in which all enrollees pay the same premium regardless of risk or health status, and guaranteed issue, in which insurers are required to offer policies to all, regardless of risk or health status. For example, in Texas, a state with no community rating or guaranteed issue, the average single monthly premium was $181, while in New York, a state with both community rating and guaranteed issue, the average monthly premium was nearly $300.27

State legislators may strongly believe that there are very good policy reasons to impose such rules as community rating and guaranteed issue of insurance; but there are trade-offs, and these trade-offs should be made visible. State officials should realize that while community rating and guaranteed issue are often enacted to assure increased access of individuals and families to health insurance, they often accomplish exactly the opposite result.

STEP 4: Conduct a study of the true cost of the uninsured and use that study to justify state credits or premium subsidies for the uninsured.

As noted, a recent analysis by Urban Institute scholars indicates that Americans pay an estimated $34.5 billion in uncompensated care for the uninsured.28 State officials should likewise get a clear idea of what they are already paying for the uninsured.

The Texas Comptroller's Office, for example, found in a major study that the total cost of health care spending in 1998 for uninsured Texans was $4.7 billion, including the costs to local governments, doctors, hospitals, and state agencies. In effect, Texas citizens paid about $1,000 for health care for each uninsured Texan.29

State officials can use this kind of analysis if they wish to expand coverage further and piggyback on any federal health care tax credits or premium subsidies. Additional state assistance, especially targeted at low-income or harder-to-insure individuals and families, would bring the cost of coverage within closer reach of these low-income working families. As noted, the Bush Administration encourages such assistance. State officials should follow through, especially if they believe that the President's proposed federal health care tax credit would not be generous enough for certain populations.

Moreover, for the unemployed, state-based assistance could be administered quickly and easily through state unemployment compensation offices. A person who is eligible for unemployment compensation could automatically be eligible for the credit or the subsidy and for private health insurance. This process of "one-stop shopping" for displaced workers and their families could be done with both a federal and a state credit or premium subsidy approach.

STEP 5: Secure HHS waivers to use existing federal funds to expand private health care coverage.

Officials at the U.S. Department of Health and Human Services have created the Health Insurance Flexibility and Accountability demonstration initiative, along with an expedited approval process, "to encourage new comprehensive state approaches that will increase the number of individuals with health insurance coverage within current-level Medicaid and SCHIP [State Children's Health Insurance Program] resources."30

HHS officials emphasize the value of "approaches that maximize private health insurance coverage options" and target populations below 200 percent of the federal poverty level.31 Nationally, a substantial majority of uninsured Americans are below 200 percent of the poverty line. State officials can take advantage of this new demonstration authority and use it to secure innovative private-sector coverage options for low-income, uninsured populations.

Under HIFA, HHS Secretary Tommy Thompson has approved several waivers. New Mexico and Oregon, for example, take advantage of Medicaid and SCHIP funds and combine them with private-sector health plans to expand coverage to the uninsured. In New Mexico, state officials can use unexpended SCHIP funds to subsidize private health insurance for 40,000 low-income residents. Under the New Mexico waiver, employers can also contribute to private health plans. With a combination of government subsidies from existing government programs and employer contributions, HHS estimates that these low-income employees will be paying about $25 to $35 per month in insurance premiums.32

Based on its waiver, Oregon officials will expand the state's premium support program, the Family Health Insurance Assistance Program, to cover as many as 25,000 beneficiaries. Under the Oregon waiver, Oregon residents earning up to 185 percent of the federal poverty level would be eligible to receive "for the first time" federal premium assistance for employer-sponsored coverage or individual health insurance.33

Finally, the President's budget proposal would provide states with increased flexibility under Medicaid and SCHIP. Under this proposal, states would be able to implement program changes and improvements without having to go through the waiver process.34

STEP 6: Improve care for Medicaid enrollees by creating a Medicaid preventive care account.

The best Medicaid policy gets low-income persons and their families out of the traditional Medicaid program and mainstreams them into the private health insurance market.35 Meanwhile, states can adopt initiatives that give Medicaid patients more control over their health care spending and decisions while ensuring that they get the care they need when they need it.

State Medicaid programs often have a rich benefits package. While Medicaid coverage looks good on paper, however, the program has a well-deserved reputation for perverse economic incentives, disruptions in the continuity of care, and poor-quality care. If Medicaid beneficiaries experience a change in income or assets, their eligibility will change, regardless of health status, possibly resulting in a loss of coverage. As a Baltimore Sun report on the plight of Medicaid patients in Maryland summarizes the problem, "They are poor, but not poor enough. They have medical bills that are high, but often not high enough. They are insured some months, but uninsured others."36 Getting clarity with respect to Medicaid eligibility can be a problem for doctors, patients, and state officials.

Faced with exploding Medicaid spending, states are cutting back on benefits, thereby causing a further deterioration in the quality of care.37 As a recent Kaiser Commission survey of Medicaid directors shows, states are planning cost-cutting measures such as limiting access to prescription drugs and reducing or freezing payments to doctors, hospitals, and other medical professionals.38

Most doctors treat Medicaid patients, but they also find that Medicaid reimbursement levels are too low and loathe wrestling with Medicaid paperwork and regulations. In 2001, roughly 20 percent of physicians were not accepting new Medicaid patients, and the overall proportion of physicians serving Medicaid patients declined slightly.39 The danger, of course, is that Medicaid patients will start to experience difficulty in getting access to doctors and, like the uninsured, will end up either in hospital emergency rooms for routine medical services or, worse, being treated for deteriorating medical conditions that could and should have been treated more effectively if treated much earlier in a doctor's office.

A partial solution to this problem would be to create a Medicaid preventive care account for each Medicaid recipient with a specified amount accessed using a PIN number and a debit card. Payments for routine medical services--doctors' visits, regular checkups, and preventive care--could be paid directly out of the Medicaid account. For Medicaid enrollees, states could roll the unused funds over each year in an interest-bearing account. When enrollees leave welfare or get a job in the private sector, the unused funds could be used to pay for private health insurance or transferred into a medical savings account or health reimbursement account.

The creation of such a Medicaid account is thus compatible with welfare reform, helping low-income persons make the transition not only into productive jobs, but also into the private insurance market. Such an account would combine the best features of the private-sector-style health reimbursement arrangement with the public-sector-style administration of the food stamp program.

HHS has already established a precedent for this approach with its "Independence Plus" initiative. This initiative both improves the existing "cash and counseling" program and provides states with an expedited process to offer families with disabled individuals the opportunity to have greater control of "the design and delivery of their own health care services."40 State officials should examine the success of such programs in New Jersey, Arkansas, and Florida, where Medicaid recipients decide how best to spend their allocated health care dollars instead of having government officials decide for them.

STEP 7: Establish a statewide voluntary purchasing cooperative for the uninsured.41

To give residents more coverage options, states should consider designing voluntary purchasing cooperatives that would function much like the Federal Employees Health Benefits Program, which covers Members of Congress, federal workers and retirees, and their families--roughly 9 million Americans.42 Nationally, hundreds of private health plans compete directly for consumers' dollars. Unlike other government health care programs, the FEHBP functions with comparatively little bureaucracy and regulation. It also enjoys a solid historical record of cost control, competitive benefits, programmatic stability, and a high degree of patient satisfaction.43

Because of its historical record of solid performance, the FEHBP is a leading model for Medicare and health care reform.44 In 2001, the Maine legislature voted overwhelmingly, on a bipartisan basis, to create a voluntary purchasing pool called "an insurance exchange," and Maine officials are in the first stages of implementing it.45 This policy initiative has precedents in other states.46

To give individuals and families greater access to affordable coverage, a voluntary purchasing cooperative could incorporate several features:

  • The state employees' health benefit program. All uninsured employees in the state could have access to existing health plans in the state employees' system, which is usually a system of multiple health plans, plus any additional health plans that meet basic benefit and fiscal solvency requirements.47 These plans, as well as the plans that serve state employees, could be made available to every uninsured person in the state.

    Initially, it might be prudent to separate the state employee pool from the private, non-state-employee pool and allow the competing private plans to risk and rate these populations separately. Since most of the uninsured are young and healthy, it is likely that state employee organizations will soon realize that the combination of the pools would directly benefit state employees with lower premiums. In the meantime, it would be politically attractive for the governor and the state legislators to open up their own health insurance system to the states' uninsured citizens.

  • Automatic sign-up for uninsured workers at their place of employment. More than four out of five uninsured workers are in full-time working families. Lynn Etheredge, a prominent health care policy analyst at George Washington University, argues vigorously that the most efficient way to target workers is therefore through their place of work.48 While employers would not pay for health insurance, there is no reason why they could not serve as the place for employees and their families to sign up for available health plans. Of course, employers could also contribute, if they wished, to their employees' premium and reap the same tax breaks as corporate employers do in the conventional payment of health insurance premiums.
  • Automatic payroll deduction for premium collection at the place of work. Employers are legally required to use the payroll deduction system for Social Security, Medicare, federal income tax, state taxes, and unemployment compensation. While employers do not sponsor the tax code, they do enforce it. With a state voluntary purchasing cooperative, employers could deduct the premium, over and above any tax credit assistance or state assistance (through SCHIP or Medicaid waivers) that would be available, and send it to the plan of the employee's choice. National Federation of Independent Business surveys show strong interest on the part of small employers in helping to administer a system of individual tax relief for insurance for their employees.49

    In order to stimulate maximum take-up, Etheredge and others have suggested that policymakers create a system of automatic enrollment for employees, with the proviso that they can refuse in writing both the available health insurance and any state tax relief or premium assistance.50 An employee's rejection of health insurance coverage and any refusal to accept help to pay for health insurance would require the employee to make a conscious trade-off, making the direct costs transparent to the employee and the employee's family.

  • A light regulatory regime. A system based on the principles of consumer choice and market competition cannot work without a system of light and intelligent regulation. This means that the state agency administering such a system should act as a referee--and not play favorites--in the competition among different types of health plans: traditional indemnity insurance, managed care, preferred provider plans, high deductible plans, health reimbursement accounts, and medical savings accounts. An efficient market requires free entry and exit of suppliers and the freedom of consumers to make the decisions in accordance with their personal wants and needs.
  • A statewide reinsurance pool to cope with adverse selection. In the adoption of a voluntary choice cooperative for the uninsured, or any similar consumer choice system that allows individuals and families to pick the kinds of plans and benefits they want, state policymakers should establish a mechanism to cope with risk segmentation or adverse selection--a process whereby higher-risk or higher-cost individuals congregate in one or more plans, contributing to spiraling costs and encouraging younger, healthier, and lower-income enrollees to leave the higher-cost plan(s) or drop out of health care coverage altogether.

    There are many ways to cope with the possible issues of adverse selection. One might be for state officials to charter a nonprofit, self-governing corporation that would be administered and financed by the health insurers themselves and that would create a pool to finance high-cost individuals without disrupting the individual's continuity in coverage. In creating such a system, state officials could require that all plans selling state-regulated health insurance, including plans writing policies for state employees or Medicaid, participate and contribute to the pool. While every health plan that ceded a risk to the pool would pay a premium to the pool for each risk ceded, there would be no taxpayer subsidies to the pool.

    Such a mechanism could protect both carriers and enrollees from the effects of adverse selection. Plans would be encouraged to cover the broadest possible pool of individuals and families and also would be able to recover a portion of the costs incurred as a result of the enrollment of high-risk individuals.

STEP 8: Enact meaningful medical malpractice reform legislation.

The Bush Administration has put the medical malpractice problem front and center in the national policy agenda. This alone is sparking a major debate. But the medical malpractice issue is essentially a matter of state tort law.

There is a medical malpractice crisis in several states. Median jury awards have increased dramatically. Malpractice premiums are soaring, "defensive" medical procedures are common, and patient access to care is being compromised.

State legislators can take remedial action. While a sound malpractice reform measure would provide for unlimited economic damages, state legislators can reduce the growing pressures on physicians through several amendments to state tort law. Such changes could include an up-front disclosure of attorneys' fees; limiting non-economic damages (such as pain and suffering) to $250,000; limiting punitive damages to $250,000 or twice the amount of economic damages (such as medical expenses or the cost of domestic services); and limiting attorneys' fees to ensure that a maximum amount of recovery for damages would go to patients. Moreover, if state legislators are unable to secure comprehensive medical malpractice reform, at the very least they could provide legal relief for doctors who accept Medicaid patients and give doctors immunity from malpractice suits when they provide charity care to the poor.

Several states have made significant progress in reforming medical malpractice laws: Alaska, California, Colorado, Maine, Michigan, and Utah. A sound model for medical malpractice reform would be the Medical Injury Compensation Reform Act of 1975, enacted by the California legislature.

STEP 9: Take advantage of the new federal health care tax credits to cover workers displaced by international trade.

In the Trade Adjustment Assistance Reform Act of 2002, Congress enacted a provision to give a 65 percent health care tax credit to the roughly 260,000 workers nationwide who have lost employment and their health care coverage in part because of expanded international trade.51 The purpose of this first-of-its-kind health care tax credit is to help these workers secure health care coverage.

While the legislation contains artificial and complicated restrictions on personal choice, it does offer states broad authority to determine new purchasing options available to these workers.52 Indeed, state officials can build such an infrastructure with a view to facilitating the coverage of other classes of uninsured Americans, particularly if Congress enacts significant health care tax credit legislation. As noted, the trade legislation also provides states with additional federal assistance to help them administer newly created purchasing options.

STEP 10: Take advantage of the new health reimbursement arrangements for state and municipal employees.

In June 2002, the U.S. Department of the Treasury ruled that America's employers could set aside funds for their employees under a new health reimbursement arrangement (HRA), a special tax-free account for the payment of health bills. Employers could roll over unused funds in the employee's account from year to year and allow employees to use accumulated funds for their health care needs in retirement.

For 2003, the Office of Personnel Management (OPM), the federal agency that runs the FEHBP, allowed the American Postal Workers Union (APWU) health plan to offer an HRA to federal employees and retirees. Under the APWU plan, federal employees can get an up-front credit of $1,000 per person or $2,000 per family in their account to pay for traditional medical expenses as well as dental, vision, and other expenses that may not be covered by insurance. The funds are available before enrollees pay deductibles, or out-of-pocket costs, and traditional insurance covers their health costs.53

State officials may also consider employing the new health accounts as a means of promoting innovative employee wellness programs. For example, the LSU Health Care Network, which covers Louisiana State University health care employees, has recently initiated such a plan, and its preventive care program ranges from routine checkups and tests to prostate exams, mammograms, and children's vaccinations. As noted, the initial comparative data showed an increase in physician visits but an overall reduction in costs.54 State officials should allow state employee to choose similar arrangements. Likewise, municipal employees should also be able to take advantage of the new HRAs.

STEP 11: Engage faith-based organizations in preventive care and wellness programs.

State and local officials manage or oversee public health clinics and health centers. These organizations help low-income and uninsured families secure health care services.55

An enormous resource exists among faith-based and religious organizations. These organizations can play a vigorous role in promoting and sponsoring wellness and preventive care programs. State officials should make every effort to tap the power of faith-based and religious organizations in their health care outreach into various communities, particularly inner-city and ethnic communities.56 They should also find ways of integrating these faith-based wellness initiatives into their public assistance programs.

Where conventional government efforts may not inspire trust or confidence, religious and faith-based organizations can often succeed. That success could result in many more poor Americans getting the checkups and routine preventive care they need.


Innovative and imaginative governors and state legislators can make significant headway in reducing the number of America's uninsured, improving access to quality health care, and expanding choice and competition in the state health insurance markets.

They can achieve this by taking several key steps, including:

  • Cooperating with the President and the Administration in expanding health coverage,
  • Promoting solid information on available health plan options,
  • Reducing barriers to coverage by reviewing the costs of mandates and eliminating excessive regulation,
  • Accepting new HHS flexibility to expand private insurance coverage for individuals and families,
  • Taking an inventory of the costs of the uninsured in their states and offsetting those costs with state health care tax credits or premium subsidies,
  • Creating preventive care accounts for Medicaid beneficiaries,
  • Cooperating with the Administration in securing coverage for displaced workers under the Trade Adjustment Reform Act of 2002,
  • Enacting serious medical malpractice reform, and
  • Engaging faith-based and religious organizations in public health efforts to secure preventive care services among poor and low-income people.

The problems of the uninsured are problems for both federal and state officials. While the central weakness of the health insurance market is the inefficient, inequitable, and restrictive federal tax treatment of health insurance, state officials can nonetheless take direct action without waiting for Congress to enact major changes in the federal tax code.

States can work energetically with the Administration and also implement innovative solutions on their own. Millions of Americans desperately need that federal-state cooperation.

Robert E. Moffit, Ph.D., is Director of, and Nina Owcharenko is Health Care Policy Analyst in, the Center for Health Policy Studies at The Heritage Foundation.

1. For a description of the range of possibilities under the new HIFA waivers, see Nina Owcharenko, "How States Can Expand Private Coverage with HIFA Waivers," Heritage Foundation Executive Memorandum No. 846, December 16, 2002.

2. Executive Office of the President, Office of Management and Budget, The Budget for Fiscal Year 2004, pp. 125-127. Cited hereafter as Budget for Fiscal Year 2004.

3. Letter to Robert E. Moffit from Gerald Chandler, Chairman, Proweh Health Systems, Inc., December 18, 2002. Proweh Health Systems compiled comparative data on utilization and costs for the first six months of 2002 and 2001.

4. For a description of the Florida consumer-directed Medicaid option, see James Frogue, "The Future of Medicaid: Consumer Directed Care," Heritage Foundation Backgrounder No. 1618, January 10, 2003.

6. Robert L. Pollock, "Americans Need a Market for Medical Progress," The Wall Street Journal, January 22, 2003.

7. Alain C. Enthoven, "Where Are Health Care's Hondas?" The Wall Street Journal, October 24, 2002. As Enthoven points out, employers often give employees a choice of "a plan," an HMO or a PPO, but the different plans are offered by the same carrier and have the same doctors. Thus, there is no real free-market competition among delivery systems under current arrangements.

8. Jack Hadley and John Holohan, "How Much Medical Care Do the Uninsured Use, and Who Pays for It?" Health Affairs, Web Exclusive, February 12, 2003, p. 3, at

9. U.S. Department of the Treasury, General Explanations of the Administration's Fiscal Year 2004 Revenue Proposals, February 2003, pp. 45-48. Cited hereafter as General Explanations.

10. See Janet M. Corrigan, Ann Greiner, and Shari M. Erickson, eds., Fostering Rapid Advances in Health Care: Learning from System Demonstrations (Washington, D.C.: Institute of Medicine, 2002).

11. For this "Creative Federalism" approach to health coverage and experimentation, the authors are indebted to Stuart M. Butler, Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.

12. For an excellent overview of the direction of the Bush Administration's health care policy, see the Hon. Mark McClellan, M.D., "The Health Care Crisis: The President's Plan for High Quality, Affordable Care," Heritage Foundation Lecture No. 768, April 17, 2002.

13. General Explanations, pp. 45-55.

14. Ibid., p. 47.

15. Ibid.

16. Ibid.

17. "A Revolving Door: How Individuals Move In and Out of Health Insurance Coverage," University of Michigan, Economic Research Initiative on the Uninsured, University of Michigan, ERIU Research Highlight No. 1, October 2002, p. 1.

20. Health Insurance Association of America, "Individual Health Insurance: Access and Affordability," HIAA Brief Analysis, October 2002, p. 1.

21. PricewaterhouseCoopers, The Factors Fueling Rising Health Care Costs, report prepared for the American Association of Health Plans, April 2002, p. 3.

22. See, in this connection, Robert E. Moffit, "Maryland Health Care Mandate Policy," testimony before the House Economic Affairs Committee, Maryland General Assembly, March 7, 2002, at

23. Jensen and Morrisey, "Mandated Benefit Laws and Employer-Sponsored Health Insurance."

25. Ibid.

26. Cheryl Jackson, "States Look at Costs of Insurance Mandates," American Medical Association, AMNews, November 11, 2002, at; "Major 2001 State Health Care Laws," BlueCross BlueShield Association, BlueCross BlueShield Health Issues, at

28. Hadley and Holahan, "How Much Medical Care Do the Uninsured Use, and Who Pays for It?"

29. See Texas Comptroller's Office, Texas Estimated Health Care Spending on The Uninsured, at

31. Ibid.

34. Budget for Fiscal Year 2004, pp. 125-127.

35. For an excellent discussion of broader Medicaid reform, see Michael T. Bond, John C. Goodman, Ronald Lindsey, and Richard Teske, "Reforming Medicaid", National Center for Policy Analysis and Buckeye Institute for Public Policy Solutions, NCPA Policy Report No. 257, February 2003, at; see also Richard Teske, "Abolishing the Medicaid Ghetto: Putting Patients First," American Legislative Exchange Council, The State Factor, April 2002.

36. See M. William Salganik, "Medicaid Revolving Door Frustrates Many in Maryland," The Baltimore Sun, September 1, 2002.

37. For a brief description of Medicaid spending pressures in the states, see "Medicaid Is Fastest Growing Item in State Budgets," National Center for Policy Analysis Daily Policy Digest, January 14, 2002, at; see also Robert Pear and Robin Toner, "Grim Choices Face States in Making Cuts in Medicaid," The New York Times, January 14, 2002.

38. Kaiser Commission on Medicaid and the Uninsured, "State Budgets Under Stress: How Are States Planning to Reduce the Growth in Medicaid Costs?" July 30, 2002, at For an excellent overview of how state officials are restricting Medicaid prescription drugs, see Linda Gorman, "Treatment Denied: State Formularies and Cost Controls Restrict Access to Prescription Drugs", Washington Policy Center, Policy Brief, February 2003, at

39. Peter J. Cunningham, "Mounting Pressures: Physicians Serving Medicaid Patients and the Uninsured, 1997-2001," Center for Studying Health System Change, Tracking Report No. 6, December 2002, at

40. Centers for Medicare and Medicaid Services, "Why Has CMS Developed the Independence Plus Programs?" Independence Plus: Frequently Asked Questions, at

41. The authors are indebted to Daniel S. Johnson, M.D., The Heritage Foundation's Visiting Fellow in Health Policy and former President of the American Medical Association, for this concept of a state-based voluntary choice cooperative.

42. For a discussion of the FEHBP as a model for a purchasing cooperative for the uninsured, see Stan Dorn and Jack Meyer, "Nine Billion Dollars a Year to Cover the Uninsured: Possible Common Ground for Significant Incremental Progress," Economic and Social Research Institute, Current Policy Series No. 4, October 2002, pp. 5-10.

44. In 1999, the majority of the members of the National Bipartisan Commission on the Future of Medicare, chaired by Senator John Breaux (D-LA) and Representative Bill Thomas (R-CA), proposed to reform Medicare along the lines of the FEHBP. During the 2000 presidential primary season, Senator Bill Bradley (D-NJ) proposed a reform of the Medicaid program along the lines of the FEHBP.

45. Maine Consumer Choice Health Plan, Chapter 708, 120th Maine Legislature, 2nd Sess., at

46. The Democratic leadership in the Maryland legislature also considered such a dramatic approach in 1992, when the Honorable Casper Taylor, Chairman of the Maryland House Economic Matters Committee and later Speaker of the Maryland House, unveiled a comprehensive and innovative reform of the Maryland health care system, based on a state-wide system of health care tax credits and consumer choice and competition. For a description of the original Taylor bill, see Robert E. Moffit, "Why the Maryland Consumer Choice Health Plan Could Be a Model for Health Care Reform," Heritage Foundation Backgrounder No. 902, June 17, 1992.

47. The addition of state employees to a new purchasing cooperative would help make the pool more attractive to carriers and more effective as a vehicle for consumer choice and competition. According to Elliot Wicks, senior fellow at the Washington-based Economic and Social Research Institute, a key lesson from the experience of purchasing cooperatives is the need to achieve "critical mass." See Elliot K. Wicks, "Health Insurance Purchasing Cooperatives," Commonwealth Fund Issue Brief, November 2002, p. 5.

48. Lynn Etheredge, "How to Administer Health Insurance Tax Credits for Working Families," Heritage Foundation Backgrounder No. 1516, January 31, 2002.

49. See Robert E. Moffit, "Why Adopting the Common Ground Health Care Proposal Would Be a Costly Mistake," Heritage Foundation Backgrounder No. 1445, June 1, 2001.

50. Etheredge, "How to Administer Health Insurance Tax Credits for Working Families."

51. See Public Law 107-210 at

52. For a discussion of state options, see Nina Owcharenko and Edmund Haislmaier, "State Opportunities to Provide Affordable Health Coverage Under the Trade Law," Heritage Foundation Backgrounder No. 1626, February 27, 2003.

53. "Anatomy of a Premium Increase," remarks by the Hon. Kay Coles James, Director, U.S. Office of Personnel Management, before the American Association of Health Plans National Policy Forum, February 25, 2003, pp. 29-31. Under the APWU plan, once the funds in the account are exhausted, there is a $600 deductible for individual coverage and a $1,200 deductible for family coverage before traditional insurance covers costs. Under the terms of the APWU plan, enrollees can roll over up to $500 per year in their accounts, up to a maximum of $4,000. According to Director James, the initial data indicate that the average age of the enrollee taking advantage of the new plan is 49.

54. Letter to Robert E. Moffit from Gerald Chandler, December 18, 2002.

55. According to HHS, 12 million Americans are served by the existing network of health centers at over 3,500 locally managed sites across the nation. See Executive Office of the President, Office of Management and Budget, 2004 Budget Proposal for the Department of Health and Human Services, at

56. On developments in the District of Columbia, for example, see Steven Gray, "In Northeast, Moved by a Fitness Revelation," The Washington Post, July 9, 2002, p. F1; see also Barbara Martinez, "How a City Aims to Give Minorities Better Health Care," The Wall Street Journal, July 10, 2002, p. 1.


Nina Owcharenko Schaefer

Senior Research Fellow, Health Policy

Robert Moffit

Senior Fellow