Top Ten Ways to Fix America's Health Insurance Market and ExpandCoverage

Report Health Care Reform

Top Ten Ways to Fix America's Health Insurance Market and ExpandCoverage

February 16, 2001 8 min read
James Frogue
Senior Fellow and Director of Government Finance Programs

President George W. Bush and the 107th Congress inherited a problem from their predecessors that they will be unable to ignore: how to fix America's troubled health care system so that every American gains access to quality health insurance coverage. Today, an estimated 42 million people go without insurance coverage at some point during the year, and experts predict that--without policy changes and reforms in today's employment-based system of coverage--this number will continue to rise.

Surprisingly, policymakers have one advantage in finding a solution soon: Fixing America's health care system is not a partisan concern. A number of bills introduced in the 106th Congress by Members of both parties sought to improve health insurance for all Americans. To the extent that those bills merely build on the current system, however, they are unlikely to succeed. If legislators and policymakers want to greatly expand access to health insurance and drastically reduce the number of Americans who go without private coverage, they must begin to think "outside the box."

The current system--a product of the World War II era--is badly fraying. It needs an injection of innovation to stimulate market forces like choice, flexibility, and accountability that will lift the quality of care and the availability of coverage. Such solutions must, therefore, be rooted in these principles:

  • Tax Fairness. Rather than relying on today's tax-biased system that ties coverage to employers, policymakers should make fully refundable, pre-payable tax credits also available so that all Americans have access to health coverage.

  • Market Expansion. Rather than limiting people to the plan(s) their employers select, policymakers should stimulate the market by amending current law to allow alternative pooling arrangements, permitting people to buy coverage from groups with which they associate and identify, such as trade associations, church groups, and fraternal organizations.

  • Deregulation of Medical Savings Accounts. Rather than crippling medical savings accounts (MSAs) with statutory and regulatory restrictions, policymakers should find ways to lift the cap on MSAs and enable more Americans to use them to purchase the health care they need.

  • Personal Choice. Rather than relying on defined benefits, policymakers should craft a system based on tax credits and defined contributions to increase consumer choice in the health market. They also should reduce the regulatory burdens imposed on consumers that limit their ability to buy health insurance. Such a system would allow consumers to choose a plan that fits their needs in the same way they buy auto, homeowners, and life insurance.

  • New Rules of the Game. Rather than perpetuating a health insurance market that is a complex maze of federal and state regulations, with confusing overlap and duplication that drives up health care costs, Congress should examine the feasibility of creating a new federal charter that sets limited solvency requirements and underwriting standards for the industry without encroaching on the ability of insurers to create benefit packages or of consumers to buy the plans of their choice.

For a variety of reasons, increasing numbers of Americans must go without coverage or try to buy coverage independent of their employment. This trend will persist, largely because of changes in the dynamic information-driven economy that puts a premium on mobility. But it will accelerate if the economy enters a recession and employers are forced to drop coverage, or if Congress passes so-called patients' rights legislation that imposes a new level of detailed regulation and mandates on the market, raising costs and expanding liability for employers.

Washington should restore some semblance of equity to the tax code so that lower-income workers receive the same tax treatment higher-income workers now enjoy. Providing resources alone, however, will not be enough. Congress must pave the regulatory way in order to empower individuals, families, and groups other than employers to make health care decisions and purchase insurance that fits their needs. Congress will also need to amend the Employee Retirement Income Security Act of 1974 (ERISA)1 to create another category of health plans called "association health plans." Policymakers who want to make sound improvements in the current system should adopt a blueprint for reform that includes changes that reflect both an understanding of the root causes of uninsurance and an appreciation of market forces that increase accessibility, coverage, and choice of health coverage.


According to the U.S. Bureau of the Census, 42.6 million Americans under the age of 65 had no health insurance at some point during 1999.2 There is some disagreement as to the exact size of this population of uninsured, but virtually all experts forecast that the number will rise in the coming years.3

In a recent study conducted for the Health Insurance Association of America (HIAA), for example, William S. Custer and Pat Ketsche of the Center for Risk Management and Insurance Research at Georgia State University estimated that the number of uninsured will rise to 48 million by 2009. Assuming rapid economic growth combined with rapid health care cost inflation, that number could reach 55 million by 2009. In the event of a recession, 61 million Americans could be without coverage at the end of this decade.4

Estimates differ, but other major studies also point generally to a rising number of uninsured. For example, the National Coalition on Health Care estimated in May 1999 that the number of uninsured Americans could climb to 61.4 million by 2009,5 while the Virginia-based Lewin Group, a leading econometrics consulting firm, projected in June 1999 that the number of uninsured would reach 54 million by 2007.6

Rising Costs
The reason for the high number of uninsured and the projected increase in the number of uninsured is, quite simply, ever-higher costs. As health insurance becomes more expensive, fewer employers are willing and able to provide coverage for their employees. Indeed, "cost" was cited by small employers as the number one reason they do not offer coverage to their employees.7

Small businesses (with one to 49 employees) account for 94.7 percent of all businesses in the United States and employ 41.5 percent of the workforce.8 In 1999, 40 percent of these businesses did not offer health insurance coverage to their employees.9 As premium costs continue to rise well beyond the rate of inflation, more Americans--and particularly those who work for small businesses--will become uninsured. A summer 2000 survey of 500 employers with fewer than 150 employees found that 11 percent said they would no longer offer health insurance if premiums rose 5 percent to 9 percent in the coming year.10 A recent analysis performed by C. T. Hellmuth and Associates, based on an examination of 2,000 health plans in 139 markets across the United States, projects average premium increases of 10 percent to 13 percent in 2001.11 Research conducted by the actuarial firm of Milliman & Robertson has led to similar predictions.12

Continued rising costs are driven by many factors, but most especially by:

  • Over-consumption of health care services due to the lack of accountability in the third-party payer system, and

  • Government mandates on the market.

In a third-party payer system, an insurance company (or any payer who is not the patient, such as the government, an employer, or an insurance company) covers most of the cost of medical services. This is the prevailing payment system in America. Such a structure encourages inefficient use of health care services by patients, because they are shielded from the true costs of those services. If an insurer will pay for 10 physical therapy sessions that include a nice massage, it is small wonder that patients will go for all 10 sessions, even if they are significantly healed after five or seven. The cost of this excess use must necessarily be spread out among everyone in that insurance plan.

The tendency to over-consume services in the third-party payer system was confirmed in a large social science study conducted by the RAND Corporation from 1974 to 1982. RAND studied the medical spending habits of 2,757 families (a total of 7,703 persons) in six U.S. cities. The families were placed in four different insurance plans, the most generous covering all medical expenses. The least generous required 95 percent co-insurance up to a $1,000 maximum. The RAND researchers concluded from the findings that:

  • The "use of medical services responds unequivocally to changes in the amount paid out-of-pocket," and

  • "The average person's health changed very little, despite the rather large change in use caused by the insurance plans."13

The other major driver of costs is the number of mandates placed on health insurers--a particular coverage benefit that either state or federal law requires them to include in plans. Examples of common mandates include forcing insurers to offer coverage for chiropractic services, in vitro fertilization, mental health parity, and treatment for drug and alcohol abuse.14

Mandates represent nothing more than politicians compelling employers and health care consumers to purchase particular benefits. If the same mindset were applied to the construction of new homes, it would be like lawmakers mandating that all houses be built with 12-foot ceilings and a swimming pool. Of course, not everyone can afford such features, and more important, not everyone wants them.

A typical mandate dispute concerns the length of hospital stay for mothers and newborns after delivery. Some states recently have mandated that all plans guarantee a 48-hour hospital stay, even though a 48-hour stay is not necessary in all cases and providing it to everyone when it is sometimes not needed raises costs for everyone. In 1980, the average length of stay in the hospital for American mothers and their newborns was three days. If the 1980 average of three days were mandated back in 1980, any attempt to reduce or eliminate it today would meet intense opposition from hospitals specializing in maternity care.15 Yet a general decline in the length of hospital stay after childbirth has been occurring in all 29 countries of the Organisation for Economic Co-operation and Development (see Chart 1).


James Frogue

Senior Fellow and Director of Government Finance Programs