For the last six years, the Bush administration and Republican Congress have put forth their solution to sky-rocketing health costs: consumer-driven health care. Underlying this policy lies the belief that Americans over-consume health care. Labeling this a “moral hazard” problem, proponents push for high-deductible health plans that make consumers spend out-of-pocket from the first dollar of coverage up to the plan deductible. The theory is that facing a greater share of the costs of medical care will make people better health-care consumers, cutting back on wasteful spending, spurring more competitive health care markets and, hopefully, lower prices. The Bush administration has offered tax breaks on out-of-pocket spending (health savings accounts or HSAs) for enrolling in qualifying high-deductible plans.
Unfortunately for them, firms haven’t answered the call and offered these type of health plans. According to a Kaiser Family Foundation survey, only six percent of employers offering health insurance provide workers an option to enroll in HSA-qualifying plans. Furthermore, a study by the Commonwealth Fund shows considerably lower satisfaction in these types of plans than traditional health insurance.
Not only do low offer rates and low user satisfaction signal problems with the consumer-driven health care solution, but there's compelling evidence to suggest that these types of plans will be ineffective at lowering health costs. It’s big-ticket items that drive aggregate health care expenditures—not one more visit a year to the doctor, one extra test or the choice of one doctor over another, but chronic conditions and costly hospitalizations. The top 20 percent of health spenders account for 80 percent of all health spending. The vast majority of high-spending medical interventions, then, lie above the region where the incentives from consumer-driven health care lie.
In addition, HSA contributions are tax-deductible, with the deduction working as a government subsidy which reduces their actual cost-effectiveness. That is, if the point is to make people face a higher fraction of the "real" cost of health care—why offer tax breaks for health care costs? Furthermore, even if people with high-deductible plans do economize on care, they could be penny-wise and pound-foolish—delaying preventive care and ending up with serious, expensive conditions that might have been prevented.
The newest health proposal from this administration is a flat-tax deduction for the purchase of health insurance in the employer or individual market. It would cap the value of the current tax exclusion of health premiums through employment, and offer identical tax treatment to individual purchase of insurance. The incentives are designed to encourage people to buy cheaper, less comprehensive plans so consumers, once again disciplined by facing more of the cost of care, can spend their health dollars more wisely. Or at least more frugally.
Over time, this proposal erodes the employer market. The employer market, whatever its vices, does produce large risk pools and keeps insurance more affordable for those who get sick and wouldn't be offered affordable insurance outside a group plan. Employers group people according to non-health characteristics, creating viable insurance pools. A flat subsidy that encourages buying the "leanest" (least comprehensive) insurance plan possible potentially siphons off younger, healthier people into the individual market, thereby destabilizing employer risk pools. The flat exclusion will affect few people at first, but as health costs rise faster than the exclusion amount (indexed to overall inflation, not health-care inflation), it will cause further employer erosion over time.
As the employer market erodes, more people will need to buy through the individual market. This market provides no guarantee that the insurance they buy today will be available to them next year—especially should they turn out to be expensive to insure (i.e., sick). In short, it's an extension of this administration's belief in the ownership society; as in "you're on your own."
The change in congressional leadership and the presidential primary race have introduced new ideas to solve the health insurance crisis. These ideas are grounded in the virtues of shared risk and guaranteed, high quality, affordable health care.
One such plan, written by Jacob Hacker from Yale University and published as part of the Economic Policy Institute’s Agenda for Shared Prosperity, draws on the strengths of the employer-provided health insurance system and the advantages of public insurance.
Hacker’s plan gives those without access to employer-provided health insurance or Medicare the ability to buy into the Health Care for America insurance pool, modeled largely on Medicare, but tailored for the non-elderly population. Employers would be required to either provide a comparable insurance package or contribute to cover their employees and dependents in the new national insurance pool. Affordability would be ensured through generous subsidies for those without employer ties.
In contrast to an individual-based system, a large insurance pool saves on administrative costs and relieves burdens on small employers trying to provide affordable insurance to their workers. In addition, a large public pool can use its purchasing power to negotiate lower prices and provide incentives for the use of evidence-based medicine, enforce best practices and encourage disease prevention and chronic disease management.
The Hacker plan, while capturing the benefits of a large public insurance pool, still allows the private sector to compete in providing for effective and efficient health insurance solutions. This competition will provide cost discipline to both markets while still providing high-quality guaranteed coverage. In short, the shared risk approach isn't just nicer, it's smarter. Furthermore, a recent pool by the New York Times shows a majority of Americans support guaranteed health insurance for all.
