Health Reform: Part I: Things to Avoid

It is the season for health insurance reform, and that’s dangerous.  The odds of doing something bad are much higher than the odds of doing something good. 

At the NCPA, we are producing a handbook on state health reform.  The final document will soon be ready.  However, we don’t want to be like the FDA and deny people life-saving remedies.  So here is the URL for the latest draft:

In the meantime, here are four things to avoid.

1. Do not turn a tax subsidy into an entitlement. 

The primary way the government encourages private insurance is through tax subsidies.  Many reform proposals would completely change the nature of the subsidies; e.g., by creating a refundable tax credit.  The risk is that the new tax subsidy could become an entitlement.

Medicare and Medicaid entitlements are already on a course to crowd out every other government program.  We cannot survive creating more health care entitlements.

That means: government’s commitment must be defined contribution, not defined benefit.  Tax subsidies are going to grow roughly at the rate of growth of national income.  Health care spending is growing at twice that rate.  The new system of tax subsidies must also grow with national income, not with health care costs.

2. Avoid mandated coverage and mandated benefits.

Proposals to require everyone to have health insurance increase the likelihood that the government subsidy will become an entitlement.

It makes no sense to mandate a benefit package if the cost of the package is going to grow at twice the rate of the subsidy.  By keeping the subsidy restrained, you will force health plans to curtail costs somehow – with HSAs, restricting payments to evidence-based medicine, HMOs, etc.

Pay-or-play is much better than a mandate.  Since you will never be able to enforce the mandate anyway (and rigorous attempts at enforcement would cost far more than they are worth), let people choose whether to be insured or not.  If they choose to be insured, give them a subsidy; if they choose not to be insured, make them pay a tax penalty and put the unclaimed subsidy (or the tax penalty) into the safety net.

Also, with pay-or-play you do not have to define a mandated benefit package, vulnerable to cost-increasing special interest measures.

3. Don’t create perverse incentives for health plans.

Insurance pricing restrictions create perverse incentives.  If people can switch plans annually at premiums that are unrelated to expected costs, the plans will seek out the healthy and avoid the sick.  Once people are enrolled, the plans will over-provide to the healthy and under-provide to the sick.

A much better idea is to give plans an incentive to compete for the sick.

4. Don’t encourage people to forgo private coverage by expanding public coverage.

There should be no expansion of Medicaid and SCHIP in a way that encourages people to drop their private coverage in order to get free public coverage.  Instead, the incentives should work the other way.  We should use public money to encourage private insurance.

Link to Handbook on State Health Care Reform:

Comments (7)

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  1. Dr. Bob says:

    Could not agree more. If any kind of health care reform is to happen, it becomes necessary to:

    1 Remove the insurance industry from the decision making process and let them be third party administrators

    2 Make physicians and other care providers accountable for the way they take care of patients.

    3 Incentivize wellness and good health

    4 Reward for doing the right thing, not just for doing it right.

    5 Embrace "Dr. Bob's Rule of Six". Do the right thing, to the right patient, for the right reason, in the right place, at the right time, for the right price.

    6 Defined contribution will only work if we restore some ethics and morality into our system.

    It would be wise for our administration to use the defined contribution model to fund the war in Iraq. It certainly better than the open ended entitlement that the DOD seems to have at the present time.

  2. Rob Moffatt says:

    I disagree with your concept of health improvement as a one time cost shift in "Illusory Solutions" on p.9. I agree that it doesn't work as a stand-alone reform platform, but improvement in long term health risk is a cost control mechanism, not a shift. Prevention of disease doesn't shift cost, it eliminates it. No reform solution will be sustainable without changes to current lifestyle-related health trends.

  3. […] Remembering “Do No Harm” in Health Care Reform June 12th, 2007 — Fred Fortin As the passion starts to build for health care reform this summer, I’ve tried to remind us to be cautious and deliberative in our thinking. Others seem to be advising similar caution. In John Goodman’s Health Blog warns us against rushing to entitlements, overly broad mandated benefits, installing perverse financial incentives, and public programs that encourage people to drop private health care coverage. Goodman also has authored a paper “Applying the ‘Do No Harm’ Principle to Health Policy” in the Journal of Legal Medicine expanding on these points. […]

  4. Roger Beauchamp says:

    If one believes that a competitive market is the best arbiter of efficacy, quality and price, then one should consider the following:
    The only thing that government can do to make health care more affordable is to not tax earned dollars set aside for that specific need, thereby leaving more dollars under the direct control of those citizens who earn the benefit dollars and and take responsibility for providing for their own needs.
    Fairness dictates that this amount should be capped annually and tied to the CPI.

    1.Cap the employment based exclusion and permit every citizen to exclude up to the same amount in a health financing account. This way citizens who do not have an employment based health care benefit can exclude up to the same amount that those working for Fortune 500 companies can. Leave them free to decide how much to spend for an insurance product that meets their needs and how much to save for the direct payment of health care. All dollars, under the cap will have exactly the same tax treatment. No tax at all. New insurance products will appear to entice them to purchase insurance.
    2. Permit married couples to choose the better of two earned employment based benefit programs as their primary insurer. Permit the spouse to direct that the dollar equivalent of their employment based program be direct deposited into their Health Financing Account or divided between a contribution to the HFA with the balance taken as taxable wages. This will create an opportunity to transition from first dollar third party payment of health care to individually owned policies designed to fit well with a Health Financing Account. The market will have to reprice risk as it should and this will a change in the benefit plan design of existing programs.

    Your 5 conclusion points in the booklet titled Reforming the Health Care System. I am not clear on what you mean by neutral between private insurance and public insurance (assistance?), giving equal encouragement for people to be privately insured or enrolled in a public program? The above policy would seem to be an excellent fit with all the other points.

  5. Bill Waters says:

    Wow. Have already programmed my reading time for this coming weekend.

  6. Jackson Brown says:

    Thank you for you very insightful email. I agree with the points in the email. I am fearful that the push to expand SCHIP is just a back door route to a single paying financing system for America’s children. According to data that I have seen, 400% of poverty includes between 70% and 80% of the Nation’s children, depending on the source of the data. The Ebenezer Scrooge charge is, of course, untrue, but can be a very disarming weapon. In dentistry, I believe we have data that indicate that coverage of middle class children with public funding simply shifts the source of funding from private to public. Moreover, since middle class parents are more demanding users of dental services, I believe there is a real chance that covering children from families that can pay for dental care works to the disadvantage of poor children because they could be crowded out of the delivery system, certainly in the short-run.

    I believe that the traditional Medicaid program have failed to realize its objectives for medical care, but especially for dental care. The excellent book “Lives at Risk” that your coauthored with Gerry Musgrave and Devon Herrick provides example after example of the inadequacies of single payer funding system. I have never understood why one would want to bring all children in the U.S. down to the dismal level of utilization that the disadvantage suffer, instead of trying to improve the utilization of the disadvantaged so it is more like that of middle class children – which by the way is very good. We need a different approach, not more of the same. Savings accounts and portable insurance separated from employment are two approaches that I have followed closely. Your example of using the child tax credit is very interesting.

    There is a program in Michigan called Healthy Kids Dental. It provides Medicaid eligible children with the same coverage that Michigan Delta provides for populations like the UAW. They are given an insurance card that is essentially indistinguishable from other families covered by Delta. Dentists are reimbursed at market levels. The results have been rather amazing and in a rather short period. Utilization rates of Healthy Kids Dental have nearly doubled over Medicaid children in just four years. The number of participating dentists have increased to such an extent that it is no longer an issue. Untreated dental disease in the covered children is declining which such reduce the out year costs of the program. The problem, if it can be called a problem, is that poor children are receiving more care and that is costing the State of Michigan more, but what do they expect – more care for less resources – dentistry is too efficient for there to be much potential for that.

  7. Mark Litow says:

    I agree absolutely with you on ideas to avoid. but pay-or-play systems as they have frequently been defined, where play means buy insurance or pay means you enter a government program, is a bad idea. If the pay is a penalty that goes to safety net usage but does not pay for any coverage, that can be a reasonable idea. The reason the former idea is so bad is that it creates an adverse selection scenario where the high cost groups relative to the tax take the government option and others play.