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Agoraphobia: what ails most of the conservative proposals to reform health care.

IN THE United States the total expenditures for and the relative price of medical care are spiralling upward at rates that, if unchecked, will increase pressures for expanding the regulation of medical care. Total expenditures are about 14 percent of GDP and represent the most rapidly growing component of private industry payrolls and government budgets. If the relative price of medical care continues to increase at its 1991 rate of 5.8 percent, it will double in twelve years. Despite the spiralling costs, the United States is the only country in which people can consume medical care almost without any constraints of market prices or government rationing.

The high expenditures and increasing relative price of medical care are primarily the result of the current tax system in the United States that allows employers to deduct employees' health insurance as a valid business expense. Employees do not report this insurance, or benefits received, as taxable income. Therefore, they have no incentive to control the costs of the medical services they receive. And providers of medical care, compensated by third-party payers, also have no incentive to control costs.

There has already been a significant increase in the regulation of the U.S. medical care sector to curb the increase in expenditures and prices. Medicare has controlled its compensation rates to hospitals since 1983 and to physicians since 1992. And Congress is considering a bill that would extend the Medicare compensation rates to all private payers by imposing limits on balance billing.

In the face of those existing and proposed controls of the escalating costs of medical care, conservatives have offered a variety of proposals to reform the provision of medical care. Their proposals range from the Conservative Democratic Forum's Managed Competition Act of 1992, to the Heritage Foundation's Consumer Choice Health Plan, to the Responsible National Health Insurance plan published by the American Enterprise Institute, to a plan published by the Cato Institute that would privatize health care by allowing for personal, portable catastrophic health insurance, Medisave accounts, and medical IRAs.


The Managed Competition Act of 1992, proposed by the Conservative Democratic Forum's Task Force on Health Care Reform, would change the tax code to encourage providers and insurance companies to form health plans that would be improved, expanded versions of health maintenance organizations, preferred provider organizations, and other group practices. Those publicly accountable plans would be organized to compete by offering high-quality, low-cost care and would offer insurance and health care as a single product. Large regional purchasing cooperatives would afford individuals and small businesses the benefits of greater purchasing power. A national health board would establish a uniform set of effective health benefits. To enjoy a tax-favored status, health care plans would be required to offer those standard benefits, to comply with insurance reforms that would prevent charging extremely high rates for individuals not enjoying excellent health or denying coverage for individuals with preexisting conditions, and to disclose information on medical outcomes, cost effectiveness, and consumer satisfaction.

Employers would be allowed to deduct the costs of plans that cover basic health care but not the additional costs of policies that provide more than the basic benefits. To make consumers cost-conscious, basic policies would require copayments. All individuals, including the self-employed, would receive a tax benefit for 100 percent of the basic health plan costs.

Health plan purchasing cooperatives would offer group rates with lower administrative costs to individuals and small businesses. Individuals would choose from a variety of health care plans, and their employers would choose the dollar amount, if any, at which they would fund the plan.

The Managed Competition Act of 1992 would provide health coverage for all individuals below 100 percent of the poverty level and would provide a federal subsidy for the purchase of health care to individuals and families between 100 and 200 percent of the poverty level. In addition, the proposal would emphasize the importance of preventive health care by charging no copayment or deductible and would increase the funding for early intervention, immunization, and screening programs.

To reduce the costs of defensive medicine and malpractice litigation, the proposal would limit noneconomic damages and would reduce unreasonably long statutes of limitation. Those changes would be complemented by measures to identify providers of substandard services.

To achieve administrative efficiencies, the proposal would authorize the national health board to ensure that health plans adopted standardized claims forms and electronically transmitted data.

The Conservative Democratic Forum's Task Force on Health Care Reform contends that its proposal is budget-neutral since it would provide complete financing for Medicaid reforms and its other provisions by eliminating the limit on income that is subject to the Medicare health insurance tax, by capping the deductibility of health care plan expenses at the price of the most cost-effective accountable health plan, and by redirecting federal Medicaid spending.


The Heritage Foundation's Consumer Choice Health Plan would replace the employer's tax exclusion with tax credits given directly to nonelderly and non-Medicaid individuals to help purchase their health insurance and pay for out-of-pocket health care expenses. If an individual or family's credit exceeded its tax liability, it would receive the difference from the government in a voucher that could be used only for health care.

The Heritage plan would require all households to purchase at least a basic health plan specified by Congress, unless they were covered by Medicaid, Medicare, or other government health programs. In addition, the plan would require the private insurance market to offer a standard basic health care package at an acceptable price. The Heritage plan would also end state insurance mandates for the coverage of particular services and would be exempt from state restrictions on managed care.

During a one-year transition period, employers would be required to add the cash value of their existing plan to the income of any employee who elected to subscribe to an alternative plan. Employers who decided to discontinue providing medical insurance would also have to add the value of their plan to employees' incomes. Employers would also be required to establish a payroll deduction for health insurance and to adjust employees' withholdings.

The Heritage plan would require changes in the health insurance market. First, uninsurable Americans would be randomly assigned to insurers and health care plans doing business in a state. That would spread the cost of insuring high risks among existing plans. Second, the insurer would be required to provide portable, individual coverage to all those covered under employment-based group plans. Finally, in converting people from group to individual coverage, the insurance company could vary the price of premiums by no more than 25 percent on the basis of age, sex, and geographical adjustments.

The Heritage Consumer Choice Health Plan is modelled after the Federal Employee Health Benefits Program. Families would choose among competing plans, and plan organizers would bargain with doctors and hospitals to contain costs.

The Heritage proposal would not directly affect Medicaid and would not change Medicare. To the extent, however, that the refundable tax credit for health care insurance motivated families on Medicaid to seek employment, Medicaid costs would decline.


The Responsible National Health Insurance plan, authored by Mark V. Pauly, Patricia Danzon, Paul J. Feldstein, and John Hoff and published by the American Enterprise Institute (Responsible National Health Insurance, Washington, D.C.: The AEI Press, 1992), represents an attempt to achieve equity and efficiency in the provision of medical care by targeting government's focus on those goals rather than on financing and regulating health care. Asserting the need for an institutional framework that supports a vigorously competitive market, the authors of this plan would combine government assurance of universal coverage with financial assistance as needed to achieve that coverage.

The Responsible National Health Insurance plan would require each citizen to obtain at least minimum adequate coverage against catastrophic medical expenses. Existing tax and welfare systems would enforce the requirement to obtain coverage. The required coverage would be made affordable by providing, to those who needed them, refundable, fixed-dollar tax credits or adjustments in total federal taxes. Such a system would replace the tax treatment of health insurance that subsidizes it by excluding premiums employers pay from taxable income. With respect to Medicare, the plan's authors propose allowing policymakers to choose among the options of keeping Medicare separate from the plan, phasing Medicare into the plan, or permitting Medicare beneficiaries to decide whether to join the plan.

The Responsible National Health Insurance plan would establish a fallback insurer for each geographic market area. The fallback insurer would provide government-approved insurance coverage at a reasonable premium. In addition, to improve equity and efficiency, the plan would replace the current exclusion of employment-related premiums from taxation with a fixed-dollar or closed-end tax credit.

The Responsible National Health Insurance Plan would eliminate state-mandated benefit laws and would create a patient protection fund -- financed by assessments on insurers and the benefit payments of self-insured firms and administered by either the states or the federal government -- to compensate enrollees for benefits due in cases where plans became insolvent during the contract period.

To control costs the Responsible National Health Insurance plan would rely on responsible, informed buyers to make choices that reflect an appropriate balancing of costs and benefits. Thus, there would be no mechanisms to control or impose limits on costs.


The Cato Institute has published two studies that call for a health care system that solves problems by relying on the power of competitive markets and the self-interested behavior of individuals. The first study, What Has Government Done to Our Health Care? by Terree P. Wasley (Washington, DC: Cato Institute, 1992), shows how government has limited the supply of medical care and stifled innovation while Medicare, Medicaid, and the tax laws have overstimulated the demand for medical care. To reverse the trend and control the resultant skyrocketing prices, she proposes giving consumers the power to control their medical care spending.

The second study, Patient Power: Solving America's Health Care Crisis by John C. Goodman and Gerald L. Musgrave (Washington, DC: Cato Institute, 1992), develops in greater detail a plan to reform the medical care system by introducing personal, portable medical IRAs, Medisave accounts, and catastrophic health insurance policies. In the Patient Power plan, Goodman and Musgrave outline changes that must be made to correct for the lack of a genuine marketplace in the production and consumption of medical care.

The Patient Power plan would change the income-tax treatment of health insurance. The plan would replace the current tax preference for employer-provided insurance with an income-tax credit for health insurance for all Americans, regardless of who purchases the policy. The tax subsidy would be limited to encourage the purchase of catastrophic, no-frills insurance and to establish Medisave accounts and medical IRAs, and higher credits or refundable credits would be available to enable low-income families to purchase health insurance.

Goodman and Musgrave propose the creation of individual self-insurance through Medisave accounts. Funds in those accounts would pay for small medical expenses. Third-party insurance would be used only for large medical expenses. Savings in those accounts would grow tax-free and would be restricted to the payment of medical expenses.

The Patient Power plan would also introduce the use of medical IRAs designed primarily to pay for medical expenses during retirement. The savings in those accounts would also grow tax-free and would gradually substitute for Medicare.

Although the Patient Power plan would reduce the need for public subsidies, it would allow direct subsidies for clearly socially desirable needs. Provisions would include an income-related system of disability payments to help families with preexisting and expensive medical needs that could not be covered by private insurance. In addition, there would be income-related subsidies to help high-risk people obtain coverage they could not otherwise afford. General tax revenues would finance those subsidies.

The Patient Power plan would eliminate the pernicious regulation of physicians, hospitals, and health insurance. By empowering patients and reducing the role of third-party payers, the plan would call for government to focus its efforts on providing information and preventing civil and criminal fraud. In the competitive marketplace hospitals would announce their costs up front for common procedures so that patients could become informed consumers. People would be free to purchase no-frills catastrophic health insurance policies that suited their needs. Insurers would be able to offer real insurance and accurately price risk.

The Patient Power plan would also empower people covered by government health care programs. Goodman and Musgrave propose that policymakers restrict Medicare and Medicaid to the original goal of providing funds for the purchase of medical care. While those programs would limit the amount government would pay for medical services, patients could negotiate the total price for the services they sought. Medical enterprise zones and medical enterprise programs would give rural residents and the urban poor access to a competitive medical marketplace. Tax dollars paid by those who chose not to purchase health insurance would be returned to local communities to pay for otherwise uncompensated medical care.


Proponents of the conservative proposals for health care reform consider their plans to be market-oriented. But with the exception of the Patient Power plan, the proposals have features that will delay the cure of agoraphobia -- fear of the marketplace.

The managed competition plan, endorsed by the American Medical Association, the U.S. Chamber of Commerce, and some of the largest health insurers, is touted to provide the benefits of competition while solving social problems. Indeed, the plan would offer employees a choice among competing health plans. The employer would contribute a fixed sum, and the employee would pay for the balance of the premium. Thus, cost-conscious employees would encourage insurers to control the costs of their policies so that their health plans would be attractive.

The managed competition proposal would also make insurance personal and portable, so that employees would not lose coverage if they changed jobs. In addition, the proposal would bar insurers from arbitrarily canceling policies and charging sick policyholders excessive premiums.

So where's the rub? Proponents of managed competition call for the government to manage the program. In addition, they would compel everyone to subscribe to a managed care program. Price-fixing would determine prices for policies. Finally, health insurers would be driven from the traditional insurance industry into a managed care industry. Unable to compete on their ability to price policies and manage risk, they would have to compete on their ability to manage the costs of medical care. So much for market forces!

The Federal Employee Health Benefits Program is the model on which the Heritage Foundation bases its Consumer Choice Health Plan. Essentially, the Federal Employee Health Benefits Program is a form of managed competition. Thus, the Heritage plan imposes the same barriers to creating a free market in the health care sector as does the managed competition plan. Moreover, medical expenditures are likely to rise under a system modelled alter the federal health benefits program, because studies have shown that during the 1980s the federal government's expenditures for health benefits grew at a faster rate than those of employers in the private sector. Those studies have shown that the escalating costs in the Federal Employee Health Benefits Program are in part attributable to the Office of Personnel Management's pressure on insurers to continue to offer policies with low deductibles and low copayments. Those constraints have been imposed to prevent insurers from introducing less expensive plans with higher deductibles and copayments that would attract young, health employees and effectively allow insurers to cream skim. Thus, the Heritage plan not only bars free markets from operating in the health care sector but could increase the level of expenditures for medical care.

Like managed competition and the Heritage Consumer Choice Plan, the Responsible National Health Insurance plan published by the American Enterprise Institute would require everyone to purchase health insurance whether he wanted to or not. Moreover, mandating health insurance creates a constituency to urge government to control costs and can easily lead to government intervention to regulate the entire health care sector. Thus, the Responsible National Health Insurance plan limits the ability of competitive forces to shape the health care sector.

The Patient Power plan advocated by Goodman, Musgrave, and Wasley is the only prescription that cures agoraphobia in the U.S. medical care sector. By eliminating government policies that bar competition in the market for health care and by creating new incentives for individuals to exercise consumer choice, the Patient Power plan could revolutionize the health care sector in the United States.

The plan will empower individuals to purchase no-frills catastrophic insurance at an affordable price. They will also be able to choose among competing plans and to purchase the type of coverage most appropriate for their needs. Individuals will have greater flexibility in choosing among plans without incurring income-tax penalties. For example, they will be able to choose between health plans provided by employers and those obtained independently, between self-insurance and third-party insurance for small medical expenditures, and among plans with effective cost controls.

By enabling individuals to open Medisave accounts and medical IRAs, the Patient Power plan will allow people to reduce the costs of their annual insurance premiums and to save for future medical expenses.

Introducing competition into the provision of medical services will also enable consumers to compare prices and to save by making economical choices. Provisions of the plan will also free people from the social costs of rationing medical care under the Medicare and Medicaid systems.

Introduction of the Patient Power plan would benefit suppliers as well. They will have increasing opportunities to find ways to reduce the cost of providing medical care. Indeed, all participants in the marketplace would benefit from the Patient Power plan by gaining the chance to explore voluntary contracts and exchanges as an alternative to the inordinately costly tort system.

Local communities will find new ways to provide care to the previously underserved. Likewise, rural residents and the urban poor will find new ways to satisfy their needs without costly regulations. Moreover, hospitals and physicians will have a more equitable way to receive compensation for providing charity care. Indeed, the Patient Power plan would achieve gains for all Americans as the result of the more rational expenditure of public funds for health care.


Although all four conservative proposals to reform the health care sector in the United States consider themselves to be market-oriented, the Managed Competition Act of 1992, the Heritage Consumer Choice Plan, and the Responsible National Health Insurance plan all sacrifice competition in the pursuit of management. Only the Patient Power plan introduces innovations that enable competitive forces to reform America's health care system.

Implementing the reforms proposed by Goodman, Musgrave, and Wasley in their Patient Power plan -- particularly changing the tax treatment of health insurance and enabling individuals to buy personal, portable catastrophic health insurance policies and to maintain Medisave accounts and medical IRAs -- would eliminate all the legal provisions that have nurtured our cost-plus medical care finance system. Market-based institutions will replace that albatross.

Moving to a new market-based medical care system would shift power from bureaucracies to individuals looking out for their own interests. Patients would purchase their medical care directly. Physicians would act as patients' agents. Hospitals would compete to sell services to patients and doctors. The role of third-party payers would be reduced to paying for catastrophic medical care. The role of government would be reduced to providing information to consumers and to preventing civil and criminal fraud. Only with market forces unshackled can Americans receive adequate, affordable medical service and can American businesses focus on business instead of employee benefits.

Leigh Tripoli is manging editor of Regulation and a senior editor at the Cato Institute, Washington, DC.


Butler, Stuart M. "A Policy Maker's Guide to the Health Care Crisis, Part II: The Heritage Consumer Choice Health Plan." Heritage Talking Points (March 5, 1992). Butler, Stuart and Haislmaier, Edmund. A National Health System for America. Washington, DC: Heritage Foundation, 1989.

Goodman, John C. and Musgrave, Gerald L. Patient Power: Solving America's Health Care Crisis. Washington, DC: Cato Institute, 1992.

"The Managed Competition Act of 1992: Proposal of the Conservative Democratic Forum's Task Force on Health Care Reform." H.R. 5936. Washington, DC: U.S. House of Representatives, 1992.

Pauly, Mark V., Danzon, Patricia, Feldstein, Paul J., and Hoff, John. Responsible National Health Insurance. Washington DC: The AEI Press, 1992.

Wasley, Terree P. What Has the Government Done to Our Health Care? Washington, DC: Cato Institute, 1992.
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Title Annotation:fear of the marketplace
Author:Tripoli, Leigh
Publication:Business Economics
Date:Apr 1, 1993
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