Printer Friendly

Health care policy reform - in the public interest or for the special interests?

CHANGE IN public policy on health care at the federal government and state government levels is one of the major public policy areas for 1993. Hundreds of plans have been proposed by various health care provider groups, representatives of consumer groups and elected officials. The claimed goal of these efforts is more access to needed care for more people at more reasonable prices.

If governments did not intervene in the health care delivery system in any manner, some amount of health care would be demanded by consumers of care with money to pay for care, and some amount of care would be offered by health care providers responding to the market demands of health care consumers. We could argue over how this market would operate and how much care would be consumed, but a market would exist without public policy on health care. The only reasons to have government intervention is to increase the quality, increase the quantity, lower the price and expand the number of people who could afford to have care. The 1993 debate about public policy on health care begins with the assumption that increased government intervention will lead to a more positive outcome than would occur without that additional intervention.

Public policy on health care, or any other issue, is not made solely by disinterested public servants toiling to improve the lot of the common man. Votes are made in the Congress and state legislatures by human beings who have their own opinions shaped by their personal experiences and the experiences of family and friends. Millions of dollars, perhaps billions, will be spent by providers and receivers of care to influence votes by our elected leaders.

Public policy on health care is made by compromising many different special interest views to the point that enough groups will not oppose an outcome so that it can command a majority vote. Public policy on health care will change when the pain associated with maintaining the status quo is greater than the pain caused by moving to new policies. Economists should be concerned for personal reasons, because the quality of our lives and the lives of people we care about will be influenced by who controls the money in the health care system. But business economists also need to watch this debate for two business reasons:

1. Business costs will be directly impacted by changes in health care policy. Employers with employer-based health care plans are already familiar with the costs of health care. These costs will be impacted by federal government-imposed minimum benefit requirements. Employers who do not provide health care plans may be required to provide a plan or pay a payroll tax to fund employee health benefits from a state or federal plan. Higher business taxes may be imposed to pay for expanded care for low-income families.

2. The outcome of the health care policy debate may establish new precedents on how businesses can use public policy to influence the cost of inputs. If businesses can use public policy to force suppliers of health care for employees to accept government set prices, could they do the same with other suppliers? Would washing machine manufacturers then try to use public policy to control the price of steel or plastic, or car rental companies use public policy to limit price increases on automobiles? By the historical accident of providing health care as a fringe benefit, businesses have been sucked into a much wider debate of government-set prices and standards.


The debate on health care policy has already been shaped into a narrow debate over how to implement changes that have become part of the accepted political agenda. This agenda is articulated in many different ways, but basically it comes down to universal access, cost control and redistribution of who pays for care. All plans, regardless of how "marketed-based" or how much "government control," come back to those basic points, Goodman and Musgrave describe from a public choice economics perspective why that has happened:

". . . political competition inexorably leads candidates to adopt a specific position. It is called the winning platform. The idea of a winning platform is a fairly simple one. It is a set of political policies that can defeat any other set of policies in an election. A politician who wants to be elected or re-elected has every incentive to endorse the winning platform. If he does not, he becomes vulnerable; for if his opponent adopts the winning platform, the opponent will win the election . . .

"This line of reasoning leads to a remarkable conclusion: In democratic political systems with two major political parties, the tendency is for both to adopt the same political policies. They do so not because the party leaders think alike or share the same ideological preferences, but because their top priority is to win elections and hold political office."

During the presidential campaign, the language of President Bush and Governor Clinton may have been different, but the expansion of the role of government in the delivery and payment of health care was at the root of both policy positions. What is true about politicians and elections is also true of special interest groups trying to influence politicians. The ongoing debate on health care is not a philosophical one. The action in 1993 will be a fight of special interest groups to turn the accepted political agenda to their advantage.

The challenge may have been best articulated by David Weinschrott of the Hudson Institute in the August 16, 1991, Wall Street Journal, "Cost containment for consumers, whether achieved by healthy competition or unhealthy controls, is tantamount to revenue containment for providers. No interest group in history has ever preferred competition to subsidies. And the latter are invariably marketed as 'reform.'"


In this special interest fight for control of a portion of the over $900 billion spent each year on health care, the best position is to have a cause that would have wide support under all conditions, a limited cost that would be politically acceptable and a policy that maximizes those two advantages. The position of the American Academy of Pediatrics (AAP) is almost a perfect fit.

No one in the policy process can be against pregnant women and children. Factory workers and computer operators can fend for themselves, and senior citizens have had their chances to live life. But children, the argument goes, cannot take care of themselves and are the nation's hope for the future. If increased government intervention in health financing and delivery is the proper policy approach, then children and pregnant women are the natural starting place.

The AAP plan, introduced in the 102nd Congress by Representative Matsui (D-CA) as H.R. 3393, would apply to all children through age 21 and all pregnant women. The basic mode of operation would be play or pay. Employers would either provide a government-approved minimum plan for dependents or employers would pay a 3.5 percent payroll tax and employees would pay a 1 percent payroll tax to a state-administered insurance fund.

Health care plans would be guaranteed issued, renewable regardless of health or risk status, community rated and have no preexisting condition exclusions. Money currently allocated to Medicaid and additional general revenue would be used by state insurance funds to purchase prepaid medical plans for low-income and no-income children and pregnant women not covered by other plans.

Health care providers would be able to provide virtually any health care service and have it paid under the government-approved basic plan. As outlined in the AAP provided summary of H.R. 3393, benefits would include:

Preventive. Child preventive (routine visits, routine lab tests and immunizations), prenatal, newborn, family planning, child abuse assessment and preventive dental.

Primary/Major medical. Hospital services, inpatient and outpatient physician care for acute and chronic conditions, diagnostic tests, acute dental care, ambulance, durable medical equipment, corrective glasses and lenses, hearing aids and prescription drugs.

Exended/Major medical. Mental health, substance abuse services, treatment of developmental and learning disabilities (excludes educational component), speech, orthodontia, occupational and physician therapy, hospice, respite, short-term skilled nursing care and nutritional assessment and counseling.

A resource-based relative value scale (RBRVS) for pediatric and obstetric services, similar to one used by Medicare for physicians, would be established by the Department of Health and Human Services (HHS) to reimburse physicians and hospitals. All insurance plans would pay providers these government-set prices for goods and services.

The American Medical Association (AMA) policy starts with mandating that employers provide health care plans that meet federal government-set minimum standards, arguing that employers should be required to contribute to health plans as they do to Social Security and unemployment compensation. To this base of funding for physicians, they would add increased Medicaid outlays to cover all people below the poverty level. Medicaid would cover all medically necessary physician and hospital services, prescription drugs, rehabilitative services and emergency services. Medicaid reimbursement levels would be increased from their present low levels. The Medicaid changes would be phased in to lessen the budget shock of higher government outlays, starting with children and pregnant women. The AMA knows what the AAP knows.

New regulations on insurance providers are supported, as is the creation of state-level risk pools, so that more people have access to health care plans. State government-mandated benefits for health insurance policies would be eliminated and self-insured plans would lose their exemptions under the ERISA pension laws.

The AMA big tent version of reforms had to stretch to cover several mandated payment systems. The AMA proposal would require private health care plans to offer at least three different ways of paying physicians: a benefits payment schedule, a usual and customary rate and a prepaid plan. The plans could choose to provide other payment systems in addition to the three mandated ones.

The struggles that AMA has had with the payments issue points up one of the great difficulties of any broad-based special interest group. It is relatively easy to set policy on what other participants in health care delivery should do, such as employers providing health care plans, taxpayers paying more taxes to fund more Medicaid spending and medical liability reforms that may negatively impact lawyers and plaintiffs. It is exceedingly hard for the broad special interest group to decide how money should flow to members of its own group.

The Secretary of HHS would be required to establish a national advisory committee composed of pediatricians, family physicians, obstetricians and experts on and advocates for maternal and child health to advise the Secretary on appropriate payment amounts and all factors that influence the adequacy of health funding for children and pregnant women.

The AAP has devised a plan that dictates that virtually every health care product and service will be available to children and pregnant women with the bill paid for b.v someone other than the families actually receiving the care. Even noneconomists know that demand for free services is almost boundless. When this plan results in exploding costs for these services, the AAP, through the national advisory committee, will have positioned itself at the side of the Secretary of HHS advising that each and every service is absolutely essential and cannot be cut.

AAP stresses they believe in "children first" not "children only." They believe all people should be under a program similar to the one proposed for children, but that children should be first. However, the program for children and pregnant women would drain off enough money so that nothing would be left for the others.


While the AAP has the advantage of representing health care providers that focus on only one segment of the health care market, children and pregnant women, other groups have to be far more inclusive. The AMA and the Health Insurance Association of America (HIAA) are examples of groups that have to have "big tent" policies that encompass a wide span of opinions. The AMA appears to have kept its tent up, with some creative adjusting of the tent poles, while the HIAA tent has a huge rip straight down the middle. Because AMA could not decide on a single payment plan, and the proposal would not be complete without a plan, they punted by mandating three plans.

The Ripped Tent

The Health Insurance Association of America has not been capable of devising a policy position that protects the financial interest of all of its members, or in some cases its former members. In recent years, HIAA has supported policies that fit the accepted political agenda of universal access, expanded coverage for the poor and near poor, state government pools for the medically uninsurable, federal tax policy changes and managed care.

The heart of the problems at HIAA is that health insurance as asset protection and risk transfer has been supplanted by prepaid medical plans that attempt to socialize the cost of health care. In car insurance and house insurance, the financial relationship is between the owner of the car or house and the insurance company. In health care, the buyer of the health care plan is increasingly not the receiver of care and the payments by the insurers are made to the providers of care rather than the receivers of the care. Insurance companies no longer perform an insurance function, they perform a payment function.

A number of smaller companies that would prefer to orient toward the insurance concept have broken away from HIAA to form the Council for Affordable Health Insurance. They stress individual decision-making in health policy reforms.

Some of the biggest members, or former members, of HIAA have invested heavily in managed care networks and see themselves positioned to take advantage of further collectivizing the health care payment system. Because HIAA policy has not sufficiently embraced policies favorable to further growth in their market share, three large insurers (Metropolitan Life, Aetna Life & Casualty Company and Cigna Corporation) have dropped out of HIAA. Two others, Prudential Insurance Company of America and Travelers Corporation, are reported to be considering dropping out.

In recent months, HIAA has tried to move closer to the accepted political agenda by changing some of its policies. As reported in the December 4, 1992, Wall Street Journal, G. David Hurd, the chairman-elect of the HIAA and chairman and chief executive officer of the Principal Financial Group, a Des Moines, Iowa, insurance company, said of the changes, "I'd say it's enlightened self-interest; it's certainly not an altruistic act."


While the accepted political agenda calls for more government control of health care delivery and payment, the experiences in England, Canada and other countries that have heavier government control of health care have left a gnawing fear in some people that government control of health care will lead to a lessening of the quality of care and the availability of care for those now receiving care. A policy that gives respect to market forces while allowing for substantial government involvement would be a preferable option for many in the health care policy debate. That policy position is currently filled by a proposal called managed competition.

The basic concept of managed competition is that market forces achieve economic efficiencies, but that uncontrolled competition leads to market failures and unmet politically determined needs. Under managed competition, the federal government would decide what basic services would be provided by health plans. Managed care networks, called accountable health partnerships, would provide these services.

Large employers would contract with the accountable health partnerships to provide health care to employees. The large employers would negotiate directly with the accountable health partnerships to set the yearly per-person payment for care. Smaller employers and individuals would use health insurance purchasing corporations as intermediaries with the accountable health partnerships. The competing accountable health partnerships would quote premium rates to the health purchasing corporations, who would offer the plans to smaller businesses and individuals. Both the accountable health partnerships and the health insurance purchasing corporations would be regulated by the federal government.

Power in such a system would be held by the large managed care networks and large hospitals and physician groups that would contract with the managed care networks. Power losers under such a plan would be smaller hospitals, individual physicians and small physician groups, insurance companies that do not have managed care networks, and consumers who can only choose an accountable health plan but not specific physicians and hospitals.

Managed competition as an idea was developed by the Jackson Hole Group and has been around for several years. It was introduced in the House last September by Congressman Cooper of Tennessee and will undoubtedly be introduced again in the new Congress. Some large hospitals and insurance companies have voiced interest in the plan. More will do so in the coming months when they realize they will control the power. The headlines will say competition is good and costs will be controlled, but the decision to support this plan will be based on who has the power.


The Clinton plan, as outlined during the campaign, would use many of the ideas of managed competition as its base, but adds an overall federal limit on public and private health care spending, known as a global budget, and government-set prices. Many of the groups that support managed competition will resist the efforts to impose the budget caps and the price controls. If given a choice between the Clinton plan and a market-based health care system, the supporters of managed competition will take the Clinton plan because it will give them the most power and the least competition.


To be effective, health care policy reforms should focus on both payment issues and delivery issues. Major increases in economic efficiencies could be achieved by reconsidering public policy that restricts who can deliver care and the regulatory requirements on those care providers. Most of the focus, unfortunately, is on the payment issues. Even when proposals try to focus on delivery, they quickly fall back to payment issues.

Groups like the American College of Physicians (ACP) have identified the overbearing administrative bureaucracy that now exists. The ACP calls for ". . . an end to the overwhelming regulatory intrusion that dominates practice today" and ". . . the primary locus of quality assurance must be returned to the medical profession and to health institutions." That call for more professional control is understandable. But, the ACP plan for reform starts with a national commission to set a national health budget and parcel that money to the states. They go on to support all the other top-down public policies supported by many of the other groups discussed in this article.

Groups like the ACP seem not to understand the "golden rule of economics" -- "He who has the gold rules." Actions by local physicians, hospitals and other providers will be controlled by the federal and state bureaucracies who control the flow of payments. To expect anything else is to ignore the little we have learned from watching government over the past 100 years.

The proposal by the Catholic Health Association (CHA) boldly states, "The CHA working proposal begins with delivery reform, in contrast to other proposals that focus on financing issues." The proposal then outlines funding, rather than discussing delivery. The funding ideas are the usual national health board and state health organizations. Their delivery reform ideas are centered on integrated delivery networks, similar to the accountable health partnerships under managed competition. The flow of money is such an overpowering issue that changes in delivery cannot be discussed.

The American Nurses Association proposal does weigh in on one change for health care professionals, "Financial and regulatory obstacles, as well as institutional barriers, that deny consumers access to all qualified health professionals will be removed. The wider use of a range of qualified health professional will increase access to a care, particularly in understaffed specialties, such as primary health care, and in underserved urban and rural geographic areas." The common language translation of those statements is, "Where appropriate, nurses should be allowed to do more and be adequately paid for their efforts." That could definitely lower the cost of delivering care. It is too bad it must be said in code.

The American Hospital Association also takes a stab at delivery reform by promoting more community-based care. That comes after pages of material about payment changes and then is restricted to hospital tax matters and flexibility in staffing for hospitals in rural areas.


As noted repeatedly, the accepted political agenda is for more government involvement, particularly the federal government, in the delivery and payment for health care. In spite of this majority political view, a significant number of special interest groups have tried to raise the issue of the freedom of individual providers and receivers of care to interact as the best way to provide the greatest amount of access to the most people at the most reasonable prices. While some of this rings as self-serving, a portion of it also reflects the reality that collectivist economic policies with command and control central planning have not been shown to be effective in this country or the rest of the world.

The Association of American Physicians and Surgeons is a group that has consistently called for government to get out of health care, both on the payment issues and the delivery issues. They believe that insurance is for the benefit of the patient (asset protection and risk transfer), not the providers. They support health insurance plans not tied to employment and repeal of mandated benefits and other requirements on insurance plans. They oppose government-dictated practice guidelines.

The Council for Affordable Health Insurance (CAHI), mentioned earlier as a break away group from the HIAA, and the AMA have also voiced support for more consumer freedoms. The companies that support CAHI have generally operated in insurance markets where individual choice has played an important role. They would also probably have trouble competing with the established large managed care networks if managed competition became public policy.

The freedom of choice rhetoric of the AMA reflects the concerns that some physicians have had for many years about the growing power of government in health care. Of course, that concern does not completely square with efforts of physicians at the national, state and local level for the past 100 years to control public policy on health care to their advantage. In fairness to AMA, they are not the only special interest group that is inconsistent on policy.


No one special interest group is likely to strike a clear victory in the 1993 battle over health care policy changes. The accepted political agenda of more government involvement is likely to be maintained, at least early on. The concerns about government-run programs, be they health programs or anything else, mitigates against the British or Canadian approach (that is why this article has not spent time on supporters of those programs). Under those conditions, managed competition definitely has the hot hand. It fits the accepted political agenda, and the larger insurance companies, hospitals and physician groups realize that they will have the power. Those groups can generate money and influence.

The pain of shifting to the managed competition approach may generate more political pain than the process can stand. In the end, the managed competition forces will likely have to compromise with both the Clinton Administration and the free-to-choose group. That will result in health care policy that is even more confusing than the current one, but it will have the least objections compared to the others and get at least 51 percent of the vote.

Ross C. Korves is Deputy Chief Economist and Chief Policy Analyst, American Farm Bureau Federation, Park Ridge, IL.


American Academy of Pediatrics "The Children's and Pregnant Women's Health Insurance Act of 1991," September 1991.

American Hospital Association, "Public Policy Priority Summary," Summer 1992.

American Medical Association, "Health Access America," 2d ed., September 1992.

American Nurses Association, "Nursing's Agenda for Health Care Reform," June 1991.

Catholic Health Association, "Setting Relationships Right: A Working Proposal for Systemic Health Care Reform," February 20, 1992.

Clinton/Gore '92 Committee, "Controlling Costs and Guaranteeing Care for All -- The Clinton/Gore Health Care Plan," September 1992.

Council for Affordable Health Insurance, Position Paper, April 1992.

Ellwood, Paul, "The Jackson Hole Initiative: A Proposal for Health Care Reform." July, 1992.

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

Health Insurance Association of America, "Health Care Financing for All Americans," 2d ed., 1992.

"Insurance Group Relaxes Its Resistance to Greater Regulation of Health Care," The Wall Street Journal, December 4, 1992.

Orient, Jane, Executive Director, Association of Physicians and Surgeons, personal communication, December 1992.

"Universal Insurance for American Health Care, A Proposal of the American College of Physicians, Annals of Internal Medicine," Vol. 117, No. 6, September 1992.

Weinschrott, David, "Self-Interest Reigns in Health Care Reform," The Wall Street Journal, August 16, 1991.
COPYRIGHT 1993 The National Association for Business Economists
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Korves, Ross C.
Publication:Business Economics
Date:Apr 1, 1993
Previous Article:How not to fix the health care crisis.
Next Article:Agoraphobia: what ails most of the conservative proposals to reform health care.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters