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How not to fix the health care crisis.

THE HIPPOCRATIC OATH provides the guiding philosophy of health care -- First, do no harm. That would be sound advice for many of the political leaders who are trying to solve our health care crisis.

No one can deny that our current health care system is badly in need of reform. Costs are skyrocketing. Twenty years ago, health care was a 842 billion per year industry. Today, total U.S. health care spending tops $662 billion, more than 14 percent of our Gross Domestic Product. These soaring costs are putting enormous financial pressures on American businesses, forcing thousands of small businesses to reduce or drop benefits for their employees. Moreover, health care costs are an increasing burden to already strained family budget. At the same time, nearly 35 million Americans lack health insurance. However, many of the proposed cures currently being debated in Congress are worse than the disease.


One of the most dangerous health care reform proposals currently being considered is the call for a single-payer, government-operated, tax-funded system. This type of system, generally referred to as National Health Care, is currently operated in Canada, Europe, Australia, New Zealand, and elsewhere.

A single-payer national health care system would come at enormous cost to American taxpayers. Even supporters of national health care admit that such a system would require $60 billion in new taxes. However, most economists put the cost much higher, possibly as high as $339 billion in additional taxes. This would require either a 15 percent payroll tax on all businesses, a 10 percent national sales tax, or a 14 percent increase in income tax-rates.(1)

For all this tax money, we would buy surprisingly little health care. The one common characteristic of all national health care systems is a shortage of health care services. For example, in Great Britain, a country with a population of only 55 million, the waiting list for surgery is more than 800,000.(2) In New Zealand, a country with a population of just 3 million, the surgery waiting list now exceeds 50,000.(3) In Sweden, the wait for heart x-rays is more than 11 months. Heart surgery can take an additional eight months.(4) In Canada, the wait for hip replacement surgery is nearly ten months, for a mammogram: two and one-half months, for a pap smear, five months.(5) Surgeons in Canada report that, for heart surgery, the danger of dying on the waiting list now exceeds the danger of dying on the operating table.(6) According to Alice Baumgart, President of the Canadian Nurses Association, emergency rooms are so overcrowded that patients frequently line the corridors awaiting treatment.(7)

Nor do national health care systems control the rising cost of health care. Proponents of national health care make much of reported differences in the proportion of gross domestic product spent on health care by Canada and the U.S. It is true that Canada spends only about 9 percent of GDP on health care, while U.S. costs have skyrocketed to more than 14 percent of GDP.(8) However such comparisons are seriously misleading.

Between 1967 and 1987, Canadian GDP grew by nearly double the rate of the United States. Therefore, any comparison of health spending should be adjusted to compensate for the differing rates of economic growth. Additional adjustments should be made for such factors as population growth; general inflation; currency exchange rates; the larger U.S. elderly population (the elderly require more, and more expensive, health care); higher U.S. rates of violent crime, poverty, AIDS, and teen pregnancy; and greater U.S. investment in research and development. When all such factors are taken into account, Canadian health spending is virtually identical to that of the United States and has actually been rising faster over the past several years.(9)

Indeed, Canadian public policy experts warn that health care costs are rising so rapidly, "(T)hey are crowding out every other public spending priority -- social services, the environment, education. All are being short-changed to feed an inefficiently organized health care system."(10)


The second most commonly discussed proposal for health care reform is called "play or pay." Under a "play or pay" plan, employers would be required either to provide health insurance to all workers or pay a tax that would be used to fund health insurance for those who remain uninsured. However, in reality, play or pay is an unworkable scheme that would cost hundreds of thousands of jobs and, ultimately, degenerate into a national health care system.(11)

First, attempts to mandate health care costs onto the back of business runs into the wall of simple economics. The amount of compensation each worker receives for his or her work is directly related to that worker's productivity. Mandating an increase in that compensation by requiring the employer to provide health insurance does nothing to increase productivity. Thus one of two things happens: consumers must pay higher prices for products; or more likely in a competitive economy, employers will be forced to reduce their payroll costs to offset these new and increased costs of health benefits. Payroll reductions may take several forms. One is a reduction in cash compensation, which in practice is unlikely. More probable is a reduction in the number of employees, either through layoffs or by postponing the hiring of new workers. In either ease, unemployment increases, especially among low-skilled workers for whom mandated health benefits constitutes a relatively large increase in employee compensation.(12)

There is a particular unfairness to "play or pay." While most individuals without health insurance are the working poor, studies show that 25 percent of the uninsured have incomes greater than 300 percent of the poverty level.(13) These are frequently young, healthy individuals who have chosen not to purchase health insurance, preferring to spend their discretionary income elsewhere. Under a play or pay system, low-skilled, poor people would lose their jobs to provide these relatively affluent individuals with government-funded health insurance.

Second, play or pay does nothing to address skyrocketing health care costs.(14) As a result, there will inevitably come calls for government action to control prices, such as global budgeting or fee setting.(15) The result of such policies, as can be clearly seen from the Canadian and European health care systems, is the rationing of care.

Third, a "play or pay" program would have enormous costs for American taxpayers and businesses. The Urban Institute, in a study commissioned by the U.S. Labor Department, has estimated that "play or pay" would cost taxpayers at least $36 billion per year in higher taxes, and would cost businesses an additional $30 billion in higher health care costs.(16) Other economists warn that "play or pay" would increase the budget deficit by $46.5 billion and would reduce the U.S. gross national product (GNP) by $27 billion.(17)

Fourth, and perhaps most importantly, "play or pay" systems are designed in a way that will surely degenerate into a national health care system, with all its attendant problems. Again, the reason is simple economics. The average business currently pays nearly $4,500 per employee for health care benefits. For an employee making $20,000 that is 22.5 percent of the employee's salary. If the payroll tax were 7 percent, as envisioned under current proposals,(18) the obvious choice for the employer would be to pay the tax and turn the employee's insurance over to the government.(19) This scenario is even more likely for big businesses, such as the automobile industry, that provide very extensive -- and expensive -- health benefits.(20) One reason that certain big businesses, such as Chrysler and AT&T, are so supportive of such a plan is that they would be only to happy to foist their health care costs on others.

As the government assumed responsibility for providing health care to more and more workers, the play or pay system would transform itself into a Canadian-style national health care system.


The third commonly discussed reform of our health care system is changes in insurance law. The goal is to reduce insurance costs or make insurance more available to a wider range of groups. The most common target for these reforms is the small group market.

Some of these insurance market reforms are sensible, such as eliminating mandated benefits.(21) However, there are increasing efforts to manipulate insurance laws to require insurers to provide coverage for groups or individuals that they would not normally cover.

Among the most common proposed reforms:(22)

1. Renewability. Insurers would be prohibited from canceling policies for groups or individuals within a group because of deteriorating health of the group or one of its members.

2. Continuity. Insurers would be prohibited from imposing new restrictions on a previously insured individual when that individual changes jobs. Some variations would go further by making an employee's insurance package "portable," enabling the employee to carry it from job to job.

3. Premium Limits. Limits would be imposed on how much an insurer could vary rates between similar groups. Limits would also be imposed on how much an insurer could raise rates from year to year.

4. Guaranteed Issue. Insurers would be prohibited from denying coverage to any small group or excluding any employee within a group.

Most insurance reforms have a worthy intent, expanding access to insurance to those small employers that have been unable to purchase insurance under current practices. However, the reforms may have unintended consequences that will increase the cost of insurance and actually leave more people without insurance.(23) This is particularly true of guaranteed issue and community rating.

Insurance is a business of risk allocation, in which the insurer receives payment in exchange for agreeing to cover the expense of certain risks. The cost and scope of coverage is determined by morbidity/mortality statistical analysis.(24) To the degree that insurers are prevented from basing their contracts on such actuarial values, other policyholders will be forced to absorb the additional costs.

Indeed, studies estimate that, while employers with high-risk employees would certainly notice improved access to coverage under proposed insurance reforms, overall premiums could increase substantially. A recent study by the American Society of Actuaries found that claims costs in the second year of guaranteed issue policies were 50 percent higher than for standard issue policies. Claims costs tapered off in subsequent years, but still averaged 38 percent higher.(25) The results of this extensive seven-year study confirms earlier studies by Community Mutual Insurance of Ohio and Tillighast Corporation that showed premiums increasing by 25 to 35 percent in a guaranteed issue environment.(26)

The net result would be to force many small businesses to drop their current insurance coverage. Some currently uninsured workers would move into the insurance market. Others, who now have insurance, would move out. Thus, insurance reforms would defeat their own raison d'etre. Even supporters of guaranteed issue now admit that it will do little to expand access to health insurance. For example, John Gummerre, Chairman of Phoenix Mutual Life Insurance Company, recently admitted, "|W~e know that the small group reforms will probably raise rates for the majority of small employers, and we should not pretend otherwise. We also know that most uninsured employers are uninsured because they feel that our standard new business premiums are unaffordable. Hence making guaranteed issue coverage available . . . is not going to significantly expand coverage."(27)

It should also be noted that most insurance reform proposals would benefit large insurers, whose cash reserves and larger profit margin give them more flexibility to meet the new demands, at the expense of smaller companies. This may explain the support of the Health Insurance Association of America (HIAA) and Blue Cross/Blue Shield for many reform proposals.

As insurance expert Arthur Ferrara has noted:

"Equitable distribution of this burden was not a high priority of |HIAA~. The larger companies exercise a commanding position on HIAA committees and its Board. Concerned over the specter of national health insurance, they convinced the Board to adopt a poorly conceived plan . . . The cost of the proposal will not affect those large companies and their policyholders. They are not significantly involved in the small employer group market, and are apparently not involved in the cost of the solution proposed."(28)

The whole theory underlying most small group market reforms is essentially a flawed one -- that healthy people and sick people should pay the same for insurance.(29) But, because sick people inevitably require greater benefits, the cost of insuring them must be subsidized by healthy people. Moreover, the additional costs are highly regressive in nature, forcing the highest marginal costs on those least able to afford the increase. For example, if small group reforms cause the premiums for a family policy to increase by $1,000, that's a 10 percent surcharge for a family earning only $10,000 per year, but only a 1 percent surcharge for a family earning $100,000.(30)

The essential unfairness of such subsidization has long been recognized as a matter of insurance practice and law. In fact, insurance companies are generally required by law to make distinctions between risks and classify those risks in such a way as to assess fair premiums. These laws, which are based on the Unfair Trade Practices Act (UTPA), developed by the National Association of Insurance Commissioners and enacted in some form in all fifty states, are designed to "protect insured persons from paying excessive amounts to subsidize policy holders and high-risk groups."(31)


The latest buzzword in health care reform is managed competition. Managed competition proposals are generally being presented as a compromise that would preserve many free market aspects of health care, while making the market more accountable to government control. The concept is generally considered the brain child of the "Jackson Hole Group," an ad hoc coalition of health care executives and academic experts, led by Dr. Paul Ellwood.(32) In Congress, it is being supported by the Conservative Democratic Forum.(33) At the state level, it is championed by California Insurance Commissioner John Garamendi.(34)

As envisioned under the most common managed competition proposals, there would be established a national system of Health Insurance Purchasing Cooperatives (HIPCs), which would act as collective purchasing agents on behalf of employers and individuals.(35) All Americans would be enrolled in a HIPC, either through their employer or individually.(36) The HIPC would negotiate with Accountable Health Partnerships for a benefits package on behalf of its members, operating much like German sickness funds.(37) The government would establish a Uniform Effective Health Benefits package as a minimum standard benefits requirement, replacing current state-mandated benefits. Accountable Health Partnerships would be required to community rate all members of the HIPC and to guarantee coverage to all HIPC members.(38)

Employers would be required to provide coverage for all full-time employees. Employers must pay at least half the cost of coverage, but to discourage excessive benefits the employer's tax deduction will be limited to the amount of the lowest cost plan offered by an Accountable Health Partnership. Unlike "play or pay," employers would not have the option of paying rather than providing coverage. However, employers would be required to pay a payroll tax for noncovered part-time workers. Nonemployed people with incomes and the self-employed would also have to pay a tax. These taxes would be collected by the federal government, then returned to the states on an "equalized" basis. States would use this money, plus current funding from uncompensated care and indigent care funds, to subsidize insurance purchases by those not covered through an employer and unable to pay the full insurance cost themselves.(39)

Public programs, such as Medicare and Medicaid, would have the option of purchasing care through a HIPC.(40)

The program would be overseen by a new Federal agency, The National Health Board. This would be an independent agency, "similar to the SEC," removed from day-to-day oversight from Congress or the Executive Branch. The program also envisions three additional agencies, established by legislation, but controlled by a combination of employers, consumer groups, health care providers, and insurers.

These would be the Health Standards Board, to review medical efficacy and assess benefits; the Health Insurance Standards Board, to oversee insurance organization and market issues; and the Outcomes Management Standards Board, to oversee a new program to provide increased information to health care consumers.(41)

As proposed, managed competition appears to offer a great deal of management and very little competition.

1. The mandate that employers provide health benefits for all full-time employees will cost jobs. The Jackson Hole Group admits that "employer mandates are a form of employment tax."(42) They claim, however, that their explicit taxes would be "fairer" than the current system of allocating costs. But, the real result of such a tax increase is likely to be lost jobs. At the same time, the combination of payroll taxes for part-time workers, taxes on the self-employed and nonemployed, and savings from uncompensated care are likely to fall well short of the cost of providing extended Medicaid benefits and subsidies for the uninsured. Those costs are estimated to top at least $29.7 billion per year.(43) Further, the proposal to "equalize" the return of tax revenue will penalize states with a low unemployment, probusiness economy to benefit those states whose high taxes and business regulations has caused slower economic growth.

2. The proposal creates not just one but four new government bureaucracies. While the proposal fails to offer any real estimate of the cost of these agencies, those costs can be assumed to be substantial. Even more worrisome is the proposal to exempt the agencies from legislative or executive oversight. The history of "independent" agencies, such as the FDA, FTC, FTC, SEC, has been one of unrestrained growth and abuse of power.

3. The call for Uniform Effective Health Benefits simply moves the problems of mandated insurance benefits from the states to the federal level. Inclusion in the mandated benefits package is much more likely to be based on the relative lobbying strength of various provider groups than on a rational view of medical necessity. Whatever benefits are mandated will increase the cost of insurance. And consumers will be deprived of the ability to make individual choices on the type of benefits they wish to purchase.

4. Requirements for guaranteed issue and community rating will increase the cost of insurance.

5. The proposal is vague about how it will control overall health costs. The Conservative Democratic Forum claims that cost controls will result from: (1) capping the tax deductibility for employers who provide insurance in excess of the lowest-cost plan; (2) increased government spending for preventive health care programs; (3) tort reform; (4) paperwork reduction; and (5) holding providers and insurers "accountable for costs and medical outcomes."(44) However, the ability of the first four of these proposals to hold down costs is unproven. And number five sounds suspiciously like price controls. Indeed, Garamendi's California proposal explicitly embraces global budgeting.(45)


Lawmakers are under intense pressure to do something to solve our health care crisis. However, they must resist the temptation to pursue solutions -- government run health care systems, "play or pay," insurance market reforms, managed competition -- that will lead to even worse problems.

There are health care reforms that will lead to reduce costs and increased access: deregulation, privatization of Medicaid, individual medical accounts, changes in tax policy, etc. These solutions are not as easy for the legislative demagogues to exploit, but they will lead to better health care for all Americans.

In the meantime, legislators should remember first do no harm.

Michael Tanner is Director of Research, Georgia Public Policy Foundation, Atlanta, GA.


1 Aldonna Robbins and Gary Robbins, What a Canadian-Style Health Care System Would Cost U.S. Employers and Employees (Dallas:National Center for Policy Analysis, February 1990).

2 John Goodman, Beware of National Health Insurance (Washington, DC: The Heritage Foundation, May 17, 1990).

3 John Goodman, "National Health Insurance: An Expensive Way to Die," National Review, April 16, 1990.

4 Anikka Schildt, "In Sweden, Equality is Tinged with Inefficiency," Washington Post, August 16, 1988.

5 Michael Walker, "From Canada: A Different Viewpoint," Health Management Quarterly, Spring 1989: Michael Walker, "Cold Reality: How They Don't Do It in Canada," Reason, March 1992; Ed Haislmaier, Problems in Paradise: Canadians Complain About Their Health Care System, (Washington, DC: The Heritage Foundation, February 19, 1992).

6 "Canadians Cross Border to Save Lives," Wall Street Journal, December 12, 1990.

7 "Cuts Hurt Canadian Health Care," Washington Times, June 24, 1991.

8 George Scheiber and Jean-Pierre Poullier, "Data Watch: International Health Spending and Utilization Trends," Health Affairs, Fall 1989.

9 "Health OECD, Facts and Trends," Health Affairs, Spring 1991; Jacques Krasny and Michael Ferrier, The Canadian Health Care System in Perspective, (Trenton: Boggart, Delafield, Ferrier, Inc., July 1990).

10 Michael Rachlis and Carol Kushner, Second Opinion: What's Wrong with Canada's Health Care System and How to Fix It (Toronto: Collins, 1989).

11 Ed Haislmaier, The Mitchell Health America Act: A Bait and Switch for American Workers, (Washington, DC: Heritage Foundation, January 17, 1992).

12 According to the Institute for Research on the Economics of Taxation (IRET), a mandate for employers to provide health insurance "would result in unemployment that would fall most heavily on lower income workers whose salary approaches the minimum wage." Roy Cordato, Universal Health Care at Any Cost, (Washington, DC: Institute for Research on the Economics of Taxation, February 20, 1989).

13 Lewin/ICF analysis of Current Population survey data, March 1988.

14 Actually, the Congressional proposal does contain a proposal for voluntary spending limits, with targets for the total amount spent on physician fees and hospital services. But, the nation's 5,000 hospitals and 500,000 physicians are highly unlikely to reach a consensus on voluntary spending restrictions. John Goodman, "Wrong Prescription for the Uninsured," Wall Street Journal, June 11, 1991.

15 Stuart Butler, Why "Play or Pay" National Health Care is Doomed to Fail, (Washington, DC: The Heritage Foundation Lecture Series, July 24, 1991).

16 "Study Says Democratic Health Care Plan Would Boost Annual Costs by $66 Billion," Wall Street Journal, January 10, 1992.

17 John Goodman, Aldonna Robbins and Gary Robbins, Mandating Health Insurance, (Dallas: National Center for Policy Analysis, February 1989).

18 S 1227.

19 John Goodman, "Wrong Prescription for the Uninsured," Wall Street Journal, June 11, 1992.

20 Its Cheaper to Pay Than it is to Play, (Washington, DC: The NFIB Foundation, 1991).

21 For a complete discussion of the harm caused by mandated benefits and proposals to eliminate them, see Michael Tanner, Returning the Market to Medicine, (Atlanta: Georgia Public Policy Foundation, April 1922); John Goodman, Aldonna Robbins and Gary Robbins, Mandating Health Insurance, (Dallas: National Center for Policy Analysis, February 1989); John Goodman and Gerald Musgrave, Freedom of Choice in Health Insurance, (Dallas: National Center for Policy Analysis, November 1988); John Goodman, Duane Parde and Michael Tanner, State Mandated Health Benefits: The Wrong Prescription, (Washington, DC: American Legislative Exchange Council, December 1989).

22 See Health Insurers Finalize Small Business Coverage Reforms Options for Assuring the Availability of Private Coverage to Small Employers, (Washington, DC: Blue Cross and Blue Shield Association, April 1991); Report of the Subcommittee on Insurance Reform, Task Force on Health Care, (Washington, DC: American Legislative Exchange Council, March 1991).

23 Arthur Ferrara, "A Minority of One," Probe, April 15, 1991.

24 Scherzer, How Insurance Rates Are Calculated, in AIDS and the Law, 1987.

25 Molly Hering, "Some Small Group Health Insurance Reforms May Contain Wrong Remedy," FYI, American Legislative Exchange Council, June 19, 1992.

26 "Unintended Consequences," Forbes, April 1, 1991.

27 Letter from John Gummerre, Chairman of the Board and CEO of Phoenix Mutual Life Insurance Company, to Dr. Carl Schramm, President, Health Insurance Association of America, March 11, 1992.

28 Ferrara.

29 John Goodman, "Should Healthy People Pay More for Health Insurance," (Dallas: National Center for Policy Analysis, April 1992).

30 John Goodman, "A Lay Person's Guide to Health Insurance Reform," (Dallas: National Center for Policy Analysis, September 28, 1992).

31 Hollowell and Etheridge, AIDS and the Insurance Industry: The Debate Within the Debate, J. Leg. Med., June 1989.

32 Paul Ellwood and Lynn Etheredge, The 21st Century American Health System, (Excelsior, MN: September 3, 1991).

33 Proposal of the Conservative Democratic Forum Task Force on Health Care Reform, June 18, 1992.

34 California's Health Care Proposals: Are They Worse Than the Disease?, (Sacramento: Golden State Center for Policy Studies, June 15, 1992).

35 The Jackson Hole Initiative: A Proposal for Health Care Reform, (Teton Village, WY: Jackson Hole Group, July 23, 1992).

36 Ibid.

37 For a discussion of German Sickness Funds see, Bradford Kirkmann-Lift, "Health Insurance Values and Implementation in the Netherlands and the Federal Republic of Germany: An Alternative Path to Universal Coverage," in Caring for the Uninsured and Underinsured, (Chicago: American Medical Association, 1991).

38 Jackson Hole Initiative, p. 4.

39 Ibid.

40 Ibid.

41 Ibid.

42 Ellwood and Etheridge, pp. 5-6.

43 Conservative Democratic Forum, pp. 4-7.

44 Ibid.

45 California Health Care in the 21st Century, (Sacramento: California Department of Insurance, February 1992).
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Date:Apr 1, 1993
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