Political Prescriptions

Neither the Republicans nor the Democrats are serious about health-care reform.

All eyes were on Pennsylvania last November, when Democrat Harris Wofford's come-from-behind victory over Republican Richard Thornburgh in a U.S. Senate race provided the only interesting landmark in a desolate off-year election landscape. But the gaze of politicians, reporters, and the public didn't rest for very long on Wofford or his much-hyped health-care theme.

If the truth be told, Wofford's "health-care proposal" was less a plan than a slogan: "If every criminal has the right to a lawyer, shouldn't every American have the right to a doctor?" That's great ad copy, but what does it really mean? Wofford apparently pictured some kind of nonprofit corporation working with private insurers to keep health-care costs low while guaranteeing coverage to everyone. But that's about as specific as it got. Would the nonprofit corporation be funded by the federal government? By new mandates on business? Wofford didn't say, but then again, Thornburgh didn't ask. Thornburgh—and the Bush administration officials who advised him—saw voter worries about health care more as a sign of distress about jobs and the economic downturn than as a clear signal about health-care policy. So they never thought to challenge Wofford on the issue itself.

Democrats in the national party and in Congress couldn't have been giddier about the Wofford win. Health care was already their chosen issue for 1992. Back in the spring of 1991, leading Democratic pols such as Reps. Henry Waxman and Pete Stark of California and Sens. Edward Kennedy of Massachusetts and Jay Rockefeller of West Virginia called for their fellow congressional Democrats to pass a comprehensive healthcare reform plan—preferably some kind of benefit mandate on employers—and then hang Bush in 1992 with his expected veto.

Inertia and ennui (plus concern by a few lawmakers about the budget deficit) stymied this plan for months, but the Wofford win reinvigorated it. In December, Senate Majority Leader George Mitchell of Maine, a primary sponsor of an employer-mandate reform bill, and eight other Senate Democrats organized public hearings in five cities across the country to call attention to health care. "We cannot—we must not—sit back and wait for a consensus to emerge on how to solve this crisis," Mitchell yelped. In the House, 200 members planned public meetings in their districts on the same day, January 14. In New Hampshire, the Democratic presidential candidates held a December bluster-in, officially called a debate, to blast Bush for inaction.

The Democrats are right. The Bush team not only doesn't have a radical reform plan but is steering clear of anyone who does. "This is one issue where [Democrats] can convincingly claim that the president isn't doing anything," says Lisa Sprague, manager of employee benefits policy at the U.S. Chamber of Commerce. The Democrats, however, are no more willing to endorse systemic changes. That's why employer mandates, or even smaller changes involving state regulation and medical malpractice, dominate the congressional debate. The incentive for politicians during the coming election year is to talk a good game but to stay off the playing field.

The only two true reforms of the healthcare system—national health insurance and consumer-oriented "managed competition"—would require radical changes in the way patients pay for health care and medical personnel provide it. They'd also cost money. That's why the storm clouds will continue to gather over health care in America, with politicians and opinion leaders thundering loudly about the need to reform but refusing, in the end, to bring the discussion down to earth.

The national debate over what to do about health care has advanced further than the Wofford "plan," but not by much. There are three main ideas under discussion—national health insurance, employer mandates (sometimes called "pay or play"), and managed competition—plus a fourth category, piecemeal reforms, where the action really is for now.

National Health Insurance

Except for the stray union lobbyist, Naderite activists, and Democratic presidential candidate Tom Harkin, there aren't many people actively promoting national insurance. In Congress, Rep. John Dingell (D–Mich.) heads the short list of players favoring it. Other members, such as Stark and Sen. Bob Kerrey of Nebraska (another presidential candidate), favor hybrids that retain some private insurers, employer payments, or diversity among states.

Maybe part of the problem is that national-insurance proponents are running out of countries—Britain, Sweden, Canada—to idolize, since each country's plan has shortcomings that become rather obvious when serious debate is joined. While the United States spends a lot more on health care than these "model" countries, Americans also have access to new technologies, treatment innovations, and the latest surgical procdures. Countries with national insurance plans of some kind tend not to encourage much innovation.

Also, the goals of many national insurance plans are ideologically tinged and not directly related to improving access to medical care. "Any national insurance ends up being income redistribution," says Christopher Conover, an associate in research at Duke University's Center for Health Policy Research and Education, "even though that's better done by the tax system, if at all."

But the biggest factor scaring off potential supporters is the enormous price tag associated with moving America's $700-billion health-care industry from 40-percent government funding to the 90-percent-plus government funding a national insurance system would entail. Even if the much-vaunted cost savings of eliminating marketing, paperwork, and other "waste" materialize, American households will still have to pay about $2,000 apiece for the privilege of one-stop shopping for health-care coverage, notes Edmund Haislmaier, health-care policy analyst for the Heritage Foundation. National health insurance is an "internally consistent" position, he says, "but no one wants to pay for it."

"Pay or Play"

Despite its huge drawbacks, national health insurance—turning medical care into a closely regulated utility—does address the status quo's lack of accountability. Currently there is no link in the minds of patients between the medical care they purchase and its cost, and there is a limit to how much the cost-consciousness of third-party payers can substitute for that lacking in patients. This problem can be addressed in only two ways: by giving consumers more of a direct financial incentive to shop wisely for care or by taking choice away from consumers, as a nationally run health insurance system would.

The reform plan of choice among many congressional activists would do neither of these. The pay-or-play approach enshrined in Mitchell's bill, among others, would require employers either to buy health insurance coverage for their employees from private insurers (subject to federal mandates on the scope and type of coverage) or pay a new payroll tax to fund government insurance for those employees.

In practice, this system would probably collapse rather quickly into a Medicare-type federal insurance program for business employees. At first, employers would have a strong incentive to dump or avoid hiring workers whose health insurance would be costly. Recognizing that, Mitchell placed tough antidiscrimination language in his bill. But, as Heritage Foundation Director of Domestic and Economic Studies Stuart Butler told the Senate Labor and Human Resources Committee in 1991, "It is clear that attorneys would earn good fees from such provisions and that companies could face the prospect of potentially staggering damage claims from employees or would-be employees."

If the cost to "play" is this high, employers will choose to "pay," and more and more workers will move into the government insurance program—just as the combination of mandatory auto insurance and a subsidized assigned-risk pool lures increasing numbers of drivers out of the regular insurance market and into the pool.

Under pay or play, cost control will go out the window. This would get all the disadvantages of a national health insurance system without its one potential cost-control advantage. Furthermore, it would be funded by yet another regressive payroll tax, at a time when Social Security taxes are already reducing the real incomes of working Americans.

"I do not believe it is the intention of this committee or of Congress to fund America's health care system by taxing the poor," Butler said in his testimony. "Yet, that is precisely what [the Mitchell bill] would do."

Despite the obvious shortcomings of "pay or play," there are several political reasons why members of Congress, activists, and some business leaders are pushing it. In November, a coalition of CEOs of Fortune 500 companies, labor union reps, and consumerists called the National Leadership Coalition for Health Care Reform announced their support for an employer-mandate approach similar to Mitchell's bill. Big businesses, for one thing, already pay exorbitant health-care bills and want to make sure their smaller competitors have to as well.

There's an industry-sector dimension, too. "Many manufacturers want the service industry to pay their fair share," Sprague says. When uninsured employees need care, hospitals often provide it and simply shift the cost to paying customers in the form of higher prices. That drives up the cost of insurance for companies currently providing it. Meanwhile, union leaders, many of whom favor national health insurance but understand its political problems, correctly view pay or play as national insurance by stealth.

Managed Competition

The alternative proposed by Heritage, many health economists, and conservative lawmakers is to move away from employer-provided health insurance altogether, in favor of direct purchase of care by families. These reformers would end the current federal tax exemption for employer-provided care and replace it with a refundable tax credit for families to use to buy insurance, sign up with a health-maintenance organization, pay medical expenses out of pocket, or save for future medical expenses.

A bill introduced by Sen. Steve Symms (R–Idaho) probably comes closest to the ivory-tower vision of consumers shopping around for health care in a competitive, albeit managed, market. The Symms measure would do two things: 1) establish a refundable income-tax credit of 15 percent for most taxpayers, and between 50 percent and 100 percent for poor Americans, to pay for insurance or HMOs; and 2) create the Individual Medical Account (IMA), into which taxpayers could make annual contributions of up to $2,500 a year. Individuals could withdraw funds from their IMAs without tax penalty to pay for out-of-pocket expenses such as deductibles, co-payments, or other costs not covered by insurance. Up to $10,000 could be kept in an IMA without it showing up as gross income at tax time.

In conjunction with these changes, the bill would eliminate tax deductibility for employer-provided medical benefits. "Because we subsidize employer-provided care in the tax system, employers have an incentive to over-cover their employees," Duke University's Conover says. When providing a certain level of compensation to employees, businesses are encouraged by the tax code to pay relatively more in benefits and relatively less in salaries—even if the benefits aren't really needed. Making the tax system more neutral, so self-employed people get the same benefits as employees of large companies and everyone has an incentive to shop around for coverage (pocketing the savings generated by going to a less costly plan), would create a more competitive market for health-care coverage. That, advocates say, would spur insurers and HMOs to come up with more personalized packages tailored to different consumers, whose personal choices and physical health would become more important.

"A lot of health-care costs are lifestyle-related," notes Conover, but employer-provided coverage puts everyone in a big, undifferentiated pool. Groups of non-smokers, married people, or others with demonstrably lower health risks could get better coverage at lower prices—but not in the current employer-driven system. Group insurance based around social organizations, unions, health clubs, churches, or other institutions would replace group insurance at the workplace. And since employment would be unrelated to coverage and the tax credit would be refundable, a large segment of the uninsured population—poor people without jobs or sufficient income to buy insurance—could obtain coverage.

There are some practical and political red flags here, however. First, consumers would suddenly be expected to shop around in a complex marketplace that was previously the domain of their employers. "It sounds kind of chaotic," says Sprague, though her organization, the U.S. Chamber of Commerce, and other lobbyists for small businesses favor this approach over pay or play. Would enough consumers have the knowledge and motivation necessary to make cost-effective decisions about their health care?

Perhaps, but the transition, at least, would be pretty rocky. Some people with such incurable diseases as AIDS or with other special medical problems might have a hard time getting coverage (though competition advocates say insurers would have the incentive to develop ways to cover them) and would probably make a lot of noise about it. Lastly, some consumers could act as free-riders by choosing bare-bones plans, pocketing the savings, and then relying on the generosity of public hospitals when a serious health problem arises.

The political obstacles are even clearer. It's easier to put the onus on institutions, such as businesses or the government, than on individuals, especially during times of stress and rapid change. Opponents of the Symms bill or similar measures could use emotional appeals about "shifting responsibility from your employer to you." On the Hill, a health-care reform plan based on the tax system would have jurisdiction problems. The most activist members on health care sit on labor and human resources committees, not tax-writing panels, and they're likely to rely on measures they can pass and crow about, rather than going through the time-consuming and laborious process of putting together coalitions to make changes in the federal tax code.

Piecemeal Reforms

That last reason is one motivating force behind what's really happening in healthcare reform in Washington. Politicians are coming together to draft modest reforms with simple targets and low price tags that avoid major changes in the health-care finance system.

"People in the administration, and indeed most members of Congress, if they were honest about it they would admit they don't understand the issue," Haislmaier says. "So they either want it to go away or the next best thing—do as little as possible."

So, for example, Rep. Alex McMillan (R–N.C.), Sen. Pete Domenici (R–N.M.), and other members have introduced bills to reform medical malpractice. McMillan's bill would limit awards for pain and suffering and would require most Americans to settle cases outside of court. He would create a corps of professional arbitrators, adding to the current pool, to decide most cases.

Unfortunately, the savings from malpractice reform may not be very big. The actual cost of malpractice cases makes up only about 1 percent of America's health-care bill, according to consumerist groups. The out-of-pocket hidden cost of doctors performing "defensive medicine"—ordering tests or surgical procedures to avoid malpractice liability—is significantly higher but still isn't the main force driving the medical cost explosion.

Other popular piecemeal reforms include measures to make insurance purchased by self-employed people tax-exempt and to preempt state mandates on insurance coverage that make it too expensive for small businesses. When the Bush administration finally announced its package of health-care reforms, promised for more than a year in December, it included small steps such as the establishment of a $3-billion program of school-based clinics and insurance for children, anti-smoking measures, and tort reforms. After an underwhelming response to those proposals, Bush finally embraced a modest, Heritage-like tax plan in his State of the Union address but did not endorse the sizable changes in the tax code needed to make the plan really work.

The trick for Democrats and Republicans alike is to sound like health-care reformers without doing anything rash or costly. Pay or play was the original product of this kind of thinking, but less drastic measures fit the bill even better. For Americans as a whole, this political dynamic is probably a blessing too, since the prospect of clueless lawmakers enacting a huge, pricey reform of the nation's entire health-care system should scare even the most trusting citizen. Advocates of a consumer-oriented system like the Symms plan say they are gaining ground among business and opinion leaders, lobbyists, and some members of Congress, so in the long term this approach may triumph. And in the short term, all the political rhetoric about 33 million uninsured Americans and spiraling health care costs and the like will remain full of sound and fury, signifying nothing—fortunately.

Contributing Editor John Hood is editor of Carolina Journal and a columnist for Spectator (N.C.) magazine.