Mandatory Health Insurance Now!

It will save private medicine -- and spur medical innovation.


In an ABC News/Washington Post poll last fall, 62 percent of the respondents favored a universal, government-run medical insurance program. Such surveys reflect a widespread frustration with a health care system that is too expensive, too uncertain, and too complicated.

The answer proposed by John Kerry and John Edwards is to continue the creeping socialization of medicine that Americans have been experiencing since the 1960s. That course would mean the end of private health care in the U.S., and with it the unparalleled medical progress that has benefited patients in this country and throughout the world. It would have a disastrous impact on medical innovation and the quality of care.

The Bush administration, for its part, has failed to offer a coherent alternative to piecemeal nationalization of health care. But the increasingly successful campaigns to privatize Social Security and expand school vouchers suggest a way out: mandatory private health insurance. Under this system, in effect, purchasing health insurance would be not much different from buying car or homeowner's insurance today. As a result, we could preserve and extend the advantages of a free market with a minimal amount of coercion.

Why Worry

The current system poses three main problems. First, it's expensive. In 2003 total spending on health care was $1.7 trillion, some $5,800 for every man, woman, and child in the nation, accounting for more than 15 percent of the U.S. gross domestic product (and up from 14.1 percent of GDP in 2002).

Second, despite all the spending, many Americans don't have health insurance. A May 2003 Congressional Budget Office study estimated that 59 million Americans are uninsured at some point in the course of a year, while 21 million to 31 million are uninsured for the whole year. According to a June 2003 report from the Institute of Medicine, the U.S. loses between $65 billion and $130 billion annually as a result of poor health and early death due to lack of insurance. The uninsured impose costs on the rest of us, too: A 2003 Kaiser Commission report to the Urban Institute estimated that uninsured Americans each year receive about $34.5 billion in uncompensated health care while paying $26.4 billion out of their own pockets.

Third, health care is a paperwork nightmare for patients, doctors, insurers, and employers. In 1999 The New England Journal of Medicine published a study that found it cost $300 billion annually to administer various health insurance plans. It takes some 3 million clerks and managers to run our health care system; that's nearly four times the number of doctors practicing medicine in the United States. It costs between $8 and $18 to file each insurance claim, and a third of them have to be refiled. In a survey published last year by the American Hospital Association's Trendwatch, 64 percent of doctors said they were either extremely or very concerned about the level of paperwork and administration they have to deal with.

Fed up with the whole mess, 82 percent of Americans rank health care as one of the most important issues in the 2004 presidential election, according to a Gallup poll conducted in February. A Pew Research Center for the People & the Press survey conducted in the summer of 2003 found that 67 percent of Americans favored "the U.S. government guaranteeing health insurance for all citizens, even if it means raising taxes." In last fall's ABC News/Washington Post poll, 79 percent of respondents said it was more important for the government to provide health care coverage for all Americans than it was to hold down taxes.

Politicians pay attention to the polls. The compassionate conservatives in the Bush administration tried to neutralize a traditionally Democratic issue by ramming a new $530 billion Medicare drug benefit program through Congress last fall. They have also offered various half-hearted market-oriented baby steps that do not add up to a plan that can compete with the Democrats' vision of "affordable, quality, and reliable health care coverage" for all.

John Kerry vowed at the Democratic National Convention, "When I am president, we will stop being the only advanced nation in the world which fails to understand that health care is not a privilege for the wealthy and the connected and the elected—it is a right for all Americans." His running mate has declared, "I want to make health care a birthright for every single child born in this country, period. I want to make sure all of us vulnerable adults are covered." The main thrust of the Kerry-Edwards reforms is to extend the coverage offered by various government health insurance programs to more and more Americans. The candidates want to enroll nearly everyone under age 18 in the State Children's Health Insurance Programs (S-CHIPs) and allow Americans to join Medicare at 55.

These Democratic health care proposals are a continuation of the socialization trend that began with the adoption of Medicare and Medicaid in the 1960s. Despite the breakdown of the ambitious Clinton health care plan in 1994, we have seen gradual adoption of elements of that proposal, including the S-CHIP program in 1997 and the new Medicare drug benefit. What remains of private medicine is being slowly strangled by the mandates and regulations that come with growing government health care spending. In fact, we're already nearly halfway to a completely centralized, government-funded medical system. Since Medicare was enacted in 1965, the federal and state portion of medical expenditures has risen from 24 percent to 45 percent.

ClintonCare Lives

A decade after Bill Clinton almost forced through his all-embracing health care plan, government-run medicine is once again becoming a respectable public policy idea. Last year a coalition called Physicians for a National Health Program launched a new campaign for universal single-payer health insurance. In the August 13, 2003, issue of The Journal of the American Medical Association, the coalition proposed what "in essence would be an expanded and improved version of traditional Medicare," covering "every American for all necessary medical care," funded through a new tax on income. The proposal, which has been endorsed by 8,000 physicians, has been introduced in Congress as a bill that aims to establish "a new American national health insurance program by creating a single payer health care system."

Advocates of a single-payer system often cite the lower medical costs of the completely nationalized health care systems in Canada and Britain, which spend less than 9.6 percent and 7.7 percent of their GDPs on health care, respectively. Despite the lower spending, the average life expectancy at birth is 79.8 years in Canada and 78.2 years in Britain, higher than America's 77.1. What explains the differential? As University of Iowa health economist Robert Ohsfeldt notes in the fall 2003 issue of The Independent Review, if higher U.S. accident and homicide rates are taken into account, our life expectancy numbers match those of Britain. The difference is also partly due to a slightly higher infant mortality rate in the U.S.: 6.8 per 1,000 live births, compared to Canada's 4.9 and Britain's 5.3 rate per 1,000. (That seems largely related to racial disparities—the white U.S. infant mortality rate in 2000 was 5.7 and the black infant mortality was 14.4.

Another factor is improvements in fetal medicine that have allowed infants who would otherwise have died before delivery to survive into the early newborn period. Canada too has racial disparities; the infant mortality rate for aboriginals is 8 per 1,000 live births—nearly double that of the white population.)

The U.S. looks much better than countries with nationalized health care when you consider waiting times for tests and treatments. Ohsfeldt reports, for example, that in 1997 the mean waiting time for magnetic resonance imaging (MRI) of the head was 150 days in Canada, compared to three days in the U.S. In 1998 the U.S. had 16 MRI machines per million citizens, compared to 3.4 in the U.K. and 1.7 in Canada. Such delays have a serious impact on quality of care: A patient has to wait longer for a good diagnosis, increasing the probability that his treatment will not prevent a lasting disability.

Even more important, America's mainly private system has made the U.S. a font of medical innovation. The U.S. pharmaceutical and biotechnology industries have developed more cancer drugs than their European, Canadian, and Japanese competitors combined, according to Robert Goldberg at the Manhattan Institute's Center for Medical Progress. Due to other countries' price controls, pharmaceutical research and development is increasingly centered in the United States. Consequently, Goldberg notes, that is where 75 percent of all new drugs are discovered and first used. It was U.S. companies, for example, that developed coated stents for treating narrowing heart arteries and invented LASIK surgery for correcting vision problems.

And even when a new therapy is not invented in the U.S., the country's markets can rapidly deploy it. Although the first test tube baby was born in Britain, the U.S. is now the world's leader in human reproductive medicine, pioneering treatments like pre-implantation genetic diagnosis of embryos and sorting sperm by sex chromosomes.

Insuring Cost Inflation

The payoff for less innovation under a single-payer system is supposed to be lower spending. Yet such proposals do not address the origins of the health care system's ever-escalating costs, which go back to World War II. During the war, employers competing for workers found a way around the government's wage controls by offering health insurance in lieu of higher pay. On October 26, 1943, the Internal Revenue Service further encouraged this practice by ruling that employees did not have to pay taxes on such benefits. In 1954 Congress codified the tax-exempt status of employer-provided health insurance.

Nowadays most insured Americans (61 percent) get their health insurance through their employers. The rest buy their own insurance (9.6 percent) and/or receive some sort of government coverage, including Medicaid (11.6 percent) and Medicare (13.4 percent). However well this system may have worked in the immediate postwar years, it is not meeting the needs of Americans today. Fewer and fewer Americans are following the career path of their grandparents and parents: graduate from high school, go to work for a big corporation that provides health insurance for the family, and retire at 65 with a company pension.

"This arrangement might have made some sense back in the days when most families consisted of a man working at a single company over the course of his life supporting a wife and kids at home," says Grace-Marie Turner, president of the Galen Institute, a health policy research organization in Alexandria, Virginia. "The problem is that politicians are still trying to impose a 20th-century health insurance system on a 21st-century work force." Workers today change jobs more frequently, more people are working for smaller companies that offer fewer benefits, and 8 percent of Americans (a share half as big as the percentage of Americans who are uninsured) start their own businesses.

Health insurance is also much more expensive than it was in the 1940s and '50s, partly because modern medicine can do so much more to heal our ills. As William B. Schwartz, a professor of medicine at the University of Southern California, notes in his 1998 book Life Without Disease: The Pursuit of Medical Utopia, "In 1950 costs of health care were remarkably low, because, for a large percentage of patients, doctors really couldn't do much. People spent relatively little on health care (only 4.4 percent of gross domestic product) and got what they paid for—very few useful diagnostic tests or effective treatments." In 1950 there were no polio, measles, or hepatitis vaccines; no open heart surgeries or pacemakers; no organ transplants; few cancer chemotherapy agents; no MRI or CAT scans; and no drugs for ulcers, high blood pressure, or arthritis.

Employer-provided medical coverage is itself another major reason for the high cost of heath care. Rather than pay workers wages that will be taxed, companies use pre-tax dollars to purchase health insurance as a benefit. Instead of paying an employee $1,000 more in wages, of which $400 will be taxed away, companies purchase $1,000 in additional health insurance tax-free. In this way companies funnel more than $140 billion a year in federal tax breaks to their workers. The tax-free status of employer-provided health insurance encourages generous coverage that allows employees to ignore the prices of medical services, which in turn encourages providers to charge more and more. Employees, seeking to take advantage of their coverage, tend to overutilize the system, which also puts pressure on prices.

Thus we have a system skewed toward overuse by the haves and underuse by the have-nots, in which the healthiest people (highly paid employees) get the most generous health insurance. The Kaiser Commission reported that per capita spending on health care is $2,484 for fully insured Americans, compared to $1,253 for Americans who are uninsured for a full year.

No Such Thing as a Free Physical

"Everybody thinks they're spending somebody's else's money," explains Robert Helms, a health care scholar at the American Enterprise Institute. Yet "payments for health insurance come out of wages. Everything ultimately comes out of wages; it's just accounting that obscures that fact." For decades American patients have had little reason to worry about how much they spend on medical care, because they erroneously believe someone else is paying for it. Consequently, doctors and hospitals have little reason to control their expenses. Spiraling costs are the predictable result. The federal government has added to the problem with its own third-party payments through programs such as Medicaid and Medicare.

Nowadays patients are accustomed to low out-of-pocket medical expenses, and big companies are expected to give their employees gold-plated health insurance policies. "Insurance should cover low-probability, high-cost events," says Helms. When it comes to medical care, the whole idea of insurance—of protecting against unexpected losses—has been obscured. Think how expensive your car insurance would be if the cost of routine maintenance such as oil changes and tire purchases were included in your premiums. This is the problem with most health insurance policies today. Instead of insuring against large, unpredictable costs such as chemotherapy or a heart bypass, many policies cover what is essentially routine maintenance: flu shots, annual physicals, and so on.

Despite such generous coverage, employer-based insurance makes Americans anxious. "It's just a stupid system that causes you to lose your health insurance when you lose your job," says Grace-Marie Turner. "If you lose your job, you don't lose your car insurance or your homeowner's insurance. Why should you lose your health insurance?" Last fall's ABC News/Washington Post poll found that 53 percent of insured Americans were worried about losing their health insurance as a result of losing their jobs. This fear helps explain why most Americans tell pollsters they favor universal government-financed health care.

Unable to unravel this dysfunctional system of third-party payments, American companies have turned to health maintenance organizations, which constrain both doctors and patients to keep costs low. But HMOs ultimately were unable to control costs because they couldn't enforce limits on use and because the gains from preventive care were less than they hoped. Single-payer advocates argue that it's time for the government to step in.

"National health insurance would make it possible to set and enforce overall spending limits for the health care system, slowing cost growth over the long run," says the proposal from Physicians for a National Health Program. In his 1998 book False Hopes, Hastings Center bioethicist Daniel Callahan is a bit blunter. "A steady-state, equitable medicine will have to limit, not expand, patient choice," he writes. "It will require frank rationing. It will work to resist patient demands, particularly demands stimulated by market pressure and incentives."

Unfortunately, there is no prominent political or intellectual figure on the national scene offering a comprehensive free-market alternative to socialized medicine. You certainly won't find one in the Republican Party. Frank Luntz, the Republican pollster and spinmeister, told an audience of libertarian and conservative activists last year that Republican politicians had simply failed to come up with any way, much less a persuasive way, to discuss health care with the public.

When it comes to health care policy, Republicans are Democrats Lite. "The Republicans always say, 'We're going to give you the same program, only less than that proposed by the Democrats,'" says Tom Miller, former director of health policy studies at the Cato Institute. "Republicans just offer cheaper, more apologetic programs." Witness the new Medicare drug benefit, which John Kerry immediately denounced as "a raw deal for America's seniors and a big windfall for the big drug companies." No matter how much they give away, Republicans can never give away enough to satisfy the demands of the nationalized health care advocates.

Piles of Bodies?

Why not just tell Americans they are responsible for buying their own health insurance from now on? If people couldn't pay for medical care, either through insurance or out of pocket, they wouldn't get it. "After people begin to notice the growing pile of bodies by emergency room entrances," Tom Miller wryly suggests, "they will quickly get the message and go get medical coverage."

But that's not going to happen, says Mark Pauly, a health care economist at the University of Pennsylvania's Wharton business school. "Americans don't want to see their neighbor dying bleeding in the street," he says. "Therefore we already make sure that everyone gets some medical care when they need it. The alternative would be a world in which voluntarily uninsured people wore a bracelet that read: 'In case of an accident, do not take me to the nearest hospital. I've made my choice.'"

Since it's unlikely that Americans will allow their improvident neighbors to expire without medical care in the streets, is there a politically palatable alternative that can preserve and expand private medicine in the United States? Yes: mandatory private health insurance.

The New America Foundation, a liberal policy shop in Washington, D.C., has outlined some elements of how such a system would work. The slogan for its proposal is, "Universal coverage in exchange for universal responsibility." The devil is in the details, of course, but the plan offers some interesting possibilities. For example, mandatory health insurance coverage might be combined with medical savings accounts that would encourage people to save and invest for future medical emergencies.

The New America Foundation proposal preserves private insurance and allows consumers to choose among competing insurance plans and coverage options. Most intriguingly, the plan offers a way out of the dysfunctional employer-financed third-party-payer model that is so grievously distorting our health care system. Employers eventually would devolve responsibility for health insurance to their employees by giving them the money the companies currently pay to insurance companies. Employees would then have a strong incentive to shop around for the best health care deals, putting pressure on insurers to keep costs low.

Even some Republicans are suggesting that mandatory health insurance be required for at least some Americans. Senate Majority Leader Bill Frist (R-Tenn.) recently argued that it is unfair to expect taxpayers to pick up the health care tab for the third of Americans without health insurance who make incomes over $50,000. "I believe higher-income Americans today do have a societal and personal responsibility to cover in some way themselves and their children," the senator said in a speech at the National Press Club in July.

Privatizing Medicaid and Medicare

Uninsured Americans currently receive health care for which they don't have to pay. Their bills are paid by tax dollars spent on Medicaid or the state Children's Health Insurance Programs, or through higher insurance premiums and medical charges to make up for the losses doctors and hospitals incur when they treat the uninsured. Why shouldn't we require people who now get health care at the expense of the rest of us to pay for their coverage themselves?

There's a big bonus. "Mandated coverage would replace Medicaid and state Children's Health Insurance Programs because lower-income and unemployed people would receive a voucher to purchase private health insurance," says Wharton's Mark Pauly. "This would mean full privatization for people under age 65." He holds out an even brighter prospect: "Actually, in principle, mandated coverage could replace Medicare too." The entire medical system could be privatized. The slowly expanding Medicare, Medicaid, and S-CHIP behemoths that are inexorably absorbing more and more of the U.S. health care system could be eliminated.

Mandatory health insurance would be not unlike the laws that require drivers to purchase auto insurance or pay into state-run risk pools. They also resemble the libertarian Cato Institute's proposals for reforming Social Security, which do not eliminate mandatory payments; they privatize them. Similarly, school voucher plans generally mandate that children receive an education. As the Rose and Milton Friedman Foundation notes, universal school vouchers would allow "all parents to direct funds set aside for education by the government to send their children to a school of choice, whether that school is public, private or religious." This system separates "the government financing of education from the government operation of schools."

Once government and health insurers have defined a standard basic package of health care benefits, the current dynamic of constant government meddling in health insurance and health care markets that leads to higher and higher costs should change. Consumers, transformed from passive recipients into direct purchasers, can be expected to be vigilant about government interference that would increase their rates or reduce their services.

As Rep. Bill Thomas (R-Calif.) noted at a recent National Center for Policy Analysis conference, if everyone had to buy his or her own coverage the way people buy car or homeowner's insurance, and if the size of the tax breaks didn't hinge on employment status, you would have the beginnings of a real market. Thomas said he wanted to make basic, low-cost catastrophic health care coverage widely accessible through tax subsidies and credits. More-extensive coverage would be available to individuals who wanted it, but they would have to pay for it with after-tax dollars.

Under a mandatory insurance scheme, all Americans would be required to purchase a basic high-deductible catastrophic health insurance policy from a private insurance company. "Let's say you cap the deductible at $4,000 and set a limit that out-of-pocket health care costs can't exceed 10 percent of an individual's or family's income," suggests Pauly. "That would mean that a family earning $30,000 per year would receive $1,000 in a health voucher." In other words, the family would pay the first $3,000 of medical expenses out of pocket and receive a $1,000 voucher to cover expenses up to the $4,000 deductible.

A high deductible would encourage people to be more careful about the services they purchase. They would shop around for good deals on drugs and scrutinize the costs of various treatment options more closely. Of course, some people inevitably would try to save a penny or two by delaying a visit to the doctor for their stomachache, only to find out later that it's cancer, but no system can make people perfectly prudent.

Health insurance policies covering catastrophic expenses today typically cost under $300 per month for a family of four. So that's $3,600 per year for insurance. Assuming employers pay between $6,000 and $9,000 to cover an employee and his family, that means workers would be getting an extra $2,400 to $5,400 in their paychecks. Even a $3,600 policy would be expensive for a family living on $18,000 a year, so perhaps they would be required to pay 10 percent of their income, $1,800, for insurance and receive a voucher for $1,800 to cover the rest of their premiums.

Money in the Bank

This plan differs from the mandatory health care schemes in Germany and France, which are financed by payroll deductions set at a percentage of wages up to a certain income level. In the United States today, an employer generally pays the same health insurance premium for each employee. So if the premium at a company is $5,000 a year per employee, under this plan each employee would get $5,000, tax-free, to purchase insurance. That money would make a lot more of a difference to an employee earning $20,000 than to one earning $80,000.

A second component of the new private insurance scheme might encourage (or even mandate) that families and individuals make annual contributions to health savings accounts (HSAs) similar to those included in the otherwise very flawed Medicare prescription drug law. As currently formulated, HSAs allow employees to set aside pretax money to cover routine checkups, co-payments, prescription drugs, vaccinations, and so forth, while costly medical procedures are covered by high-deductible insurance policies. HSAs permit employees to keep their own money, rolling over any unspent funds in their HSAs at the end of the year and investing the money for future medical expenses or saving it for retirement; the money can be passed on to heirs. Since it's a real asset, people have an incentive to manage it frugally.

HSAs have several attractive features. Employers as well as employees make contributions, so instead of paying insurers for low-deductible policies, companies can give the money directly to their workers. Best of all, for those worried about the instability of linking health insurance with steady employment, people who lose their jobs can withdraw funds from their HSAs to continue their families' health insurance coverage. Employers will be attracted to HSAs because they will be able to lower their health care expenses by offering their employees higher-deductible insurance plans. Such plans generally cost 20 percent to 60 percent less than conventional low-deductible health insurance policies.

There's no reason to put off the campaign for a mandatory private system until we've worked out all the details. To keep the great American health innovation machine running, it is vital to keep medicine private and consumer-driven, and that means going on the offensive now.

Maintaining our private medical system is vital because American health care and medical science are the most advanced and innovative in the world. If a national single-payer health care system is adopted, most medical progress will be stopped in its tracks. The proposal for mandatory health insurance offers a way to maintain our private system, expand consumer choice, lower costs, and allow medical progress to continue.