Healthy Disagreement

The struggle to offer a politically palatable alternative to Hillarycare

For activists on the American "right"—the loose confederation of conservatives, libertarians, and free-market thinkers ranging from economics professors to U.S. senators—the early months of the Bill Clinton presidency have been fun. Jokes at the president's expense are rampant. Speeches and rallies against Clinton programs attract great crowds and enthusiasm. Republican presidential aspirants such as Sens. Phil Gramm and Bob Dole make easy headlines by savaging Clinton. The president's image seems defined by expensive haircuts, political disarray, waffling on issues, wayward White House staffers, an antagonistic press corps, and Rush Limbaugh's one-liners. For Clinton's opposition, it all seems too good to be true.

And, indeed, it is. The president's political operation has been revamped. After a dramatic, even melodramatic, confrontation on Capitol Hill, Congress finally acted on the federal budget with only modest deviation from Clinton's script. And waiting in the wings is Hillary Rodham Clinton's task force on health care.

Few observers believe the plan Mrs. Clinton's group has devised—the "managed competition" approach in which regional health-purchasing cooperatives negotiate on behalf of individuals to get heavily regulated health coverage—will be enacted in recognizable form by the Congress. With its price controls and budget caps, Hillarycare gores too many health-care oxen.

But something is likely to pass. Too many politicians have invested too much time and money in the issue to let it disappear. State budgets are bursting at the seams as Medicaid costs skyrocket. Local communities feel the pinch as hospitals struggle under the crushing burden of regulations and paperwork and companies try to afford basic insurance coverage for their workers. Families worry about coverage and the quality of the care they receive.

The battle will be joined in earnest in 1994. At stake is the roughly one-seventh of the nation's economy devoted to the health-care industry, plus the share of economic output needed to pay new taxes to fund reform. Also at stake are the lives and well-being of 250 million Americans. Faced with such a staggering problem, the opposition to Clintonomics and Hillarycare can't afford to assume that the administration's complex and costly plan will collapse of its own weight. Clinton critics need a plan of their own to present to a confused and worried public.

They have two.

Or, rather, there are two main groups advocating their particular versions of markets and consumer choice in health care. One is headed by Stuart Butler, vice president of the Washington-based Heritage Foundation. The other is headed by John Goodman, president of the National Center for Policy Analysis in Dallas.

Butler, a native of Great Britain, has enough first-hand experience with socialized medicine to fear its even partial imposition here. "My mother still lives under that system," Butler says, referring to the British National Health Service. "And I spend a good deal of my time on the telephone to Britain trying to get her the health care she needs. She is lucky. I still have reasonably good political connections there."

Goodman's first foray into health-care research also involved socialized medicine in Britain. In the late 1970s, he says, "Teddy Kennedy, Joseph Califano, and others were pushing the British model here. We needed to know exactly how the system really worked." Goodman's research has since led to an examination of national health-care systems from Canada to Singapore, and to a detailed understanding of how American hospitals, doctors, insurers, and patients act within the medical marketplace.

Butler and Goodman share a deep antipathy for socialized medicine, and the similarities between their health-care "factions" don't end there. Both groups are clustered around think tanks and academics, with some support in the insurance and health-care industries. Both have the ear of politicians on Capitol Hill. Both receive favorable notices in the right-leaning press and, to some extent, from strange bedfellows on the other side of the ideological divide. And both Heritage's and Goodman's plans purport to be based on similar principles: Markets can work in health care; consumers must retain choices; and the system of third party payment is the major source of health-care inflation.

Why, then, are there two warring factions instead of one, unified opposition? Because the devil is, indeed, in the details—and each side sees a touch of evil in the details of the rival plan.

The Heritage Foundation, the E.F. Hutton of the conservative movement (when Heritage talks, conservatives listen), began working on a comprehensive health-care reform plan in the late 1980s. Foundation executives believed that previous efforts to oppose liberal-leaning policies and budget-busting medical entitlements were doomed to eventual failure. They concluded, said Butler in a recent speech, that "conservatives must instead counterattack with proposals that achieve the goals of society, but do so according to conservative principles. If a team plays only defense, the best it can hope for is a scoreless draw. More likely, no matter how good the defense is, it will lose the game."

In a nutshell, Heritage proposes that consumers be able to choose from among a host of health-care options ranging from traditional insurers to health maintenance organizations (HMOs). Using refundable tax credits that decrease as income grows, Heritage would empower families to choose plans on the basis of coverage, service, and price. As part of the "healthcare social contract" thus formed, Butler says, heads of households would be required by law to buy basic health-care coverage "to protect society from citizens who would try to exploit the good nature of ordinary Americans" by free-riding on the system.

The tax deduction for employer-provided health insurance would be phased out, in favor of the family-based tax credit. Families could still choose to join group plans. But by helping people buy insurance directly, rather than relying on employers to provide it, Heritage would solve the "portability" problem, in which employees are trapped in undesirable jobs because they're afraid of losing health coverage.

Butler and health-care analyst Edmund Haislmaier introduced the key elements of the Heritage plan in a 1989 book, A National Health System for America. In 1992, Heritage began to tout the Federal Employee Health Benefits Program (FEHBP) as a model for how a national consumer choice system in health insurance might function. Robert Moffit, deputy director of domestic policy studies at Heritage and a former manager of FEHBP, became one of the foundation's key spokesmen on the issue.

Heritage's embrace of FEHBP—a regulated and flawed government program, according to some critics—nevertheless provided a great "hook" that may well have enhanced the foundation's overall sales pitch on health-care reform. As voter disaffection with elected leaders soared, Heritage could say, "What is available for Congress and its employees should be made available to every American family." This message resonated with the public.

It also attracted curious liberals to Heritage's big tent. No doubt they were following the lead of Michael Kinsley, who praised the Heritage plan in his column for The New Republic. Kinsley wrote that it "should have great appeal to principled liberals as well as principled conservatives" because it would guarantee universal access, transfer income through the tax system to give the poor resources to buy care, and separate insurance from employment.

But adopting the federal employees' system as a national model—and Maryland's managed-competition model for the states—wasn't just a change of political strategy on Heritage's part. The move reflected some changes in policy as well.

In its initial work, Heritage stressed the need for consumers to make more decisions about spending health dollars. Perhaps the biggest factor contributing to the meteoric rise in total health-care costs is the current system of third-party payment, in which consumers file insurance claims for even routine doctor visits and procedures. Just processing these claims drives costs up, and consumers, insulated from the price of procedures at the point of sale, have little incentive to economize on tests and treatments.

In their initial work, Butler and Haislmaier emphasized this point. They suggested that consumers be able to choose low-cost, high-deductible "catastrophic" health-care plans and pocket the savings from lower insurance premiums to pay directly for most doctor visits.

Also, in the original Heritage plan, insurers were allowed to charge different prices to consumers depending on their health. In other words, insurers could accurately price and manage risk. The Heritage plan helped higher-risk families by increasing the value of their tax credit, but it left the pricing system basically intact.

The FEHBP, however, operates on substantially different principles. Offerings to federal employees must meet minimum standards and regulations; no mere "catastrophic" plans are allowed. And the Heritage proposal itself has grown to include more regulations of coverage. These are designed to make the transition from employer-based insurance to individual-based insurance easier and to make the reform package more politically palatable.

The idea is that once individuals can use tax credits to buy insurance for their own families, employer-provided insurance will quickly unravel. Relatively healthy families will find they can get coverage for less than the average premium at their jobs. As they're left with only high-cost employees to insure, employers will stop offering insurance. Unhealthy people will be stuck paying high premiums themselves. The only question, says Haislmaier, is whether "you have a messy unraveling or a neat, controlled unraveling."

To accomplish the latter, the Heritage plan would limit the price individuals paid for their own coverage to no more than 25 percent of the premium their employer used to pay. In this way, healthy employees can benefit from lower premiums, but employees with preexisting health conditions won't have to obtain new coverage at substantially higher rates. Since the Heritage plan guarantees renewal of policies once they are issued, this price regulation would remain in place for as long as the employees are insured.

While this regulation will underprice coverage for some individuals, Haislmaier says that the alternative is politically impossible. He says that the Heritage plan is designed to be "purely political"—to accomplish as much as possible in market-oriented reform without dooming the package to failure.

A more troubling question is where to set the "minimum" coverage Heritage would require of all Americans. The scope of the "low-cost" plans in FEHBP is still broader than the insurance many consumers might choose in a truly free market. All FEHBP plans cover kidney dialysis and preventive care, for example.

The Heritage plan lets consumers choose among approved insurance plans. It doesn't let them make choices about medical care itself. Indeed, Butler himself discounted the ability of consumers to make informed choices about medical procedures and other care in revealing congressional testimony before the Senate Finance Committee last year. "Let me draw a distinction between two ways in which consumer choice can operate," he said in answer to a senator's question. "One…is that individuals would shop around between doctors, ask for price lists, and so forth. I don't think that is a reality that is ever going to come and I think it mistakes the way consumer choice can and should operate. The other type of consumer choice is…to choose a [health insurance] plan….I tend to feel that the ordinary American can probably do that."

John Goodman believes ordinary Americans can do more than that. He and other economists have drafted a health-care reform based on the notion that individuals and families are capable of shopping around in the medical marketplace and that tax law and government policy should actively encourage self-insurance through medical savings accounts, or Medisave.

Goodman's plan, as proposed in NCPA publications and a book for the Cato Institute (Patient Power: Solving America's Health Care Crisis) coauthored by Gerald Musgrave, would still provide funds for families (through refundable tax credits) to buy health care. But it would not require families to purchase any particular amount of insurance. Instead, families could choose a mix of insurance coverage, out-of-pocket payment, and savings in tax-free "Medisave" accounts.

Goodman's plan would require insurers to renew policies even when an insured person develops a serious medical condition, just as life insurers do. But insurers could price initial policies without regulation. And under his regime, employers could continue to pay premiums directly to insurers to provide (presumably) catastrophic insurance for their employees. Or they could simply add the premiums to employee compensation and let individual workers buy their own insurance. In either event, the insurance would be fully portable.

How would the Medisave account work in practice? Patrick Rooney, chairman of Golden Rule Insurance Company in Indianapolis, is already offering Medisave plans even though current federal law does not extend tax deductibility to savings accounts. Here's how Rooney runs the numbers: The average cost of health insurance in the United States is about $4,600 a year for a family. Instead of spending that money to pay for a low-deductible insurance plan, Rooney suggests that the average family could buy a $3,000-deductible policy to cover true medical catastrophes. That would cost, in most communities, about $1,600. The family could deposit the premium savings, $3,000, in the savings account to pay for routine care throughout the year. Unspent funds would accumulate and help pay for long-term care or other needs in the future.

Advocates of Medisave point to health services that already operate mostly on a cash basis, such as optometry. In these sectors, cost increases have lagged well behind the rest of the health-care industry. Other precedents exist for the Medisave approach. Many large companies already maintain flexible spending accounts (FSAs) for their employees under Section 125 of the Internal Revenue Code. These FSAs operate like Medisave accounts—except that FSAs are governed by a "use it or lose it" policy, which destroys the personal incentive to economize and avoid unnecessary procedures.

For the past two years, Dominion Resources Inc., a Richmond, Virginia-based public-utility company, has been experimenting with an approach strikingly similar to Medisave. Dominion employees receive cash rewards if their medical expenses stay below the company health plan's deductible. In this way, employees are given a strong incentive to economize. The company reduces claims and can get a better deal on insurance. As a result of this and other cost-control programs, Dominion's spending on health care has risen by less than 1 percent over the last three years.

"All too often businesses and their employees view health-care insurance as a use-it-or-lose-it commodity," says Kennedy Davis Jr., Dominion's vice president. "We want healthy employees who have incentives to stay healthy and incentives to use their insurance funds wisely." Other companies, such as Wal-Mart, are reportedly considering variants of Medisave or Dominion's program.

Goodman credits Jesse Hixson, a researcher at the American Medical Association, with the concept of Medisave accounts. But Goodman and Musgrave, who now heads Economics America Inc. in Michigan, have expanded the concept to address such problems as indigent care, Medicare and Medicaid, state and local regulations of medicine and hospitals, and liability law. To increase coverage and serve the needs of poor families, their plan would:

• Allow public assistance such as Medicaid to flow directly to local communities, with the proviso that it be spent on indigent care.
• Allow poor families to deposit Medicaid money directly into Medisave accounts. Savings could be spent on routine care or, much later, tapped to pay for long-term care at home or in nursing homes.
• Create deregulatory Medical Enterprise Zones and Medical Enterprise Programs to deliver needed care at lower cost. Rural hospitals are particularly hurt by state regulations regarding service, operations, or personnel. These regulations raise the cost of care significantly.
• Route tax money paid by uninsured individuals directly to hospitals to underwrite indigent care. (By taking their compensation in the form of wages rather than benefits, these people would continue paying taxes that their insured peers would not.) This provision attempts to address the free-rider problem Heritage cites—but without mandating coverage, as Heritage does.

At first glance, it may appear that the Heritage "consumer choice" plan and the Medisave "patient power" plan don't differ all that much. Both camps have run preliminary numbers to estimate savings and costs, and both claim to reduce health-care costs generally while imposing no new burden on the national treasury. Heritage endorses more insurance regulation and establishes a basic level of coverage that each household must purchase, while the Medisave approach represents less regulation and no mandates.

The differences are partly in emphasis, partly in design. Heritage scholars say that the Medisave approach is too limited in scope and not sufficiently salable to politicians and interest groups. "A conservative proposal [in health care] must change the political debate," Butler said in a Heritage Foundation forum. "The Heritage plan takes the initiative by dealing with all the major concerns expressed about the current system….To do less than that means that you are continuously on the defensive in the debate over health care." Butler went on to cite voluntary Medisave accounts as an example of a "good idea" but one that doesn't present a real challenge to national health insurance or Clinton's managed competition. And Haislmaier suggests that federal reform should remain "neutral" about whether to spend health-care dollars on insurance or on self-insurance.

That's precisely why Goodman believes the Heritage plan remains flawed. By requiring a minimum health-care package for everyone and interfering excessively with insurance underwriting, the Heritage plan would lock third-party payment for health care firmly in place by discouraging self insurance. Goodman also believes that by endorsing too much government action, the Heritage plan fails its own political-astuteness test. "The liberals [defending managed competition] can point to their plan and say that 'even the conservative Heritage Foundation says government must intervene' in many areas," he says.

By trumpeting FEHBP or the Maryland plan as models, he charges, Heritage is making it more likely that ostensibly market-oriented health-care reform—perhaps enacted by default in Congress after the Clinton administration's managed competition plan is flayed to death by health-industry lobbyists—will still contain too many regulations to function effectively.

Greg Scanlon, who heads the Council for Affordable Health Insurance, an association of 30 health insurers supporting Medisave, warns that by focusing on consumer choice among insurers but not patient choice among health-care alternatives, proposals such as the Heritage plan run aground. "There is a real sense of elitism out there," he says. "The feeling is that people need to be protected from their own stupidity by professional claims administrators."

Each plan's partisans seem to believe that the prospects for merging the two concepts are dim. But the politicians don't see it that way. Earlier this year, both Butler and Goodman met with Republican senators to map out a strategy for challenging Clinton administration reforms and offering alternatives. While both sides left the table with lingering suspicions, the senators plan to introduce a hybrid version of Medisave accounts and the Heritage tax-credit approach soon.

"Republicans are of two schools about what we are for on health care," Texas Sen. Gramm recently told the Los Angeles Times. "But we are fairly united about what we are against."

On Capitol Hill, some 200 senators and representatives, from conservative Republicans to liberal Democrats, have endorsed some form of Medisave accounts, while the Heritage model was introduced last year (with a Medisave component) by Sen. Orrin Hatch (R-Utah). This year, Gramm plans to push his version of Medisave (probably including Heritage's idea of mandated coverage for catastrophic insurance) right after the Clinton administration introduces their plan.

The National Association of Health Underwriters and Scanlon's association of small insurers strongly support Medisave, while Physicians Who Care (based in Texas) and other medical and insurance executives have expressed support for the Heritage plan. The complexities and economic aspects of health-care reform may get some attention, but as Larry Neal, Gramm's press secretary, observes, the "key feature in the debate is what it will cost the taxpayer up front."

How will a market-oriented hybrid fare? Recent polls suggest that Americans want health-care reform—but nothing overly revolutionary or costly. Richard Morin, pollster for The Washington Post, notes that in the last few months "newspapers have been filled with revisionist stories raising doubts about the health-care crisis." For example, those 37 million uninsured Americans include a lot of college-aged kids or young workers with little immediate need for insurance coverage. After reading about these facts, the public seems less likely to buy whatever reform plan comes down the pike. In one Post survey, a solid majority said they would oppose any national health-care plan paid for by a tax hike.

If legislation by Gramm or someone else can keep individual insurance mandates at a bare minimum, making Medisave viable for most consumers, then it will represent a real, politically attractive challenge to Clinton's managed competition—and the partisans at Heritage and the Medisave camp, for all their private grumbling, will claim victory with a smile. Given the dangerous alternatives, they will have good reason to.

Contributing Editor John Hood is vice president of the John Locke Foundation in Raleigh, N.C., and a columnist for N.C. Business Press Syndicate.