Common Sense
About Healthcare Reform

Rising healthcare costs, increasing numbers of uninsured Americans, and growing frustrations among patients and doctors are the inevitable result of distorted incentives and mechanisms in our current healthcare system. These problems will only grow worse without fundamental overhaul of the way we pay for healthcare.

He who pays the piper calls the tune

Because health benefits purchased by an employer are tax deductible to the employer and tax free to employees, most Americans get insurance through job-based plans. This arrangement worked well enough under traditional fee-for-service coverage, when patients and doctors called the shots and insurance companies reimbursed most of the costs.

But by the 1980s, this tax-advantaged, cost-plus financing drove expenditures way up. With the bill for healthcare rising dramatically, employers and governments turned to managed care to contain costs.

Unlike traditional insurance, which paid most bills without question, managed care works up front, guiding the use of services. Managed care changed everything, because it gets directly involved in the way healthcare is provided.

As health insurance became dominated by managed care, the freedom of patients and doctors was drastically reduced, and the power of intermediaries increased. Today, employers and HMOs essentially have the final say in how healthcare is provided for most Americans.

Think about it: You choose your plumber; your boss chooses your cardiologist.

A bold plan

Since the failure of the Clinton health plan, gradualism has been the watchword of healthcare reform.

But even if tinkering at the edges could get more Americans enrolled in today's costly, restrictive health plans, major problems would remain:

• Our nation would still have a system that is accountable to the wrong parties, with confusion about who the real customers and ultimate payers are.
   
• We would have increased spending for troubled public programs.
   
• The huge and regressive tax subsidy for job-based benefits would continue, unfairly, to give the biggest tax breaks to those earning the most.
   
• We would have done nothing to relieve doctors of administrative burdens that tie their hands, or to empower patients to seek out quality care.

That is why the Institute for SocioEconomic Studies rejects incremental changes, and instead suggests a bold leap ahead.

• Our plan would make coverage available to all Americans, resolving the crisis of the uninsured.
   
• Cost containment would be accomplished in a manner that allows freedom of choice for consumers and independence for doctors to practice quality medicine -- the same forces that made American healthcare the best in the world. We don't try to hold down costs by price controls or rationing services.
   
• Instead of encouraging litigation over managed care, our approach promotes a patient's fundamental right -- to be an empowered consumer.

Best of all, our research indicates that such a plan is affordable today!

A return to true insurance

Affordable, high quality insurance requires that most Americans become more familiar with the cost of healthcare services. To ensure quality and value, we must be willing to spend money directly wherever possible, with a reasonable stake in the unavoidable cost-benefit decisions.

"Insuring" routine health expenses only guarantees excessive costs. We might as well have shirt insurance, since no one wants to shell out "real money" when their collar starts to fray!

But this is nothing more than "dollar swapping": You give the insurer $100, he takes out administrative expenses, then gives you the balance back in goods or services, with strings attached.

There is a reason we don't pay for shirts this way, or groceries, etc.: it is cumbersome and wasteful.

The Institute's plan focuses insurance where it is most useful, effective, and efficient: on "insurable events" which are infrequent, of severe financial impact, and outside our control.

What most of us really want from health insurance is protection against major, catastrophic expenses. Hospitalization, car accidents, and severe or chronic disease are examples of the types of risks against which people need insurance. These "big ticket" items represent less than half of all healthcare expenditures for the non-Medicare population.

How should people pay for routine healthcare? The way they pay for everything else! Paying directly for treatment of minor illnesses and injuries would not be a burden for most working people. For such limited cost items, people are both able to pay, and in the best position to shop around as consumers.

In our plan, people will bear the full cost of routine, predictable, and discretionary services. Above the threshold level of annual spending, comprehensive major expense insurance -- "catastrophic coverage" -- protects agains the financial ruin that serious health problems can bring.

Because a given expense weighs differently on people of varying means, the threshold for insurance in our plan is a percentage of annual household income.

We have modeled several plans, with patient costs typically amounting to no more than 10% of income. Families would be responsible for a deductible equal to 5% of their income, and a share of additional expenses, capped at another 5% of income. Everyone is protected from expenditures in excess of 10% of annual income.

Examples:

A family earning $50,000 would be responsible for all costs up to a deductible of $2,500. The family's burden then falls to 20% of costs, until they have paid another $2,500 out of pocket. Above $5,000, the plan covers all costs.

A family earning $10,000 would be responsible for all costs up to a deductible of $500. The family's burden then falls to 20% of costs, until they have paid another $500 out of pocket. Above $1,000, the plan covers all costs.

An affordable alternative

Since the poorer members of society may be unable to afford even the less expensive coverage proposed here, this plan provides for refundable tax credits to help give every American access to medical care, and a stake in the financial consequences of their healthcare decisions.

Our research indicates that credits covering the full cost of this insurance for Americans under age 65 in families earning up to $20,000, and part of the cost for families earning between $20,000 and $40,000, would cost $85-$89 billion per year -- less than the $90 billion currently spent on publicly-financed health expenditures for this population.

Expanded coverage for the poorest Americans could help ensure that they do not neglect valuable preventive care.

Recognizing the limits of insurance

For years, the debate about healthcare reform has been burdened by the legacy of health insurance as we have come to know it. Whenever we want health services, we assume insurance must be the way to get them.

But we've moved beyond the point where medical care is simply a risk to insure against. Where medical care was once provided in reaction to bad things like sickness or accidents, it is increasingly something we seek out even in the absence of those triggers.

Managed care has highlighted the problems that come from trying to "insure for" something. Insurance is much more affordable, efficient, appropriate, and -- properly structured -- more equitable, when it is used to finance insurable risks, rather than all possible health-related costs.

Freedom to choose, for patients and for doctors

Healthcare should never become a commodity, but it is more like other goods and services than unlike, and will always be subject to the laws of economics. Since potential demand for healthcare services is infinite, and our means -- as individuals and as a society -- all too limited, the question is: "Who will make the choices?" There is no magic bullet, just decisions to be made about costs and benefits.

The Institute for SocioEconomic Studies: empowering individuals

The Institute's approach to socioeconomic policy is to empower individuals to help themselves. In healthcare, as in all other spheres of life, people know how to allocate their resources better than the government or employers, and ought to be allowed to make their own choices freely.

Fundamental reform such as the Institute is proposing can put doctors and patients back in charge. Our approach will expand coverage, restore affordability, and put the American healthcare system back on the path to ever-increasing quality.