In his State of the Union address, President Bush devoted only a few sentences to health policy. But as the president was speaking, the administration released a five-page document describing health policy proposals so sweeping and bold, they are comparable in scope to Hillary Clinton's proposals of a decade ago. If the White House devotes the energy and political capital necessary to see them through, these reforms will leave a lasting mark on social policy in this country.
In 2003, the president signed legislation that theoretically allows every nonelderly American to establish a Health Savings Account (HSA). His proposed changes will make HSAs more affordable, flexible and available to more people.
Patient Power. The idea behind HSAs is quite simple. Individuals should be able to manage some of their own health care dollars through accounts they own and control. They should be able to use these funds to pay for out-of-network doctors, diagnostic tests and other out-of-pocket expenses. They should be able to profit from being wise consumers of medical care and by having account balances that grow tax-free and eventually become available for nonmedical purchases.
To enable people to make more of these types of decisions on their own, the president is proposing to (1) increase the amount people can contribute to their HSAs, (2) make it easier for people to obtain one and (3) encourage everyone to have one. (The tax breaks, portability and chronic illness features described below apply only to HSA plans.)
Patients will respond to the financial incentives created by HSAs in different ways. Some will seek information about diseases, treatments and health care providers over the Internet. Some may bypass primary care physicians altogether and directly order their own diagnostic tests or seek online specialist consultations. Others may bypass brand name drugs for less-expensive generic and therapeutic substitutes and over-the-counter drugs. When people spend their own money, they will generally not spend a dollar on health care unless they get a dollar's worth of benefit.
Tax Fairness. For the first time in 60 years, individually-purchased insurance and employer-purchased insurance would compete on a level playing field under the tax law if the President has his way. There would literally be no reason for an employer to offer insurance (instead of wages) unless there were clear efficiencies or other advantages from group purchase.
The main reason companies today provide their workers with health insurance rather than pay higher wages is the tax law. In contrast to taxable wages, every dollar an employer spends on employee health insurance premiums avoids federal income and payroll taxes, as well as state and local income taxes. For a middle-income employee, this generous tax subsidy means that government is effectively paying for almost half the cost of the insurance. People who purchase health insurance on their own get virtually no tax relief, however. They must buy their insurance with after-tax dollars. As a result, a middle-income family effectively pays twice as much if they have to buy insurance directly.
The president proposes making premiums an above-the-line deduction (available even to taxpayers who do not itemize) for individually-purchased HSA policies. And there would be a credit to offset payroll taxes on the income used to pay premiums.
Portability. One of the most radical reforms the president is proposing is to allow employers to purchase individually-owned, personal and portable insurance for their employees – insurance that would travel with them from job to job. Although few specifics are available, the genesis of this idea is a plan designed by the National Center for Policy Analysis and Blue Cross/Blue Shield of Texas. The administration is proposing to take this idea nationwide – allowing federally regulated insurers to sell such policies in every state.
One of the peculiarities of the current system is that the health plan most of us have is not a plan that we chose; rather, it was selected by our employer. Moreover, we can easily lose coverage because of the loss of a job, a change in employment or a decision by our employer. Virtually all employer health insurance contracts last only 12 months. At the end of the year, the employer – in search of ways to reduce costs – may choose a different health plan or cease providing health insurance altogether.
All too often, a switch in health plans means changing doctors too, since each plan tends to have its own network. Additionally, different employer plans have different benefit packages. So some services, like mental health, may be covered under one employer's plan but not under the next employer's plan.
These disruptions affect some families more than others. For people who are healthy, they may amount to minor inconveniences. But if an employee (or a member of the employee's family) has a health problem, it means discontinuity of care. One study of chronically ill workers found that workers who rely on their employers for health coverage have 40 percent less job mobility compared to similar workers who obtain their health coverage elsewhere. This "job lock" can lower the potential incomes of the workers affected.
Under the president's proposal, employers initially would pay most of the premiums (as they do today). But this insurance would be owned by the employees and would travel with them as they move through the labor market. Thus employees would get portable insurance (a characteristic of individual insurance), but at group insurance prices.
Chronic Illness. Equally radical is the president's proposal to allow employers to make special deposits to the HSAs of the chronically ill. Until now, HSAs have not been designed with sick people in mind. But they could be. Employers currently make different premium payments for employees, depending on their expected cost; similarly, the president's plan would allow them to deposit different amounts into their HSAs.
Studies show that with a modest amount of training, people with chronic conditions – like diabetes or asthma – can manage their own health care and achieve results at least as good as and at less cost than traditional care. If they could also manage the dollars involved, we could align financial incentives with health incentives.
For instance, if asthmatics with HSAs monitor their condition and avoid trips to the emergency room, they would not only improve their health, they would also benefit financially. Diabetics who monitor their blood glucose levels and avoid costly complications would realize financial benefits as well as health benefits from their decisions. Pilot programs for the disabled are already showing very positive results (in Medicaid, of all places!). These programs allow patients to choose some of their health care providers, and give patients an account with which to pay for health care services.
Considering that chronic patients spend about 70 percent of all health care dollars, this is not a minor reform. It is a huge reform.
A National Insurance Market. In an ideal world, you would be able to go online and buy insurance in a national marketplace instead of being forced to buy in the state where you live. Thanks to the Supreme Court you can now buy wine across state lines, which has led to a big drop in costs for many consumers. When you can buy insurance the way you buy wine, insurance premium costs will plummet as well.
Many cities and towns have only one insurer. In these markets, policies are often offered on a "take it or leave it" basis. They may be overpriced, with benefits that do not fit the needs of many individuals and families. But with few or no alternatives, buyers must purchase a less desirable plan or forgo insurance altogether.
Furthermore, state governments regulate health insurance excessively. And they do so in 50 different ways. In addition to taxes, price controls and regulations governing access to insurance, states require health insurance buyers to pay for extra benefits they may not want or need. Studies estimate that as many as one out of every four uninsured Americans has been priced out of the health insurance market by these regulations and mandated benefits.
The president proposes to allow insurers licensed in any one state to sell insurance in every other state under the rules and regulations of the home state. This is a major step in the direction of replacing 50 over-regulated markets with one large, relatively free and less-costly market.
A New Health Care Vision. All of these reforms will make health insurance more affordable and more accessible. They will reshape the health care marketplace by empowering patients and turning them into true consumers of care. They will strengthen the doctor-patient relationship and allow doctors to be agents of their patients rather than agents of third-party payers. All in all, they are a vast improvement over the current system.
John C. Goodman is president of the National Center for Policy Analysis.