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More Reform is Cheaper: The Paradox of Health Care Reform

11/21/2008 04:12 am ET | Updated May 25, 2011

The American health care system is filled with paradoxes. The United States is #1 in the world for per person health care expenditures, and yet is not #1 -- and often near the bottom of developed countries -- for almost all major health outcomes. In the case of heart disease, researchers at Dartmouth have shown that more tests and treatments do not lead to better outcomes, but actually worse outcomes. This paradox of more care being worse arises because having more doctors treat each patient leads to more tests -- and higher costs -- but fragmented care.

Health care reform is filled with similar paradoxes. One of the most important, is that incremental changes produce higher price tags, while more comprehensive reforms actually generate lower costs. When it comes to health care reform, more is actually cheaper.

Sen. McCain's reform proposal is incremental. It does not aim at fully achieving any of the major goals of health care reform -- universal coverage, cost control or improving health care quality. It focuses on changing the health insurance market. Currently, people pay no income or payroll tax for their employer-based health insurance. McCain would tax this benefit but instead give families $5000 tax credit and individuals a $2500 tax credit to buy health insurance. His proposal would also allow interstate sales of insurance, circumventing most state regulation of health insurance.

The cost of McCain's proposal is substantial. While there is some controversy, a recent non-partisan assessment has McCain's plan providing 21 million Americans health coverage -- fewer than half the uninsured -- at a cost of over $200 billion per year.

Sen. Obama's reform is more comprehensive. It retains the employer-based health insurance system, Medicare, and Medicaid while mandating that children be covered and that large employers insure their workers or pay a penalty. It subsidies poor individuals so they can buy health insurance as well as gives a 50% tax credit to small businesses that provide their workers with health insurance. To reduce costs it creates a national insurance exchange where the government as well as private health plans compete to offer a standard health benefits package.

According to recent estimates, Obama's plan will insure 26 to 34 million more Americans -- lowering the uninsured to about 5-7% of the population. And the cost will be lower than the McCain plan at $120 billion per year.

The biggest surprise is that even more comprehensive reform, not only achieves universal -- true 100% -- coverage of all Americans but does so while controlling costs. Prof. Victor R. Fuchs and I have proposed Guaranteed Healthcare Access Plan. It phases out employer-based insurance, Medicaid, and Medicare. Instead each American would receive a voucher to buy a standard benefits package modeled on the federal employee health benefits plan through regional insurance exchanges in which private health plans would compete. Workers would receive a pay increase from their employers who no longer pay for health care; state taxes decline because states no longer have to devote 32% of their budgets to health care. The plan is financed by a value-added tax.

Our plan is similar to the Wyden-Bennett bill in the Senate in which employers would have to convert workers' health care premiums to higher wages or, if they do not provide coverage, to pay a tax to pay for Americans to buy coverage. Americans would then have to buy health coverage through a state insurance exchange. American families earning under $80,000 per year would be subsidized. Both our proposal and the Wyden-Bennett plan assure Americans complete portability, guaranteed enrollment, and preclude exclusions for any pre-existing conditions.

The Congressional Budget Office has assessed the Wyden-Bennett bill for its costs and economic impact. This comprehensive reform is the only health care reform actually scored as saving money. According to the CBO, in its first year of full implementation, the Wyden-Bennett bill would be revenue neutral. In other words, covering all Americans costs no more than the current system. By year 2 and beyond, it actually saves money. The Lewin consulting group estimates that over 10 years, the Wyden-Bennett bill saves over $1.4 trillion in health care costs compared to continuing with the current system.

How can it be that more comprehensive reform which achieves true, 100% universal coverage actually costs less?

The current health care system is tremendously inefficient. It does not need more money. It needs to re-allocate the money being spent. One way comprehensive reforms achieve this is to eliminate the role of employers, and merge workers and Medicaid recipients into one system. Currently health insurance companies must underwrite, market, sell, and bill to each of the millions of employers separately. According to the McKinsey Global Institute, this employer insurance market alone wastes over $70 billion a year -- almost enough to cover all the uninsured. Creating insurance exchanges in which all health plans offer a standard set of benefits with individual Americans choosing among them, saves the underwriting and billing costs. Similarly, merging Medicaid patients into the usual system saves the substantial administrative costs for determining eligibility. Incremental reforms that keep employers providing most of the insurance coverage retain a defective insurance market and cannot realize these savings.

Sustained savings also requires clear financial and other incentives that reward physicians, hospitals, and health plans for coordination of care, use of patient safety measures, and elimination of tests and treatments that do not add to better quality outcomes. The current system with thousands of different benefit plans, and fee-for-service payments generates conflicting and wrong incentives, ones that encourage doing more tests and treatments but not coordinating care. Comprehensive reform that puts everyone into the same system with the same benefits and communicates clear financial limits to health plans provides more explicit incentives for getting value in tests and treatment rather than just high volume for high payment.

With the current financial crisis and looming deep recession, we need to remember the paradox of health care reform: more comprehensive changes can actually constrain costs while covering all Americans. Small changes only make the deficit and economy worse -- without solving the health care problem.

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