More Reform is Cheaper: The Paradox of Health Care Reform

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.

Comments

[AngelaQuattrano]

This would only work if we were to recognize access to health care services as a right, which we do not currently, nor is there a trend in that direction.

The primary purpose of the US health care system is not to deliver services to people who need them. It is to prevent people who do not deserve these services from getting access to them. People who deserve health care services are subsidized, although hardly at a high rate, as can be seen in Sicko. People who do not deserve health care—because they are unlucky enough to be uninsured, poor, disabled, or even just sick—can pay inflated prices for their own health care after paying their share of subsidies to people in a much better position to pay for their own care.

[sociocanuck]

Health care reform is very important, and like environmentaql actiion it's a great shame that it keeps getting delayed due to opposition, in both cases the root of which tends to be concern over how the current big money makers will continue to rake in exactly the same profits. I agree that the best way to reach them is to demonstrate the financial benefits of action; but I do think there's a sociological dimension that deserves much much more emphasis. Those who chose to ignore it only show themselves to be completely non-humanitarian.

[Bibbo]

I believe that universal and quality health care will never be possible. We will waste billions of dollars and destroy the good in the system we now have trying to get there. Its like trying to eliminate poverty. In order to fix the problem you must first correctly diagnose the problem. Liberals misdiagnosed the poverty problem as primarily a lack of money and education of the poor. Billions of dollars were thrown at the problem through welfare and the problem is probably worse today than 20 yrs ago. The correct diagnosis was behavior,especially unwed teens and a subculture that glorifies "rap" music values. The uninsured is not a problem of money it also is a behavioral problem. Its only going to get solved by getting people to assume more responsiblity for themselves. This is impossible to do because a certain % of people will not ever do so. I dont see any rational answere to this except let these people hurt themselves if they so choose. This in not cruel,its the best that can be done. It in fact will motivate some of them to change once they realize nothing is free. Society can help them but not do it all for them. Its simply not true that there are a lot of sick people not getting care because of lack of insurance.

[SeriousBlack]

"... we need to remember that more comprehensive changes can actually constrain costs while covering all Americans.­"

DUH.

However, try convincing Republican­s/conserva­tives of that without just having "socialist!" spit back in your face...

Hopefully we will have enough critical mass in the government (legislative and executive) to at least START making some freakin' changes beginning in 2009...

[TheFriendlyAtheist]

Any reform that leaves in the possibility of people going bankrupt because of medical bills should be DOA. We need a single payer, universal coverage system, like most of the rest of the civilized world.

[wearyvoter]

From today's LA Times:

http://www.latimes.com/features/health/la-fi-insure21-2008oct21,0,3458547.story

[DundeeNatalSA]

As someone who works in the medical field the most important issue for me is the financial wipe outs of patients over the last 8 years especially. talk about golden parachutes. Hospitals/doctors are wiping people out financially because there is no protection against over whelming medical bills.

My parents on Medicare have sufferred under crippling medical bills and still vote for McCain. I just don't think people grasp that McCain's plan is destructive in a way they can't begin to imagine.

And out of state - ha! What a joke. By the time you take your acute appendicits to another state you could have a perforated appendix and perontinitis. Out of State option - Laughable!!!!

[ProudAmerican23]

And why are there "whelming medical bills"? First. Because of overwelming insurance costs that hospitals have to pay... and why do they have to pay for such large amounts of coverage? because people will sue for anything and ask for any amount (usually several million) Wanna make medical bills smaller? Just make it illegal to sue for any amount higher than what that patient had listed in his life insurance policy. As for forcing hospitals and doctors to charge less? LOL Apply that mentality to every industry and see what happens. Seriously think about it. No matter what YOUR job or business is, pretend the Gov just called and told you to cut your price by 30% what are you gonna do? You start by cutting all employee benefits and paid time off, turn off the A/C in the building, cut the quality of your products, fire people before they reach retirement, and pray you still make enough to stay afloat.

[JaioXung]

I like what your saying here and it makes sense. But I wonder what happens to all the people currently employed by insurance companies to take care of underwriting, marketing and account handling? You would be talking about a sizable chunk of jobs disappearing if I understand you correctly.

I would also be afraid of some businesses moving jobs over seas to avoid the proposed tax hikes they would receive if they did not up their employees pay after doing away with their insurance. We all know how companies love to cut cost in the lower parts of the company and move all of that money up top to their CEOs. If they had the chance to do away with paying for employee health benefits their first thought would be to pay their CEOs another 40% over what the average employee makes.

[slemay]

While this will not be a simple transition, it seems that we should aspire to something like the healthcarse system in Switzerland. This is a step in the right direction, but falls short of that 'ideal.'

Health care should be attached to the individual, not to the job. Since we now spend 16% of GDP on healthcare, and Switzerland spends 8%, the cost picture would greatly improve. If the research and analysis is to be believed, so would the service.

Thanks for a thoughtful post.

[tdbach]

I'm all for universal health insurance, but this sounds cumbersome. Maybe after I study it a little more, it will make more sense.

One feature of your plan that puzzles me is that you you say that it will be paid for through a VAT. Why? VAT is a highly regressive tax, hitting the bottom of the economic ladder hardest, as they/we spend a greater proportion of our income (virtually 100%). Wouldn't creating another, parallel tax system add cost, too? Is that factored into your equation? Why not feed this program through our existing, progressive tax system, raising taxes to the level necessary to fund it? It would cost nothing (except the taxes).

Thanks for giving this issue a lot of thought and sharing your ideas. May the best ideas win.

[polyfoamworkshop]

We had a chance to do this in 1992, If only.