In the Nation's Interest

You Can’t Get There From Here?

Even though concerns about the U.S. health-care system continue unabated, many have concluded that the current financial crisis has rendered systemic reform infeasible. The reasoning is that the costs of the rescues of financial and other institutions, plus the budgetary hit from the recession itself, make health reform unaffordable.

This conclusion might follow from the belief on the part of some that health-care "reform" consists solely or primarily of extending insurance coverage under today's costly and ineffective health-care system to those currently uninsured. Certainly, under those terms, health-care "reform" is unaffordable today - and surely was even before the financial crisis.

Coverage for all Americans is necessary on moral grounds alone. But there can be no universal coverage - indeed, the current degree of coverage is unsustainable - unless health care becomes more affordable.

Thus, from a more realistic point of view, true health reform is not unaffordable, but rather essential to long-term solvency. The runaway cost of health care is the primary cause of the projected longer-run explosion of the public debt - as well as a heavy burden on U.S. firms trying to compete in the global marketplace, and on consumers and taxpayers as well. The near-term increase in public debt due to the financial crisis only hastens the likely onset of the public debt explosion, and so makes true health-care reform - with cost control and quality care for all - more urgent. Indeed, given the years it will take for the health-care industry to reshape itself to provide higher quality at lower cost, real reform could not come a moment too soon.

But that leaves a premium on squaring the circle - achieving health-care reform at a time of extreme federal budgetary stress. Here, we believe that CED's suggested transition path, included in our statement, Quality, Affordable Health-Care for All: Moving Beyond the Employer-Based Health Insurance System, has much to offer. We would like to highlight that part of our proposal at this time, because we believe that such a transition mechanism could be essential to ultimate success in reforming health care.

Beginning the Transition

The core problem with the current health-care system is that there is no market for quality, affordable care. No one in the health-care industry - providers, suppliers and insurers - has a strong reason to seek to deliver better care that also costs less. This is in stark contrast to virtually every other industry - which is why innovation, process improvement and technological change lead to stable or even falling costs with improved quality in of the U.S. economy broadly, but not nearly to the same degree in health care.

But beyond making reform affordable, there are other priorities of a health-system transition. All people, and especially those who already have health problems, are justifiably concerned that uncontrolled change could cause them to lose their relationships with their doctors and interrupt their treatments. Those who have insurance they like do not want to be forced to accept different plans. An improved health-care system must involve some significant change, because the current system is unsustainable - its costs are too high and are rising too rapidly. But people's important concerns about change must be answered, or the nation will not now accept even improvements that are essential and inevitable in the long run. That would leave the current system to fester, forcing abrupt and ill-considered change at some future moment of outright crisis.

For this reason, CED recommends that the nation begin the health-reform process by creating the institutions that will lead to a vibrant market in which consumers demand quality, affordable care. Even in the short run, in the scale of the health-care industry, the necessary investment in these institutions is not costly. However, in the long run, the savings that would flow from a vital market for affordable, quality care could be enormous. And these institutional investments will create a responsive system that can meet the needs of those who fear change even while improving the quality and cost of care.

As we say in our statement, we do not claim that our transition mechanism is the best way, or the only way, to achieve market-based universal health insurance. But we do believe that our recommended approach would be feasible and effective.

The institutions that we cite in our statement include the following:
First, we propose creation of a Federal Health Insurance Board, or "Health Fed." The Health Fed would be modeled, institutionally, after the Board of Governors of the Federal Reserve, with diverse and knowledgeable appointees given long terms of office to make them independent of politics. The Health Fed itself would be given an independent source of funding, like the Federal Reserve. The Health Fed would oversee research on health care, and set standards for health insurance to assure true competition and protection of consumers.

Second, within the Health Fed, create an alternative national regulator for health insurance. That would allow insurance plans to compete across state lines, so that quality, efficient plans can grow, and other plans are forced to improve.

Third, again within the Health Fed, create a research institution that will provide objective and authoritative evaluation of the value and costs of clinical interventions, so that providers can achieve better results and avoid wasteful treatments.

Fourth, we propose to improve the Federal Employees Health Benefits Plan as the basis for a new national system, under the management of the Health Fed. The federal government's contribution for health insurance premiums would change to a fixed-dollar amount, equal to the cost of the low-priced plan (subject to quality standards, so that no deficient plans would be allowed to compete solely on price), so that each employee could have the low-priced plan at no out-of-pocket cost, but could buy a more-expensive plan by paying only the incremental cost. Also, the premium revenue that insurers receive would be subject to risk adjustment, such that plans that enroll disproportionately sicker people would be paid more. This would reduce the incentive for insurers to shun sick people, and would prevent spirals of adverse selection that drive plans with sicker enrollees out of business. Also, national plans would quote prices on a regional basis, to increase competition.

These steps would improve the workings of the market for health care. They should be supplemented with improvements in public programs, such as the State Children's Health Insurance Program (SCHIP), to extend coverage in the near term.

Beginning Market-Based Insurance

Once those institutional improvements are in place, the nation can begin to build a market for health insurance based on quality and price.

We propose to begin that process by extending the FEHBP, under the Health Fed, to become a health-insurance "exchange." As a first step, it would be open to employees of small firms (perhaps those with payrolls of 100 or fewer). It is essential to build a large, diverse and stable risk pool. Voluntary risk pools, such as high-risk pools created by some states, have not been successful. Voluntary pools attract only the worst risks and must charge high premiums as a result, driving away good risks and becoming non-viable. Instead, we propose to require that small firms participate in the new health-insurance exchange under the Health Fed as a condition of receiving the tax exclusion for employer contributions. Such small firms would be allowed to continue to purchase insurance on their own, but without the benefit of the tax exclusion. As a result, we would expect that virtually all small firms that purchase health insurance for their employees would participate in the exchange, and many firms that hitherto could not afford insurance would find that they could do so. Those small employers' insurers, if they do not already offer coverage to the FEHBP, would be highly likely to join the exchange, so the employees of small firms would almost certainly be able to "keep what they have."

Virtually all small firms would find themselves better off with this option. The exchange would relieve them of administrative cost and paperwork. They would be a part of large and stable risk pool, and would be relieved of problems from pre-existing conditions and of the risk of losing their insurance should some employee become sick. The cost of insurance almost surely would go down. Only a very few small firms that happened to have uniformly young and healthy employees might find insurance more expensive, and those firms under the current system run the constant risk that one illness would destroy their plans in any event.

From the perspective of the employees of these firms, participation in the exchange would almost certainly be an improvement. Federal employees all across the country now have a choice of a minimum of ten different health plans, and in most parts of the country the choice is even broader. Those ten plans are fee-for-service plans with wide choices of doctors and hospitals, so people who want to keep their current doctors would be able to do so. With the prospect of such a large market, any insurers that do not now offer to serve federal employees would be expected to seek to participate, so the offerings of plans should only become broader. Very few employees of small firms have anything near this range of choice of plans; in fact, only about 60 percent of employees of small firms receive employer-based insurance at all. Thus, the availability of the exchange to these employees should expand health-insurance coverage significantly.

Although this proposed access to the exchange would be limited to small firms, taken together, the employees of all of those small firms would constitute a large, diverse and stable risk pool. Firms with fewer than 100 employees together constitute about 30 percent of employment in the United States. They are handicapped at providing insurance when working individually, however, because many such firms have difficulty affording insurance, the per-employee costs to insurers and the employers themselves of servicing their employees are high, and many firms have one or a small number of employees with health histories that make them hard to insure. Binding all of those small employers together in the exchange would thus greatly enhance their collective standing in the insurance market.

Moving to Market-Based Universal Health Insurance

Only when institutions have been built and strengthened, and the exchange system has proved itself successful, would our proposed transition need to begin the major steps of expanding coverage to all.

As interim steps, the ceiling number of employees below which employers must participate in the exchange to keep the tax exclusion could be raised. Employers and employees likely would welcome this. In insurance-policy terms, a firm of 500 or even several thousand employees is not large, in terms either of the per-employee overhead cost or the vulnerability of the risk pool to one very serious illness.

At that point, the health-care system would be enormously improved. Each individual worker would have a wide range of choice among many health-insurance plans. People, not their employers, would choose insurance plans that people wanted. All of the employees of one firm, with a wide range of diverse preferences among health-care plans, would not be forced in lockstep together into one one-size-fits-all plan by the choice of their employer, as is commonly the case today. Insurers and providers would have to satisfy individual customers, not employers in executive-suite negotiations, to earn their business. And employees would choose plans based on quality and price. As a result, in sharp contrast to the situation today, insurers and providers would have a strong incentive to practice quality medicine at the lowest possible cost. They would seek improvements in their practices and processes in the same way that has driven productivity, quality improvements and economy in every other industry.

Even if this firm-size ceiling were raised to infinity, however, insurance coverage still would not be universal. There still would be some employers who would choose not to participate; and also, like today, there still would be some employees of employers who do offer insurance who would not take up the offer. As that process of raising the firm-size ceiling was undertaken, the federal government could impose a ceiling on the tax exclusion for employer-provided plans to raise money to provide coverage to low-wage workers and others. Such a ceiling would encourage workers to choose less-costly, more-efficient plans and providers.

But still, the final step to market-based universal health insurance would be for the federal government to provide every individual with a fixed-dollar credit equal to the cost of the low-priced plan in that region. At that point, all individuals could purchase insurance and be covered. But this step would be taken only after all of the institutional changes, including the health-insurance exchange and the Health Fed, had proved themselves, and after those employees who participated in the system were satisfied. The process would move in manageable increments.

We believe that this process is workable and entails much lower risk than a once-for-all, instantaneous conversion of our $2 trillion health-care system. These ideas demonstrate that it is possible to move from our current costly, ineffective, unsustainable system in a systematic way. We seek to engage a public debate on the merits of such fundamental but gradual health-system reform now, before a crisis forces the nation to ill-considered action in haste.

Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development.