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Laying the Groundwork for Universal Health Care Coverage
by Stuart M. Butler, Ph.D.
Testimony
March 10, 2003 | |
Testimony given March 10, 2003 before the Special Committee on Aging, United States Senate.
My name is Stuart Butler. I am Vice President of Domestic and Economic Policy Studies at The Heritage Foundation. The views I
express in this testimony are my own, and should not be construed as representing any official position of The Heritage
Foundation.
Mr. Chairman, any observer of the American health care system is immediately struck by two of its central features.
Gaps and unevenness in coverage. Despite the huge expenditures devoted to the system, there are enormous gaps in the degree
in to which it covers Americans and there are wide difference in the level and type of benefits available to people of
similar circumstances.
Millions of Americans lack any insurance protection at all, and many of these are middle class. Many poor and non-working
Americans are eligible for a wide range of benefits, while others struggle to keep their families just out of poverty yet
lack any insurance. A worker may have coverage one week, arranged by his employer, yet lose it the following week because he
switched jobs to a firm without coverage. Similarly, workers who are perhaps forced in to early retirement by economic
conditions, or their health, are not eligible for Medicare or any other program and can find themselves suddenly in dire
straits for lack of affordable coverage.
The level of benefits available also can widely differ. An elderly person who happens to qualify for veteran's benefits can
obtain general support for their outpatient pharmaceutical needs. Yet an otherwise identical retiree in Medicare has no such
coverage.
So our "system" is a system in name only. It is really a patchwork of public and private programs with widely differing
eligibility criteria. And many people end up falling between the eligibility requirements of the programs and many others
have benefits only loosely connected to their needs.
Multiple systems of health care. The second distinctive feature of the American system is that different parts of it are run
on totally different principles of design and economics. The Veterans Administration health system, for example, has
similarities to single payer systems in other countries, in that the VA maintains its own hospitals, pays its own staff, and
decides centrally on the distribution of medical resources. Meanwhile another government program, Medicare, runs on other
principles, with private providers reimbursed by government for the services they render to eligible beneficiaries. In
Medicare, the primary package of benefits is decided in detail by Congress. Moreover, Medicare is actually two separate
programs. The hospital insurance system functions as a traditional mandatory social insurance program. The other part of
Medicare, principally covering physician costs, is a voluntary system with a subsidy for government-sponsored insurance.
Yet another government program, The Federal Employees Health Benefits Program (FEHBP), covers over nine million federal
employees, their families and federal retirees, and operates on yet another approach. The FEHBP provides a direct subsidy
which is used by eligible families to reduce the premium cost of the private plan of their choice, providing that plan meets
basic requirements laid down by the government. The benefits in FEHBP plans vary significantly. Congress sets down only a
very basic set of benefit classifications, and the actual content of each plan is determined by consumer demand in the
competitive market place.
In parallel to these widely differing government-sponsored programs is the extensive private insurance system that covers
most working age Americans. The primary component of this system is insurance sponsored by employers to cover their employees
and families. The families obtaining health coverage in this manner enjoy an often very large tax benefit since the value of
the employer sponsored component of there compensation is free of all taxes. Other individuals obtain private insurance by
purchasing it directly from insurance companies, often because their employers do not provide such coverage. While some tax
benefits are available for this form of purchased insurance the criteria for tax relief are so restricted that many in this
market have no tax subsidy at all.
Our experience with this fragmented patchwork of programs should lead us to draw some important lessons as we ponder ways to
achieve universal coverage in America. Among these lessons:
Lesson 1: The employment-based system, while successful for certain families, has severe weaknesses as the basis for
universal coverage
The employer-sponsored system is often pointed to as a success story, despite the current concerns about escalating costs. In
the case of coverage offered through larger firms, employment-based coverage does have advantages. For instance:
Pooling.A company with a large workforce obviously also has a large pool for insurance purposes. A large number of
individuals can be grouped together and insured as a group for a standard premium, despite possibly wide variations in
medical risks among employees. Large companies also have the economies of scale and the sophistication to provide insurance
at a low administrative cost per employee.
Advantages for bargaining and administration.Larger companies also can bargain very effectively with insurers and providers,
and so are able to deliver cost-effective coverage that is often tailored specifically for their work force.
Choice.Because of the size of their insurance pool and their sophistication, large companies can arrange a choice of health
plans, making it more likely that workers will be reasonably satisfied with their coverage.
Employment-based insurance is very convenient. When an employer provides coverage, it is normally very easy for an employee
to take part in the plan. Premiums are paid directly by the employer, and the worker does not have to apply for a tax
exclusion; the W-2 form, indicating the worker's income for tax purposes, simply makes no mention of the value of the
employer's contribution to his health insurance. Moreover, if the worker has to pay something toward the cost of his plan,
this is usually done in the form of a convenient payroll deduction during each pay period.
Problems for Small Firms Sponsoring Health Insurance
While these advantages of employer-sponsored coverage certainly apply to workers in many firms, they are less likely to apply
to certain specific categories of workers, especially those employed in small firms.[1] Among the reasons for this:
Small firms by definition are small insurance pools. A retail store with a handful of employees is a dismal pool for
insurance purposes. Hiring a new employee with a disability, for example, can mean a huge change in insurance costs for the
employer. States and the federal government recognize this and are exploring various ways to group small firms together to
form larger insurance pools. But the need for these efforts only underscores the fact that the place of employment is not a
particularly good basis for the pooling of these insurance risks for employees of small firms.
Small firms face relatively high administrative costs, and many small-business owners do not wish to organize insurance.
Because they lack the economies of scale and the management resources of larger firms, small businesses tend to face high
costs when administering plans. According to data collected by the Congressional Budget Office, overhead costs for providing
insurance can be over 30 percent of premium costs for firms with fewer than 10 employees, compared with about 12 percent for
firms with more than 500 employees.[2] Moreover, many small-business owners have little desire to engage in the demanding
task of trying to organize health insurance that meets the often-varied needs of their employees.
Small firms can rarely offer a choice of plans. If a small employer provides coverage, it tends to be a single "one-size-
fits-all" plan. Small companies rarely offer a choice of plans. While 81 percent of workers with insurance in firms of 5,000
or more employees had a choice of at least three plans in 2000, only 2 percent of covered workers in companies with fewer
than 25 employees had a similar choice of at least three plans. Meanwhile, 95 percent of covered workers in the smaller
companies had only one plan available to them.[3]
These obstacles to employment-based coverage in the small-business sector help to explain the high level of uninsurance among
families with workers in that sector. According to a recent survey by the Kaiser Foundation, 74 percent of the uninsured are
in families with at least one full-time worker, and while 99 percent of large firms offer insurance, only 55 of firms with
fewer than 10 employees do so. Among low-wage workers (defined as those who earned less than $7 an hour in 1996), 45 percent
are not even offered insurance.[4]
Lesson 2: The primary method for subsidizing insurance for working families is inequitable, inefficient and fundamentally
flawed.
Today we subsidize for insurance very efficiently. In fact, the current form of subsidy encourages an inefficient overuse of
medical care by most non-poor Americans while providing little or no help to the lower-paid uninsured, and it actually
exacerbates the problem of uninsurance for many Americans. This happens because by far the largest subsidy for insurance for
working Americans is the tax exclusion for employer-sponsored insurance. The exclusion means that the portion of a worker's
compensation devoted to employer-paid health insurance is not subject to federal or state income taxes, or payroll taxes. In
aggregate this subsidy dwarfs even the value of the mortgage interest deduction. John Sheils and Paul Hogan valued the
subsidy in 1998 at over $111 billion at the federal level and nearly another $14 billion in exemptions from state taxes.[5]
In contrast to a subsidy aimed at those who need help the most, a tax exclusion provides most help to upper-income workers (
who are in the highest tax bracket) with the most generous coverage. Sheils and Hogan have estimated the average annual
federal tax benefits in 1998 as ranging from $2, 357 for families with incomes of $100,00.
But the exclusion is highly inequitable. Sheils and Hogan estimated the average annual tax benefit at just $71 for families
with incomes of less than $15,000. Thus the exclusion provides little help to lower-paid workers, who often face hardship in
paying for family coverage or out-of-pocket costs, and it is not available to workers lacking an employer-sponsored plan. It
is hard to imagine a less efficient system of subsidies for helping people to obtain coverage.
Lesson 3: The Medicare program does not represent a sound structure for universal coverage.
The trust fund woes of the Medicare program indicate the financing dangers of a social insurance approach to health care.
Similar to the experience of maturing social insurance programs around the world, Medicare is plagued with huge unfunded
liabilities as political pressure for ever-larger defined benefits today mean ever-larger obligations on future generations.
The 2002 report of the Medicare trustees provided a dire picture of the program's finances, with expenditures rapidly
outstripping dedicated revenues in future decades.[6]
But the structural problems of Medicare are not confined to its financing. When Medicare was created in 1965, its benefit
package was based on the prevailing Blue Cross/ Blue Shield package for working Americans in large firms. As such, it was
seen as state-of-the-art coverage. Since that time, however, the benefits for Medicare recipients gradually slipped further
behind the benefits routinely available to working Americans. For example, Medicare provides no outpatient prescription drug
benefit. It would be virtually unthinkable for a large corporation today to offer its workers a plan without at least some
coverage for outpatient pharmaceuticals, or, for that matter, protection against catastrophic medical costs.
The main reason that Medicare's benefits package is out of date--despite the general awareness that it needs to be updated--is
that all major benefit changes require an act of Congress. Consequently, discussions about changing benefits (especially
about introducing new benefits by reducing coverage for less important ones) are necessarily entangled in the political
process. Providers included in the package fight diligently--and usually effectively--to block serious attempts to scale back
outdated coverage for their specialties. Meanwhile, talk of upgrading the Medicare benefits package unleashes an intense
lobbying battle among other specialties that seek to be included in the Medicare benefits package. Invariably, the result
depends as much (if not more) on shrewd lobbying than on good medical practice. The understandable reluctance of most
lawmakers to subject themselves to this pressure further slows the process of modernizing benefits.
Formula Payments. Medicare today uses complex formulas to determine its payments to managed care plans serving beneficiaries
and payments to physicians and hospitals under the traditional fee-for-service program. Through legislation and regulation,
the government tries to create a payment schedule that will work in all parts of the country and that takes into account
local conditions. But as is typical of attempts by government to set payments by formula, these schedules rarely match the
actual market, which constantly changes. As a result, policymakers and health care providers grumble constantly that the
formulas systematically and wastefully overpay some plans and underpay others, and that many payments to physicians and
hospital are far out of line with the cost and difficulty of providing specific services.
Bureaucratic Decisionmaking. Just as arcane and problematic the complex administrative process used by the Centers for
Medicare and Medicaid Services (CMS) to modify benefits, to determine whether certain medical treatments or procedures are to
be covered under Medicare, and to define under what conditions or circumstances servicesare to be delivered and paid for.
This byzantine process is marked by intense pleading by medical specialty societies, and a degree of congressional
micromanagement that makes efficient management of the program impossible.[7]
Moving Towards Universal Coverage
If we are to construct a health care system in this country that focuses resources efficiently to help those who need
assistance to obtain health coverage, we need to take the following important steps:
Agree on a health care social contract between society and individuals that is explicit and fair.
Today there is a legal and moral obligation on society to provide some level of health care to those who become ill. Under
federal law almost all hospitals must provide immediate health services to individuals entering the emergency room. In
addition, physicians and hospitals routinely provide services to individuals unable to pay for these. A recent study by Jack
Hadley and John Holahan estimates that as much as $38 billion is spent each year in public and private resources on health
care services for the uninsured.[8]
This implicit "social contract" is both inefficient and unfair. It is inefficient because the method of providing services
often means they are delivered in the most expensive setting. And because the services are not part of a comprehensive plan
they are inefficient from a medical point of view. The contract is unfair because it discourages many families with the means
to obtain adequate coverage from doing so.
The current social contract should be replaced with a more rational one. In a civilized and rich country like the United
States, it is reasonable for society to accept an obligation to ensure that all residents have affordable access to at least
basic health care - much as we accept the same obligation to assure a reasonable level of housing, education and nutrition.
But as part of that contract, it is also reasonable to expect residents of the society who can do so to contribute an
appropriate amount to their own health care. This translates into a requirement on individuals to enroll themselves and their
dependents in at least a basic health plan - one that at the minimum should protect the rest of society from large and
unexpected medical costs incurred by the family. And as any social contract, there would also be an obligation on society. To
the extent that the family cannot reasonably afford reasonable basic coverage, the rest of society, via government, should
take responsibility for financing that minimum coverage.
The obligations on individuals does not have to be a "hard" mandate, in the sense that failure to obtain coverage would be
illegal. It could be a "soft" mandate, meaning that failure to obtain coverage could result in the loss of tax benefits and
other government entitlements. In addition, if federal tax benefits or other assistance accompanied the requirement, states
and localities could receive the value of the assistance forgone by the person failing to obtain coverage, in order to
compensate providers who deliver services to the uninsured family.
Provide support to people to obtain health care based on their need, not where they happen to work, or their eligibility for
welfare, or their military record, or their age. Enable individuals and families to use this support to enroll in a seamless
system of coverage according to their choice.
The central public policy objective of a health care system is to use public funds in an efficient and economical way to
enable every household to obtain at least an acceptable level of health care services and protection from large financial
burdens associated with ill health. Whether a US resident is able to count on that commitment should not depend on their
current circumstances. Moreover, resources should be used as efficiently as possible to provide help those who need it most
to obtain coverage. That requires us to overhaul current subsidy methods to target funds more efficiently and to achieve
horizontal equity between similar people.
An important step towards that would be to overhaul the tax treatment of health care, gradually ending the regressive tax
exclusion for employer-sponsored health insurance and replacing it with a more progressive subsidy. That is the logic behind
the various refundable tax credit proposals in numerous proposals for addressing uninsurance. These proposals would increase
the subsidy to lower-income households relative to upper-income households.
The same rationale lies behind various approaches designed to alter the Medicare program to target a higher proportion of
benefits on lower-income seniors, in contrast with the traditional social insurance vision of equal benefits regardless of
income. And while there is fairly universal support for a residual safety net public program for indigent or dysfunctional
households, replacing part of the Medicaid program with a refundable tax credit or voucher-like assistance is in line with
the same goal.
It is also important to de-link financial support from household work status. In other words assistance for health care
coverage should not be based on employment or retirement status, and it should be available for the cost of coverage from any
reasonable source. Thus an unemployed person and his or her family should have the same degree of assistance as an employed
household of similar income with employer-sponsored coverage. A worker with employer-sponsored coverage should get the same
tax break or direct subsidy for coverage as a similar worker whose firm does not provide insurance. A 60 year-old early
retiree should be able to count on the same help as a similar person who is still in the workforce.
The value of the assistance should also not differ according on the source of coverage. Thus a household should receive the
same subsidy value were it to obtain coverage through an employment based insurance plan or by buying into a public program.
On the other side of the same coin, an individual or household should be able to continue the same form of coverage
throughout their life if they wish. Thus a worker with a private insurance plan should be able to continue that coverage into
retirement, receiving "Medicare" benefits in the form of assistance towards the cost of continued insurance coverage.
Make it possible for the place of work be the location through which most families can get coverage, without employers
necessarily being the sponsor of coverage.
Most people in America pay their taxes through a place of work. This is a very convenient system under which employers
withhold income and Social Security taxes and send the money to the government. In addition, employees typically adjust their
withholdings to take advantage of any tax breaks for which they may be eligible (for example, the mortgage interest
deduction). This means that employers actually operate the basic income tax system; but they do not in any sense design the
tax code for their employees or "sponsor" the tax system. They could more appropriately be considered a clearinghouse for tax
payments.
The place of employment is likewise particularly convenient and efficient for handling health insurance enrolment and
payments. Workers with employer-sponsored health insurance benefits typically sign up for the firm's plan when they take a
job and arrange for a payroll deduction to cover premium costs for them or their family. With individual tax credits or other
forms of subsidy discussed above, employers could carry out the critical clearinghouse role for plan choices, tax
adjustments, and premium payments. Such employers would not required to organize or sponsor a plan for their employees to
obtain tax relief or other subsidies for the cost of coverage.
In other words, smaller employers could handle the mechanical aspects of arranging for payroll deductions and premium
payments (similar to their role in the tax collection system) without having to sponsor a plan. Thus, the employer could play
a very important role in facilitating coverage without having to organize coverage. In this way the place of employment could
be the "point of service" for selection and payment decisions, and for the receipt of subsidies, without the employee being
restricted to coverage decisions made by the employer.
Using automatic enrollment to boost coverage. Whether or not they sponsored insurance, employers could be encouraged to
institute an automatic enrollment and payment system to make health insurance premium payments and to obtain health-related
subsidies. This means that employees would automatically be enrolled in a health plan unless they explicitly declined to do
so, perhaps by signing a document indicating that they understood the possible consequences of not enrolling in a plan.
Alternatively, a state could establish a default bare-bones health plan in conjunction with a private insurer, to which
anyone not otherwise choosing a plan would be assigned.
Evidence from pension plans indicates that an automatic enrollment system for health insurance could have dramatic effects on
sign-up rates.[9] This payment system is also very similar to the way in which the FEHBP enables a federal worker who may
work in a small workplace, such as the local office of a Member of Congress, to choose from possibly dozens of plans.
4. Use "creative federalism" to discover the best arrangements for organizing health coverage.
Any approach designed to secure universal coverage, and perhaps especially one which seeks to encourage greater equity and
freedom of choice in coverage, has to confront the challenge of organizing the system of coverage. There is no consensus on
which structures are best to deliver health care. Some argue for government-sponsored plans. Others for individual insurance.
Others still argue for various group arrangements. In addition, allowing people to make choices in health care, even within
government-sponsored programs, raises such issues as risk selection. Moreover, views differ on how to achieve the right
combination of subsidy and insurance regulation to secure affordable and efficient coverage for people of differing health
status.
Perhaps the fastest way to discover the best methods of organizing health coverage under a universal system would be to
institute a modified form of the idea of "creative federalism." Under this approach, federal-state covenants would be
instituted to test comprehensive and internally consistent strategies at the state level designed to move towards universal
coverage. Congress would provide federal funds to assist states to experiment with a chosen strategy for arranging health
insurance and services. In contrast to a simple system of block grants, these federal-state covenants would operate within
policy constraints designed to achieve national goals for achieving universal coverage.
The Institute of Medicine (IOM), one of the national academies, recently proposed a limited version of this strategy designed
to stimulate and test creative methods of expanding coverage for the uninsured.[10] The IOM proposed that the federal
government create a number of statewide 10-year demonstrations based on combinations of proposals, including federal and
state tax credits, as well as Medicaid and SCHIP expansions partly financed by the federal government.
Congress should consider the IOM recommendations. But it could also pursue a more comprehensive strategy to trigger state
experimentation. Under such a more comprehensive "creative federalism" approach the federal government would do four things:
1) Congress would establish goals for universal coverage. The goals could include a certain percentage reduction in
uninsurance rates in each state over a period, and steps towards ending multiple programs and eligibility criteria. Congress
would also establish boundaries in policies that could be adopted in reaching the goals (e.g. that no person could face
unreasonable coverage costs as a result of their medical condition)
2) Congress would enact a number of changes to provide an "a la carte menu" of federal policy options that would be
available to states to help achieve the goals. These options might include making a version of the FEHBP available within the
state, allowing some Medicaid/SCHIP money to be used in creative ways, removing regulatory/tax obstacles to churches, unions,
and other organizations providing health insurance plans, and the creation of association plans and other innovative health
organizations that would then be available to states.
3) Congress would provide an amount of funding. This would be fortwo purposes. Part of the money would help states fund
certain approaches. The other part would "reward" states according to how successful they were in meeting the goals.
4) The federal government would enter into agreements, or covenants, with states to achieve the goals. States would
propose some combination of modifications of their current programs, initiatives with their federal allocation, and a
selection from the federal menu. The states could also negotiate regulatory waivers to the extent allowed by law. The federal
agreement would have to agree to the covenant before it could proceed and evaluation procedures would have to be included.
The goal of universal coverage is likely to remain elusive under our current health care system. Today we provide help to
people to afford coverage in such an inefficient and inequitable way that it is impossible to help all those who need it to
afford coverage. In addition, we have a patchwork of programs and subsidy systems with a multitude of complex eligibility
requirements that guarantees people will fall through the cracks. Reaching the goal of universal coverage will be difficult.
But it will be much easier if we rationalize subsidies for health coverage, enable people to pick the form of coverage that
is best for them, and encourage state-federal experiments to explore innovative ways of organizing health care coverage.
---------------------
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[1]For a summary of the pros and cons of employer-sponsored coverage, see Uwe E. Reinhardt, "Employer-Based Insurance: A
Balance Sheet," Health Affairs, Vol. 18, No. 6 (November/December 1999), pp. 124-132.
[2]Congressional Budget Office, The Tax Treatment of Employment-Based Health Insurance, 1994, p. 8.
[3]Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits, 2000 (Menlo Park, Cal.:
Kaiser Family Foundation, 2000), p. 57.
[4]Kaiser Commission on Medicaid and the Uninsured, Uninsured in America: Key Facts (Washington, D.C.: Kaiser Family
Foundation, 2000).
[5] John Sheils and Paul Hogan, "Cost Of Tax-Exempt Health Benefits In 1998," Health Affairs, vol. 18, no. 2, March-April
1999, pp. 176-181.
[6] The 2002 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Insurance
Trust Funds (Government Printing Office, Washington, D.C., 2002), p.10.
[7] For a recent review of management problems arising from congressional micromanagement, see Sheila Burke et. al.,
Improving Medicare's Governance and Management, (Washington, DC.: National Academy of Social Insurance, 2002), pp. 39-42.
[8]Jack Hadley and John Holahan, "How Much Medical Care Do The Uninsured Use, And Who Pays For It?" Health Affairs web
exclusive, February 12, 2003, available at: http://www.healthaffairs.org/WebExclusives/Hadley_Web_Excl_021203.htm
[9]A recent study found that automatic enrollment for 401(k) plans boosted participation rates from 37 percent to 86 percent
for such voluntary pensions, with even sharper increases for young and lower-paid employees. See Brigitte Madrian and Dennis
Shea, The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, National Bureau of Economic Research
Working Paper No. 7682, May 2000, p. 51.
[10]Janet M. Corrigan, Ann Greiner, Shari M. Erickson, Editors, Fostering Rapid Advances in Health Care: Learning from System
Demonstrations (Washington, D.C.: Institute of Medicine, 2002).
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? 1995 - 2004 The Heritage Foundation
All Rights Reserved.
How the President's Health Care Plan Would Expand Insurance Coverage to the Uninsured
by Nina Owcharenko and Robert E. Moffit, Ph.D.
Backgrounder #1636
March 11, 2003 | |
Millions of Americans are without health insurance. As a result, these individuals and their families too often find that
their access to vital health care services is compromised while American taxpayers bear the burden of paying the costs.
President George W. Bush has proposed a number of positive policy initiatives that can reverse this situation and make health
care coverage more affordable for millions of individuals and families.
A Diverse and Dynamic Uninsured Population
According to the U.S. Bureau of the Census, 41.2 million Americans did not have health insurance coverage in 2001.1 Roughly
half of the members of this diverse population are uninsured for a period of six months or less, and about 40 percent are
uninsured for a period of 18 months or more.2
The overwhelming majority of the uninsured are young, between the ages of 18 and 34; over 80 percent are part of a working
family.3 They tend to be employed in small businesses and are concentrated in wholesale and retail trade industries as well
as in agricultural, forestry, fishing, mining, and construction.4 They are disproportionately minorities, largely Hispanic.5
While a substantial majority of these Americans are low-income working people, the fastest growing portion is comprised of
middle-income to upper-middle-income families.6
Although the majority of Americans have health care coverage through their place of work, lower-income working Americans are
less likely to have employer-sponsored coverage.7 Yet Americans get unlimited tax relief for the purchase of health insurance
if--and only if--coverage is provided through their employer. In 2000, the tax subsidy linked to employer-sponsored coverage
was estimated to be $126 billion.8
Lower-income working Americans who do not or cannot get health insurance at their place of work have few choices; they can
either purchase non-group coverage outside of the place of work (and do so with after-tax dollars) or go without coverage
altogether. Health care economists concluded long ago that this health care tax policy is inequitable and inefficient, and
that it distorts the insurance markets and contributes significantly to the number of the uninsured in the United States.9
Policymakers should also consider the "cost" of the uninsured to the public--including the costs of government payments and
programs and other public spending for health care. In a recent research paper, Urban Institute analysts Jack Hadley and John
Holohan estimate that, in 2001 dollars, the public paid $35 billion in uncompensated care and that $30.6 billion of this
payment was in the form of government spending.10 As Hadley and Holohan explain:
We...estimated that governments finance most of the uncompensated care received by the uninsured, spending about $30.6
billion on payments and programs largely justified to serve the uninsured and covering possibly as much as 80-85 percent of
the uncompensated care costs through a maze of grants, direct provision programs, tax appropriations, and Medicare and
Medicaid payment additions. Most of this money comes from the federal government, primarily through Medicare and Medicaid,
followed by state/local tax appropriations for hospitals, Medicaid DSH and UPL payments, and VA's direct care programs.11
Replacing this inefficient and messy system with direct assistance to the uninsured would be both simpler and more cost-
effective.
The President's Plan to Expand Coverage and Choice
President Bush is proposing changes to address the needs of America's uninsured by fixing the inequities of the current
system and mainstreaming uninsured individuals and families into the private insurance market. While liberal policymakers
would like to enroll the uninsured in public programs such as Medicaid (which are, even now, overwhelmed and underperforming
), available survey research shows that Americans prefer to have private health coverage rather than government-run public
programs.12 To achieve this objective, the Bush Administration would create a new system of tax credits for health care
coverage that targets low-income individuals and families who do not have employer-provided coverage.
In addition, President Bush has put forward a series of policy changes aimed at improving existing health care accounts.
These policy recommendations would enable individuals and families to control decisions regarding their own health care and
decide for themselves how best to spend their health care dollars.
The President's proposals to expand coverage and return personal choice and control to individuals and families include the
resubmission of a system of tax credits, targeting individuals and families who do not get health insurance through the
workplace; allowing the carryover of existing flexible spending arrangements (FSAs) to enable individuals and families to
build up savings for health care expenses; and the elimination of statutory restrictions on medical savings accounts (MSAs).
Health Care Tax Credits
The President is resubmitting an $89 billion health care tax credit proposal to assist millions of Americans who are without
health insurance provided through the workplace. The health care tax credit would provide a subsidy of up to 90 percent of
the cost of a health insurance premium, up to a dollar amount of $1,000 per person and $3,000 per family. Families with an
adjusted gross income of $25,000 or lower would be eligible for the maximum credit of $3,000. For families with incomes above
$25,000, the size of the credit would vary with income and would be phased out at income levels of $30,000 for an individual
with no dependents and $60,000 for families with children.13
In its structure, the proposed Bush tax credit would be refundable, meaning that low-income individuals and families who owe
minimal or no taxes would still receive a direct subsidy for the purchase of health insurance. It would also be "
advanceable," meaning that individuals or families would get the assistance at the time premium payment is due and not have
to wait until the end of the year for reimbursement.
The Bush tax credit proposal outlines a new role for the states, both in building an infrastructure that incorporates choice
and competition and in providing additional subsidies for low-income Americans. Under the terms of the original Bush tax
credit proposal outlined last year, a person could purchase individual health insurance with the tax credit; under the terms
of the revised version, in addition to options in the non-group market, a person could purchase health insurance through
private-sector purchasing pools, state-sponsored insurance-purchasing pools, and state high-risk pools.14 These state
purchasing arrangements are similar to those extended to states under the Trade Adjustment and Assistance (TAA) Act.15
At the discretion of state authorities, after December 31, 2004, individuals and families who would not otherwise be eligible
for public assistance could receive a federal tax credit to buy into certain state-sponsored purchasing groups where private
insurance is offered or to buy into state government employee health-purchasing groups.16 Moreover, states could supplement
the federal tax credits used for group purchasing of private health plans with additional state contributions. Under the
terms of the Bush proposal, states could make an additional contribution of up to $2,000 per adult for those with incomes at
133 percent of the poverty level; this contribution would be phased down to $500 per adult for those with incomes that are
200 percent of the poverty level.17
Health Care Accounts
Beyond the tax credit proposals, the Bush Administration has unveiled a broad range of policy improvements to make health
care coverage more affordable by giving individuals greater control of their health care spending. In 2002, the U.S.
Department of the Treasury issued a ruling to clarify the status of health reimbursement arrangements (HRAs). Through these
arrangements, employers could offer employees a health plan in combination with a tax-free spending account for health care
expenses, allowing any unspent funds to be carried over from year to year, tax-free.18
Beyond this administrative change in the system, the Bush Administration is also proposing statutory changes that would
expand and improve Archer MSAs and FSAs.19 Changes in Archer MSAs are particularly significant, given that nearly 73 percent
of MSA enrollees were previously uninsured.20
Flexible Spending Arrangements
Under current law, employees can participate in employer-based flexible spending arrangements, through which employees can
set aside a portion of their salaries in a special, pre-tax account to use for anticipated qualified health care expenses. If
employees do not use the funds they have set aside in their FSA by the end of the year, however, they lose them. They may not
carry over any unused funds to the following year. Under the Bush proposal, employees could carry forward up to $500 of
unused funds in their FSAs tax-free every year for medical expenses.
Medical Savings Accounts
Today, some Americans are permitted to open medical savings accounts from which individuals and families can pay for their
medical expenses. These accounts are tax-free and can be rolled over from year to year. Under current law, no more than 750,
000 individuals can have a medical savings account, and the MSA demonstration is scheduled to end after December 31, 2003.21
These stipulations are both a profound restriction on the health insurance market and a legal impediment designed to
discourage the growth of such plans.
In addition to these restrictions, there are a number of statutory and regulatory restrictions that determine how such
accounts may be used. For example, under current law, an MSA must be coupled with a high-deductible health plan. The law
specifically defines a high-deductible plan as one that has "deductible(s) in the range of $1,700 to $2,500 in the case of
individual coverage, and $3,350 to $5,050 in other coverage arrangements, with out-of-pocket limits set at $3,350 for
individual coverage and $6,150 in "all other cases."22
The Bush proposal would eliminate the artificial participation cap on MSAs and make the demonstration permanent. These
changes would remove market disincentives and allow supply to meet market demand. The Bush proposal would open up the MSA
option to any individual who wanted one (with the exception of those who would otherwise be eligible for a refundable tax
credit) and change the definition of a "high-deductible" plan to any plan with an annual deductible as low as $1,000 for an
individual and $2,000 for family or other coverage, with an additional provision to encourage preventive medical services. In
addition, it would allow both employers and employees to contribute to the account and would permit contributions up to 100
percent of the annual deductible.23
Making the President's Proposals Better
The problems of the uninsured reflect a broader problem of the health care system--the current federal and state tax
treatment of health insurance. The current system undermines the portability of insurance, inhibits personal ownership and
control of health plans, prohibits genuine consumer choice, and obstructs the functions of the market. Heritage Foundation
health policy analysts have long championed a comprehensive and universal reform of America's health care system and have
recommended replacing the existing federal and state tax structure for health insurance with a national system of tax
credits.24
Short of such a comprehensive reform, President Bush's health care policy agenda is laudably ambitious. It would make health
care coverage more affordable and would help millions of Americans secure health insurance coverage. The President's policy
would ensure the expansion and availability of private health insurance coverage for individuals and families.
Congress should work with the Bush Administration to make further improvements in health care policy. Specifically, Congress
should:
Permit states to determine the level of tax credit supplement and allow employers to contribute. As described above, the Bush
proposal allows states to supplement the federal tax credit. However, there are limits regarding the amount that states may
contribute and whom they may assist. States should have the flexibility to leverage all available resources to enhance the
federal tax credit as they see fit for their residents. Furthermore, for employees who are not receiving employer-sponsored
coverage, regulatory policy should be amended to permit employers to make a contribution on behalf of their employees.
Provide a partial tax credit for employer-sponsored health insurance. While a number of uninsured workers do not have access
to employer-sponsored coverage, there are those who simply decline employer coverage due to cost.25 Furthermore, those
insured low-income families who make a financial commitment to get insurance through their employer would not be eligible for
assistance. Therefore, to promote equity, certain income-eligible individuals should be able to receive a partial tax credit
that can be applied to an employer-sponsored policy. Such a policy could also encourage some small businesses to offer
coverage. According to a recent survey, "75 percent of uninsured small employers said that they would consider offering a
health plan if the government provided tax credits to workers to help them pay for coverage."26 Senator James Jeffords (I-VT)
incorporated such an approach in legislation introduced in the 107th Congress.27
Expand the FSA carryover to include all unused funds. There should be no limit to the carryover amount of unused FSA funds.
Monies contributed to an FSA are set aside from the employee's earned wages. It is the employee's money; therefore, any
unspent dollars in the account should be carried over year to year. Instead of simply anticipating planned annual medical
expenses, workers would also be able to save for future, unexpected, or uncovered services.
Establish individual ownership of HRAs. Currently, employers control health reimbursement arrangements, including the
accounts. While employees are able to carry over unspent funds from the account year to year, when an employee leaves his or
her job, the employer controls the account funds. Some employers have decided to allow their employees access to any
remaining funds in the accounts after they leave. However, if an employer chooses not to do so, there is little incentive for
an employee not to "spend down" the funds in the account before separating from the company. A better solution would be to
give employees control and ownership of these accounts so that, upon their departure, they would be able to maintain the HRA
policy on their own and continue to have full access to the account.
Expand the use of re-employment accounts for health care-related expenditures. President Bush has proposed establishing re-
employment accounts for certain unemployed workers. These accounts would be worth up to $3,000 and could be used to purchase
training and supportive services.28 Since most workers lose their health insurance when they lose their jobs, unemployed
workers should also be allowed to use the funds in these re-employment accounts to assist with health care-related costs,
including premium payments on a health insurance policy, during their period of unemployment.
CONCLUSION
The President has laid out an ambitious health care policy agenda that includes substantial revisions in the federal tax code
and the federal tax treatment of health insurance. These tax changes would broaden access to private health insurance
coverage, establish equity in the treatment of health insurance, and improve the overall function of the private health
insurance market by incorporating consumer choice and market competition.
The President's proposals establish a high bar for success. With the help and support of Congress, the bar can be reached--
and, in some cases, raised even higher.
Nina Owcharenko is Health Care Policy Analyst in, and Robert E. Moffit, Ph.D., is Director of, the Center for Health Policy
Studies at The Heritage Foundation.
--------------------------------------------------------------------------------
1. U.S. Department of Commerce, Bureau of the Census, "Health Insurance Coverage: 2001," September 2002, p. 1. Cited
hereafter as "Health Insurance Coverage: 2001."
2. "A Revolving Door: How Individuals Move in and out of Health Insurance Coverage," University of Michigan, Economic
Research Initiative on the Uninsured, ERIU Research Highlight No. 1, October 2002, p. 1.
3. Paul Frostin, "Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 2002 Census
Population Survey," Employee Benefit Research Institute Issue Brief No. 252, December 2002, pp. 20, 11.
4. Ibid., p. 12.
5. "Health Insurance Coverage: 2001," p. 2.
6. BlueCross BlueShield Association, "The Uninsured in America," February 2003, p. 7.
7. Frostin, "Sources of Health Insurance," p. 16.
8. White House, Council of Economic Advisers, "Health Care Tax Credits," February 14, 2002, p. 4.
9. For an overview of the relationship between federal tax policy and insurance coverage, see Grace-Marie Arnett, ed.,
Empowering Health Care Consumers Through Tax Reform (Ann Arbor: University of Michigan Press, 1999).
10. See Jack Hadley and John Holohan, "How Much Medical Care Do the Uninsured Use, and Who Pays for It?" Health Affairs,
February 12, 2003, at http://www.healthaffairs.org/WebExclusives/Hadley_Web_ Excl_021203.htm.
11. Ibid.
12. Jennifer Edwards et al., "The Erosion of Employer-Based Health Coverage and the Threat to Workers' Health Care," The
Commonwealth Fund, Issue Brief, August 2002, p. 7.
13. U.S. Department of the Treasury, General Explanations of the Administration's Fiscal Year 2004 Revenue Proposals,
February 2003, pp. 45-47. Cited hereafter as General Explanations.
14. Ibid., p. 47.
15. See Nina Owcharenko and Edmund Haislmaier, "State Opportunities to Provide Affordable Health Coverage Under the Trade
Law," Heritage Foundation Backgrounder No. 1626, February 25, 2003. Public Law 107-210, H.R. 3009, included provisions to
provide both workers who lost their jobs in part because of expanded international trade and certain other individuals a
refundable, advanceable health care tax credit worth 65 percent of the premium to assist them in securing health care
coverage. These tax credits could be used only for a select group of coverage options, which included state-sponsored
purchasing pools.
16. General Explanations, p. 47.
17. Ibid. Under the Bush proposal, persons with incomes in excess of 200 percent of the poverty level would not be eligible
for additional state subsidies or refundable tax credits.
18. Press release, "Treasury and IRS Guidance on Health Reimbursement," U.S. Department of the Treasury, June 26, 2002, at
http://www.treas.gov/press/releases/po3204.htm.
19. White House, "The President's Proposals for Health Security in the World's Best Health Care System," at http://www.
whitehouse.gov/infocus/medicare/health-care/health-accts.html.
20. U.S. Department of the Treasury, Internal Revenue Service, Internal Revenue Bulletin, October 7, 2002, p. 685, at http
://www.irs.gov/pub/irs-irbs/irb02-40.pdf.
21. General Explanations, p. 54.
22. Ibid.
23. Ibid., p. 55. Under the Bush proposal, preventive health care services would get an additional incentive: "Such plans
would be...permitted to provide, without counting against the deductible, up to $100 of coverage for allowable preventive
services per covered individual each year."
24. See Stuart M. Butler, "Reforming the Tax Treatment of Health Care to Achieve Universal Coverage," in Jack A. Meyer and
Elliott K. Wicks, eds., Covering America: Real Remedies for the Uninsured (Washington: Economic and Social Research
Institute, 2001), pp. 21-42, at http://www.esresearch.org/RWJ11PDF/butler.pdf; see also Stuart M. Butler and Edmund F.
Haislmaier, A National Health Care System for America (Washington, D.C.: The Heritage Foundation, 1989).
25. Kaiser Family Foundation and Health Research and Educational Trust, "Employer Health Benefits 2002 Annual Survey,"
September 2002, p. 48.
26. BlueCross BlueShield Association, "The Uninsured in America," p. 11, referring to the 2002 Small Employer Health Benefit
Survey conducted by the BlueCross BlueShield Association, the Consumer Education Council, and the Employee Benefit Research
Institute.
27. For further detail, see S. 590, the Relief, Equity, Access, and Coverage for Health (REACH) Act, at www.thomas.loc.
28. Executive Office of the President, Office of Management and Budget, The Budget for Fiscal Year 2004, p. 199.
--------------------------------------------------------------------------------
? 1995 - 2004 The Heritage Foundation
All Rights Reserved.
New Data on Health Insurance, the Working Poor, and the Benefits of Health Care Tax Changes
by Derek Hunter
WebMemo #492
April 28, 2004 | printer-friendly format |
Health care tax credits can make health insurance coverage affordable for millions of working Americans.
In 2002, 43.6 million Americans went without health insurance at some point.[1] Most were uninsured for a short period: 44.1
percent for less than four months and an additional 19.9 percent for between five and 8 months.[2] The shortness of the
coverage gap can be explained by any number of reasons, including the time spent between jobs after having lost work and the
probationary period, after which coverage begins, when switching jobs. However, that still leaves a significant number of
Americans without health insurance for long periods of time.
Policymakers have been struggling for years to find ways to help those without insurance obtain coverage. President George W.
Bush has proposed a tax credit, based on income, of up to $1,000 for an individual and $3,000 for a family. There has been
some criticism that this amount would be too little to help low-income individuals and families purchase coverage, but new
data from eHealthinsurance.com show the cost of individual plans to be well within reach of those numbers.
Congress and the Administration should aggressively promote health care tax credits, and thus help millions of Americans who
do not, or cannot, get health insurance through their places of work.
Current Tax Policy
There is currently a tax advantage for the purchase of health insurance for those who get that insurance through their
employer, but this favorable tax treatment is not available for people who purchase health insurance on their own in the
individual market. Workers with employer-provided coverage have their contribution toward their premiums taken out of their
compensation pre-tax and, therefore, are not taxed on that income; those in the individual market do not have that option. In
2004 there will be an estimated $188.5 billion tax break for individuals and families with employer-provided health
insurance, with 26.7 percent of that tax benefit going to families with incomes of $100,000 or more--roughly 14 percent of the
population.[3] Families with lower incomes see less of a benefit. (See Chart 1)
While the average family receives a tax break for health benefits of $1,482, lower-income families--those with incomes of less
than $30,000--get a break of only $725, with that amount being less the lower their income is.
Favorable tax treatment for health insurance should not be based on whether one has access to employment-based health
insurance. Congress can end this inequitable policy. A tax credit would be the most efficient and effective way to accomplish
this goal, and Congress could target the credits to individuals and families with the greatest needs including those who work
in small businesses. With a change in congressional policy, health insurance in the individual market would be within reach
for millions of uninsured citizens.
Premium Costs in the Individual Market
In the April 2004 study by eHealthinsurance.com, researchers analyzed the more than 62,000 plans the company sold to
individuals and families in 42 states and the District of Columbia since August 2003. What they found was that the average
annual premium for an individual was $1,812, or about $151 per month.[4]
Annual premiums varied widely by state, from a high of $4,044 in New Jersey to a low of $1,188 in Iowa and Wyoming, and the
average age of the consumer was 33 (See Table 1).[5]
The study also found the average cost of a family plan (average of 2.9 family members) to be $288 per month, or $3,456 per
year.[6]
Type of Coverage Purchased
Individual Plans
Seventy-five percent of individuals and 79 percent of families purchased Preferred Provider Organization (PPO) plans, while
14 percent of individuals and 9 percent of families purchased Health Maintenance Organization (HMO) plans.[7]
Of the plans purchased, "94% of policies purchased by individuals and 89% of policies purchased by families can be considered
'comprehensive' in coverage, where comprehensiveness is defined to include: Inpatient, Outpatient, Lab and Test benefits. 76%
of these plans also include Prescription Drug benefits."[8]
Deductibles
Ehealthinsurance.com reports that the vast majority of the plans purchased through its service had deductibles of $1,500 or
less. For individuals, 71.2 percent of plans purchased had deductibles of $1,500 or less, while that number was 60.8 percent
for families.[9]
Co-Payments
Fully three-quarters (75 percent) of purchasers bought plans with co-payments of $20 or less.[10] For individuals the number
was 74.9 percent, and for families it was 75.5 percent.[11]
Preliminary Data on Health Savings Accounts
Health Savings Accounts (HSA) were signed into law on December 8, 2003, as part of the Medicare Modernization Act of 2003 and
became available for purchase on January 1, 2004. Ehealthinsurance.com has offered HSAs since that date and has released
preliminary data on who has bought them and how much they cost. The information, while from only a two and a half month
period, is very promising.
Given the option of an HSA, individuals and families of all sizes have chosen to enroll in them. Of the enrollees, 38 percent
were individuals, 16 percent were individuals and their spouses, and 4 percent were individuals with one child.[12] Families
of varying size make up the remaining 42 percent.[13]
The ages of those choosing to enroll in HSA-eligible plans ran the spectrum, with the largest group being 40 to 49 years old
(32.89 percent).[14] In fact, 55.7 percent of enrollees were over the age of 40.[15] Enrollees between the ages of 30 to 39
comprised another 30.26 percent of those choosing an HSA.[16]
The cost of HSA-eligible plans varies, but the majority of enrollees (52.83 percent) pay between $51 and $100 a month.[17]
Another 23.14 percent of enrollees pay between $101 and $200 per month, 5.65 percent pay between $201 and $300, and 17.67
percent pay $50 or less per month.[18]
Once enrollees meet their deductibles, 54 percent will have to pay 20 percent coinsurance for office visits, surgery,
hospitalization, Ob/Gyn, and X-Ray/lab tests, but 44 percent have chosen plans that require no coinsurance.[19]
While this data is very preliminary, it is promising. The option of an HSA is one that appeals, as the preliminary data show,
to a wide range of individuals and families. In the future, HSAs should continue to offer an affordable option for the
uninsured.
Conclusion
Tax benefits have long favored those who get health insurance through their employers. The policies and premiums of the
individual health insurance market are often dismissed as out of reach for millions of those who are uninsured. Based on the
data, however, this is not necessarily the case.
Comprehensive and affordable plans are available in the individual market. These health plans would be more prevalent and
more effective with tax credits that are refundable and advanceable for low-income individuals, who often work in small
businesses.
Congress can help millions of working Americans through a vital change in health care tax policy. The Bush Administration has
proposed a solid first step with a tax credit. Through refundable, advanceable tax credits, not only would more Americans be
able to afford health insurance, but the playing field would be closer to level between those with employer-provided coverage
and those who find themselves in the individual market. Thus, such a policy would be far more equitable than the existing
policy, which favors higher-income individuals with employment-based coverage in large companies.
Derek Hunter is Research Assistant in the Center for Health Policy Studies at The Heritage Foundation.
--------------------------------------------------------------------------------
[1]Robert J. Mills and Shailesh Bhandari, "Health Insurance Coverage in the United States: 2002," U.S. Census Bureau,
September 2003.
[2]Ibid.
[3]John Sheils and Randall Haught, "The Cost of Tax-Exempt Health Benefits in 2004," Health Affairs-Web Exclusive, February
25, 2004.
[4]"The Cost and Benefits of Individual Health Insurance Plans," eHealthinsurance.com, updated April 15, 2004.
[5]Ibid.
[6]Ibid.
[7]"The Cost and Benefits of Individual & Family Health Insurance Plans."
[8]Ibid.
[9]Ibid.
[10]"The Cost and Benefits of Individual & Family Health Insurance Plans."
[11]Ibid.
[12] "Health Savings Accounts Fact Sheet," eHealthinsurance.com, April 21, 2004.
[13]Ibid.
[14]Ibid.
[15]Ibid.
[16]Ibid.
[17]Ibid.
[18]Ibid.
[19]Ibid.
--------------------------------------------------------------------------------
? 1995 - 2004 The Heritage Foundation
All Rights Reserved.
Covering the Uninsured: How States Can Expand and Improve Health Coverage
by Robert E. Moffit, Ph.D., and Nina Owcharenko
Backgrounder #1637
March 14, 2003 | |
Innovative governors and legislators in every state of the Union can take specific steps to increase health insurance
coverage and improve the range of choice and quality of that coverage for individuals and families.
State officials' range of action is constrained severely by federal law because America's health insurance markets are
shaped--and distorted--by the federal tax treatment of health insurance. But while state officials obviously cannot change
the federal tax code, they can still take major steps to create more expansive and efficient consumer-based health insurance
markets.
WORKING WITH WASHINGTON
State officials can work directly with the Bush Administration and Congress to increase access to health care coverage for
millions of Americans, including those who have difficulty obtaining coverage because they cannot get it at their places of
work, are low-income working people, or have lost their health coverage with their employment. Moreover, states can do it
right by creating new structural arrangements that would give millions of Americans more choice and control over their health
care decisions.
Specifically, the states can:
Cooperate with the Bush Administration in expanding private health insurance coverage and improving public programs. This
means making changes in state law and regulation to accommodate proposed federal changes in the tax treatment of health
insurance and medical care. These include new health care tax credits, tax-free rollover of funds in existing flexible
spending accounts, and the expansion of tax-free medical savings accounts.
State officials can also take advantage of U.S. Department of Health and Human Services (HHS) waivers, particularly the new
Health Insurance Flexibility and Accountability (HIFA) demonstration waivers.1 These federal waivers encourage state
officials to develop innovative coverage options using existing federal funds and incorporating private coverage options.
Seven states have already sought and obtained expedited waiver authority from HHS. The Administration is proposing to build
on this model by giving states even greater flexibility in improving the function of their Medicaid and State Children's
Health Insurance (SCHIP) programs.2
Create a state-based information system of health plans available in the state. Individuals and families who do not get
health insurance at the place of work or do not have Internet access to health plans often do not know how or where to secure
affordable coverage. State officials should break the "awareness barrier" and make that information, including consumer
information on quality care, available in an easy and accessible way through agencies that routinely contact working
families, such as the motor vehicle administration, the revenue department, or even local hospitals.
Allow displaced workers who are eligible for new federal assistance for health coverage to enroll in private plans offered to
state employees. Under the Trade Adjustment Reform Act of 2002, an estimated 260,000 American workers displaced by
international trade can now qualify for a 65 percent federal tax credit for the purchase of health insurance. While such
displaced workers are found in all states, they are particularly numerous in Florida, North Carolina, Ohio, Pennsylvania,
Texas, and Washington. State officials can make available a variety of congressionally authorized options for these workers,
but they could secure quick coverage for these workers by allowing them to enroll in the private health plans routinely
offered to state government employees.
Allow state and municipal employees to use the new health reimbursement arrangements (HRAs) to secure the doctors and medical
services of their choice. In 2002, the U.S. Department of the Treasury issued a major tax policy ruling allowing employers to
deposit funds in tax-free health care accounts for employees and roll over the unused funds year after year in these
accounts. Combining a wellness program with this new account, the Louisiana State University Healthcare Network (LSUHN), for
example, experienced a 9.6 percent increase in physician office visits and a 28 percent decrease in total health costs.3
Under the Treasury Department's ruling, employers can also make the accumulated funds in these accounts available to
employees when they retire to help them offset retirement health care expenses. State officials can now make the HRA option
available to their employees, just as it is available to federal employees and their families.
Create preventive care accounts for Medicaid beneficiaries. While Medicaid, the huge federal-state program for the poor and
indigent, is in desperate need of reform, state officials should seek waivers to improve the program for the 44 million
people enrolled in it. To improve access to physicians, states could establish state-based cash accounts for Medicaid
recipients with a PIN number and debit card. Payments for routine medical and preventive care services such as doctors'
visits and checkups could be paid directly out of the preventive care account. Not only would doctors get quick, hassle-free
reimbursement for their services, but Medicaid beneficiaries could avoid emergency rooms and roll over the unused funds in
the Medicaid account each year. When Medicaid beneficiaries leave welfare or get a job in the private sector, the unused
funds in their account could be transferred to pay for private insurance or put into a medical savings account. Using a
federal waiver, Florida officials have already created a consumer-driven option for disabled Medicaid beneficiaries.4
Make health care coverage more affordable for individuals and families through state regulatory reforms. Benefits are
mandated nationwide. A 1999 study of state-mandated benefits, conducted by the Health Insurance Association of America, found
that as many as one out of four Americans who are uninsured lack coverage because of the costs of state-mandated benefits.5
State officials should review the continuing and accumulating costs of state-mandated benefits and health insurance
regulations, and scale back or repeal those that exceed their regulatory benefits.
Enact serious medical malpractice reform. In several states, including Texas, Pennsylvania, and Nevada, soaring medical
malpractice costs have made the practice of medicine increasingly difficult for doctors and other medical professionals.
Beyond encouraging doctors to practice roughly $50 billion worth of defensive medicine annually to avoid litigation,6 flawed
medical malpractice laws are also causing doctors to leave their states or even quit medicine altogether. This is creating
serious access problems for patients in several states. At the very least, state officials should give malpractice relief to
all doctors who treat Medicaid patients or dispense charity care to the poor.
Create a statewide voluntary purchasing cooperative. Unlike other forms of insurance, health insurance is routinely insulated
from consumer choice. According to Alain Enthoven, a professor at the Graduate School of Business at Stanford University, 77
percent of all employees with employer-based coverage do not have a choice of health insurance carrier.7 State officials can
reverse these dynamics by creating a structure that gives individuals and families easy access to health plans and allows
private health plans to compete directly with each other for consumers' dollars. This is, in effect, what the federal
government does today for federal employees and their families in the popular and successful Federal Employees Health
Benefits Program (FEHBP). The components would include a state "clearinghouse" for comparative information, the enforcement
of minimum benefit requirements and consumer protection rules, a service center for enrollment and the collection of
premiums, a reinsurance pool for companies to cope with adverse selection, and a system of premium subsidies or state-based
tax credits for insurance coverage. The best way to establish an infrastructure for consumer choice and competition would be
to fold state employee health plans into the new system.
Study the cost of the uninsured and create a system of state-based tax credits or premium subsidies for private health
insurance. Faced with tight budgets, many state officials are understandably reluctant to create a new system of health care
tax credits or premium subsidies for low-income persons to purchase private health plans. But the cost of expanding coverage
must be balanced against the cost of not expanding coverage. According to Jack Hadley and John Holohan of the Urban
Institute, a prominent Washington public policy institution, Americans today pay $34.5 billion, mostly through government
spending, in uncompensated care costs on behalf of the uninsured.8 State officials should emulate the Texas Comptroller's
Office and undertake a similar analysis of the total cost of the uninsured to state taxpayers. The Texas Comptroller
estimated that in 2002, Texans paid roughly $1,000 for each uninsured Texan, or the same amount that President Bush has
proposed for his $89 billion program of health care tax credits for eligible uninsured adults.9
THE NEXT STEPS: CREATIVE FEDERALISM
Policy analysts at the Institute of Medicine, reflecting a growing consensus among health policy analysts, have suggested
that the states, in cooperation with the federal government, undertake innovative demonstrations to find out what works best
in expanding coverage for the uninsured.10 As one example of "creative federalism," Congress could specify a "menu" of
changes available for federal funding, including various consumer choice alternatives, a set of "performance goals" for the
states to meet as a condition for federal funding, and a bonus program to reward states that meet the agreed-upon goals of
expanding patient choice, insurance coverage, quality improvements, and patient satisfaction.11
In the 1990s, innovative state welfare initiatives helped to drive the overhaul of national policy to fix the crumbling
welfare system. Governors and other state officials can pattern their health care reform efforts after the success in welfare
reform. To assist states, Congress has already created a new source of federal funding to create pooling arrangements to
cover the uninsured under the Trade Adjustment Assistance Reform Act of 2002.
HOW STATES CAN EXPAND HEALTH CARE COVERAGE, IMPROVE QUALITY, AND CONTROL COSTS
Securing health insurance coverage for millions of Americans is both a federal and a state problem. State officials should
engage in a continuing dialogue with officials at HHS and take advantage of new opportunities to expand choice, control cost,
and reduce the number of the uninsured.
To advance this agenda, state officials can take a variety of steps:
STEP 1: Cooperate with the President in reducing the number of uninsured.
Over the past two years, the Bush Administration has outlined an ambitious and fairly comprehensive health care reform
agenda.12 It includes an $89 billion program of refundable tax credits for the uninsured, an annual rollover of up to $500 of
unused funds in employer-based flexible spending accounts (FSAs), and a lifting of existing statutory restrictions on medical
savings accounts (MSAs).13
In concert with congressional action on these items, or even in anticipation of such changes, state officials could start
changing state law and regulations to accommodate these federal initiatives in order to facilitate increases in patient
choice, control, and coverage. For example, the Bush tax credits would be available not only for private health insurance on
the individual market, but also for individuals and families who purchased health plans through "private purchasing groups,
state-sponsored insurance purchasing pools and state high risk pools."14
After December 31, 2004, under the Bush proposal, the states could permit eligible individuals and families to buy into state
employee purchasing groups using the new federal health care tax credits.15 Moreover, states could supplement federal health
care tax credits for individuals and families with incomes at or below 200 percent of poverty with additional state
contributions ranging from $500 to $2,000 per adult, depending on their income levels.16 State officials should start
planning for such changes.
STEP 2: Take a statewide inventory of private plans and design a consumer-friendly information clearinghouse for individuals
and businesses on available health plans.
Most Americans easily access the health insurance system through the place of work; but for those who do not get health
insurance through their places of work, the task of securing affordable coverage can be formidable. The 41.2 million
uninsured Americans are a dynamic population, uninsured largely because of a change in employment. According to a special
report on the uninsured produced by researchers at the University of Michigan, "Half of the uninsured go without coverage for
six months or less, while more than 40 percent are uninsured for at least 18 months."17
While expanding Internet access has helped make better information available to consumers, states could do more to make that
information more readily available for those without Internet access or those who just do not know where to secure health
care coverage. According to a 1999 study by the California Health Care Foundation, 53 percent of the "non-poor" uninsured
said that they would be more likely to buy insurance coverage once they knew the true cost of available plans.18
Breaking down barriers to awareness becomes increasingly important if Congress or the state legislatures start providing
individual tax relief or creating a system of premium supports for individuals and families to purchase health insurance. If
Congress or state legislators enact a health care tax credit, the mere existence of that assistance is of little help if the
persons who would benefit most from it are unaware of the health plans available to them. State officials could establish
information centers or clearinghouses for individuals and families seeking health insurance and make comparative information
available at state offices, including the revenue department and the motor vehicle administration.
There is precedent for the provision of consumer information in a consumer-driven health care system at the federal level.
The U.S. Office of Personnel Management (OPM) and the personnel offices of all federal agencies provide comparative plan
information for federal employees and retirees enrolled in the consumer-driven FEHBP. These enrollees can choose from many
private health plans and receive useful comparative information on the available health plans, including premium costs, co-
payments, the levels of benefits, and solid comparative information on health plan performance.
STEP 3: Make sure that health plans available to the uninsured are affordable.
A key advantage of group health insurance is that group coverage makes premiums affordable, but individual health care
policies can also be affordable for millions of Americans without coverage. A national on-line source of health insurance
policies, eHealthInsurance.com, has reported that the average premium for an individual policy purchased through their
Internet service was less than $1,500, with a typical deductible of $500 or less.19
Studies conducted by the National Health Underwriters and the Health Insurance Association of America (HIAA) report similar
findings. HIAA, for example, found that of its members who sell individual policies, the average premium was $2,070 for
single coverage and $4,000 for family coverage.20
Policy costs vary from state to state, reflecting differing economic conditions, demographics, and patterns of medical
practice. However, health plan costs also reflect the cost of state rules and regulations governing individual policies.
For example, states impose benefit mandates on individuals and families that purchase health insurance, regardless of whether
they want or need such benefits. In a recent analysis of the factors driving health care costs, PricewaterhouseCoopers
estimated that, nationwide, government mandates and regulations contributed 15 percent of the total increase in health care
premiums for 2001-2002.21 In 2001, Maryland led the nation with 54 such mandated benefits, including legislative requirements
to cover politically favored medical specialties, treatments, and procedures.
For various political reasons, state officials might hesitate to reduce or eliminate all such benefit mandates, but they
could at least reduce or eliminate such mandates for those who are uninsured or have endured a spell of uninsurance for a
specified period of time. Such a policy could make health plans more affordable for those young families who desperately need
coverage.22 A young family with two children needs a health plan that gives them access to physicians and hospitalization
services; they should not be forced to buy a health plan that incorporates dozens of benefits they do not want or need, some
of which--like alcohol and substance abuse treatments or coverage for in vitro fertilization--are very expensive.
Mandated benefits are often popular with provider groups and medical specialty societies, which battle ferociously to make
sure that state legislators include their treatments or procedures in all state-regulated health plans. Research shows that
health mandates increase health costs, pricing many individuals and families out of the private market. According to a 1999
HIAA study, as many as one in four of the uninsured are without coverage because of state health benefit mandates.23
Some states have begun to change their benefit mandate policies. North Carolina, for example, has imposed a moratorium on any
new benefit mandates.24 Hawaii, Texas, Louisiana, and Vermont require a cost assessment before imposing new benefit mandates
.25 Some states have considered "mandate-lite" plans, and others are taking similar steps.26
State officials should also order an independent econometric review of state health insurance regulations, including a cost-
benefit assessment and an assessment of their impact on the affordability and accessibility of private health plans. This
type of analysis should be performed by a top-ranked, private econometrics firm, not by a state agency or any other political
institution that has a vested interest in maintaining the regulatory status quo.
In many states, the health insurance market is heavily regulated, and this raises the cost of insurance and prices many
lower- and middle-income families out of coverage. In a state-by-state price comparison of insurance policies, analysts for
eHealthInsurance.com found significant price differences between states that have differing levels of insurance regulation.
Two of the most significant insurance rules include community rating, in which all enrollees pay the same premium regardless
of risk or health status, and guaranteed issue, in which insurers are required to offer policies to all, regardless of risk
or health status. For example, in Texas, a state with no community rating or guaranteed issue, the average single monthly
premium was $181, while in New York, a state with both community rating and guaranteed issue, the average monthly premium was
nearly $300.27
State legislators may strongly believe that there are very good policy reasons to impose such rules as community rating and
guaranteed issue of insurance; but there are trade-offs, and these trade-offs should be made visible. State officials should
realize that while community rating and guaranteed issue are often enacted to assure increased access of individuals and
families to health insurance, they often accomplish exactly the opposite result.
STEP 4: Conduct a study of the true cost of the uninsured and use that study to justify state credits or premium subsidies
for the uninsured.
As noted, a recent analysis by Urban Institute scholars indicates that Americans pay an estimated $34.5 billion in
uncompensated care for the uninsured.28 State officials should likewise get a clear idea of what they are already paying for
the uninsured.
The Texas Comptroller's Office, for example, found in a major study that the total cost of health care spending in 1998 for
uninsured Texans was $4.7 billion, including the costs to local governments, doctors, hospitals, and state agencies. In
effect, Texas citizens paid about $1,000 for health care for each uninsured Texan.29
State officials can use this kind of analysis if they wish to expand coverage further and piggyback on any federal health
care tax credits or premium subsidies. Additional state assistance, especially targeted at low-income or harder-to-insure
individuals and families, would bring the cost of coverage within closer reach of these low-income working families. As
noted, the Bush Administration encourages such assistance. State officials should follow through, especially if they believe
that the President's proposed federal health care tax credit would not be generous enough for certain populations.
Moreover, for the unemployed, state-based assistance could be administered quickly and easily through state unemployment
compensation offices. A person who is eligible for unemployment compensation could automatically be eligible for the credit
or the subsidy and for private health insurance. This process of "one-stop shopping" for displaced workers and their families
could be done with both a federal and a state credit or premium subsidy approach.
STEP 5: Secure HHS waivers to use existing federal funds to expand private health care coverage.
Officials at the U.S. Department of Health and Human Services have created the Health Insurance Flexibility and
Accountability demonstration initiative, along with an expedited approval process, "to encourage new comprehensive state
approaches that will increase the number of individuals with health insurance coverage within current-level Medicaid and
SCHIP [State Children's Health Insurance Program] resources."30
HHS officials emphasize the value of "approaches that maximize private health insurance coverage options" and target
populations below 200 percent of the federal poverty level.31 Nationally, a substantial majority of uninsured Americans are
below 200 percent of the poverty line. State officials can take advantage of this new demonstration authority and use it to
secure innovative private-sector coverage options for low-income, uninsured populations.
Under HIFA, HHS Secretary Tommy Thompson has approved several waivers. New Mexico and Oregon, for example, take advantage of
Medicaid and SCHIP funds and combine them with private-sector health plans to expand coverage to the uninsured. In New
Mexico, state officials can use unexpended SCHIP funds to subsidize private health insurance for 40,000 low-income residents.
Under the New Mexico waiver, employers can also contribute to private health plans. With a combination of government
subsidies from existing government programs and employer contributions, HHS estimates that these low-income employees will be
paying about $25 to $35 per month in insurance premiums.32
Based on its waiver, Oregon officials will expand the state's premium support program, the Family Health Insurance Assistance
Program, to cover as many as 25,000 beneficiaries. Under the Oregon waiver, Oregon residents earning up to 185 percent of the
federal poverty level would be eligible to receive "for the first time" federal premium assistance for employer-sponsored
coverage or individual health insurance.33
Finally, the President's budget proposal would provide states with increased flexibility under Medicaid and SCHIP. Under this
proposal, states would be able to implement program changes and improvements without having to go through the waiver process
.34
STEP 6: Improve care for Medicaid enrollees by creating a Medicaid preventive care account.
The best Medicaid policy gets low-income persons and their families out of the traditional Medicaid program and mainstreams
them into the private health insurance market.35 Meanwhile, states can adopt initiatives that give Medicaid patients more
control over their health care spending and decisions while ensuring that they get the care they need when they need it.
State Medicaid programs often have a rich benefits package. While Medicaid coverage looks good on paper, however, the program
has a well-deserved reputation for perverse economic incentives, disruptions in the continuity of care, and poor-quality
care. If Medicaid beneficiaries experience a change in income or assets, their eligibility will change, regardless of health
status, possibly resulting in a loss of coverage. As a Baltimore Sun report on the plight of Medicaid patients in Maryland
summarizes the problem, "They are poor, but not poor enough. They have medical bills that are high, but often not high
enough. They are insured some months, but uninsured others."36 Getting clarity with respect to Medicaid eligibility can be a
problem for doctors, patients, and state officials.
Faced with exploding Medicaid spending, states are cutting back on benefits, thereby causing a further deterioration in the
quality of care.37 As a recent Kaiser Commission survey of Medicaid directors shows, states are planning cost-cutting
measures such as limiting access to prescription drugs and reducing or freezing payments to doctors, hospitals, and other
medical professionals.38
Most doctors treat Medicaid patients, but they also find that Medicaid reimbursement levels are too low and loathe wrestling
with Medicaid paperwork and regulations. In 2001, roughly 20 percent of physicians were not accepting new Medicaid patients,
and the overall proportion of physicians serving Medicaid patients declined slightly.39 The danger, of course, is that
Medicaid patients will start to experience difficulty in getting access to doctors and, like the uninsured, will end up
either in hospital emergency rooms for routine medical services or, worse, being treated for deteriorating medical conditions
that could and should have been treated more effectively if treated much earlier in a doctor's office.
A partial solution to this problem would be to create a Medicaid preventive care account for each Medicaid recipient with a
specified amount accessed using a PIN number and a debit card. Payments for routine medical services--doctors' visits,
regular checkups, and preventive care--could be paid directly out of the Medicaid account. For Medicaid enrollees, states
could roll the unused funds over each year in an interest-bearing account. When enrollees leave welfare or get a job in the
private sector, the unused funds could be used to pay for private health insurance or transferred into a medical savings
account or health reimbursement account.
The creation of such a Medicaid account is thus compatible with welfare reform, helping low-income persons make the
transition not only into productive jobs, but also into the private insurance market. Such an account would combine the best
features of the private-sector-style health reimbursement arrangement with the public-sector-style administration of the food
stamp program.
HHS has already established a precedent for this approach with its "Independence Plus" initiative. This initiative both
improves the existing "cash and counseling" program and provides states with an expedited process to offer families with
disabled individuals the opportunity to have greater control of "the design and delivery of their own health care services."
40 State officials should examine the success of such programs in New Jersey, Arkansas, and Florida, where Medicaid
recipients decide how best to spend their allocated health care dollars instead of having government officials decide for
them.
STEP 7: Establish a statewide voluntary purchasing cooperative for the uninsured.41
To give residents more coverage options, states should consider designing voluntary purchasing cooperatives that would
function much like the Federal Employees Health Benefits Program, which covers Members of Congress, federal workers and
retirees, and their families--roughly 9 million Americans.42 Nationally, hundreds of private health plans compete directly
for consumers' dollars. Unlike other government health care programs, the FEHBP functions with comparatively little
bureaucracy and regulation. It also enjoys a solid historical record of cost control, competitive benefits, programmatic
stability, and a high degree of patient satisfaction.43
Because of its historical record of solid performance, the FEHBP is a leading model for Medicare and health care reform.44 In
2001, the Maine legislature voted overwhelmingly, on a bipartisan basis, to create a voluntary purchasing pool called "an
insurance exchange," and Maine officials are in the first stages of implementing it.45 This policy initiative has precedents
in other states.46
To give individuals and families greater access to affordable coverage, a voluntary purchasing cooperative could incorporate
several features:
The state employees' health benefit program. All uninsured employees in the state could have access to existing health plans
in the state employees' system, which is usually a system of multiple health plans, plus any additional health plans that
meet basic benefit and fiscal solvency requirements.47 These plans, as well as the plans that serve state employees, could be
made available to every uninsured person in the state.
Initially, it might be prudent to separate the state employee pool from the private, non-state-employee pool and allow the
competing private plans to risk and rate these populations separately. Since most of the uninsured are young and healthy, it
is likely that state employee organizations will soon realize that the combination of the pools would directly benefit state
employees with lower premiums. In the meantime, it would be politically attractive for the governor and the state legislators
to open up their own health insurance system to the states' uninsured citizens.
Automatic sign-up for uninsured workers at their place of employment. More than four out of five uninsured workers are in
full-time working families. Lynn Etheredge, a prominent health care policy analyst at George Washington University, argues
vigorously that the most efficient way to target workers is therefore through their place of work.48 While employers would
not pay for health insurance, there is no reason why they could not serve as the place for employees and their families to
sign up for available health plans. Of course, employers could also contribute, if they wished, to their employees' premium
and reap the same tax breaks as corporate employers do in the conventional payment of health insurance premiums.
Automatic payroll deduction for premium collection at the place of work. Employers are legally required to use the payroll
deduction system for Social Security, Medicare, federal income tax, state taxes, and unemployment compensation. While
employers do not sponsor the tax code, they do enforce it. With a state voluntary purchasing cooperative, employers could
deduct the premium, over and above any tax credit assistance or state assistance (through SCHIP or Medicaid waivers) that
would be available, and send it to the plan of the employee's choice. National Federation of Independent Business surveys
show strong interest on the part of small employers in helping to administer a system of individual tax relief for insurance
for their employees.49
In order to stimulate maximum take-up, Etheredge and others have suggested that policymakers create a system of automatic
enrollment for employees, with the proviso that they can refuse in writing both the available health insurance and any state
tax relief or premium assistance.50 An employee's rejection of health insurance coverage and any refusal to accept help to
pay for health insurance would require the employee to make a conscious trade-off, making the direct costs transparent to the
employee and the employee's family.
A light regulatory regime. A system based on the principles of consumer choice and market competition cannot work without a
system of light and intelligent regulation. This means that the state agency administering such a system should act as a
referee--and not play favorites--in the competition among different types of health plans: traditional indemnity insurance,
managed care, preferred provider plans, high deductible plans, health reimbursement accounts, and medical savings accounts.
An efficient market requires free entry and exit of suppliers and the freedom of consumers to make the decisions in
accordance with their personal wants and needs.
A statewide reinsurance pool to cope with adverse selection. In the adoption of a voluntary choice cooperative for the
uninsured, or any similar consumer choice system that allows individuals and families to pick the kinds of plans and benefits
they want, state policymakers should establish a mechanism to cope with risk segmentation or adverse selection--a process
whereby higher-risk or higher-cost individuals congregate in one or more plans, contributing to spiraling costs and
encouraging younger, healthier, and lower-income enrollees to leave the higher-cost plan(s) or drop out of health care
coverage altogether.
There are many ways to cope with the possible issues of adverse selection. One might be for state officials to charter a
nonprofit, self-governing corporation that would be administered and financed by the health insurers themselves and that
would create a pool to finance high-cost individuals without disrupting the individual's continuity in coverage. In creating
such a system, state officials could require that all plans selling state-regulated health insurance, including plans writing
policies for state employees or Medicaid, participate and contribute to the pool. While every health plan that ceded a risk
to the pool would pay a premium to the pool for each risk ceded, there would be no taxpayer subsidies to the pool.
Such a mechanism could protect both carriers and enrollees from the effects of adverse selection. Plans would be encouraged
to cover the broadest possible pool of individuals and families and also would be able to recover a portion of the costs
incurred as a result of the enrollment of high-risk individuals.
STEP 8: Enact meaningful medical malpractice reform legislation.
The Bush Administration has put the medical malpractice problem front and center in the national policy agenda. This alone is
sparking a major debate. But the medical malpractice issue is essentially a matter of state tort law.
There is a medical malpractice crisis in several states. Median jury awards have increased dramatically. Malpractice premiums
are soaring, "defensive" medical procedures are common, and patient access to care is being compromised.
State legislators can take remedial action. While a sound malpractice reform measure would provide for unlimited economic
damages, state legislators can reduce the growing pressures on physicians through several amendments to state tort law. Such
changes could include an up-front disclosure of attorneys' fees; limiting non-economic damages (such as pain and suffering)
to $250,000; limiting punitive damages to $250,000 or twice the amount of economic damages (such as medical expenses or the
cost of domestic services); and limiting attorneys' fees to ensure that a maximum amount of recovery for damages would go to
patients. Moreover, if state legislators are unable to secure comprehensive medical malpractice reform, at the very least
they could provide legal relief for doctors who accept Medicaid patients and give doctors immunity from malpractice suits
when they provide charity care to the poor.
Several states have made significant progress in reforming medical malpractice laws: Alaska, California, Colorado, Maine,
Michigan, and Utah. A sound model for medical malpractice reform would be the Medical Injury Compensation Reform Act of 1975,
enacted by the California legislature.
STEP 9: Take advantage of the new federal health care tax credits to cover workers displaced by international trade.
In the Trade Adjustment Assistance Reform Act of 2002, Congress enacted a provision to give a 65 percent health care tax
credit to the roughly 260,000 workers nationwide who have lost employment and their health care coverage in part because of
expanded international trade.51 The purpose of this first-of-its-kind health care tax credit is to help these workers secure
health care coverage.
While the legislation contains artificial and complicated restrictions on personal choice, it does offer states broad
authority to determine new purchasing options available to these workers.52 Indeed, state officials can build such an
infrastructure with a view to facilitating the coverage of other classes of uninsured Americans, particularly if Congress
enacts significant health care tax credit legislation. As noted, the trade legislation also provides states with additional
federal assistance to help them administer newly created purchasing options.
STEP 10: Take advantage of the new health reimbursement arrangements for state and municipal employees.
In June 2002, the U.S. Department of the Treasury ruled that America's employers could set aside funds for their employees
under a new health reimbursement arrangement (HRA), a special tax-free account for the payment of health bills. Employers
could roll over unused funds in the employee's account from year to year and allow employees to use accumulated funds for
their health care needs in retirement.
For 2003, the Office of Personnel Management (OPM), the federal agency that runs the FEHBP, allowed the American Postal
Workers Union (APWU) health plan to offer an HRA to federal employees and retirees. Under the APWU plan, federal employees
can get an up-front credit of $1,000 per person or $2,000 per family in their account to pay for traditional medical expenses
as well as dental, vision, and other expenses that may not be covered by insurance. The funds are available before enrollees
pay deductibles, or out-of-pocket costs, and traditional insurance covers their health costs.53
State officials may also consider employing the new health accounts as a means of promoting innovative employee wellness
programs. For example, the LSU Health Care Network, which covers Louisiana State University health care employees, has
recently initiated such a plan, and its preventive care program ranges from routine checkups and tests to prostate exams,
mammograms, and children's vaccinations. As noted, the initial comparative data showed an increase in physician visits but an
overall reduction in costs.54 State officials should allow state employee to choose similar arrangements. Likewise, municipal
employees should also be able to take advantage of the new HRAs.
STEP 11: Engage faith-based organizations in preventive care and wellness programs.
State and local officials manage or oversee public health clinics and health centers. These organizations help low-income and
uninsured families secure health care services.55
An enormous resource exists among faith-based and religious organizations. These organizations can play a vigorous role in
promoting and sponsoring wellness and preventive care programs. State officials should make every effort to tap the power of
faith-based and religious organizations in their health care outreach into various communities, particularly inner-city and
ethnic communities.56 They should also find ways of integrating these faith-based wellness initiatives into their public
assistance programs.
Where conventional government efforts may not inspire trust or confidence, religious and faith-based organizations can often
succeed. That success could result in many more poor Americans getting the checkups and routine preventive care they need.
CONCLUSION
Innovative and imaginative governors and state legislators can make significant headway in reducing the number of America's
uninsured, improving access to quality health care, and expanding choice and competition in the state health insurance
markets.
They can achieve this by taking several key steps, including:
Cooperating with the President and the Administration in expanding health coverage,
Promoting solid information on available health plan options,
Reducing barriers to coverage by reviewing the costs of mandates and eliminating excessive regulation,
Accepting new HHS flexibility to expand private insurance coverage for individuals and families,
Taking an inventory of the costs of the uninsured in their states and offsetting those costs with state health care tax
credits or premium subsidies,
Creating preventive care accounts for Medicaid beneficiaries,
Cooperating with the Administration in securing coverage for displaced workers under the Trade Adjustment Reform Act of 2002,
Enacting serious medical malpractice reform, and
Engaging faith-based and religious organizations in public health efforts to secure preventive care services among poor and
low-income people.
The problems of the uninsured are problems for both federal and state officials. While the central weakness of the health
insurance market is the inefficient, inequitable, and restrictive federal tax treatment of health insurance, state officials
can nonetheless take direct action without waiting for Congress to enact major changes in the federal tax code.
States can work energetically with the Administration and also implement innovative solutions on their own. Millions of
Americans desperately need that federal-state cooperation.
Robert E. Moffit, Ph.D., is Director of, and Nina Owcharenko is Health Care Policy Analyst in, the Center for Health Policy
Studies at The Heritage Foundation.
--------------------------------------------------------------------------------
1. For a description of the range of possibilities under the new HIFA waivers, see Nina Owcharenko, "How States Can Expand
Private Coverage with HIFA Waivers," Heritage Foundation Executive Memorandum No. 846, December 16, 2002.
2. Executive Office of the President, Office of Management and Budget, The Budget for Fiscal Year 2004, pp. 125-127. Cited
hereafter as Budget for Fiscal Year 2004.
3. Letter to Robert E. Moffit from Gerald Chandler, Chairman, Proweh Health Systems, Inc., December 18, 2002. Proweh Health
Systems compiled comparative data on utilization and costs for the first six months of 2002 and 2001.
4. For a description of the Florida consumer-directed Medicaid option, see James Frogue, "The Future of Medicaid: Consumer
Directed Care," Heritage Foundation Backgrounder No. 1618, January 10, 2003.
6. Robert L. Pollock, "Americans Need a Market for Medical Progress," The Wall Street Journal, January 22, 2003.
7. Alain C. Enthoven, "Where Are Health Care's Hondas?" The Wall Street Journal, October 24, 2002. As Enthoven points out,
employers often give employees a choice of "a plan," an HMO or a PPO, but the different plans are offered by the same carrier
and have the same doctors. Thus, there is no real free-market competition among delivery systems under current arrangements.
8. Jack Hadley and John Holohan, "How Much Medical Care Do the Uninsured Use, and Who Pays for It?" Health Affairs, Web
Exclusive, February 12, 2003, p. 3, at www.healthaffairs.org/WebExclusives/Hadley_Web_Excl_021203.htm.
9. U.S. Department of the Treasury, General Explanations of the Administration's Fiscal Year 2004 Revenue Proposals, February
2003, pp. 45-48. Cited hereafter as General Explanations.
10. See Janet M. Corrigan, Ann Greiner, and Shari M. Erickson, eds., Fostering Rapid Advances in Health Care: Learning from
System Demonstrations (Washington, D.C.: Institute of Medicine, 2002).
11. For this "Creative Federalism" approach to health coverage and experimentation, the authors are indebted to Stuart M.
Butler, Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.
12. For an excellent overview of the direction of the Bush Administration's health care policy, see the Hon. Mark McClellan,
M.D., "The Health Care Crisis: The President's Plan for High Quality, Affordable Care," Heritage Foundation Lecture No. 768,
April 17, 2002.
13. General Explanations, pp. 45-55.
14. Ibid., p. 47.
15. Ibid.
16. Ibid.
17. "A Revolving Door: How Individuals Move In and Out of Health Insurance Coverage," University of Michigan, Economic
Research Initiative on the Uninsured, University of Michigan, ERIU Research Highlight No. 1, October 2002, p. 1.
18. Cited by Vip Patel, "Raising Awareness of Consumers' Options in the Individual Insurance Market," Health Affairs, Web
Exclusive, October 23, 2002, p. 2, at www.healthaffairs.org/WebExclusives/Patel_Perspective_Web_Excl_102302.htm.
19. Cited in Mark McClellan and Katherine Becker, "Reducing Uninsurance Through the Non-Group Market: Health Insurance
Credits and Purchasing Groups," Health Affairs, Web Exclusive, October 23, 2002, p. 2, at www.healthaffairs.org/
webExclusives/McClellan_Perspective_
Web_Excl_102302.htm.
20. Health Insurance Association of America, "Individual Health Insurance: Access and Affordability," HIAA Brief Analysis,
October 2002, p. 1.
21. PricewaterhouseCoopers, The Factors Fueling Rising Health Care Costs, report prepared for the American Association of
Health Plans, April 2002, p. 3.
22. See, in this connection, Robert E. Moffit, "Maryland Health Care Mandate Policy," testimony before the House Economic
Affairs Committee, Maryland General Assembly, March 7, 2002, at www.heritage.org/library/keyissues/healthcare/.
23. Jensen and Morrisey, "Mandated Benefit Laws and Employer-Sponsored Health Insurance."
24. Paul Guppy, "How Mandates Increase Costs and Reduce Access to Health Care Coverage," Washington Policy Center, Policy
Brief, June 2002, at www.wips.org/HealthCare/PBGuppyHealthCareMandates.html.
25. Ibid.
26. Cheryl Jackson, "States Look at Costs of Insurance Mandates," American Medical Association, AMNews, November 11, 2002, at
www.ama-assn.org/sci-pubs/amnews/pick_02/bisc1111.htm; "Major 2001 State Health Care Laws," BlueCross BlueShield Association,
BlueCross BlueShield Health Issues, at bcbshealthissues.com/proactive/newsroom/release.vtml?id=20063.
27. Fact sheet, "The Cost and Benefit of Individual Health Insurance Plans," eHealthInsurance.com, September 30, 2002, p. 3,
at www.ehealthinsurance.com/ehealthinsurance/expertcenter/ExpertCenter.html.
28. Hadley and Holahan, "How Much Medical Care Do the Uninsured Use, and Who Pays for It?"
29. See Texas Comptroller's Office, Texas Estimated Health Care Spending on The Uninsured, at www.window.state.tx.us/
uninsure/.
30. U.S. Department of Health and Human Services, "Health Insurance Flexibility and Accountability Demonstration Initiative,"
at www.cms.hhs.gov/hifa/default.asp.
31. Ibid.
32. Centers for Medicare and Medicaid Services, "Health Insurance Flexibility and Accountability (HIFA) Initiative Fact
Sheet: New Mexico," at www.cms.gov/hifa/nmfs.pdf.
33. Press release, "Oregon Receives Okay to Expand Oregon Health Plan at No Additional Cost to State," State of Oregon,
October 15, 2002, at www.governor.state.or.us/governor/press/p021015a.htm.
34. Budget for Fiscal Year 2004, pp. 125-127.
35. For an excellent discussion of broader Medicaid reform, see Michael T. Bond, John C. Goodman, Ronald Lindsey, and Richard
Teske, "Reforming Medicaid", National Center for Policy Analysis and Buckeye Institute for Public Policy Solutions, NCPA
Policy Report No. 257, February 2003, at www.ncpa.org/pub/st/st257; see also Richard Teske, "Abolishing the Medicaid Ghetto:
Putting Patients First," American Legislative Exchange Council, The State Factor, April 2002.
36. See M. William Salganik, "Medicaid Revolving Door Frustrates Many in Maryland," The Baltimore Sun, September 1, 2002.
37. For a brief description of Medicaid spending pressures in the states, see "Medicaid Is Fastest Growing Item in State
Budgets," National Center for Policy Analysis Daily Policy Digest, January 14, 2002, at www.ncpa.org/iss/hea/2002/pd011402b.
html; see also Robert Pear and Robin Toner, "Grim Choices Face States in Making Cuts in Medicaid," The New York Times,
January 14, 2002.
38. Kaiser Commission on Medicaid and the Uninsured, "State Budgets Under Stress: How Are States Planning to Reduce the
Growth in Medicaid Costs?" July 30, 2002, at www.kff.org/content/2002/20020730/statbudupdate73002.pdf. For an excellent
overview of how state officials are restricting Medicaid prescription drugs, see Linda Gorman, "Treatment Denied: State
Formularies and Cost Controls Restrict Access to Prescription Drugs", Washington Policy Center, Policy Brief, February 2003,
at www.washingtonpolicy.org/HealthCare/PBGormanTreatmentDenied.html.
39. Peter J. Cunningham, "Mounting Pressures: Physicians Serving Medicaid Patients and the Uninsured, 1997-2001," Center for
Studying Health System Change, Tracking Report No. 6, December 2002, at www.hschange.com?CONTENT/505/?topic+topic01.
40. Centers for Medicare and Medicaid Services, "Why Has CMS Developed the Independence Plus Programs?" Independence Plus:
Frequently Asked Questions, at cms.hhs.gov/independenceplus/.
41. The authors are indebted to Daniel S. Johnson, M.D., The Heritage Foundation's Visiting Fellow in Health Policy and
former President of the American Medical Association, for this concept of a state-based voluntary choice cooperative.
42. For a discussion of the FEHBP as a model for a purchasing cooperative for the uninsured, see Stan Dorn and Jack Meyer, "
Nine Billion Dollars a Year to Cover the Uninsured: Possible Common Ground for Significant Incremental Progress," Economic
and Social Research Institute, Current Policy Series No. 4, October 2002, pp. 5-10.
43. See Robert E. Moffit, "Promoting Choice and Controlling Cost: What Congress Can Learn--Again--From Its Own Health
Insurance Program," Heritage Foundation Web Memo No. 146, September 20, 2002, at www.heritage.org/Research/HealthCare/wm146.
cfm.
44. In 1999, the majority of the members of the National Bipartisan Commission on the Future of Medicare, chaired by Senator
John Breaux (D-LA) and Representative Bill Thomas (R-CA), proposed to reform Medicare along the lines of the FEHBP. During
the 2000 presidential primary season, Senator Bill Bradley (D-NJ) proposed a reform of the Medicaid program along the lines
of the FEHBP.
45. Maine Consumer Choice Health Plan, Chapter 708, 120th Maine Legislature, 2nd Sess., at janus.state.me.us/legis/ros/lom
/LOM120th/6Pub701-713/Pub701-713-07.htm.
46. The Democratic leadership in the Maryland legislature also considered such a dramatic approach in 1992, when the
Honorable Casper Taylor, Chairman of the Maryland House Economic Matters Committee and later Speaker of the Maryland House,
unveiled a comprehensive and innovative reform of the Maryland health care system, based on a state-wide system of health
care tax credits and consumer choice and competition. For a description of the original Taylor bill, see Robert E. Moffit, "
Why the Maryland Consumer Choice Health Plan Could Be a Model for Health Care Reform," Heritage Foundation Backgrounder No.
902, June 17, 1992.
47. The addition of state employees to a new purchasing cooperative would help make the pool more attractive to carriers and
more effective as a vehicle for consumer choice and competition. According to Elliot Wicks, senior fellow at the Washington-
based Economic and Social Research Institute, a key lesson from the experience of purchasing cooperatives is the need to
achieve "critical mass." See Elliot K. Wicks, "Health Insurance Purchasing Cooperatives," Commonwealth Fund Issue Brief,
November 2002, p. 5.
48. Lynn Etheredge, "How to Administer Health Insurance Tax Credits for Working Families," Heritage Foundation Backgrounder
No. 1516, January 31, 2002.
49. See Robert E. Moffit, "Why Adopting the Common Ground Health Care Proposal Would Be a Costly Mistake," Heritage
Foundation Backgrounder No. 1445, June 1, 2001.
50. Etheredge, "How to Administer Health Insurance Tax Credits for Working Families."
51. See Public Law 107-210 at thomas.loc.gov.
52. For a discussion of state options, see Nina Owcharenko and Edmund Haislmaier, "State Opportunities to Provide Affordable
Health Coverage Under the Trade Law," Heritage Foundation Backgrounder No. 1626, February 27, 2003.
53. "Anatomy of a Premium Increase," remarks by the Hon. Kay Coles James, Director, U.S. Office of Personnel Management,
before the American Association of Health Plans National Policy Forum, February 25, 2003, pp. 29-31. Under the APWU plan,
once the funds in the account are exhausted, there is a $600 deductible for individual coverage and a $1,200 deductible for
family coverage before traditional insurance covers costs. Under the terms of the APWU plan, enrollees can roll over up to $
500 per year in their accounts, up to a maximum of $4,000. According to Director James, the initial data indicate that the
average age of the enrollee taking advantage of the new plan is 49.
54. Letter to Robert E. Moffit from Gerald Chandler, December 18, 2002.
55. According to HHS, 12 million Americans are served by the existing network of health centers at over 3,500 locally managed
sites across the nation. See Executive Office of the President, Office of Management and Budget, 2004 Budget Proposal for the
Department of Health and Human Services, at www.whitehouse.gov/omb/budget/fy2004/hhs.html.
56. On developments in the District of Columbia, for example, see Steven Gray, "In Northeast, Moved by a Fitness Revelation,"
The Washington Post, July 9, 2002, p. F1; see also Barbara Martinez, "How a City Aims to Give Minorities Better Health Care,"
The Wall Street Journal, July 10, 2002, p. 1.
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