Next Steps for Healthcare Reform

While no one can be sure of the outcome of the Supreme Court case on Obamacare, if the Court finds the law is unconstitutional, Congress will be forced to consider a new approach to providing more affordable access to healthcare for millions of Americans.

Many supporters of the Patient Protection and Affordable Care Act (ACA) continue to claim that no plans have been proposed by Republicans or conservatives are sufficient to address that problem, or that the plans only cover a small number of uninsured Americans. That canard has been touted by those who believe that the government should be in charge of deciding which procedures and treatments can be provided to individuals; in fact, the level and type of benefits seem to be more important than the financing for that group. In fact, for several decades there have been dozens of reasonable and affordable proposals that have been offered by numerous members of Congress and private sector healthcare experts, all of which give individuals and healthcare providers much greater control over decisions that affect an individual’s well-being.

There are two distinct choices that could be considered by Congress should the Supreme Court find the ACA unconstitutional and overturn the entire law. One is adopt a single payer system, which would be constitutional, but that concept was not approved by Congress during the debate over the ACA and has no chance of getting through the House. The other is to completely eliminate the employer-based healthcare system and adopt the consumer-driven healthcare model first proposed by Regina Herzlinger. It is also unlikely that such a change will be made right away; but other steps could be taken that would provide greater control over healthcare choices by individuals rather than the government, such as vouchers to purchase private insurance, or providing access to a plan similar to the one that is provided for members of Congress.

In the Spring 2012 edition of National Affairs, James Capretta, a visiting fellow at the American Enterprise Institute and a fellow at the Ethics and Public Policy Center, and Bob Moffett, a senior fellow at the Center for Policy Innovation at the Heritage Foundation, wrote an article about “How to Replace Obamacare.” Both authors have worked for many years on this subject matter.

The article cites several underlying problems with the healthcare system – rapidly rising costs, the Medicare fee-for-service payment system, and employer-provided healthcare insurance. Obamacare, the authors argue, does not fix these problems; in fact, they become more problematic.

Capretta and Moffett suggest several reforms. First, establish a “defined contribution” model, which would force consumers to become cost-conscious. Since employers, Medicare or Medicaid are the sources of insurance coverage, consumers do not have to face any tradeoffs that force them to prioritize how their healthcare dollars are used. They suggest that “Coverage would be provided through competing insurance plans; government’s involvement would come through the provision of a fixed financial contribution toward the purchase of insurance by each beneficiary. That subsidy would not vary based on a person’s insurance plan, giving Americans every incentive to shop for good value in their health coverage and to get the most for their defined-contribution dollars.”

Second, individuals should have greater personal responsibility and health insurance should provide continuous-coverage protection. Rather than taking the approach of Obamacare, which provides mandates to require coverage of pre-existing conditions and the individual mandate to help fund that coverage, Capretta and Moffett suggest that individuals who are “continuously enrolled in health insurance, with at least catastrophic coverage, … will never again face the prospect of high premiums associated with developing a costly health condition.” The details of such changes are discussed in “How to Cover Pre-existing Conditions,” by James Capretta and Tom Miller, published in the Summer 2010 issue of National Affairs.

Finally, unlike Obamacare, which tramples on states’ rights, genuine healthcare reform must create a true partnership with the states. Participation in any federal plan should be voluntary, and those states that agree to what should be minimal national standards should have control over the design of their health insurance markets. Rather than setting up health exchanges, which “could later become instruments of excessive regulatory control,” Capretta and Moffett propose two simple tasks for states: inform consumers of their insurance options, and make it easy to enroll in the plan of their choice by “cooperating with the federal government to facilitate the payment of credits and vouchers directly to private insurers.”

Healthcare reform also requires tax reform. In its 2011 “Saving the American Dream” plan, the Heritage Foundation proposed replacing the unlimited employer-based tax deduction with a non-refundable tax credit that would be phased out based on income. The government could also limit the credit to a “pre-determined level of insurance coverage.” Individuals would use the credit to purchase private insurance coverage.

Capretta and Moffett also provide recommendations for covering the most vulnerable Americans by overhauling Medicaid through a system of credits and vouchers, and also reforming Medicare through a premium support system, a bipartisan concept that was discussed in a March 22, 2012 article in Health Affairs.

According to the article, the term was “first used in a November 1995 Health Affairs article by Brookings Institution economists Henry Aaron and Robert Reischauer. Under the approach that they described, beneficiaries would receive a government contribution toward the premium charged by a private plan of their choice. If the premium exceeded the contribution, beneficiaries would pay the difference.” The plan was based on the “managed competition” concept that was popularized by Alain Enthoven, a Stanford economist. Health plans would offer various features and prices and compete for enrollees.

Premium support plans have been including in legislative proposals, including the fiscal year 2013 Budget Resolution, which passed the House of Representatives on Thursday, March 29. The House plan was initiated by Budget Committee Chairman Paul Ryan (R-Wis.) and Sen. Ron Wyden (D-Ore.); prior iterations were supported by Clinton White House budget director Alice Rivlin and former Senate Budget Committee Chair Pete Domenici (R-N.M.) through the Bipartisan Policy Center.

The current Medicare system is financed through a fee-for-service payment system, under which providers are reimbursed based on a predetermined rate based on a specific service. Under premium support, Medicare beneficiaries would choose a private health plan and the federal government would pay a predetermined contribution to that plan on behalf of the individual.

Chairman Ryan’s 2011 plan was criticized as “ending Medicare as we know it” because it eventually required all beneficiaries to enter into the premium support system. The 2013 plan that he created with Sen. Wyden and which is included in the FY 2013 Budget Resolution would allow a choice of staying in the current Medicare system or moving to the premium support plan. Nonetheless, politicians and organizations that want the government to continue to control healthcare choices remain critical of anything that resembles a premium support plan.

The Medicare Trustees have made it clear for the past several years that the program is going broke a lot more quickly than previously anticipated. The premium support plans are intended to prevent the bankruptcy of one of the nation’s most popular entitlements.

The Health Affairs article states that savings from the premium support program depends on “the initial government contribution level in the first year of the restructured system and the allowed rate of growth in that contribution over time. The Congressional Budget Office (CBO), for example, estimated that the 2011 Ryan proposal would probably reduce federal spending by 2030 by 8 to 11 percent. A more recent analysis by Roger Feldman and colleagues at the American Enterprise Institute suggests that a fully implemented competitive bidding system would reduce federal spending on Medicare by about 5.6 percent, or $339 billion, through 2020.”

Since its inception in 1984, Citizens Against Government Waste (CAGW) has been a proponent of allowing patients to be in charge of their healthcare. Among other activities, in 1998, CAGW held a healthcare forum on Capitol Hill and in 1999 sponsored a taxpayer conference healthcare reform in Phoenix, Arizona. The principles discussed at these events, many of which were suggested as alternatives to President Clinton’s healthcare plan, continue to shape CAGW’s positions today.

The featured speaker at the forum on the Hill was Regina Herzlinger, who is the Nancy R. McPherson Professor of Business Administration Chair at the Harvard Business School and has been called “the Godmother of consumer-driven healthcare.” Her 1997 book, Market-driven Health Care: Who Wins, Who Loses In The Transformation Of America’s Largest Service Industry, contended that the healthcare system would function more effectively by removing the third-party payment system (mostly employer-based) and allowing consumer demand to shape the healthcare market. For example, she noted that vision care is not covered by most medical insurance, and competition forced providers to respond to consumer demand.

Professor Herzlinger’s book helped inspire CAGW’s 1998 report, “Patient-Centered Healthcare: The Road to Wellville,” the first of many reports on healthcare reform. The comments made in this report (unfortunately too old to be available online) are still relevant to the upcoming debate that will follow the Supreme Court’s decision in the ACA.

The report stated that, “The problems at the core of America’s healthcare woes are the loss of liberty, limited choices, and the abdication of control over financial resources. … Congress must turn its attention to the tax code, correct its inequities, extend to individuals the tax breaks on healthcare costs enjoyed by businesses, and repeal statutory barriers to competition. … As soon as consumers are free to opt out of their employer-sponsored plans and purchase healthcare coverage with before-tax income, they will go in search of the insurance product that best suits their individual needs. This infusion of flexibility, choice and cash will spur the development of a wide variety of individual insurance products. Consumers, back in charge of their healthcare decisions, will demand and get the kind of information about quality and outcomes they have come to expect in every other industry in the country.”

Similar ideas were expressed at CAGW’s taxpayer conference in Phoenix in October 1999, which was titled “A Prescription for Healthcare Reform and Empowering the Patient.” The event featured several members of Congress, including Sen. Jon Kyl (R-Ariz.) and Reps. Jon Shadegg (R-Ariz.) and Matt Salmon (R-Ariz.).

Once Americans get a chance to taste the freedom of choice under a market-oriented system, they will never again want to swallow the bitter pill of Obamacare or anything else that resembles a single payer, nationalized healthcare plan.