Comments on the Final Report of the Governor's Bipartisan Commission on Health Care Availability & Affordability

While it is not possible to carefully analyze each of the statements of problems and recommendations for solutions contained in the final report of the "Governor's Bipartisan Commission on Health Care Availability & Affordability," this paper will attempt to highlight some of the wisdom contained in the report in assessing problems and to highlight some of the better ideas for solutions.

A state of crisis?

"Health care in Vermont is near a state of crisis - some of us would say it already is in crisis?Health care costs in Vermont?are increasing at a sufficient rate to place state government itself in jeopardy." (P. 3)

Because this excerpt is so central to the commission's findings, it might be advisable to analyze the statement.

Most Vermont residents believe that the quality of the care they receive is high, but not everyone is covered by health insurance. The U.S. Census Bureau reported that in 2000, 89 percent of Vermont residents had access to some form of health coverage, leaving 11 percent uninsured. While this is far from its goal of universal coverage, Vermont is doing far better than the great majority of the other states in providing health coverage to its citizens.

Facilities that accept public funds also are required to provide medical treatment to anyone who presents needing care. While this is far from ideal and is expensive, inefficient, and promotes anxiety on behalf of uninsured citizens, it is a safety net, and federal systems are in place to provide some payments for this uncompensated care. One way or another, people have access to essential medical care.

The crisis therefore seems to be in the demand on state funds for health care services and in the cost of health care to individual citizens.

Problems enumerated

"Because Vermont has a high Medicaid participation rate, the pressures of Medicaid costs on the State budget are greater in Vermont than elsewhere," the report states. (P. 18)

Many states also are experiencing serious budget problems this year, largely because of the growth of entitlement spending in publicly-supported health care programs like Medicaid and SCHIP. Once the entitlement is established, the only way to reduce spending is to either roll back the entitlement qualifications or services or to reduce payments to providers. The former are very difficult politically, and the latter is therefore too often the course that is chosen. But these low payment schedules cause problems of their own.

One proposal that was not unanimously adopted by the commission would allow FHAP buy-in to employers. This would seem to move in precisely the wrong direction by bringing more people into a program that already is breaking the budget. It is an illusion that such a move would be cost neutral.

It might be well to look at a different way of instituting cost savings in these publicly-supported programs. The Incentive Plan for Medicaid described in the report could provide such an opportunity, as I will discuss later.

"Health insurance is financially inaccessible." (P. 11)

Vermont citizens trying to purchase health coverage are presented with having to buy policies that are burdened by expensive mandates and regulations, like community rating.

"Community rating has the effect of lowering costs for older people and those with medical conditions while raising them for younger, healthier people. It does not provide incentives to avoid freely chosen risky behaviors...Some insurers withdrew from the Vermont market because they did not wish to compete in a community-rated marketplace where they were required to insure all types of risks at similar rates." (P. 9) "Adverse selection is driving up the cost of the market for individual health insurance." (P. 15)

Further, the report observes that a lack of consumer awareness of the costs of health care and a lack of responsibility for their own health are problems are also driving up the cost of health care.

Another cost driver is administrative costs, estimated to be $400 million a year in Vermont.

"Government is causing some of these problems but limited scrutiny by government and by consumers has resulted in a lack of accountability by all parties. Simply put, there are enormous inefficiencies and unjustified paperwork burdens in the administration of health care." (P. 23)

The quality of care and access to care are being impacted by the cumulative effect of attempts at solutions.

"Medicaid's reimbursement rates are causing both availability and affordability problems in Vermont, as care givers curtail the number of Medicaid patients they will see and as unreimbursed costs are shifted to commercially insured patients, raising the cost of claims and premiums." (P. 27)

It is clear that Vermont's decisions over the years to expand access to publicly supported health care programs and the state's expansion of mandates and regulations on the private insurance system have sown the seeds of the problems the state is facing.

The solution is not to do more of the same but to look at a different way of controlling costs by engaging the consumer in the decision-making process. K-12 education in healthy behaviors and media literacy would be a start. But unless people have a financial stake in the process, there will be little incentive for them to change their behavior.

New ideas

The Incentive Plan for the Vermont Health Access Program provides attractive options to move in this direction. This would give consumers an opportunity to have "more freedom and incentive to take charge of their health care?[with] greater consumer understanding of costs?" (P. 18).

This pilot project could provide an incentive for recipients to be more responsible in their consumption of health care by making the costs visible. With a voucher or a smart card, they would realize they are spending real money, and if they save it, they could spend it for other necessities, including education (P. 21). Instituting Smart Card technology is another good way to empower consumers with information and to take advantage of the opportunity for new technologies not only to produce better medical care but also to provide cost savings.

The report recommends that the state apply for a federal waiver for this experiment.

The Department of Health and Human Services has created a new waiver opportunity to give states much more flexibility in management of their SCHIP and Medicaid programs for optional populations. The new programs is called the Health Insurance Flexibility and Accountability (HIFA) Guidelines, and more information is available at www.hcfa.gov/medicaid/hifa/default.htm

As a former four-term governor of Wisconsin, HHS Secretary Tommy Thompson is very enthusiastic about this new initiative and the flexibility it will give to states, and he hopes many will take advantage of it

Secretary Thompson said his department has cleared the backlog of Medicaid waiver requests dating back to 1986 from states wanting more flexibility so they can expand access to coverage, often with the same number of dollars. The result, he said, is that more than 1.5 million more people will be able to get health insurance this year than last. In this era of budget shortfalls, finding a ways to expand coverage without new expenditures is very good. This new HIFA waiver may provide just such an opportunity.

The key is that states are able to shed some of the mandates and regulatory red tape that provide excessively generous health benefits to some while leaving many others out in the cold.

The report also describes ways to strengthen the Insurance Market and proposes "tax rebates for the purchase of all health insurance" including catastrophic policies (P. 31).

The footnotes on page 31 are critically important. Commissioner Costle points out that the two measures not be very effective without action by the federal government. This is exactly right.

In fact, the idea of providing federal tax credits to uninsured workers is gaining a great deal of attention in Washington and will almost certainly be on the docket when members return for the 2002 session. Many of the problems with the large number of uninsured are rooted in flawed federal tax policy, and this federal tax credit initiative would begin to correct those flaws. If Vermont were to strongly back this idea and stress its importance to the state to encourage federal action, enactment of tax credits could take some of the pressure off the state to fix the problems of the uninsured which are not of their making.

Vermont Senator Jim Jeffords is a strong leader in this arena. He has offered legislation to provide refundable tax credits to help the uninsured obtain health insurance and his bill has strong support among key members of Congress, including pivotal Democratic centrists like Sen. John Breaux of Louisiana.

House Ways and Means Chairman Bill Thomas also is a strong supporter of the concept because, he says, "It frees up individuals to pick the kinds of insurance they believe they need."

Providing tax credits to individuals and families would energize the market for private health insurance by giving people actual resources to assist them in purchasing the coverage of their choice. The credits would be refundable if taxpayers owed few or no taxes, and they could be advanceable-meaning people wouldn't have to wait until they file their taxes to get coverage.

Wharton economist Mark Pauly has produced several studies showing that credits would provide a powerful incentive for the uninsured to purchase health coverage. One study showed that 75% of the uninsured would buy a policy if they received a credit worth 66% of the premium cost. He also found that the market for individually-purchased health insurance is more vibrant and more affordable than conventional wisdom perceives.

The information economy also is providing new options for people to obtain coverage. For example, eHealthInsurance, an on-line health insurance brokerage, produced a study last summer showing that the average premium for individual and family policies purchased through the company ranged from $1,200 to $1,500 a year per person.

And it wasn't just bare-bone coverage; 88% of the individual policies could be considered comprehensive. If tax credits were enacted, the market would be transformed with new ways for individuals to buy coverage.

As referenced in the report, linking health insurance to the workplace is a relic of World War II when employers needed a way to boost workers' pay without running afoul of wage controls. The Internal Revenue Service ruled that an employer's contribution to health policies would not be counted as taxable income to employees.

This worked tolerably well for an Industrial Age economy when workers stayed with the same company for years or even decades. But workers now are highly mobile. The Bureau of Labor Statistics has reported that 13 million Americans typically change their job status every month, and millions lose their health insurance as they move from job to job, go back to school, and start new businesses. In these circumstances, it is difficult to sustain a political position that would either tether health insurance to the workplace or push more and more people into expensive, centralized government programs.

Tax credits and vouchers would help to equalize the current system so millions who are shut out would have access to coverage.

Giving individuals control over their health spending through private insurance is not just the right answer for the uninsured, but the only way to begin to impose sensible cost awareness on consumers. Tax credits could be the beginning of important consumer-driven changes in the health sector.

Concluding observations

The commission expressed alarm that the cumulative level of state spending on health care was nearly equal to the total state budget. But this is a false comparison. The state should not be concerned about how much people spend on health care if it is their money and citizens are spending it on something that they value -health care, education, housing, travel, or computers. The state's concern should be over the amount of taxpayer money it is spending on health care and whether it is crowding out other legitimate services.

Second, the report seems to bemoan the fact that there is no health care system and "No one is in control." That is exactly as it should be. No one is in control of the U.S. economy. Rather, it is run by Adam Smith's invisible hand of consumers operating in their best interest to get the maximum value for their dollars, and sellers doing everything they can to attract consumers by providing the best service and value for those dollars. One of the biggest problems in the health sector is that this natural process is interrupted because consumers do not have control over the money and providers are not forced to respond to these customers but instead to cater to large private and public sector bureaucracies.

I would be happy to discuss the points contained in this paper and other ideas with you at any time.