Targeted Intervention Is Best

by Earl L. Grinols

Rather than focus on the intellectual failures of HR 3200 and the Senate’s bill, let us apply the management guru’s advice: Do not fix fundamentally flawed bills, replace them with sound ones.  What would sound legislation look like?  If one had to select just three fundamentals that Congress needs to get right to extend insurance coverage to all without damaging those portions of American’s health care that are the best in the world, what would they be?

Failure to buy health insurance calls for much less meddling than Congress has in mind.  Some do not buy insurance because they cannot afford it.  Others can afford it but do not buy because they do not have a strong motivation to do so.

•    Fundamental 1:  Lack of earnings is not a health care problem.  It is an income problem.  The solution to too little income is provision of income.  This can be done for those who qualify through some appropriate mechanism such as an augmented Earned Income Tax Credit.  An augmented EITC makes sure that everyone has enough income to buy insurance suitable to their circumstances.  (By the way, PriceWatersCooper estimates that defensive medicine costs $210 billion annually.  Saving this amount through medical malpractice reform could pay for the amount needed for EITC transfers four times over.)

•    Fundamental 2:  Studies show that 25 percent of the uninsured qualify for Medicare or SCHIP (State Children’s Insurance Program) but do not bother to complete the paperwork.  Thus, an incentive much stronger than present must be supplied to make all Americans want to buy health insurance.  This is not a health care problem, but a motivation problem.

A price benefit to motivate insurance purchase can be accomplished at no budget cost.  How?  When we want to motivate people not to litter, we ask bottle and can buyers to place a deposit on the bottle or can.  A deposit creates the same incentive as paying out a subsidy to picking up (not littering) cans and bottles.  No government outlay is needed and anyone who does not litter pays nothing extra because the deposit is returned.  Only those who litter pay a higher price for their bottles and cans.  What is the economic equivalent of asking for a deposit on buying health insurance?  The answer is imposing a uniform tax that raises all prices (such as a value added tax) but rebates the tax back for (or does not collect it from) those who have purchased health insurance.  This arrangement is favored by Health Care for Us All written by James Henderson and myself because it is implied by economic theory.  (See pp. 131-136, 27-29).

If a uniform tax is politically rejected (even though it collects no revenue when everyone has insurance and is present only to provide an incentive), then other alternatives that cause the uninsured to want to buy health insurance can be substituted, though they will be less efficient.  One example is an income subsidy paid through an augmented EITC.  An EITC to those who qualify, coupled with a tax penalty, would provide a once-per-year reminder and reach those uninsured who file taxes.  Those who don’t file, would need to be motivated in some other way.

•    Fundamental 3:  Let the insurance market work as it should.  Homogeneous risk pooling requires rating by age and gender.  Once that is done, good health insurance requires carrying both event-risk health insurance and reclassification risk health insurance.  The first pays for a treatable event in the coming policy year, and the second pays any increase in premium in subsequent years if the insured’s health status changes in a way that places him or her into a higher risk pool.  Legislatively this could be accomplished by mandating guaranteed renewability coupled with guaranteed issue for everyone at the standard rates for others of his or her same age and sex.

What else is left?  Apart from Fundamentals 1, 2, and 3, Congress should have figured out by now that the only known, reliable, self-enforcing mechanism to keep costs low is robust competition.  There are a number of pro-competitive initiatives for health insurance and health care that could be put into legislation in relatively few pages.  For starters, health care providers should be allowed to charge whatever price they want, but Congress should require them to transparently and publicly post such prices (the internet would seem to be a good option) and to charge all buyers of the same service on the same terms the same price as they charge to their most favored customer.

Economists also know ways that the public budget for health care reform can be kept out of the entitlement category and remain an administrative choice of government.  It should cost far less than ½ of one percent of GDP, based on the provision-cost of the increased health care usage to be expected if everyone had health insurance.  In contrast, market reforms have the potential to reduce health care costs by over 2 percent of GDP.  By targeting intervention, collateral damage to the health care market and health insurance market is kept to a minimum, more good can be done for those who need help, and public budget costs can be kept to a fraction of those associated with Congress’ misguided efforts.  If there are two ways to accomplish the same task, would you choose the method that cost six times more?
There are workable ideas out there.  Perhaps Congress should take the time to learn what they are.

Earl L. Grinols is a former Senior Economist for the President’s Council of Economic Advisors.  His most recent book is Health Care for Us All published by Cambridge University Press.