Chapter 3

High Anxiety: Working Families Need Market-based Health Care Reform
Robert Emmet Moffit, Ph.D.

Introduction

Many American workers and their families are in a state of high anxiety. They are insecure in their jobs, and many fear that losing their jobs also could mean losing their health insurance. There is an attraction to public policies that would reduce their insecurity. Meanwhile, surveys show that the majority of Americans are unfriendly to health care reform measures that would compromise what they feel are the best features of the health care system. The pharmaceutical, medical device, and biomedical research communities give Americans access to an astonishing level of rapidly advancing medical technology. At the same time, however, more Americans are uneasy about the quality of the medical care they get from managed care arrangements made by their employers. The growing popular concerns about "quality" are relatively new.¹

Nonetheless, there is still broad popular dissatisfaction with the health care system, echoing President Bill Clinton's 1993 description of it as "badly broken." The number of Americans with no health insurance at all is growing, reaching approximately 44 million at any one time. Even though recent annual declines in corporate insurance premiums are welcome, both business leaders and employees harbor a residual fear of a significant rise in future costs. Moreover, physicians still are frustrated with unreformed and costly medical malpractice laws, and employers and employees remain dissatisfied with the paperwork and cumbersome administration of insurance claims processing.

 

Two Choices

In reforming the health care system, it is important for policymakers at the federal and state levels to recognize that the universe of policy options is shrinking. The United States has a health care system that is best described as a "mixed economy" with a cumbersome and interlocking system of public and private arrangements. The public (meaning taxpayer-funded) sector of the health care economy is growing rapidly. Today, huge and rapidly growing government health care programs, primarily Medicare and Medicaid, make up almost half of all health care spending. The public portion of the health care dollar is projected, even under the most conservative reform proposals in Congress, to grow substantially in the foreseeable future. Beyond the government programs, moreover, the private health insurance market itself is one of the most highly regulated sectors (if not the most highly regulated sector) of the U.S. economy.

Over the past half-century of intermittent debate over government involvement in financing health care, Americans have traveled a very long and controversial road. It is not clear what the outcome will be, but the choice will be between government-run health care, including federal or state financing and control, and the free market, including real consumer choice and serious competition.

Regrettably, the current trajectory of health care policy in the United States and the evolution of the health care market are not in a direction that would be recognizable to Professor Adam Smith, the father of modern political economy and author of The Wealth of Nations (1776). Current trends, particularly in financing, point to something far less liberal, in the very best and noblest sense of that ancient word, and far less humane.

The problem certainly is not that members of Congress and state legislators suffer from any lack of market-based reforms from which to choose. If anything, their problem is sorting out the most prudent policies from among a wide range of conservative and libertarian proposals for reforming the health care system. The Heritage Foundation's comprehensive tax credit proposal is just one of the most prominent contributions to the national debate,² but there are many others as well.

 

Unfinished Business

Americans who think that the current system is structurally unsound have one thing in common: They are right. While federal and state policymakers speak in the largely unintelligible jargon of complex cost-control methodologies and arcane insurance market rules, workers and their families are anxious about the deficiencies of the current system. They suffer from these deficiencies in concrete and often painful ways.

First, there has been no portability in the employment-based health insurance system.³ If a worker loses or changes his job, he does not lose his life insurance or his auto insurance or his homeowner's insurance. But he does lose his health insurance: the insurance that protects him and his family in case of serious illness or accident. The reason: It does not belong to him. Considering that Americans live and work in an information age characterized both by rapid technological advances and a high degree of mobility in the work force, the current system of employment-based health insurance not only is outdated, but also represents absurd social policy.

The absence of portability often confounds workers and their families. It is not immediately clear to them why they can change jobs or move from job to job without losing any insurance except health insurance. But there is, of course, a specific reason for it: Unlike every other type of insurance that American workers and their families buy, they do not buy their own health insurance, at least not directly, and therefore do not own it. Instead, the employer owns the policy.⁴

There are specific historical and economic reasons for this arrangement. Employment-based policies conveniently spread risk over the employees' group. As Robert Helms of the American Enterprise Institute, my colleagues at the Heritage Foundation, and many others have shown, the current structure of the employment-based health insurance system is also deeply rooted in the wartime economic conditions and compensation and tax policies of the 1940s.⁵ Even though those wartime policies of price controls and rationing long since have disappeared in the mists of memory, and even though the compensation requirements of workers entering the twenty-first century are radically different from those of the 1940s, the basic tax policy and its dominance over our health insurance remain virtually unchanged: American workers can get meaningful tax relief for the purchase of health insurance only if they get their insurance through their employers.

For a variety of reasons, the impact on workers and their families of this federal tax treatment is dramatically disparate. There are big "winners" and "losers" in the current system. If, on the one hand, a worker is employed in a large corporation (often self-insured) with a large benefits package, the tax benefits are likewise generous, and the worker and his family receive a substantial portion of income tax-free. If, on the other hand, a worker is middle- or low-income and is employed in a smaller company with a smaller benefits package, the tax breaks are proportionately less generous. Low-skilled workers often do not command a wage that enables them to buy health insurance, and they get little if any government assistance in purchasing it.

Fortune plays a decisive role. For American workers and their families, much depends on the size of the company; large companies generally have a higher proportion of their personnel covered by health insurance and offer a richer benefits package. If a company offers workers and their families no health insurance at all, their options are severely limited. Workers can purchase individual policies, assuming they are not disqualified because of medical status, but these policies are likely to be prohibitively expensive. There are several reasons for this.

• First, the price of a policy may include the price of politically ordained health benefits, providers, or procedures mandated by the legislature of a particular state, ranging from mandatory coverage of chiropractic services and mammography screening to in-vitro fertilization, speech therapy, and rehabilitation for alcohol or substance abuse. This drives up the cost of premiums.
• Second, it also includes the cost of marketing individual policies, which obviously is more expensive than the cost of marketing group insurance.
• Finally, and even more important, workers must purchase their individual policies with after-tax dollars, which makes them even more expensive. Even though recent legislation has rectified this to some extent with deductibility for part of the costs of health insurance for the self-employed, it is far from the 100 percent exclusion from taxation enjoyed by workers in company-based plans.

For most middle-income workers and their families, today's purchase of an individual health insurance policy simply is not realistic financially. In good times or in bad, American workers have every reason to be concerned about health insurance costs.

 

Restricted Alternatives

The basic economic consequence of the federal tax treatment of health insurance is that it severely constrains the market. Workers and their families, as consumers, are operating in an economic environment in which the only realistic option available to them is employer-based insurance. The economic effect of federal tax policy, therefore, is to confine Americans to one kind of health insurance: employment-based insurance. Naturally, the effect of this restriction on the supply of alternatives is like the effect of restricting supply in any market: Normal market efficiencies are frustrated or forgone, and the normal competitive pressures to control costs or moderate prices are lessened or lost altogether. It takes little imagination to picture what life, auto, or homeowner's insurance would be like if Congress subjected them to the same type of tax policy. Imagine, for example, what the housing market would be like if a homeowner could deduct his mortgage only if his employer selected the real estate agent or purchased the home. Needless to say, any attempt by Congress to apply the restrictive federal tax treatment of health insurance to the housing market in this manner would be dismissed as madness.

The paradox of this "New Deal" tax policy is its perverse impact on low-income working families. Tax policy in the United States historically has been "progressive," meaning that the rate of taxation rises with income; the higher one's income, the higher one's tax liability. But the tax treatment of employment-based health insurance is stunning in its regressivity. The more a person makes, the more valuable the tax treatment of employment-based health insurance.

This regressivity has been studied many times by economists in both the public and private sectors. A 1998 analysis by the Lewin Group, a leading econometric firm, revealed that families making less than $15,000 a year received an average tax break of about $63 a year.⁶ For families making over $100,000 a year, it was over $2,000. Lewin and others have shown that the biggest tax breaks-the largest bloc of tax-free income-goes to upper-income families, while relatively little goes to lower-income families. On the basis of the earlier Lewin analysis, my colleagues at the Heritage Foundation have calculated that approximately 25 percent of the total tax relief for company-based health insurance in the United States goes to families making $75,000 a year or more.

For members of Congress, the stubborn insistence on the current tax treatment reflects their commitment to an odd and enduring social policy: from each according to his labor and to each according to the height of his tax bracket. In other words, the premise of federal tax policy seems to be that while health insurance is a "social good," its tax benefits are to be distributed disproportionately to upper-income workers and their families-the very people who need them the least. This is modern America's equivalent of the Bourbon dynasty's tax policy.⁷

Policymakers at the federal level who want to reform health care by building on the current "free-market" private-sector model, thus retaining the current federal tax treatment, logically must insist, therefore, on retaining this regressive tax structure and all its odd inequities.

 

Access, Excess, and Duplication

The paradox of regressivity in the federal tax treatment of employment-based health insurance gives rise to other inequities. Yet another paradox in the health insurance market is that workers and their families often lack insurance in the traditional sense-that is, insurance against real risk or a catastrophic event. Instead, they have tax-subsidized prepaid medical care, obtained almost exclusively through the place of work. Workers at large profitable companies may have access to a generous package of benefits; those who command low wages or who have the misfortune of working for companies without great financial resources, however, will be among a growing minority of Americans-approximately 18 percent at the present time-with no health insurance at all.⁸ Or they will have company-based coverage but with significant and financially devastating gaps, such as the absence of catastrophic coverage. Or they will have generous, even excessive coverage, which they do not purchase but nevertheless pay for indirectly. Some Americans are overinsured by being enrolled in costly "Cadillac" health plans that they would not think of buying if they were spending their own money directly on such coverage. Some families, including retirees, have two or even three policies with duplicative coverage.

 

The Broken Market

The ultimate paradox, of course, is that members of the business community often defend private-sector health insurance arrangements as models of the market and identify the various rapid and recent changes, including managed care, as "triumphs of the free market." But the health insurance market is not a "free market" in the normal sense.

Although the health care system in the United States still is largely private, it does not operate on the free-market principle of consumer choice. As noted, the competition that does exist is largely competition among employment-based plans: Corporate insurance executives bargain with corporate benefits managers, there is no normal collision between the forces of supply and demand at the consumer level, and the customer is distinct from the consumer. Most consumers of health care-the majority of American workers and their families-do not purchase health insurance; it is purchased for them by the companies that employ them. These companies are the real insurance customers. For them, offering a good health benefits package is sound compensation policy, and their payments for employee health insurance, like wages, are tax-deductible. For workers, health insurance often is perceived as an added benefit on top of wages, and sometimes even as a "free good" that automatically comes with the job. They often think the company pays for it, but appearances disguise the true nature of the economic transaction. Company health insurance is not free to workers and their families, and companies, no matter how generous or beneficent, give their workers nothing. Too many Americans still do not understand either this relationship or how much the company actually pays them in the form of health care benefits.⁹

Employers spend the money of their employees. On this central point, regardless of ideological persuasion or political bias, economists overwhelmingly agree. For every increase in company-based health benefits, there is a proportionate decrease in wages and other benefits. Health benefits, like wages, are compensation. American workers, not employers, bear 100 percent of their own and their families' health care costs.¹⁰ But the trade-offs are not always clear to them.

Within the framework of company-based health insurance, the economic problem of health care costs has been generated by both appearance and reality. It is fair to say that the problem is broadly psychological rather than narrowly economic. To the extent that workers think health insurance is an "add-on" or a free good, they have no natural economic incentive to curtail this demand for health care services. Free goods invite high utilization.

This brings us to another paradox of the federal tax treatment of health insurance: A worker who indulges in an unrestrained demand for "free" medical services is acting in an economically rational manner. It would be irrational for him to do otherwise under traditional employment-based arrangements, because any immediate savings from cost-effective health care decisions will go into the coffers of the company, not into his own pocket.

Thus, within the context of tax-favored, employer-based insurance, one cannot expect traditional fee-for-service medicine to control costs. The incentives on the demand side to increase costs are complemented by similar incentives on the supply side. Among liberal health policy analysts, a dominant theme has been that the health care market is "supply-driven," and thus that the key to cost control invariably is the tough application of various complicated fee schedules or government price controls on doctors and hospitals.¹¹

Under the traditional fee-for-service model that prevailed until recently in employment-based health insurance, doctors and hospitals normally were paid on a cost-plus basis. They obviously had no incentive to control costs or curtail services, including services that might be of only marginal benefit to workers and their families. If physicians are paid on a cost-plus basis, the more services they provide, the more money they make. It is easy to see the reason that doctors have a different kind of relationship with patients who do not pay directly for their own health care or insurance. If doctors had to deal with patients as consumers-as individuals seeking the best value for each medical dollar-they would enter into a different economic relationship with them. Under fee-for-service, the doctor is deeply committed to the welfare of his patients, but the patient also happens to be the doctor's point of entry into the lucrative third-party payment system. It is a system in which a corporate bureaucracy, executing the indemnity contract with the patient's employer, is ready and able to pay the "usual and customary" or reasonable charges-in other words, the highest fees the physician can charge the third party without appearing outrageous. It is easy to see why that traditional arrangement is disappearing so rapidly.

Without the normal collision of supply and demand that characterizes other sectors of the economy, and considering that consumers and suppliers of medical services are largely insulated from the economic decisions they make, it is no surprise that health care costs have been difficult to control. The supply and demand incentives built into the very structure of the system have been set to increase rather than constrain health care costs.

 

The Forced March to Managed Care

During the 1980s, as the cost of traditional fee-for-service medicine was increasing by double digits, an increasing number of companies responded by offering managed care plans, such as health maintenance organizations (HMOs). The result has been nothing less than a breathtaking transformation of the health insurance market in a relatively short period. The percentage of workers enrolled in employer-sponsored fee-for-service plans dropped from 71 percent to 49 percent between 1988 and 1993 alone.¹² Today, more than three-quarters of all employees in the private sector are enrolled in some form of managed care plan. Promising to protect the business community's bottom line, managed care companies dominate employment-based insurance.

Managing patient care is what managed care insurance companies do. Physicians are members of a network, governed by internal rules and guidelines designed to ensure "appropriate" medical care. Although a patient may or may not have the choice of doctor, the ratio of doctors to patients in the typical HMO is about half that found in other plans. Generally, doctors in HMOs must spend less time with patients compared with doctors in fee-for-service medicine. Not surprisingly, waiting times in excess of one month for nonemergency services are "twice as prevalent" among HMOs as they are among traditional indemnity plans.¹³

Managed care organizations have different structures, attributes, and deficiencies and are evolving constantly, but their rapid rise to "market" dominance is the latest variation of tax-supported employment-based insurance. Thus, the rise of managed care, whatever its benefits, is no triumph of free-market forces. Consumer choice in employment-based insurance still is limited, frustrated, or nonexistent. The key decisions still are made by employers, corporate benefit managers, and insurance executives, not by consumers. Decision-making by doctors is similarly constrained.

Unlike a genuine free market, managed care involves an unusual distinction between consumer and customer. The interests of each are rarely the same. In choosing the managed care plan, the employer, not the worker, is the customer. The consumer (worker), for all practical purposes, has no property rights in health insurance. The insurance seller does not compete with other sellers for the consumer's dollars, and the consumer cannot realize any savings from cost-conscious buying. The rise of managed care, therefore, is anything but a triumph of the free market: In most instances, there is neither consumer demand nor a consumers' market.

Corporate benefits managers are moving to managed care because companies no longer can afford traditional indemnity insurance. In many instances, this amounts to a reduction in workers' compensation. Companies could avoid this problem by paying workers the clear and specific difference between the higher-cost traditional plan and the lower-cost managed care plan. Based on the preliminary evidence, it is fair to say that, even though managed care invariably yields transitional savings for employers, it is disputable whether it will be able to maintain high quality and consumer satisfaction while containing costs.¹⁴ Employment-based coverage can improve to the degree to which employers offer a broader range of health care choices, possibly through the use of a "defined contribution" system for health insurance.

Even managed care insurance options can flourish under consumer choice and competition. Perhaps the best example is the current Federal Employees Health Benefits Program (FEHBP), a unique consumer-driven health system with over 300 options nationwide that serves 9 million Americans, including members of Congress and their staffs.¹⁵ Within the FEHBP, members of Congress and federal workers and retirees can choose for themselves what types of plans and benefits they want and what they are willing to pay for them. Currently, approximately 40 percent of subscribers are enrolled in various managed care plans, and surveys of federal workers and retirees report a very high degree of satisfaction with the system. This satisfaction may well be a reflection of the crucial difference between FEHBP enrollees and workers enrolled in most private health insurance arrangements: If federal participants do not like a plan or service, they can fire the insurance company.

Without the pressure of consumer choice and competition, managed care will be plagued by perverse incentives that are the opposite of those found in traditional health insurance. Where a fee-for-service system enables physicians and other providers to make more money by rendering more services, managed care rewards physicians for providing fewer services. This is akin to importing the absurdities of federal agricultural subsidies into the health care sector of the economy.

From the standpoint of the market, the future of managed care, and the personal freedom of workers and their families, much depends on the broader direction of health care reform. HMOs under the "managed competition" regimes proposed by some members of Congress and several state legislators will curtail, not enhance, consumer choice. If consumers are given a "choice" of as many as two dozen HMOs in any region of the country, with all offering the same government-standardized benefits plan and only one (or even no) fee-for-service plan, the inevitable result will be to foreclose the possibility of any meaningful range of options for American workers and their families.

 

The Future Direction of Reform

The American people once again are at a critical juncture in health policy. Ultimately, members of Congress have only two choices: They can adopt a government-run health care system along the lines of the British, Canadian, or Clinton-style model or they can eliminate the distortions in the U.S. health insurance market and recreate a sound market in the financing and delivery of health care. There is no third way. Indeed, close examination of the various incremental reforms in Congress invariably reveals a structural bias toward one or the other of these two diametrically opposed options.¹⁶

If members of Congress refuse to open up the health care market, thereby allowing people more freedom of choice and compelling insurance companies into genuine competition for consumer dollars, they probably will wind up attempting to build on the current system. But if they insist on doing that, they must recognize that the current system is characterized by severe distortions in the health insurance market. They will have to compensate for these distortions and their accompanying problems and paradoxes by imposing various mandates and regulations, largely under the rubric of insurance reform, to accomplish what otherwise would be accomplished by market forces through a tax reform that empowers the consumer.

Building on the current system, therefore, inevitably means restricting the health care system even more and increasing the role of bureaucracy in the activities of doctors, hospitals, and the insurance industry. It means barring real consumer choice and genuine competition, and reducing doctors and hospitals to the status of highly regulated public utilities.

 

The Clinton Plan

President Clinton's health plan was perhaps the best example of comprehensive reform within the framework of the current system. It proved to be a heavy mixture of government and private employer-based insurance. The president's plan simply expanded the direct control of the federal government over an already highly regulated private sector.¹⁷

President Clinton and members of his administration persist in claiming that critics "misrepresented" his plan as a government-run health care system. In promoting it, the president initially employed the language of consumer choice and competition, condemning bureaucracy as "wasteful and inefficient" and calling for "simplicity" in the health care system. But the specifics he presented to Congress in 1993 in a 1,342-page bill portrayed an entirely different system: a national health board with vast regulatory powers, hundreds of government-sponsored "regional health alliances" to control the "market" in every sector of the country, and a mandate on employers and individuals that amounted to a hefty new federal payroll tax on labor and business.

 

Managed Competition

Another variant of government control of health care is the "managed competition" model, produced by a group of scholars associated with the prestigious Jackson Hole Group and currently a prominent model for health care reform at the state level. Combining the elements of market competition and government management, this model has proven to be politically attractive. But "managed competition" is a politically unstable platform for health care reform. Even though its proponents correctly diagnose the key weakness of the current system-an absence of price competition that undermines the efficiency of the health care system-they prescribe a regulatory infrastructure that will be even more restrictive, more bureaucratic, and perhaps even more costly than today's.¹⁸

 

Consumer Choice

There is no lack of options for market-based health care reform. If anything, Congress confronts a veritable inflation of ideas and proposals. John Goodman of the National Center for Policy Analysis, Robert Helms of the American Enterprise Institute, Mark Pauly of the Wharton School at the University of Pennsylvania, John Hoff of the Galen Institute, and Michael Tanner of the Cato Institute, among many others in the market-based health care community, have advanced innovative proposals for reform.¹⁹ Likewise, my colleagues at the Heritage Foundation have developed a comprehensive health care proposal based on consumer choice and competition.

Under the Heritage proposal, every American family, regardless of employment status, would receive a voucher or tax credit in place of the current tax exclusion. Families could use that tax relief for health insurance, out-of-pocket medical costs, or a tax-free medical savings account from which they could pay medical bills directly. The tax relief would be targeted at need. Using a sliding scale of refundable tax credits, more help would go to families with low incomes or high medical bills.

As a condition for receiving a credit or voucher, the head of every family would be required to purchase at least a basic package of catastrophic coverage. By shifting tax breaks directly to families, the Heritage plan would change the health insurance market from an employer-based to a consumer-based market. It would stimulate intense competition among insurance carriers and set off an explosion of group insurance outside the workplace, enabling trade associations, unions, professional associations, and even church groups and religious institutions to sponsor health insurance, as well as community-based clinics and other health care services. The intense competition for consumers' dollars would control costs, much as it controls the cost of other goods and services everywhere else in the economy.²⁰

As noted, an econometric analysis of the Heritage plan conducted by the Lewin Group shows that virtually every income group in the United States would be better off under a tax credit system. Families making $30,000 to $40,000 per year would be helped most.²¹

It is worth noting that the superiority of a tax credit approach to health care financing was underscored by a March 1994 study by the Congressional Budget Office, which observed that "by providing a larger subsidy for low income families, a credit would encourage more people to secure health insurance, reduce adverse selection, and discourage free riders."²²

 

Conclusion

Congress has neglected the fundamental problems of the health care system in the United States. This system cannot be improved unless policymakers reform the health insurance market, and the health insurance market cannot be reformed until Congress changes the tax policy that governs it. Serious health care reform, therefore, depends on serious tax reform. Legislative manipulations of a distorted insurance market are no substitute for genuine reform.

Congress can be assured that, without genuine reform, matters will get worse. For workers and their families, this is still a time of high anxiety. The reasons are obvious. Far too many people are uninsured, and the number is rising and will continue to rise. Far too many people still have gaps in their coverage that leave them vulnerable to catastrophic illness and its financial devastation. Moreover, the enactment of the Health Insurance Portability and Accountability Act of 1996 (Kassebaum-Kennedy) has not substantially addressed, let alone resolved, these problems. Congress has imposed an unprecedented level of regulation on the individual insurance market to mitigate the problem of workers losing their health insurance when they change jobs, but this is merely regulatory compensation for a failure to address the tax-related distortions in the health care sector of the economy. There still is no true portability in health insurance, and there never will be true portability until people can own their own policies.

Finally, the good news about health care costs is not likely to last. Even though corporate premiums are down, the dip is only temporary. Health care costs can be expected to rise once again after managed care arrangements have done everything feasible to restrain the supply of medical services. One major reason is that the United States has a rapidly aging population, and the volume and intensity of the demand for medical services is bound to increase.

Economics cannot solve every social problem, and the market does have its limits. But it is a masterful engine of efficiency and pricing. It would be unfortunate if health care costs increased without benefit of the happy collision of supply and demand. The discipline of the market chastens the demand for goods "somebody else" pays for and roots out inefficiencies of supply with a vengeance. If we do not rely on the free market for health care services, American workers and their families will not be able to afford the consequences.

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Notes


¹ Public opinion during the 1994 debate on health care reform is summarized in American Attitudes Toward Health Care, Health Care Reform and The Clinton Plan, prepared for the Heritage Foundation by Fabrizio, McLaughlin and Associates, January 19, 1994. The public's view of the "quality" of health care has become less favorable since the debate on the Clinton plan.

² For a discussion of the Heritage Foundation's Consumer Choice Health Plan, see Stuart M. Butler, "A Policy Maker's Guide to the Health Care Crisis, Part II: The Heritage Foundation Consumer Choice Health Plan," Heritage Foundation Talking Points, March 5, 1992. See also Stuart M. Butler and Edmund F. Haislmaier, eds., A National Health System for America (Washington, D.C.: The Heritage Foundation, 1989).

³ The Health Insurance Portability and Accountability Act of 1996 is designed to give workers who leave their jobs the opportunity to take their health insurance with them; but as will be described below, the tax system still discriminates against them in a way that makes the policy much more expensive.

⁴ As analysts for the Congressional Budget Office have noted, "Workers who are sick or have a sick family member can get trapped in their jobs because most new insurance policies will not cover the preexisting condition. Finally, because insurance is tied to one's job, it is inherently insecure. Employees can lose their insurance if they lose their jobs or if their employers stop carrying insurance." Congressional Budget Office, The Tax Treatment of Employment-Based Health Insurance (Washington, D.C.: U.S. Government Printing Office, March 1994), pp. xii-xiii, 3.

⁵ See, for example, A National Health System for America; see also Stuart M. Butler, "A Policy Maker's Guide to the Health Care Crisis, Part I: The Debate over Reform," Heritage Foundation Talking Points, February 12, 1992.

⁶ "Distribution of Federal Health Benefits Tax Expenditures by Family Income in 1996," the Lewin Group, 1998.

⁷ The Congressional Budget Office notes that "Families with higher incomes receive larger tax subsidies because they are in higher income tax brackets. Thus, the reduction in taxable income that the exclusion produces is worth more to them on average than it is to families in lower tax brackets. Because the income tax is progressive, people with relatively high incomes (and high tax rates), who may need the least assistance in getting health insurance, benefit the most from the tax exclusion." Congressional Budget Office, The Tax Treatment of Employment-Based Health Insurance, pp. xiv, 4.

⁸ Carolyn Pemberton and Deborah Holmes, eds., EBRI Date Book on Employee Benefits (Washington, D.C.: Employee Benefits Research Institute, 1995), p. 243.

⁹ According to the Washington-based Employee Benefits Research Institute, a 1994 survey of American workers with company-based health insurance revealed that 28 percent thought they paid nothing for it; 50 percent had no idea of the true cost of their package.

¹⁰ Analysts at the Congressional Budget Office have noted how the structure of employment-based health insurance arrangements tends to hide the true cost of the commodity and disguises the way in which working families bear the full cost of health insurance benefits: "An often overlooked point is that the employer share of the cost of 'employer provided' health insurance is ultimately passed on to workers in the form of lower wages and reductions in fringe benefits other than health insurance.... This study calls health insurance that employees receive at work 'employment based' rather than 'employer provided.'" Congressional Budget Office, The Tax Treatment of Employment-Based Health Insurance, Introduction.

¹¹ For an account of the application of these fee schedules in the Medicare system, see Robert E. Moffit, "Comparable Worth for Doctors: A Severe Case of Government Malpractice," Heritage Foundation Backgrounder No. 855, September 23, 1991, and Robert E. Moffit, "Back to the Future: Medicare's Resurrection of the Labor Theory of Value," Regulation, Fall 1992, pp. 54-63.

¹² Jack Tawil and Frederick Bold, Reinventing Health Care (Richland, Wash.: Research Enterprises, 1994), p. 26.

¹³ Ibid., p. 8.

¹⁴ See Erik Larson, "The Soul of an HMO," Time, January 22, 1996, pp. 44-52.

¹⁵ For a general discussion of the FEHBP, see Robert E. Moffit, "Consumer Choice in Health: Learning from the Federal Employees Health Benefits Program," Heritage Foundation Backgrounder No. 878, February 6, 1992.

¹⁶ For an example of the problem of incremental reform, see Stuart M. Butler, John C. Liu, and Robert Rector, "How Incremental Health Care Reform Would Make Things Worse: The Rowland-Bilirakis Bill," Heritage Foundation Issue Bulletin No. 203, September 26, 1994.

¹⁷ For a comprehensive description of the Clinton health plan, see Robert E. Moffit, "A Guide to the Clinton Health Plan," Heritage Foundation Talking Points, November 19, 1993; see also Stuart M. Butler, "What the Lewin-VHI Analysis of the Clinton Health Plan Really Shows," Heritage Foundation F.Y.I. No. 7, January 7, 1994.

¹⁸ For a general discussion of the theory of "managed competition," see Robert E. Moffit, "Overdosing on Management: Reforming the Health Care System Through Managed Competition," Heritage Lecture No. 442, April 15, 1993; see also Peter J. Ferrara, "Managed Competition: Less Choice and Competition, More Costs and Government in Health Care," Heritage Foundation Backgrounder No. 948, June 29, 1993.

¹⁹ See, for example, John C. Goodman and Gerald L. Musgrave, Patient Power: Solving America's Health Care Crisis (Washington, D.C.: Cato Institute, 1992), and Mark Pauly et al., Responsible National Health Insurance (Washington, D.C.: AEI Press, 1992).

²⁰ Beyond these tax changes, the Heritage Foundation plan also includes several key health insurance reforms, including guaranteed renewability of policies, restrictions on exclusions for preexisting conditions, limited underwriting, and the provision of insurance premium discounts for individuals and families who enroll in preventive health or health promotion programs.

²¹ Butler, "A Policy Maker's Guide to the Health Care Crisis, Part II." In a second iteration of the Lewin-VHI econometric analysis, American families did better under the Heritage approach than under the Clinton plan. When the distribution of "winners" and "losers" is broken down by income category, the tax credit approach leads to more "winners" in virtually every income category, including the working poor. See Stuart M. Butler, "How the Clinton and Nickles-Stearns Health Bills Would Affect American Workers," Heritage Foundation Issue Bulletin No. 188, April 11, 1994.

²² Cited in John C. Liu, "What the Congressional Budget Office Says About the Tax Treatment of Employment-Based Insurance," Heritage Foundation F.Y.I. No. 16, May 26, 1994.