U.S. Health Care Reform: Universal Insurance or Affordable Care?

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by Don W. King, M.D., J.D., Visiting Scholar
July 03, 2017

Originally published in June 2010

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Executive Summary

The U.S. leads the world in medical innovation and likely leads the world in quality of care. However, U.S health insurance and medical care are very expensive, and some people cannot afford to pay for either. In addition, Americans may be spending more on health care than is necessary to achieve the highest quality. 

While there are many reasons that insurance and care are expensive, federal and state policies appear to be important factors. In 1943, the IRS, and later Congress, created a tax incentive that favors employer-sponsored insurance over individually-purchased insurance and direct payment for care. In 1965, Congress created Medicare and Medicaid, public programs that pay for medical care for many Americans. Beginning in the 1970s, Congress and state legislators enacted extensive regulations involving health insurance, professional care, and medical facility care; and in 1962, Congress required pharmaceutical companies to gain approval before introducing a new drug to the U.S. market. Finally, beginning around 1960, the number and monetary value of malpractice lawsuits increased. Together, these policies have contributed to high prices for health insurance and medical care and to large health care expenditures.

One approach to health care reform emphasizes the importance of all persons having some form of comprehensive, third-party coverage to pay for the majority of their medical expenses. Using this approach, Congress recently passed legislation that requires most persons to maintain health insurance or pay a penalty, provides a subsidy to low and middle-income persons to purchase insurance, requires large employers to pay an assessment if an employee receives a subsidy, and expands eligibility for Medicaid. However, economic theory and many data suggest these measures will lead to higher prices, larger expenditures, and potentially less access to care.   

This paper recommends an alternative approach, one that emphasizes the importance of each individual owning the funds used for his or her health care and choosing both insurance and care from many available options. To increase both individual ownership and available options, Congress should consider equalizing the tax treatment of funds used to pay for health care; Congress and state legislators should consider replacing public programs that pay for medical care with public subsidies and private support, decreasing restrictions on health insurance, and decreasing restrictions on professional and medical facility care; Congress should consider decreasing restrictions on access to new pharmaceuticals; and states should consider enacting malpractice reform.      

By providing more appropriate incentives and making care more affordable, greater individual ownership and more options should lead to fewer excess expenditures and to greater access to care for most people. In addition, greater individual ownership and more options may be more effective than universal comprehensive insurance at providing access to care for low-income, high-risk, and older Americans.                                                                                                           

Introduction

The U.S. leads the world in scientific discovery and medical innovation,[1] and recent studies suggest that for many clinical conditions, U.S. patients have outcomes superior to or equivalent to those in other industrialized countries.[2] However, U.S health insurance and medical care are very expensive,[3] and Americans may be spending more on health care than is necessary to achieve the highest quality.[4] While there are undoubtedly many reasons that insurance and care are expensive, present federal and state policies appear to be important factors.

Reformers agree that improving access to care[5] and decreasing unnecessary expenditures are worthy goals. However, there are widely varying approaches to achieving these goals. One approach emphasizes the importance of “health insurance”[6] as a means to assure access to care.[7] Under this approach, legislation is designed to assure that all persons have some form of comprehensive, third-party coverage to pay for the majority of their medical expenses. Since a third party pays for most care, cost control is achieved primarily by the third party, e.g., by providing incentives for patients, professionals, or facilities to use fewer resources or by negotiating lower payment rates with physicians or hospitals.      

A second approach emphasizes the importance of each individual owning the funds used for one’s health care and choosing both insurance and care from many available options.[8] Under this approach, legislation is designed to repeal or neutralize laws that favor one form of paying for care over others and to repeal or decrease the stringency of many of the regulations presently governing health insurance and medical care. Since individuals would choose their insurance and care from many options, individuals, often in consultation with their physician, would be primarily responsible for cost control.      

Since World War II, Congress and state legislators have taken the first approach, attempting to increase access to care by increasing the prevalence of some form of comprehensive, third-party coverage.[9] The bills recently passed by Congress take this same approach.[10] However, for many years, real prices for insurance and care have increased,[11] and both private and public expenditures as a percentage of GDP have increased.[12] In addition, it is not clear that access to care has improved.

Proponents of universal, comprehensive insurance envision universal access to high-quality care, a very worthy goal. However, economic theory and many data suggest that legislative attempts to achieve universal insurance will have major unintended consequences. These include higher prices for insurance and care, larger expenditures, and potentially less access to care.

In contrast, by making insurance and care more affordable, greater individual ownership and more options should result in better access to care for most people. In addition, these reforms should lead to fewer excess expenditures, greater innovation, and potentially higher quality. Finally, greater individual ownership and more options may be more effective than universal insurance at providing access to care for low-income, high-risk,[13] and older Americans.

This paper is divided into four parts. Part 1 provides an overview of present federal and state policies and their effects on U.S. health care. Part 2 summarizes the likely effects of recent legislation designed to increase third-party coverage. Part 3 recommends a number of ways Congress and state legislators could increase individual ownership of the funds used for health care and increase people’s options for insurance and care. Part 4 describes the likely effects these latter reforms would have on specific populations who may need assistance. There is a brief conclusion. 

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[1] For a summary of data suggesting that the U.S. leads the world in scientific discovery and medical innovation, see  Economic Report of the President, together with the Annual Report of the Council of Economic Advisors, U.S. Government Printing Office, Washington (Feb., 2004), accessed at http://www.gpoaccess.gov/usbudget/fy05/pdf/2004_erp.pdf .

[2] Because of differences among countries in disease registries and in early disease detection, comparison studies must be interpreted with caution. Nevertheless, recent comparison studies suggest that for many types of cancers, U.S. outcomes are superior to or equivalent to outcomes in other advanced countries. For example, see Milena Sant, Claudia Allemani, Franco Berrino, et al., Breast Carcinoma Survival in Europe and the United States: A Population Based Study, 100 Cancer 715 (Feb. 15, 2004); Arduino Verdecchia, Silvia Francisci, Hermann Brenner, et al., Recent Cancer Survival in Europe: a 2000-02 Period Analysis of EUROCARE-4 Data, 8 Lancet Oncology 784 (2007); June E. O’Neill and Dave M. O’Neill, Health Status, Health Care and Inequality: Canada vs. the U.S., NBER Working Paper # 13429 (Sept., 2007).

[3] See Gerard F. Anderson, Uwe E. Reinhardt, Peter S. Hussey, et al., It’s the Prices Stupid: Why the United States Is So Different from Other Countries, 22(3) Health Affairs 89 (May/June 2003). Between 1960 and 2008, prices for medical care increased at a significantly greater rate than the Consumer Price Index (CPI). See Bureau of Labor Statistics, Databases, Tables, and Calculators by Subject, All Urban Consumers (Current Series), accessed at http://www.bls.gov/data/ . Similarly, between 1988 and 2007, premiums for employer-sponsored insurance increased at a significantly greater rate than the CPI. See The Kaiser Family Foundation and Health Research and Educational Trust, Cost of Health Insurance, Employer Health Benefits: 2007 Annual Survey, Section 1, accessed at http://www.kff.org/insurance/7672/upload/76723.pdf

[4] For example, see Jonathan Skinner, Elliott S. Fisher, and John E. Wennberg, The Efficiency of Medicare, NBER Working Paper No. 8395 (July, 2001); Elliott S. Fisher et al., The Implications of Regional Variations in Medicare Spending, Part 2: Health Outcomes and Satisfaction with Care, 138 Ann. Intern. Med. 288 (Feb. 18, 2003). See also Willard G. Manning, et al., Health Insurance and the Demand for Health Care: Evidence from a Randomized Experiment, 77 Am. Econ. Rev. 251 (1987). 

[5] There is not a standard definition for access to care. For the purpose of this paper, access to care is the ability of an individual to obtain the care one needs at a price one can afford in a convenient and timely manner. Using this definition, access may include care paid by a third party payer, care paid directly by an individual using one’s own funds or donated funds, or care provided at no charge or at a  discounted rate. 

[6] For health insurance to efficiently spread the risk of loss, the loss must be uncertain, measurable, and large. In addition, one’s insurance premium must be based on one’s risk, and the risk pool must consist of a large number of insured. See John A. Boni, et al., The Health Insurance Primer: An Introduction to How Health Insurance Works (The Health Insurance Association of America, 2000). Today, most U.S. health insurance plans contain a component of true insurance, as well as a large component of “prepaid benefits” that cover small and expected expenses. Also, instead of indemnifying individuals for their loss, most plans now pay physicians and hospitals directly and to some extent, “manage” care, e.g., a few plans employ physicians and operate facilities, while many plans contract with physicians and hospitals concerning methods of payment, payment rates, and other items. For a discussion of these arrangements, see Paul Starr, The Social Transformation of American Medicine, Book 2, Chap. 2, (Basic Books, 1982); Charles E. Phelps, Health Economics, 3rd. Ed., Chap. 11 (Addison Wesley, 2003); Thomas Rice, Financial Incentives as a Cost-Control Mechanism in Managed Care, in The Privatization of Health Care Reform, Chap. 5 (M. Gregg Bloche, ed., 2003). Finally, self-insured employee benefit plans and public programs pay for medical care for many Americans. In this paper, “health insurance” refers to the various forms of payment for medical care that include a component of true insurance.

[7] For example, see David M. Cutler, Your Money or Your Life, Chap. 10 (Oxford University Press, 2004); Timothy Stolzfus Jost, Health Care at Risk, Chap. 11 (Durham, Duke University Press, 2007). 

[8] For example, see John F. Cogan, R. Glenn Hubbard, and David P. Kessler, Healthy, Wealthy, and Wise, Chap. 2 (Washington, D.C., The AEI Press, 2005); Michael F. Cannon and Michael D. Tanner, Healthy Competition, Second Edition, Introduction (Washington, D.C., Cato Institute, 2007). 

[9] Both federal and state governments have attempted to increase access to care by providing tax incentives for employer-sponsored insurance, by providing public insurance for a growing number of Americans, by requiring insurers to offer insurance to all applicants, and by requiring insurers to include certain benefits in the policies they offer. These measures are discussed in Part 1.  

[10] Congress recently passed The Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010 (Reconciliation Act). See Pub. L. 111-148 and Pub. L. 111-152. These statutes, discussed in Part 2, extend comprehensive, third-party coverage to more Americans.

[11] See discussion and references supra note 3.

[12] See Centers for Medicare and Medicaid Services, Table I, National Health Expenditures Aggregate, Per Capita Amounts, Percent Distribution, and Average Annual Percent Growth, by Source of Funds: Selected Calendar Years 1960-2008, NHE Web Tables, Historical, National Health Expenditure Data, accessed at http://www.cms.gov/NationalHealthExpendData/downloads/tables.pdf .

[13] For the purpose of this paper, a high-risk individual is one who because of a genetic variation, chronic disease, or other condition is more likely to incur large medical expenses than the general population.