You’ve heard the statistics. Health-care costs are rising at three times the rate of inflation, and have been for the past five years. CEOs of major corporations are screaming that these costs are creating major problems for U.S. corporations and their workers. Employers are raising employee’s copays, trimming other benefits, or cutting off health insurance altogether. Wages are stagnant or falling, especially for less skilled workers because the hike in health-insurance premiums eats up a larger share of the total compensation. As a result, the ranks of the uninsured are growing–by 100,000 Americans each month. Some companies, like Wal-Mart, are said to encourage their lower-wage workers to sign up for Medicaid, the government health program for the poor, jointly administered by the federal government and the states; California alone spends nearly $32 million in tax dollars to pay for the health care of Wal-Mart employees. Not surprisingly, Medicaid’s budgets are soaring, with governors slashing benefits and dropping hundreds of thousands from the rolls, further adding to the ranks of the uninsured. Meanwhile, Medicare is shaping up to be a tidal wave of red ink. By 2008, the country will spend more insuring retirees than on defense. By 2020, Medicare will gobble up 5 percent of the GDP.
Someday soon, probably in the next few years, this growing problem will reach such proportions that Washington won’t be able to ignore it. And that could be where the real trouble starts, for the GOP leadership has already signaled how they’re likely to respond: with “reforms” that, like the Republican Social Security reforms, promise to make the situation for many Americans worse, not better.
After years of denying there were problems with the American health-care system, leading Republicans now agree that the problems are so severe that a piecemeal approach can’t work. House Ways and Means Chairman Bill Thomas (R-Calif.) and Senate Republican Leader (and presidential aspirant) Bill Frist (R-Tenn.) have each called for “a comprehensive game plan” to replace the current, employer-provided health-care system. What they propose in its place, however, is a system that puts a greater share of health-care costs onto the backs of individuals, who would pay for care with a tax-free “health savings account.” The proposal would do little to extend coverage to more Americans and would leave sicker Americans with little help.
Scarred by the political rout that followed the Clinton health-care reform effort, most Democrats have been reluctant to offer more than incremental reforms. Many of those who still believe in comprehensive change remain enamored with a Canadian-style government-administered, single-payer system. Both of these positions no longer make sense. The exploding costs of health care and the lack of any immediate cost-cutting alternative have created a political environment that is far more open to reform than it was in 1994. Yet single-payer is no more politically feasible today than it was when President Clinton rejected it as a model for reform. Sure, a compelling case can be made that the Canadian or French system serves those countries’ citizens better than the American system does ours. But an equally compelling case can be made that we’d be better off with an extra dollar-per-gallon tax on gasoline. These are, in the end, liberal sugarplum visions. If progressives want to use this moment to achieve universal health care, they will need to put forward a proposal that makes the most of what’s good about the current system and reflects America’s basic values.
First, it should cover every American, no exceptions.
Second, it should pay for covering those who are currently uninsured by cutting waste, not by increasing the total amount our country spends on health care.
Third, it should hold down the rate of increase of future health-care costs.
Fourth, it should give Americans more choice of health plans, not less.
Fifth, it should make our economy more productive, not less.
Sixth, it should reduce, not expand, government bureaucracy.
Finally, to get anywhere, a comprehensive reform plan must be politically viable by offering advantages to more (and more powerful) interest groups than those it upsets, while cohering with American values so that it can draw a broad base of support.
This vision is not a wonky figment of the imagination. It is possible to recast our health-care system in a way that is fair, progressive, efficient, and realistic. We have designed such a system, which we call Universal Healthcare Vouchers (UHVs). As the name implies, our plan achieves goals long sought by both sides of the political divide: the progressive dream of universal coverage and the conservative values of free choice and efficiency. Most importantly, it puts the brakes on the ruinous increases in the cost of health care that threaten to engulf our economy.
Every household in America will receive a voucher entitling its members to enroll in a private health plan of their choice. All plans will be required by law to guarantee the basic features of what most Americans now receive from their insurers: doctors’ visits, hospitalization, pharmaceuticals, and catastrophic coverage. These insurance policies will not cover everything. Viagra and cosmetic surgery will not be included, but Americans will still be able to purchase them and any other service or care with their own money.
Those with preexisting conditions or high medical costs will be protected because they will have guaranteed coverage with any plan they choose. UHVs solve the problem of adverse selection by adjusting the reimbursement value of the voucher to the differing risk levels an insurance company absorbs by taking on different patients. So, the payment to insurers for covering older, sicker patients will be higher than for younger, healthier Americans, eliminating the incentive to exclude high-risk patients. Moreover, while individuals can change health plans if they are dissatisfied, a plan will not be allowed to drop an individual for any reason.
Seniors currently enrolled in Medicare will see no change. All of that program’s current obligations will be fulfilled. But there will be no new enrollees into Medicare. Americans who have yet to turn 65 will simply continue with their voucher-paid coverage, keeping the same choice of plans that they enjoyed throughout their lives. Medicare, with the regressive payroll tax that financed it, and its calamitous fiscal future, will over time be completely replaced by the voucher system. Americans will no longer have to wait for retirement before they are guaranteed reliable health insurance. And because every American will be covered regardless of their income, Medicaid will also be eliminated.
When it comes time to go to the doctor, Americans will see little difference. Just as today, different doctors may choose to accept or not accept different insurance plans. But unlike today, when most employees have no choice of insurance company, people will have greater freedom to choose a plan that suits them best. For their part, doctors will see little change in how they care for their patients. But rather than spending time and energy fighting with insurance company bureaucracies, doctors will have the information, infrastructure, and incentives to deliver the best proven cares to their patients, and know they will be reimbursed. Moreover, because everyone will be covered, doctors and hospitals will no longer have to absorb the cost of “charity care” for uninsured patients who lack the means to pay.
The greatest change will be found not in the doctor’s office, but in the workplace. Employer-based insurance, with all its inefficiencies and inequities will disappear. Workers will have the freedom to switch jobs, try self-employment, or drop down to part-time work without losing health coverage. Not only will “job lock” disappear, but so will “wedlock” when men and women stay in marriages they would rather be out of because of health-insurance needs. Employers will also be free to hire workers without considering how much they may add to the health-insurance bill.
Small businesses and their employees would gain especially from UHVs. Small firms are often stuck with premiums that run 20 percent higher per employee than large businesses. With UHVs, all employees will be covered and all employers will be on equal footing.
The role of health insurers will be significantly changed by UHV. What too many patients find these days is large insurance companies eager to offset risk and cost by refusing to insure patients with pre-existing conditions or other serious needs. These at-risk patients can still find coverage, but often only through boutique insurance companies that fill tiny niches and require sky-high copays for the sickest of consumers. The new system changes all of this in two important ways. First, because all Americans will be guaranteed coverage in the plan of their choice, the hundreds of smaller insurers will probably fade away. The result will be a significantly consolidated, streamlined, and more efficient industry; economies of scale will lower administrative costs.
The system will be administered by a new board modeled after the Federal Reserve Board. The Federal Health Board (FHB) will have regional boards to facilitate implementation of programs in different areas. It will contract with health plans, define and periodically update the basic required benefits package, inform Americans about their health-care options, reimburse health plans, and collect data and research related to patient satisfaction, quality of care, and risk and geographic adjustments for payments. Since many of these activities are currently done by state health agencies and insurance companies, creating the FHB will still mean a reduction in government bureaucracy.
The FHB will regularly report to Congress on the health-care system to ensure that the program is politically accountable. However, like the Federal Reserve, its board will have long-term appointments so that it is insulated from politics. The Federal Reserve Board has proven itself remarkably adept at resisting political pressures; that same insulation will be essential for the FHB so that it can issue decisions on what new drugs or treatments to require insurers to cover without being influenced by congressmen who may receive campaign contributions from health-care companies.
While UHV will be more efficient than today’s health-care system, it will not be free. Unlike past health-reform proposals, which have added the cost of a new health-care system to the total federal budget and proposed financing it through income and corporate taxes, we propose that UHV be financed by a dedicated Value Added Tax (VAT). Because consumers ultimately pay a slightly higher price for the taxed good, a VAT is essentially a hidden tax. Some of the tax might be absorbed by producers, but in the end, we can expect goods and services to be 8 to 10 percent higher than they are now.
The VAT is efficient, easy to administer, spreads the tax burden broadly, and encourages savings. Still, financing health care with a VAT poses political vulnerability for the UHV plan. Conservatives may argue that the VAT is a “money machine” that raises money too easily because the tax is hidden. But there are reasons to think that this argument won’t be definitive. Polls show that many Americans are willing to accept higher taxes in exchange for guaranteed health care. Moreover, conservatives themselves, hoping to install a VAT in place of the income tax have promoted its virtues.
For their part, some liberals will argue that the VAT is regressive. But there is a reason why European voters have consistently signalled their approval of VATs. When applied to social services, VATs are decidedly progressive. Not only will it be used to fund health care for everyone, including low-income Americans who currently have none, but the VAT is also much more difficult for the affluent to evade than income taxes. Furthermore, the VAT can be made even more progressive by adjusting what is taxed–necessity items such as food and utilities that cost the poor disproportionately can be excluded from the base. Perhaps most importantly for the long-term viability of the program, the fact that lower-income Americans will be paying into the system will mean that it will be more difficult for conservatives to cast the program as “welfare.”
While this is a new tax, most Americans will end up paying the same for their health care as they do today. Some upper-middle class and upper-income Americans will pay a little more in order to achieve the gold-plated coverage that they enjoy as subsidized coverage through their employers, but they will gain, as all Americans will, from the security of knowing that their insurance is guaranteed for life. This is no small benefit, and one most Americans appear willing to pay for. According to the Kaiser Family Foundation, the fear of losing health insurance is more prevalent than the fear of losing a job, of losing one’s life savings in the stock market, or of being the victim of a terrorist attack or violent crime.
What will the overall cost of this program be? The easiest way to estimate that is to multiply the cost of the typical employer-provided insurance plan by the number of Americans who would be covered. The cost of extending the same coverage to all 250 million Americans under 65 is $713 billion. (Since Medicare will be untouched at first, we leave it out of our calculations.) Adjusting this figure upward 7 percent to account for the fact that the insured and Medicaid recipients tend to be sicker than the average worker and have higher medical expenses brings it to $763 billion.
That’s a pretty big number. But it’s no more than the $800 billion employers and the government spend today on a health-insurance system that leaves 45 million people without any coverage. UHV offers everyone good insurance for about the same as the current system.
How is this possible? UHVs will dramatically reduce inefficiencies in both government and insurance bureaucracies immediately. It could save tens of billions of dollars by eliminating for insurance companies the cost of negotiating and contracting with employers every year and by shrinking the number of overall insurance companies and their associated administrative costs. Meanwhile, UHVs will do away with some of the absurd inefficiencies of government health care, one of which is Medicaid, which–with 50 separate state bureaucracies required to operate it–currently spends tens of billions each year just to determine who is eligible for the program. That cost disappears under the UHV plan.
In addition to the immediate savings, UHVs would help rein in future health-care costs that threaten our economy and our government finances. Health-care inflation is driven by four factors: 1) the economy’s underlying inflation rate; 2) the aging of the population; 3) increased demand for expensive treatments or tests, such as MRIs; and 4) new technology. The first two, which account for 40 percent of health-care inflation, cannot be changed (unless you’re God or Alan Greenspan). Still, they alone are not powerful enough to make health-care costs rise faster than GDP. The threat to the economy comes from the costs associated with new technology and demand for existing technology, which account for the remaining 60 percent of health-care inflation. UHV holds these costs down considerably.
First, because the sole source of income for the UHV system is the VAT, increasing the amount we spend on health care will require federal action to increase the tax. If the public wants coverage of more services they can exert pressure on Congress to do just that. But higher taxes are a tough sell, and it would likely take significant improvement in medical care for Congress to agree to raise the UHV budget. And if the public values these improvements, the budget should be raised.
In addition, the FHB will moderate increases in cost due to new technologies–the most significant driver of health-care inflation. New technologies sometimes reduce the cost of care, such as when pharmaceuticals obviate the need for expensive surgery. More often, however, new medicines or equipment with small or negligible benefits add wildly inflated costs to health plans. Vioxx, Celebrex, and similar medicines are not any more effective for younger patients than is ibuprofen, which costs a penny per pill. But the sizzle of new drugs leads thousands to request and be prescribed them at a cost of billions of dollars.
There is nothing wrong if individuals want to spend money on marginal medicine, but weighed against, say, universal prenatal care, the benefits simply do not justify the costs. A nonpolitical board that could objectively assess these data will reduce the use of marginal medicine, causing a ripple effect that sends a message to pharmaceutical, biotechnology, and device companies: Marginal improvements that a company develops are unlikely to be covered by the voucher program. So, why not stop developing an unending chain of Viagra rip-offs and redirect research toward drugs that offer clear benefits to the public health?
Economic feasibility, of course, is not enough. If the history of health-care reform teaches us anything, it is that its politics cannot be an afterthought. Looking at the hammerlock which conservatives hold on the federal government and on the lobbyists of K Street, some might say that the chances of a successful bipartisan overhaul of the health-care system are next to nil. We disagree for two important reasons. First, what elevates UHVs above the ranks of attractive yet doomed health-care reforms is the way that vouchers reshape the politics of the issue, attracting some powerful interests that have traditionally opposed reform while isolating and limiting the remaining opponents. To put it bluntly, it will be hard to oppose this plan on grounds that aren’t strictly partisan. And the second reason cannot be repeated too often: This is not 1994.
The turnaround of the attitude of business towards reform is one of the biggest changes from 1994 and the first health-care fight. Large businesses opposed Clintoncare on the theory that managed care would keep their expenses in check. For the short term, it was a good bet. Managed care did restrain health-care costs until 1999. Since 2000, health-care costs have risen dramatically, breaking the backs of companies, and there are no more savings to wring out of the current system. In 2003, business health-care spending rose 12 percent, the fifth consecutive year of double digit rates of inflation. General Motors and Ford both had their debt rating slashed to junk status this May in large part because of their pension and health-care liabilities (Ford’s liability in 2004 reached $12.3 billion or 70 percent of its market capitalization). Nearly half of 1,400 chief financial officers surveyed by Robert Half Management Resources said they expected health care to account for the biggest increase in their cost of doing business over the next year. Removing these costs from their balance sheets and restoring a measure of predictability to wage and benefit costs would be irresistible to businesses. While many CFOs might prefer to be relieved of the responsibility for health care altogether without any tax at all, most recognize that such a retreat (to the 1920s) is unlikely to happen.
Large insurance companies–whose opposition presented a significant stumbling block to Clintoncare–should support a UHV plan because it preserves the role of private insurers and brings 45 million new paying customers into the industry. They should be joined on the side of reform by doctors, who stand to benefit financially from reduced administrative costs associated with consolidation of the industry and from the end of charity care for uninsured patients, and who did, after all, enter their profession in order to care for the sick, not just wealthy sick people. Governors and state legislators would put their muscle behind the plan because it relieves them of the Medicaid costs. Even traditional liberal constituencies that were lukewarm about Clintoncare can be expected to support this reform. The union movement, for instance, has been forced to accept higher premiums and copays in negotiations; if health benefits are no longer an issue, leaders will have more leeway to bargain for higher wages and other benefits.
Certainly, the most significant opposition to UHV will come from smaller insurance companies, whose steep profits come from insuring those Americans who are too risky for large insurers to touch. With universal coverage, these boutique insurers will be rendered obsolete as their customer gravitate toward the larger, most efficient firms which offer higher levels of care for the same amount of money. While small insurers are well-funded, well-connected, and well-organized, they will be on their own in this fight. Their old ally in the Clintoncare fight–big business–has grown tired of paying high premiums and doesn’t see the existence of small insurers as vital to its own survival.
When you add business, doctors, state officials, and large insurers to the column for reform, the political scorecard looks a lot stronger than it did for Clintoncare. Even if small insurers and no-tax conservatives put all their strength behind defeating UHVs, they would still have to overcome a powerful coalition. The outcome certainly isn’t predetermined, but, for the first time in a long while, the odds seem more favorable to reform.
And so does public sentiment. At its high point, the Clinton health-reform proposal garnered the support of 56 percent of Americans–a not-insignificant number, but nothing like the levels of support for universal health care today. In 2003, the Pew Research Center asked Americans if they would support universal health care even if it meant rescinding tax cuts passed since President Bush took office. A full 72 percent said yes, including a majority of Republican respondents. Voters no longer view health care as a squishy liberal cause, but as a moral and security issue. A recent BusinessWeek cover story identified a block of voters dubbed “Safety Netters”; Pew calls them “Pro-Government Conservatives.” Whatever the label, the new political landscape now includes a significant segment of voters who are basically conservative, but who believe in the benefits of a social safety net and who fear the financial and health costs of losing access to care.
In the inevitable debate over health-care reform, there will likely be three basic choices. First, the status quo, which promises ever-higher numbers of uninsured, endless cost increases for business, and potential fiscal ruin for government. Next is the conservative option, in which individuals are by and large on their own, swallowing a greater portion of their health costs while unabated inflation makes the cost of a doctor’s visit more and more prohibitive. But as the Social Security debate proves, any major legislation demands bipartisan support. Conservative health-care reform has little if anything to offer Democrats, even moderate ones. UHV, because it enhances consumer choice while offering clear benefits to Republican constituencies such as large insurers and business, has a good chance to draw enough Republican legislators to get over the top.
Precisely when Americans will once again look to Washington for solutions to the problem of American health care is somewhat unclear. But what is certain is that the day will come, and soon. Those who believe that health care is a right, not a privilege, should be prepared to offer an answer with a chance of succeeding.
1. Universality: Every American under 65 years of age would receive a voucher that would guarantee and pay for basic health services from a qualified insurance company or health plan.
2. Free Choice of Health Plan: Individuals and families would choose which basic insurance program or health plan they wanted among several alternatives.
3. Freedom to Purchase Additional Services: Americans who wanted to purchase additional services or amenities, such as wider choices of hospitals and specialists, or more comprehensive mental health or dental services, could do so with their own money.
4. Funding by an Ear-Marked Value-Added Tax: Earmarking creates a direct connection between benefit levels and the tax level, serving as a political restraint on health care inflation. If the public wants more services to be covered in the basic plan, they must be willing to support a tax increase.
5. Reliance on Private Delivery System: This proposal does not call for government health care and would not legislate changes to the current private delivery system. Health insurance companies and health plans would continue to contract with physicians, hospitals, rehabilitation facilities, pharmacies and other providers for services to the individuals who enroll in their plans.
6. Ending Employment-based Insurance: Experience demonstrates that health insurance provided by employers lowers wages, raises prices or reduces employment. The end of employment-based health insurance would translate into higher wages, lower prices, and the recapture of lost tax revenue.
7. Eliminating Medicaid and Other Means Tested Programs: Since every individual and family would receive a voucher, there would be no need for Medicaid, the state Children’s Health Insurance Program (S-CHIPs), or other means tested programs. Those covered by such programs would be incorporated into the mainstream health care system without means testing.
8. Replacing Medicare over time: While no existing beneficiary would be forced to change to the voucher system, Medicare would be phased out over time. Individuals turning 65 would continue to be enrolled in UHV; there would be no new enrollees in Medicare.
9. Administration: Modeled on the Federal Reserve Board, management and oversight would be the responsibility of a Federal Health Board with multiple regional boards to facilitate implementation of programs in different geographic regions. The board would be active contractor with health plans, defining and periodically modifying the basic benefits package, informing Americans about their health care options, reimbursing health plans, and undertaking data collection and research related to patient satisfaction, quality of care, and risk and geographic adjustments for payments. The board would regularly report to Congress on the health care system.
10. Technology and Outcomes Assessment: An independent Institute for Technology and Outcomes Assessment would be established. Its research and database would focus on assessing the effectiveness and value of different interventions and treatment strategies and disseminate information concerning outcomes of treatments delivered in regular practice.
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Ezekiel Emanuel, M.D., Ph.D., is an oncologist, author of No Margin, No Mission, and president of the Posterity Project. Victor R. Fuchs is the Henry J. Kaiser Jr professor emeritus at Stanford University.
