How Romney-Ryan should use states to reform health care

HHS/Chris Smith

Dr. Donald Berwick, Administrator of the Centers for Medicare and Medicaid Services (CMS), talks with Washington DC seniors about Medicare's Open Enrollment period.

Article Highlights

  • Proponents of the #ACA are convinced that leaving health reform to the states would be a bad idea.

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  • In reality, the biggest barrier to state health reform action is Uncle Sam.

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  • Imagine a world in which Uncle Sam made 3 changes to convert $1T into individualized subsidies that follow each patient.

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Proponents of the Affordable Care Act (ACA) are convinced that leaving health reform to the states would be a bad idea. They cite all sorts of problems. Some states are too poor. Others are intransigent. And yet others are held captive by lobbies (unlike the federal government, which we all know has plenty of spare cash, takes action effortlessly and nimbly, and is a master at keeping special interests at bay).

In reality, the biggest barrier to state action is Uncle Sam, and the fastest road to reform might simply be for him to get out of the way. Examinations of programs such as Medicaid and Medicare underscore this need.

After operating under centralized control for five decades, Medicaid ranks as "America's worst health care program"-in some cases worse than no coverage at all. Physician fees under Medicaid are 28 percent lower than Medicare payment rates overall and 34 percent lower than Medicare payment rates for primary care physicians. Is it any wonder that nearly half of doctors are no longer willing to accept all or most new Medicaid patients?

Instead of fixing the program, ACA essentially tosses a Hail Mary pass by simply shoveling millions more people into a very dysfunctional program and hoping that everything turns out okay.[1]

Medicare is not much better. Almost three out of every four doctors are no longer willing to accept all or most new Medicare patients-three times as large as the percentage who refuse to take any new privately insured patients. And as the program's actuary has repeatedly pointed out, access to care is about to get a lot worse for Medicare patients if the ACA's planned cuts are implemented. Under the law, physician payment levels are scheduled to fall 74 percent below those of private insurers and well below the rates paid even by Medicaid.

Likewise, cuts in payment rates to hospitals are so draconian that the Medicare actuary has estimated that law would result in hospitals eventually being paid 61 percent less by Medicare than by private health insurers. Here a picture truly is worth 1,000 words:

Medicare has many other flaws such as its encouragement of open-ended, fee-for-service benefits-a model that nearly all employer health plans abandoned more than a decade ago. Today, only seven percent of employers who offer health benefits offer "conventional" fee-for-service plans similar to Medicare (i.e. plans which impose no restrictions on which doctors the patient can see and no provisions to restrict care, such as pre-authorization requirements). Most employer plans are either plans with limited provider networks such as HMOs or preferred provider organizations or plans with much higher levels of cost-sharing than Medicare (e.g., high deductible plans) that incent patients to be much more prudent users of front-end care even while providing ample back-end protection for catastrophic expenses. Because management of Medicare benefits is so lax, government experts have estimated that about 10 percent of Medicare expenditures are lost to fraud and abuse (the magnitude of fraud and abuse in Medicaid is of similar scale).

As if that were not bad enough, we provide hundreds of billions of dollars a year in tax subsidies to encourage the purchase of employer-provided health insurance. But these incentives are completely upside down, providing far larger subsidies to those with the highest incomes (in shorthand, Bill Gates gets a much larger subsidy for his health plan than does any janitor working at Microsoft). Only the wealthiest states in the country could possibly afford to reverse this subsidy structure by substantially beefing up the amounts provided to individuals at the low end (whose current subsidy is only about five percent of premiums, as opposed to nearly 40 percent premium subsidies given to the highest paid workers).

But imagine a world in which Uncle Sam made three simple changes to convert nearly $1 trillion in subsidies that now flow to health insurers and health providers into individualized subsidies that follow each patient.

  1. Moving away from defined benefits to defined contributions in Medicare would greatly enhance the efficiency (and arguably the fairness) of the program, preserving it for future generations.
  2. The same logic applies to Medicaid except that in this case defined contributions also means giving states a fixed dollar amount so that they no longer have an unrelenting incentive to expand their programs. States can decide best how to manage their programs, whether that be through reliance on private managed care plans (which many states already do) or letting Medicaid beneficiaries shop  like everyone else for private health insurance plans using a fixed dollar amount tailored to their income and health status.[2]
  3. Converting the tax exclusion to a fixed dollar tax credit (that could vary by income and health status if desired) would likewise avert many of the worst features of the current system and harness the unparalleled shopping ability of Americans to find good value for the money.

Under such changes, states simply would not need to do that much. They would have to manage their Medicaid programs, which they have done for decades, but would have a great more flexibility to do so-unbound by the thicket of federal rules that now govern them. They might wish to create a state exchange to facilitate the purchase of individualized health coverage, but they would have to do this anyway under ACA and could again do so much more easily if not being ordered how to do so by the U.S. Secretary of Health and Human Services. States could elect to provide richer subsidies to purchase insurance if desired. Yet, that would not be necessary since simply replacing the tax exclusion with fixed tax credits would greatly expand the number who opted to purchase health insurance even without adding to the total dollar amount of subsidies in the system (does anyone think Bill Gates will drop his health insurance coverage if his subsidy is reduced from 40 percent to, say, 20 or even 10 percent?).

In short, I have much more faith than the current administration appears to that states can play the role originally envisioned by the Framers. Laboratories of democracy work when not hobbled by a Leviathan that interferes with their ability to do so. I say let 51 flowers bloom!

Footnotes

[1] Specifically, even after accounting for the Supreme Court's ruling that Medicaid expansion was optional rather than mandatory, the Congressional Budget Office (CBO) projects more than a one-third increase in non-elderly Medicaid eligible by the year 2022.

[2] For example, Governor Mitch Daniels has pioneered a consumer-directed approach to Medicaid with the Healthy Indiana Program. Washington and Idaho likewise have achieved success with market-oriented Medicaid reforms.

 

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Christopher J.
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