Politics, Policy, and Progress in Health Care
A Discussion with AEI Scholars
About This Event

The U.S. health system is recognized as the world's leader in clinical innovation, yet millions of Americans do not have health insurance, reducing their access to those life-enhancing and life-saving treatments. AEI has invited twenty academic experts from around the country as well as members of the Washington health policy community to discuss those issues. The first session takes a hard look at what the federal government can do to promote health insurance coverage for all Americans. The second session addresses how Food and Drug Administration regulation affects medical progress. Mark McClellan, newly-appointed commissioner of the Food and Drug Administration, will give the luncheon address and will discuss the administration's health policies.

10:45 a.m. Registration
11:00 Session I: Designing Workable and Efficient Health Policy: A Look at Political and Economic Feasibility
Introduction: The Challenge for the Administration and the Next Congress
Speaker: Newt Gingrich, AEI
The Economic Reality of Health Insurance Coverage
Speaker: Mark Pauly, University of Pennsylvania
Discussants: Roger Feldman, University of Minnesota
Michael Morrisey, University of Alabama at Birmingham
12:15 p.m. Luncheon
Luncheon Address: Politics, Policy, and Progress: A Perspective from the Administration
Mark McClellan, Food and Drug Administration
1:30 Session II: Should the FDA Regulate Medical Progress? A Roundtable Discussion
Panelists: John E. Calfee, AEI
Scott Gottlieb, AEI
Henry Grabowski, Duke University
Peter Neumann, Harvard University
3:00 Adjournment
Event Summary

December 2002
Politics, Policy, and Progress in Health Care

On December 11, representatives from government, academia, and industry met at AEI to discuss the current challenges and opportunities for health care in the United States. The discussion covered health system reform, tax credits for the uninsured, and the role of the Food and Drug Administration in public health. This summary focuses on reform and the uninsured. The discussion of FDA issues is summarized in the AEI Newsletter, January 2003.

Newt Gingrich

Spending on health care accounts for 13.5 percent of Gross Domestic Product and is rising. With that much at stake, public policy decisions regarding the health industry can affect both the public health and economic growth. The Bush administration has articulated its health policy strategy in chapters 4 and 5 of the 2002 Economic Report of the President. The challenge facing the administration in 2003 is whether it can adhere to the values laid out in that report by developing new proposals to transform the health system.

The health care system needs to be transformed, not simply reformed. Internal changes in hospital and medical practices, and specific measures to improve outcomes, have to be at the heart of rescuing our dysfunctional system.

Health care cannot be transformed without litigation reform. We need a system that encourages the disclosure of medical mishaps if we are to learn from those incidents. In the current system, doctors and hospitals cannot be expected to be completely open about their experiences because of the threat of litigation. A health system that offers high-quality care must have mechanisms for reporting on quality. Reformers are working hard for transparency and cooperation in the health system. The burden will be on trial lawyers to defend the current approach rather than adopting a new model of medical justice that encourages doctors and hospitals to share information that could save lives.

Health care modernization should be a priority of the administration. Connectivity between doctors, hospitals, nursing homes, and pharmacies is vital not only to improve patient outcomes, but to also deal with the threat of biological warfare. Can we afford to undertake such a large-scale modernization program? The current system tolerates 2 million hospital-induced illnesses each year. A modernized health system using information technology could improve quality and lower cost. Modernization is the only way the health system will be able to meet the increasing demands by the baby-boomer generation for high-quality care delivered in an efficient and affordable manner.

Mark Pauly
University of Pennsylvania Wharton School

We need to reform the way we finance health insurance if we are to transform the health system. The great ideological question asks whom do you trust: the private sector or the government? Are we willing to trust the private market to offer health insurance, cost containment incentives, and risk spreading? Markets work best when individuals differ widely in their preferences for the way their health care is provided. Markets do not work well if everyone wants (or is required to have) the same level of health insurance but their risk of needing care varies widely.

Most people with lower-middle-class incomes (above the federal poverty level but below the median income for all families) have private health insurance. Those who do not have private insurance say they cannot afford private coverage, but many also appear to be misinformed about the availability, cost, or value of private coverage.

A small government subsidy would prove ineffective in inducing these people to buy private insurance. A meaningful subsidy offered to the lower-middle-income uninsured for voluntary coverage would come with a big budgetary price tag. Perhaps surprisingly, however, such a subsidy might increase national health expenditures by only 4 percent since the uninsured already consume most of the health services they would consume if they became insured.

Upper-middle-income people have been experiencing explosive growth in their health insurance costs, which has led to counterproductive responses by employers and employees. Some employers have sharply increased employee premiums, causing employees to drop coverage at a time when they most need the financial protection of health insurance. Although employers may appear to be paying part of premium, employees pay the entire cost of their employer-sponsored insurance by accepting lower wage rates than they could have received if the employer did not "share" the cost of insurance.

The preferred policy approach would incorporate more neutral tax incentives into a middle-income tax cut rather than maintaining the current practice that strongly favors employer-sponsored coverage over coverage purchased directly by consumers. That would make the cost of coverage more transparent and reduce many of the current distortions in the insurance market.

Roger Feldman
University of Minnesota

Health insurance purchased by individuals on the private market does not receive the substantial tax subsidies available to group coverage offered by employers. Extending the full subsidy to group and individually purchased insurance would level the playing field between how one obtains health insurance and would reduce distortions created in labor market decisions. The problem is that the current uncapped tax subsidy is both inefficient and unfair. It encourages excess insurance coverage and provides a large benefit to high-income families, with families in the top 10 percent of the income distribution receiving 23.6 percent of the subsidy. Capping the tax exclusion for employment-based insurance would help pay for a middle-income tax cut while discouraging excessive coverage.

We should give serious consideration to an individual mandate to have health insurance. Nearly everyone is willing to buy insurance, but the uninsured with low incomes do not have the resources to do so. In a survey of employees who were not offered health insurance through their employer, only 3 percent answered that they did not want or need health insurance. More than half of the uninsured have incomes below 200 percent of poverty. All companies that have over 200 employees offer health insurance, largely because of the current tax subsidy. If all individuals received a tax subsidy equivalent to that available to employees, the majority would purchase coverage. Let the people who truly do not want insurance opt out voluntarily.

The new consumer-driven health insurance plans combine insurance having a higher deductible with a savings component, called a health reimbursement account. Such plans have already outstripped Medical Savings Accounts as an alternative to traditional insurance plans. The recent IRS ruling has made such plans more attractive by giving tax-preferred status to the health reimbursement accounts. But that ruling did not go far enough because it is limited to employees. Policymakers should give individuals the same tax advantages from participating in a consumer-driven plan that employees receive.

Michael Morrisey
University of Alabama Birmingham

Policymakers are beginning to discuss seriously reforming the tax treatment of health insurance, including tax credits and limiting the tax exclusion for employer-sponsored health insurance. How would such reforms interact with other parts of the health financing system? Medicaid beneficiaries, for example, might be offered a tax credit for the purchase of private coverage rather than staying with the public system. Public hospitals provide a fairly substantial form of catastrophic insurance by offering emergency services to everyone. Perhaps tax credits could be designed to provide some payment when such services are provided to someone who is otherwise uninsured.

Employers will remain big players even if the tax exclusion is capped. Employers can search the market for insurance alternatives more efficiently than many individuals and can serve as agents for their employees. Because workers are more mobile than they have been in the past and are more likely to be part of two-earner families, increasing the employee share of insurance premiums can make sense. Rather than paying a low premium (at the cost of lower wages), a worker who is otherwise covered by insurance could choose to take more of his compensation in the form of wages or a benefit other than health coverage.

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AEI Participants


John E.
  • Economist John E. Calfee (1941-2011) studied the pharmaceutical industry and the Food and Drug Administration (FDA), along with the economics of tobacco, tort liability, and patents. He previously worked at the Federal Trade Commission's Bureau of Economics. He had also taught marketing and consumer behavior at the business schools of the University of Maryland at College Park and Boston University. While Mr. Calfee's writings are mostly on pharmaceutical markets and FDA regulation, his academic articles and opinion pieces covered a variety of topics, from patent law and tort liability to advertising and consumer information. His books include Prices, Markets, and the Pharmaceutical Revolution (AEI Press, 2000) and Biotechnology and the Patent System (AEI Press, 2007). Mr. Calfee wrote regularly for AEI's Health Policy Outlook series. He testified before Congress and federal agencies on various topics, including alcohol advertising; biodefense vaccine research; international drug prices; and FDA oversight of drug safety.




Mark V.
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