A Better Prescription
AEI Scholars on Realistic Health Reform

Click here to view the full report as an Adobe Acrobat PDF.

Executive Summary

After a year of political wrangling and two thousand-page bills that promise more than they can deliver, it is time for a more prudent approach to health care reform. Americans made it clear that they will not tolerate a top-down health reform that further centralizes power and decision making in Washington. They distrust the promises of lower cost and more secure coverage, and they fear losing what they have now.

A new approach to reform is needed, one that levels with the American people about what is possible and what is necessary. The better prescription requires that we rethink both the goals and methods of health reform.

  • We must set realistic priorities for reform. We have neither the resources nor the wisdom to solve every problem in the health system through one grand legislative act.

  • We must take measured steps to reform the health system, allowing for frequent midcourse corrections as we learn how the system reacts to policy changes. We cannot anticipate every contingency and prevent every adverse consequence, no matter how many experts we consult or pages of legislation we write.

  • We must recognize that the success of health system reform depends crucially on the way individuals, health providers, employers, and others respond to changes in incentives. Government can act as a catalyst for reform without attempting to dictate the results.

  • We must recognize that the ultimate objective is to help Americans achieve healthier, more productive lives. Much of the responsibility for accomplishing that goal will rest with individuals, and their actions can be taken with no changes in government policy.

The following describes targeted actions that should be adopted by Congress as part of a broad health system reform effort. Such actions change the economic incentives and institutional rigidities now built into the health system that promote unrealistic expectations and prevent necessary system improvements.

Number One: Place the Money--and Greater Control--in Consumers' Hands

Replace Existing Tax Breaks for Health Insurance with Tax Credits. The current "tax exclusion" promotes the purchase of insurance that reduces consumer awareness of the price of health care, which promotes the use of services that may not be worth their cost. It also provides no help for people without jobs and many low-wage workers. Tax credits can free consumers to purchase insurance that better suits their demands and willingness to pay.

Promote Better Health Insurance Choices. Allow insurers to offer coverage in any state once they have satisfied the insurance regulations in their home state. Reduce regulatory barriers that limit the variety of innovative insurance products that may be offered, and promote private "exchanges" that offer one-stop shopping and consumer-friendly information about the benefits, costs, and features of the health plan choices in the market.

Promote Information to Help Patients and Their Doctors Make More Informed Treatment Decisions. Make Medicare claims data available to assess patient outcomes and provider performance. Provide additional federal funding for sharing data, developing more accurate assessment methods, and disseminating clinical-effectiveness and performance information to patients and their physicians.

Number Two: Align Expectations with Reality

Promote Effective and Fiscally Responsible Competition in Medicare. Require all Medicare plans--both private Medicare Advantage plans and the traditional fee-for-service program--bid against each other, and set federal payment based on the low bidders. Provide beneficiaries a risk-adjusted subsidy in the form of a defined contribution rather than an open-ended entitlement to federal payment, allowing them to choose more expensive plans if they wish to pay a higher premium. Allow all plans, including traditional Medicare, greater freedom to develop innovative benefit packages to better meet the needs of beneficiaries.

Provide More Predictable Funding for Medicaid. Transition from uncapped federal financing to the states that pays a percentage of reported program costs to block grants that more accurately reflect the fiscal capacity and health needs of low-income people in each state. Subsidize the purchase of private insurance for Medicaid beneficiaries whose medical needs can be met through that avenue.

Number Three: Create Accountability in the Health System

Provide Better Access to Affordable Private Insurance. Create a functioning health insurance safety net by providing more federal assistance and better operating rules for state high-risk pools. Create a system of guaranteed access to private insurance in which everyone is offered one opportunity to enroll freely in health insurance and those who maintain continuous coverage are rewarded with lower premium rates.

Develop Better Ways to Pay for Health Services That Reward Superior Value. Replace fee-for-service payment methods in Medicare with methods that reward providers based on both the outcome and cost of care. Break down legal and financial barriers to appropriate access and sharing of health system information.

Reform the Medical-Liability System. Enact limits on malpractice awards. Implement specialized health courts better equipped than civil courts to adjudicate claims quickly and accurately.

Promote Personal Responsibility. Provide employers and insurers greater latitude to offer incentives that encourage individuals to achieve personal health goals. Provide greater flexibility in the design of high-deductible health plans and health savings account plans.


Market-based health reform provides the tools by which the health system can become more effective, more efficient, and more responsive to patient needs. It relies on financial incentives rather than central direction and control, and it recognizes that a one-size-fits-all approach will not work in a country as diverse as ours. Unlike a top-down approach, market-based reform fosters accountability throughout the health system.

A market approach is no panacea, but it does not claim to be. It does not make promises to immediately solve every problem. This approach offers something better: a framework for continuing health system innovation and improvement whose strength lies in its flexibility and ability to adapt to change. This is the only real prescription for sustainable reform of our health care system.

Click here to view the full report as an Adobe Acrobat PDF.

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI. Thomas P. Miller is a resident fellow at AEI.

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