Wilson H. Taylor Scholar Joseph Antos

Abstract: The Clinton health reform attempt in the mid-1990s and the U.S. experience since then suggest some clear lessons for the next U.S. president. Public confidence in a major reform proposal must be won, and congressional support must be garnered, even if the election is a landslide. Insisting on universal coverage as a precondition may undercut the ability to enact other policies needed to improve the health system. Excessive regulation and price controls are likely to exacerbate underlying problems. The next president should take full advantage of market incentives to promote a high-value health system.

In 1993, president Bill Clinton spoke the following words before Congress: "Millions of Americans are just a pink slip away from losing their health insurance. . . . Millions more are locked into the jobs they have now [because they could lose their health coverage]. . . . On any given day, over 37 million Americans . . . have no health insurance at all. And in spite of all this, our medical bills are growing at over twice the rate of inflation, and the United States spends over a third more of its income on health care than any other nation on earth."[1]

Except for the fact that we now have forty seven million people without health insurance, this assessment of the U.S. health system is as valid today as it was in September 1993, when Bill Clinton presented his health reform plan with considerable fanfare to Congress. Within a year, the Clinton plan was dead, a victim of politics and its own design.

That is the same fate met by major health reform proposals going back to at least Harry Truman's campaign for national health insurance in the late 1940s. If the next president expects to leave office with a record of accomplishment in health policy, he or she must avoid the mistakes made by the Clinton administration and earlier politicians who were lured by the siren song of universal coverage. As seductive as that policy goal may be, its single-minded pursuit may undercut less politicized efforts necessary to increase health system efficiency, improve the quality of care, and slow the growth of health spending.

There are equally important lessons to be learned from our experience after the demise of the Clinton reform effort. Those fifteen years have been filled with a wide range of federal and state policy changes and initiatives by private insurers, providers, employers, and others, seeking to make improvements large and small in the health system. These developments offer new potential for a distinctly American solution to the crisis we face. In the hope that the new debate will lead to reasonable policy making, I offer the next president a few suggestions drawn from the Clinton reform and what has happened since.

Do Not Assume That You Have A Political Mandate

Election to office is only the first round in the fight to win the confidence of the American people and does not by itself constitute a mandate for health reform. The next president must overcome voters' skepticism that politicians will develop sound solutions to health system problems. Democrats consistently poll strongly on this issue. In most years, 50-60 percent of respondents think that Democrats would do a good job handling health care, while only 25-30 percent have confidence in Republicans.[2]

High approval ratings are no guarantee that a president's health reform will have an easy time politically. In 1993, Bill Clinton had strong public credibility on health care and a Democratically controlled Congress--circumstances that might be repeated in 2009 if a
Democrat is elected president. However, the Clinton administration failed to bring Congress into the negotiations early on, opting instead for the development of a complex proposal by a task force that deliberated in private. A less-detailed bill than the 1,368-page Health Security Act might have met with greater legislative success if it had been negotiated publicly with Congress rather than behind closed doors.[3]

A Republican president would face even higher political hurdles on health reform, but that should not be taken as a mandate to avoid the issue. Health is an uncomfortable topic for many Republicans, and there is a deep vein of suspicion about opening up health policy after the bitter intraparty debate over the Medicare drug benefit. At least a Republican president would not suffer any delusions of political support on health reform from a strongly Democratic Congress.

Find A Balance Between Competition And Regulation

Two starkly different visions of health system reform have long been debated without resolution. One would have individuals (rather than employers or government) make their own decisions in a market of competing health plans and providers. The opposite approach is a publicly financed single-payer system, with major decision-making responsibilities shifted to the government.

The Clinton reform tried to split the difference between those two models, promoting greater consumer involvement in a more tightly controlled health system. Despite its trappings of consumer choice and competition among health plans, President Clinton's "managed competition" was far from competitive. The efficiencies that could be gained through well-functioning competitive markets would have been lost under the weight of regulation.

The core concepts and objectives of the Clinton reform continue to shape the thinking of Democrats on health policy. Two closely related provisions are particularly relevant: mandating insurance to achieve universal coverage, and controlling prices and premiums to restrain health costs. Such direct and seemingly simple policies to address specific health system problems are unlikely to work as they are intended to.

Be wary of insurance mandates. Universal coverage was one of the rallying cries of 1993, and this theme seems to dominate the Democratic side of the 2008 presidential race. Most of the Democratic contenders supported a mandate on individuals to buy insurance, avoiding the small-business opposition to an employer mandate faced by President Clinton.[4] Their proposals were grounded in the current employment-based insurance system that is familiar to almost everyone, instead of creating an entirely new way for people to buy coverage. Despite these strategic refinements, the next president (Democrat or Republican) may find that making universal coverage the prerequisite will frustrate other necessary and fundamental reforms.

A mandate to purchase health insurance does not make it more attractive to young people and others who are uninsured; it simply compels them to buy insurance and promotes scofflaw behavior. Similar mandates have had limited success in promoting automobile insurance. All but three states require that drivers carry liability coverage for property damage and bodily injury.[5] Despite the relatively low cost of such mandated insurance, 14.6 percent of drivers did not have automobile coverage in 2004.[6] That is nearly identical to the Census Bureau's estimate that 14.9 percent of the population did not have health insurance in that year. Eighteen states (including the District of Columbia) had uninsured motorist rates of 15 percent or higher. Fully a quarter of all California drivers had no automobile coverage.

An individual health insurance mandate is likely to be less effective in ensuring coverage than the automobile insurance mandate because health insurance is much more expensive, and the mandate is difficult to enforce. Massachusetts, which requires its citizens to purchase health insurance, has exempted from the mandate about 60,000 low- and moderate income residents--almost 20 percent of the uninsured--because they could not afford the premiums and were not eligible for subsidies.[7] Enrollment in Commonwealth Care is higher than expected, but that success would not have been possible without generous subsidies that threaten to create a $147 million state budget deficit.[8] Money, not the mandate, is the stronger driving force behind the Massachusetts reform.

The health care safety net, which offers at least emergency treatment to anyone needing it regardless of whether they have health insurance, also undercuts the effectiveness of a mandate. It would be difficult to prevent people from delaying their purchase of health insurance until they were "caught" by an illness requiring immediate treatment. Such delaying tactics make sense to the person who is least likely to gain from paying insurance premiums: the young, healthy person with relatively low earnings who places a low value on the financial security that health insurance affords.

One of the objectives of an insurance mandate is to eliminate this "free rider" problem and bring more paying customers into the insurance system. However, other provisions of the Clinton proposal worked against this objective. Insurers were required to issue insurance to all applicants ("guaranteed issue") and had to charge the same premiums to everyone ("community rating"). This potentially lethal combination of requirements on private insurers would reward those who delayed buying health insurance until they needed treatment. Those people would not be excluded from coverage even if they had developed a serious and expensive health condition, and they would pay the same premiums as everyone else, even though they did not previously pay for insurance. Financial penalties might be imposed to reduce the adverse selection, but enforcement would be difficult for those with low incomes who do not qualify for a subsidy.

Democrats and Republicans can endorse the principle that responsible citizens should be expected to protect themselves against potentially staggering health care costs by purchasing insurance. Perhaps a mandate is the only way to create a new social consensus, but this approach generates a host of thorny issues. What would be included in the minimum benefit package? Could people choose different benefit packages that better reflected their individual health needs and willingness to face financial risks? Would insurers and health plans be permitted flexibility to experiment with alternative benefit designs? Who ultimately decides what to buy--the consumer or the government?

The Clinton plan resolved these types of questions by centralizing control over the intricate workings of the insurance market under mandated coverage. The next president should avoid trying to regulate the market into submission, instead shaping economic incentives to promote more effective and efficient care.

Let market incentives work. The Clinton plan similarly relied on a top-down approach to limit the growth of health spending. Although there was an appeal to market forces with the concept of premium support, cost containment was to have been assured through tight limits on premiums and health care prices. This overlay of regulation would have severely limited the role of consumer choice and health plan competition in balancing cost and value in the system.

The first line of defense against rapid spending growth was premium support. Families and individuals would be granted subsidies to purchase insurance, through either a large employer or a regional health alliance that would operate in broad terms like the Massachusetts Connector. People would be able to buy a basic plan, but they could also purchase more-generous coverage if they were willing to pay the full additional cost of the premium. This arrangement was intended to give insurers a strong incentive to compete for market share based on both price and quality.

The favorable incentives of premium support would have been overwhelmed by the imposition of direct regulatory mechanisms meant to guarantee that spending would slow over time. A complex process was devised to control both the level and growth of premiums, requiring the creation of a new National Health Board and regional health alliances to calculate rates and enforce financial restrictions. Targets for the permissible growth rate of health spending were unrealistically tight. Adjusted for inflation, per capita health spending would be held to a 1.5 percent increase in 1996, phasing down to zero growth by 1999.[9] That would have required a 60 percent drop in the growth rate of real per capita health spending from 1993, when the Health Security Act was introduced in Congress.[10]

Neither the political process nor the health system is capable of that much cost containment by fiat. If such controls could be effective, they would eliminate all flexibility for insurers and health plans to compete, driving the private sector out of the health insurance business and creating by default a single-payer health system. A similar flight from the market was caused by the Balanced Budget Act of 1997, which allowed Medicare payments to private plans to increase 2 percent annually when general health costs were rising 6-9 percent a year. Within three years, nearly half of those plans had dropped out of the program.

Tight price controls could limit access to care if applied too strenuously over too long a period of time. Demand for services whose price is kept artificially low would increase, but suppliers would be unwilling to expand production since their fees would be capped. The tendency of competitive markets to move toward a balance would be thwarted if prices were not permitted to fluctuate according to changes in demand and supply. If market pricing puts needed services out of reach for some people, that is an argument for a direct subsidy rather than a reason to distort the price structure and introduce greater inefficiencies in the delivery of care.

Even if stringent price targets were enacted, Congress is unlikely to enforce them. Growth in Medicare physician payments is supposed to be controlled by the Sustainable Growth Rate (SGR) formula, which automatically imposes a fee reduction if physician spending exceeds a target. In 2002, Congress struggled to avert the first such reduction but failed, despite strong pressure from physician groups and support for a change in the SGR from the Medicare Payment Advisory Commission (MedPAC). Every year since then, scheduled fee reductions have been eliminated or deferred. Nationwide price controls are not likely to be enforced with greater vigor, despite the campaign rhetoric about unseemly profits earned by insurers and pharmaceutical companies.

Instead of attempting to micromanage the health sector, sensible policy would address the perverse incentives embedded in our heavily subsidized insurance system that have given patients and providers unrealistic expectations and promoted inefficiencies on all sides. Our current tax subsidies for health insurance, which favor the well-off and promote the purchase of first dollar coverage, should be reformed to improve both equity and efficiency. Limiting the tax exclusion for employer-sponsored insurance, which has even been endorsed in principle by Sen. Hillary Clinton (D-NY), would make consumers more aware of the cost-value trade-off in their purchase of insurance.

However, such a dramatic reform could not proceed without additional policies to improve the functioning of the insurance market. Government has an important role in setting the ground rules for a well-functioning market, enforcing antitrust regulations, and facilitating the exchange of reliable and useable information about the clinical and insurance options available to consumers.

The Clinton reform plan endorsed a number of efficiency-promoting changes in incentives (including an emphasis on preventive care, consumer information on health plan performance, expanded choice of health insurance, and malpractice reform), but the overall theme was top-down management of the system. A multitude of federal regulations attempted to eliminate adverse consequences that are virtually inevitable with any major health reform, but such micromanagement would have frustrated the attempt to blend market competition with government controls. The next president should seek a more workable balance, taking full advantage of market incentives to promote a high value health system.

An American Solution

Although it might not have seemed so at the time, Bill Clinton embarked on his health reform proposal under favorable circumstances. Health spending was 13.7 percent of gross domestic product (GDP) in 1993, well below the 16.3 percent projected for 2007.[11] Family premiums for employer coverage increased by 61 percent (in real terms) between 1993 and 2006.[12] The ranks of the uninsured have swelled by more than seven million since 1993. Moreover, the economy has cooled, and we are unlikely to see a return of the decade-long economic boom of the 1990s. The next president faces a larger and more immediate health policy challenge, and he or she will have less budgetary flexibility to finance needed improvements. Public and private investment in evidence-based medicine, health information technology, new incentive based payment systems, and other innovations could pay off in greater efficiency and slower health spending growth, but such initiatives could take years to develop.

Although we have less breathing room today, we may be better prepared to reform the health system than in 1993. The managed care "miracle" of the early 1990s has given way to rising consumerism, giving people more of a say in their health care--but also greater responsibility for the cost. New insurance models have been introduced that focus beneficiaries on the value they receive for their health dollars, including account-based coverage and variable cost sharing based on a treatment's clinical benefits. Increasing insurance premiums and greater cost sharing have resulted in patients' asking more questions about the cost-effectiveness of treatment alternatives and the skill of their physicians. The need to fuel the health system with information is now a given for all politicians, whether they prefer a single-payer or a market approach.

Sensibly, Americans remain unwilling to part with institutions (such as employment based coverage) that have worked--after a fashion--before seeing the alternative. The next president has little choice but to undertake health reform one piece at a time, building on the strengths of the current system instead of trying to instantly create a whole new structure.

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI.

Notes

1. Clinton Presidential Center, "Address of the President to the Joint Session of Congress," 22 September 1993, http://www.clintonpresidentialcenter.org/legacy/092293-speech-by-presidentaddress-to-joint-session-of-congress-asdelivered.htm (accessed 31 January 2008).
2. Washington Post/ABC News Poll, 4 November 2007, http://www.washingtonpost.com/wp-srv/politics/polls/postpoll_110407.html (accessed 19 November 2007).
3. L. D. Brown, "Looking Back on Health Care Reform: 'No Easy Choices'" (interview with Walter Zelman), Health Affairs 17, no. 6 (1998): 61-68; and R. J. Blendon, M. Brodie, and J. Benson, "What Happened to Americans' Support for the Clinton Health Plan?" Health Affairs 14, no. 2 (1995): 7-23.
4. Republican Gov. Mitt Romney (a onetime Republican presidential candidate) supported an insurance mandate in the Massachusetts health reform plan, but he does not support a federal insurance mandate.
5. Insurance Information Institute, "Automobile Financial Responsibility Laws," http://www.iii.org/individuals/auto/a/stateautolaws (accessed 8 January 2008).Wisconsin and New Hampshire require drivers to demonstrate financial responsibility in the event of an accident; Florida requires coverage for property damage but not bodily injury.
6. Insurance Research Council, "IRC Estimates More than 14 Percent of Drivers Are Uninsured," Press Release, 28 June 2006, http://www.ircweb.org/news/20060628.pdf (accessed 19 November 2007).
7. A. Dembner, "Health Plan May Exempt 20 Percent of the Uninsured," Boston Globe, 12 April 2007.
8. A. Dembner, "Success Could Put Health Plan in the Red," Boston Globe, 18 November 2007.
9. Health Security Act, sec. 6001.
10. In 1993, real per capita health spending grew 3.8 percent; author's calculation, using National Health Expenditures Accounts data from the Centers for Medicare and Medicaid Services (CMS) and the GDP implicit price deflator.
11. S. Keehan et al., "Health Spending Projections through 2017," Health Affairs 27, no. 2 (2008): w145-w155 (published online 26 February 2008; 10.1377/hlthaff.27.2.w145).
12. Author's calculation from J. Gabel et al., "The Health Insurance Picture in 1993: Some Rare Good News," Health Affairs 13, no. 1 (1994): 327- 336; and Henry J. Kaiser Family Foundation/ Health Research and Educational Trust, Employer Health Benefits: 2007 Annual Survey, 11 September 2007, http://www.kff.org/insurance/7672 (accessed 6 March 2008).