The Real Problem: Consumers Cannot Exercise Choice

What is missing from both Democratic and Republican health care proposals is an accurate diagnosis of the source of Americans' frustration and concern about their health coverage and why they lack the ability to do anything about it. Families feel powerless to force managed care plans to respond to their needs. But why is the marketplace failing consumers? It is doing so because today's insurance marketplace is so badly distorted by the tax code that health plans have little incentive to respond to or be held accountable for a patient's needs.

Most Americans get their health coverage through their place of work, and the employer selects and owns the plans made available to employees. This happens because today's tax code gives tax breaks to employees on the value of their health plan, but only if their employer purchases it. This leads to a perverse situation in which employers, not families, are making crucial decisions about the type of health plan and benefits their employees receive. The health plan is accountable to the purchaser (the employer), whose primary interest usually is cost control, rather than the consumer, who wants quality. As Ron Pollack, Director of Families USA and a supporter of the Democrats' managed care bill, recently observed, "Most of us get our health coverage from an employer, and our employers increasingly are saying `here's one plan and it's the only plan and you do not have a choice' so you can't, in effect, vote with your feet and thereby drive quality."²

For example, a family of four earning $30,000 a year receives a tax break equal to $680 on $3,000 worth of employer-provided health insurance. Yet, if this same family tried to purchase coverage on its own, it would receive no tax relief at all. This is why a majority of Americans with private health coverage receive it from their employers and why the majority of Americans who work for employers who do not offer health coverage are uninsured.

This policy virtually guarantees frustration and powerlessness. It should be changed so that people who want to buy their health insurance on their own--perhaps through their union or church--should be able to do so without tax penalty. The best way to achieve this is to end the current tax exclusion on employer-provided health benefits and replace it with an individual refundable tax credit to use to purchase health insurance. Representatives Bill Thomas (R-CA), chairman of the Health Subcommittee of the House Ways and Means Committee, and subcommittee member Jim McCrery (R-LA) are developing a proposal that would do just that.

A Failed Health Care Strategy

The current batch of legislation is just one more example of the disturbing pattern that even conservatives have accepted on health care issues. Some conservatives in Congress do not like meddling in the marketplace with regulation, but feel it is the short-term price of satisfying the public's concerns and avoiding even worse legislation. Others have shown a willingness to accept more regulation of health insurance as long as it includes some expansion of medical savings accounts (MSAs). So when costly mandates on health insurers are offered, a few "free-market" provisions are added so that supporters can claim that the bill reflects conservative values.

This pattern was played out two years ago. At that time, a bill popularly known as the Kennedy-Kassebaum bill enjoyed only lukewarm support from conservatives in Congress. This bill imposed, for the first time, unprecedented federal restrictions on private health insurance. Rather than "patient protections," the buzzwords in those days were health coverage "portability" and "accessibility." The bill had a doubtful future when first proposed. Yet, in the interest of doing something on health care, conservatives added an MSA and a couple of other tax provisions. The bill was passed and signed into law, and is now the law of the land.

What did America really get from the Kennedy-Kassebaum bill? On the positive side, the self-employed now can deduct a portion of their health insurance costs. Purchasers of long-term care insurance also may claim a deduction. But on the other side, the General Accounting Office (GAO) reports that individual insurance premiums have increased anywhere from 140 percent to 600 percent in some states because of requirements in this new law.³ And the number of uninsured working Americans has not fallen--the central aim of the bill--but continues to grow.

What about the MSA pilot program that clinched the deal? According to the only official Internal Revenue Service report on the subject, as of June 1997 only 22,000 policies had been sold out of a possible 750,000. In addition, a GAO survey of insurers has revealed several flaws in the MSA law that discourage growth in this market.⁴

Now lawmakers are faced with pressure from constituents to protect them from their health plan. In many respects, House and Senate Republicans have responded by taking one step forward only to take two steps back. The proposals contain some good ideas like voluntary purchasing cooperatives called HealthMarts, physician medical malpractice reform, and strengthening of health plan accountability rules. But these improvements will be of little or no value unless Congress takes the decisive step of giving individuals, rather than employers or the government, more control over health care decision making.

The Senate does make some progress in this area by proposing 100 percent deductibility for the self-employed, allowing individuals with company-sponsored flexible spending accounts to roll over a portion of their funds from year to year, and loosening some of the restrictions on the marketing of MSAs. But these are tiny steps and are more than offset by new, costly mandates that may actually make the private health system worse and cause greater numbers of Americans to be uninsured.

A Model That Works

A number of polls indicate that Americans want something done on health care and support the current efforts to regulate managed care. These polls are misleading in some respects. One recent survey, for example, indicated that over half of Americans' opinions on managed care are based on secondhand information and not personal experience.⁵ But the poll numbers are significant for two primary reasons.

First, whether their opinion is based on personal experience or on media reports, Americans' distrust of managed care reflects both their concern about a system of care that they see as putting cost before patient needs and their sense of being powerless to make a change.

Second, and more important, these polls show these results because Americans have not been offered a vision of how to remedy this problem that could serve as an effective alternative to more government mandates and litigation.

It is the latter point that highlights the need for lawmakers to articulate clearly to their constituents why it is they are trapped in health plans they may not like. They must then provide a road map to change the current system so that insurers are accountable to patients, not to employers or the government. The best and easiest place for Members of Congress to start is by explaining the popularity of their own health plan, the Federal Employees Health Benefits Program (FEHBP), and holding it up as a model of a consumer-driven health insurance marketplace.

Members of Congress, federal workers and retirees, and their dependents all enjoy a system of health care that is very different from that enjoyed by the average American--a system that is based on free-market principles of consumer choice and competition. The FEHBP allows almost 9 million participants to make personal choices on an annual basis among a number of competing private health plans in their area, with over 350 plans participating in the system nationwide. The price competition created by allowing people to leave plans they do not like and to choose a new one has held FEHBP costs down below both private-sector and other government-run health programs. More important, it also creates a high level of satisfaction among FEHBP enrollees that is not matched in the private sector.

The Office of Personnel Management (OPM), which manages the FEHBP, performs customer satisfaction surveys of enrollees. In addition to looking at overall satisfaction, OPM rates specific areas, such as choice of doctor and quality of care. Significantly, the surveys indicate a very high degree of satisfaction with managed care. For FEHBP health plans offered in the Washington, D.C., area (where the largest concentration of federal employees is found), 60 percent of enrollees said they were very satisfied or extremely satisfied with their health plan. Of those enrolled in HMO plans, 75 percent rated their choice of doctor, and 84 percent rated the quality of care, as excellent, very good, or good.⁶

The critical difference between how the FEHBP operates compared with private employer-sponsored health plans is that, rather than being herded into one or two plans chosen by the employer, federal employees can choose from among a wide range of plans. The government makes a fixed contribution; enrollees who want a more expensive plan pay the additional premium cost out of their own pocket. The government does not restrict the kinds of plans that can participate in the system, does not define the benefits that must be offered to enrollees, and does not use the threat of litigation as a scare tactic to make health plans perform.

The reason that HMOs in the FEHBP are popular is not that patients sue them or that they operate under dozens of mandates--they do not. Consumer satisfaction and health plan accountability are achieved the old-fashioned way: by letting the market work. Federal workers can choose from among dozens of plans without losing tax breaks or other benefits because they chose a plan other than the one favored by their immediate employer.

Conclusion

Congress can avoid repeating the mistakes of the past and propose a bill that will give frustrated consumers the same tax benefits if they choose and own their own health plan and pick a plan from any source. Speaker Newt Gingrich (R-GA), Representatives Thomas and McCrery, and Senator Don Nickles (R-OK) have voiced their strong support for tax fairness and family--rather than employer or government--ownership of health insurance. Speaker Gingrich recently instructed lawmakers to look at "how they can give every American the right to take their share of the tax deductibility and use it so that if you don't like your HMO, you simply say to your employer, `I want my share of the insurance money...[and] I'll go buy insurance I like."⁷

Real "patients' rights" will occur when families are able to leave a health plan they do not like and choose a new one. Only then will health plans be truly accountable to the patients they serve. The legislation now before Congress does not achieve that, and thus is no solution.

-- Carrie J. Gavora is a former Health Care Policy Analyst at The Heritage Foundation.