A Vision for Health Care Jude Wanniski August 28, 2004

Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: How to Fix Medicare/Medicaid

In today's papers you will find that Federal Reserve Chairman Alan Greenspan delivered a speech yesterday in Jackson Hole, Wyo., repeating his warnings that our government better soon address the financial problems looming in our health care system or we will find it impossible to correct when the baby boomers retire in 2012. It prompted me to make the "Memo on the Margin" today a speech that Chairman Bill Thomas of the House Ways & Means Committee gave on February 12 this year at a National Press Club briefing sponsored by the National Center for Policy Analysis. Rep. Thomas, a California Republican I greatly admire, gave his talk without a prepared text, and a transcript only became available this month. If you are in the medical community or know people who are, please take the time to read this and pass it on. The most difficult problems often have the simplest solutions, but they require someone as smart as Thomas to see through the chaos to the core of the problem.


Vision for Health Care
A National Center for Policy Analysis Briefing National Press Club, Washington, D.C. February 12, 2004

By Rep. Bill Thomas (R-CA) Chairman, House Ways and Means Committee

Twenty years ago the House Ways and Means Committee voted on whether to cap the deduction of fringe benefits by employers. That vote fell two votes short of establishing a limit that would have focused tax relief on those needs that were deemed most important for the dollars assigned. That was just one of the milestones in the battle to change what is now one of the most perverse systems man has ever created, which at the beginning no one had any intention of producing, and which some people apparently still fail to understand. When you look at what some folks are saying, it is amazing how much of a disconnect there is in this society over something that should have been resolved some time ago. I’m pleased to say, I believe we have the beginning of a structure in place to correct the problem.

A Proposition

Let me start off by asking: How many people here to discuss the problem of the uninsured are themselves involuntarily uninsured? Show of hands? Almost no one. I always find it ironic. Every time we get together to discuss the uninsured, it is with a group of people who are 100 percent insured, or almost always above 95 percent. My second question is this: How many of you who are now insured would be willing to give up 25 percent of the insurance you currently have? Show of hands? Ah, nobody. Well, one or two. Had you all raised your hands, the problem of the uninsured would go away. Because the problem isn’t that this country doesn’t spend enough on health insurance; its that what we spend is mal-distributed.

If we could redistribute what society spends for health insurance, we could eliminate virtually all of the problems. Why don’t we just do that? Well, that’s what we’ve been trying to do for a quarter of a century. We don’t have time to review the history, so I’ll try to focus on the thinking that baffles me even to this day. Because of it we can’t restructure the system without an enormous political battle that becomes sharply partisan very quickly.

A Closer Look At The Uninsured

When you look at the statistics on the uninsured, you can pick a number at any one time between 20 and 50 million since there are a lot of people who are chronically uninsured and others who are temporarily uninsured. If you split the group, separating those who can afford insurance but don’t buy it and those who can’t afford it and don’t have it, you find that fully 25 percent of the uninsured are low-income people who qualify for available government programs. They just haven’t enrolled. So why in the world wouldn’t you market the products Medicaid and other programs that are available. You could put a significant dent in the number of uninsured if you simply made sure you enroll people in the programs that they are qualified to join.

Just to give you the latest example, who in the world would create a partially new, exciting product and then not let people know that it’s available? People often talk about how much different government is from the private sector, yet there would not be that much difference if government were smart. If you create a product, you have got to let people know the product is available. And yet I see in the newspapers another battle over the fact that Medicare dared to actually advertise the fact that there is a new product out there that might be useful to a significant number of Americans.

Looking further, fully a third of the uninsured are higher-income people who earn above $50,000 a year. You might conclude that these people are foolish because they don’t have health insurance. But frankly, when people who make $100,000 a year remain uninsured, I think they are making a decision and communicating to the marketplace that they don’t think there is value in the products that are out there. Now, if you’re in the private sector, this would be viewed as an opportunity. But if you’re the government, this is viewed as a problem, and you have to create a program to solve the problem instead of examining why people who make enough money to buy insurance aren’t doing so and why they don’t think it gives them enough economic value for the premiums charged.

Source of Our Current Problems

Join me briefly in going back to that period in history when somebody decided that instead of paying an employee a dollar in wages, we should create collusion between the government and the employer and provide health care or fringe benefits instead. That little separation between wages and fringe benefits has laid the groundwork, fundamentally and virtually completely, for the problems we face today.

How many of you here get your homeowners insurance through your employer? How many of you here get your automobile insurance through your employer? None. So why do you have to get health insurance that way? Well, the argument is, that employment forms an insurable group. But that argument is fundamentally flawed. Why? Because not everybody is employed. But worse than that, if you tell people they can have a dollar in wages, which is fully taxable, or a dollar in untaxed fringe benefits, what do you expect them to choose? A brief labor history of the 1950s and the 1960s will show you that American workers virtually priced themselves out of the international marketplace by creating a total compensation package that made them uncompetitive. But more insidiously, the fringe benefits were in the form of a first-dollar, third-party payer system in which no one knew the cost of medical care and, frankly, no one cared. The only question patients typically asked was, Does my insurance cover it? And if the answer was no, then the follow-up was, I’ve got to get more insurance. Eventually we wound up with billions of dollars of insurance and some bizarre anomalies. People had every possible coverage under the sun. But since they used very few of the benefits, most of their premium dollars paid for coverage that generated no return. Why? Because the concept of group insurance built around the employer is the most bizarre redlining ever conceived.

Okay, lets start with a clean sheet of paper. Who needs insurance? People who are at risk. The whole concept of insurance is to pool risk. Who are the ones who have the hardest time getting insurance in this country? People who need it. Where’s the cheapest insurance? The group insurance through an employer that has gone through a number of screening processes to produce a group that doesn’t use the insurance very much.

Now, many people especially those in the insurance industry believe in the concept of insuring non-risky people. If you want to make money, you get people to buy insurance that they never use. And that’s what we have to a very great extent today. Look at all the screening procedures that apply to someone who is employed. They have to get up every morning, they go to work, and they carry out difficult tasks. All of those are screening factors in terms of health care. So when you have a group of employees, you have a group of people who are the cheapest to insure. Yet they get the biggest tax breaks. The people who really need insurance are out there in the individual market, sinking because they cant get insurance. Who would intentionally create a structure like that today? No one. And yet, that’s where we are.

Then, ironically, since you have all this insurance, and since you chose these fringe benefits over a dollar in taxable wages, you feel you've got to get something out of it. How many of you toward the end of a year in which you hadn't used much of your health insurance decided to get new eye glasses, or to have your teeth cleaned one more time, trying to get some benefit out of your insurance package? When you have first-dollar, third-party coverage and nobody knows the cost of care, you get over-utilization. Its use it or lose it.

And, ironically, at the very same time we have under-utilization. Because we have a voluntary employer-based system, you can have people performing the same job for two different employers. One has 100 percent coverage, and the other has none. Yet if the one who doesn’t have it wants it, he has to buy it out-of-pocket with after-tax dollars.

Remember, we lost the vote to cap the amount of tax free benefits in the early 1980s by two votes. Back then, we were thinking of some outrageously high dollar limit, like a $5,000 cap. Had we done that, you would have seen a much more rational decision-making process today to determine what the fringe benefit packages contain. If employees wanted coverage above the limit, you would have seen a secondary market develop, as we have seen with after-tax wraparound packages that are available to individuals. That would have initiated a rational market where you would buy what you wanted. Instead of doing that we continued a system that substitutes health insurance for wages. About 80 percent of spending on health care is third-party payer spending. The managed care cycle was just a different variation on previous methods. It didn’t fundamentally change the system.

Who said that insurance has to be sold the way it is? There wasn’t any decree that came down from on high. It was partly because in an easily-sourced, easily-sold market, insurers could make a lot of money. Now, you tell me: Do you want to trod along, picking up premiums one by one in the so-called individual market, or would you rather sit back and have an employer bring you 5,000 or 10,000 lives, which is an easy package to insure because overall costs are fairly predictable?

And who said, to use an analogy, that health insurance should be like an employer-based umbrella. As long as you stay inside, at the place of employment, you can use the umbrella, but if you go outside, if you leave your place of employment, you have to leave the umbrellas protection. The problem is: When do you need the umbrella? Answer: When you’ve left the place of employment. Instead, why cant we have a system structured so that a dollar in wages and a dollar in fringe benefits trade on a level playing field and you make decisions based upon what you think you need?

Then we have group insurance and individual insurance. Is the role of government to create a subsidy for those people least in need of insurance? Or should government guarantee that no one goes without and let the market figure out how to create a pooling system? Currently, government uses tax dollars to insure those least in need, and the individual market exists for everyone else. Why are we sending people out into this ugly individual insurance market? It’s bound to fail. At least it will if we operate under conventional concepts.

Thinking Outside the Box

Try to get out of the box a little bit. Compare scheduled airlines and chartered airlines. Why can a chartered plane sell a trip so much more cheaply than a scheduled airline? It’s pretty simple: a scheduled airline takes off whether it’s full or not. The charter says: Show up on this day, at this time, and well sell you a seat at this price. If it’s a good time and the destination is good and the price is good, the plane will be full. You know when Honda first entered the U.S. market, they provided a radio in every car as standard equipment. Some in the industry thought that was not a good idea. But Honda, in its naivete, said, You’d be amazed at how cheap radios are if you stick them in every car as standard equipment on the assembly line.

Do you realize how cheap an insurance product would be if you made a fundamental boiler-plate catastrophic program available to every American? Government could play a role not as a subsidizer for those least in need, but as a subsidizer for those most in need. If you have a low income you would be subsidized. If you have the wherewithal to purchase insurance you would get a tax credit. And any insurance above some limit would be your decision based upon after-tax dollars. Do you realize how cheap that product would be?

If you have an insurance market that doesn’t work because you have high-cost outliers, guess what you can do? Separate the outliers and you will have a market that works. Most of the health care dollars are spent on a very small number of people. At the same time, there are a lot of people who don’t cost very much. Instead of having government subsidize all those inexpensive people on the low end of the curve, why not use the money to subsidize the costly outliers at the high end of the curve? Then you would have a universe that is clearly insurable. But don’t do it through a third party that dictates what you’re going to get and leaves you with nothing when you change jobs. Create an arrangement where dollars are spent for the highest and best needs as envisioned by the person who’s being insured. Let people have what they need. Let them take it with them on their journey through the labor market. Let them realize the benefits of prudent behavior, including preventive and wellness care. Why in the world should others pay for health problems caused by people who smoke? Why in the world should others pay for the health problems caused by people who abuse themselves over the years? Why should these personal problems become society’s problems? If each of us had his own insurance policy and adopted a healthy lifestyle, over the years a whole lot of dollars would accumulate in our personal health savings accounts. And if you did abuse yourself and if you had to pay for the small costs along the way, you could still rely on catastrophic insurance.

Health Savings Accounts

We talk endlessly about the way in which this system needs to be changed, but I find it really ironic that we are having a clash of titans over a modest health savings account proposal finally coming to full fruition -- not in the aberrated forms that we had earlier --but in a simple form. Basically, if you want to help yourself, the government will allow you to put money away free of taxation, to be spent only on your definable health needs. And if at the end of the year the money you’ve put away isn’t all consumed, you get to roll it over. And wouldn’t it be something if you could take the employer dollars that are currently heavily subsidized and put them into that same pot so they could be rolled over as well? In that case the funds would clearly be yours, not your employers. And when you leave your job, you would get to take the umbrella with you.

We had a major political fight over COBRA, an insurance steppingstone for people between jobs. We created a system in which the former employer, no longer obligated to you by law, is now required to offer you insurance. And as soon as that modest steppingstone between jobs was created, the previous administration tried to blow it up into a 10-year requirement. We had a lot of hand wringing over people who aren’t yet 65 and eligible for Medicare. Many jobs nowadays end at age 55. If you’re in risk services, such as fire or police protection, 55 is a common retirement age. If you’re in the building industries, 55 is a common retirement age. What are we going to do about these people? Drag the Medicare eligibility age down from 65 to 55? If people had a health savings account for the 25 years they were employed, and if they practiced reasonable preventive health care and were a little lucky, they’d wind up at age 55 with significant amounts of money to tide them over between then and when they qualify for Medicare.

The account will also help with premiums for drug coverage and out-of-pocket costs when these people reach 65 and enroll in Medicare. The ordinary citizen will have a pot of money to be able to pay some of those costs.

Why do we have such a mal-distribution of benefits in this system? If this discussion were about income, don’t you think Ted Kennedy would be right up here next to me demanding redistribution? Why don’t we take the tens of billions of dollars of government subsidies for employer-provided insurance and talk about redistributing them? It’s because of who the groups are that currently get these benefits. It really is about whose ox gets gored. Although small business often is unable to offer health care, big business typically does. Often there are unionized contracts that, frankly, are pretty munificent. And management isn’t all that worried about it because they get their health benefits as well. So I find it ironic. I started off by asking you how many had insurance. All of you did, but none of you are willing to give up anything you’ve got to help other folks. I thought that is what government was supposed to be about.

So what I’m now saying is, okay, keep what you’ve got. I’m not going to continue banging my head against the wall trying to cap fringe benefits. I’m giving that up. I’m not even interested in subverting the employer-based system, which is fundamentally flawed. I’m giving that up too. All I want to do is ask this question: Why are people so hostile to the idea of allowing an employer or an individual or a family to put a little money away? Why can’t they have a tax-free account that allows interest to accumulate tax free, and that is tax free when they spend it on a health care need? Why such hostility toward that concept? Because it will distort the group market? What in the world does employer-based insurance do to a group market but distort it in the worst possible way? It gives the cheapest cost to the people who need it the least. Because we will disrupt government programs? Twenty-five percent of the low-income people are not enrolled in the free health care programs for which they are eligible because we refuse to spend a few bucks on marketing to make sure they’re covered.

Creating A Real Market

I think the real issue is the fear that all of the arguments over all the years that health care can never be a true market might actually be challenged. What do you need to have a market? Well, you need individuals with the wherewithal to be able to make purchases. As long as its third-party insurance, the individual never gets to do the purchasing. But you need something more than an individual who has the ability to make purchases to make a market. If you want a long-term, responsive market, you also need knowledgeable consumers. Frankly, that is an area where we have fallen down from the very beginning. We don’t have knowledgeable consumers because we don’t collect information that will allow those consumers to be knowledgeable.

There are myriad ways we can collect data in a manner that ensures privacy. Right now, we don’t have the ability to tell people what works and what doesn’t in health care, based on reliable statistics. We don’t have the ability to create guidelines that allow the largest purchaser of health care, the public sector (spending your tax dollars) to decide that one procedure is significantly and statistically better than another and pay only for the former and not the latter. And until we achieve that ability, you aren’t going to have a market.

We need to move rapidly to develop the ability to collate and collect data in a confidential way that allows us to look at outcomes so that people can make wise choices. That will be another major battle because, frankly, there is a group of people who don’t think they should be held accountable. The medical universe needs to be held accountable not in order to punish individuals, but in order to enhance our collective wisdom. I don’t know why anyone would really fear that, except that it does change the relationship in terms of power and hierarchy. But if the public is going to spend the billions of dollars it spends, we need better data available to decide what is and what is not a good purchase.

Vision for The Future

When we reach the point of knowledgeable consumers spending in a marketplace, you will have a very reasonable institution, which will keep health care costs down and which will allow for innovation in the private sector.

Maybe that’s why some of those folks are so opposed to what were trying to do. It really will take government out of the picture and create a rational process in which we empower individuals and have government fill in only to meet needs that the marketplace can’t.

For the low-income uninsured who are eligible but not enrolled in government programs, you spend a little money, like the private sector would, advertising the programs that are available. Go out and get them; fill that need. For the higher income uninsured who don’t see an economic value in the current insurance products, there will be new products. What you would have left is a relatively small group for which government would be the insurer of last resort. This would resolve virtually all of the concerns for that group of uninsured and at the same time create a market for everyone else.

That’s a tomorrow that I think we have a chance of moving toward. And I think that is one of the reasons some of our opponents are so vehement about what seems to be a very modest little change in a major health care bill. It’s not about today; it’s about tomorrow.

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If you have come this far with Bill Thomas, you may want to sit in on the Q&A session that followed. Here is the speech and the Q&A online at the website of the National Center for Policy Analysis.

http://www.ncpa.org/prs/tst/20040331bttst.htm