Ten Principles of a Market-Oriented Health Care System

Merrill Matthews | January 27, 2014

Republicans want a health care reform plan that would replace Obamacare, while increasing access, lowering costs and improving the quality of care.  In short, they want a market-driven system.  The principles of such plan have been around for years, and a number of Republicans have included them in their proposals.  But here is a brief summary of the key components.

1. Establish tax fairness.  About 156 million Americans get their health insurance through an employer.  The tax system is the primary reason that employer-based system survives, when almost all other types of insurance are bought and paid for by individuals.  Employer money spent on health insurance is excluded from employees’ income.  Giving that tax break directly to the individual, rather than having it flow through the employer, would create a level tax playing field.

President George W. Bush proposed ending the tax exclusion and giving everyone a standard deduction: $7,500 for an individual, $15,000 for a family.  As a presidential candidate, Senator John McCain proposed giving workers a refundable tax credit, $2,500 for an individual or $5,000 for a family.  Both approaches would have gone a long way toward implementing tax fairness because everyone, including the self-employed and employees without employer-provided coverage, would get the same brake.

2. Expand consumer driven options like HSAs.  The primary reason Americans spend so much on health care is that comprehensive health insurance insulates them from the cost of care.  Health Savings Accounts (HSAs), in combination with a high-deductible health insurance policy to cover major accidents or illnesses, allow workers and/or their employers to deposit money in a tax-free account owned and controlled by the individual.  Patients use their HSA money to pay for allowable smaller and routine medical care and medications, but they keep it if they don’t use it, giving them a reason to be value-conscious shoppers in the health care marketplace.

Several studies have demonstrated that HSAs lower health care spending without any negative impact on patients’ health.  Obamacare reduced the number of allowable HSA expenditures; those restrictions should be reversed to allow the widest possible use of HSAs.

3. Cap the tax deduction for health insurance.  The current health insurance tax break is unlimited, encouraging employees, and especially unions, to try to get the most comprehensive coverage they can get, which has the unintended consequence of increasing health care spending and use.  Capping that tax break—as the standard deduction and tax credit discussed above would do—would encourage people to choose high-deductible coverage, which would dramatically lower total health care spending.

4. Provide help for low-income families.  There’s general agreement that there should be some public assistance for low-income families that cannot afford coverage, but what’s the best way?

The standard-deduction approach discussed above doesn’t help if a family pays no income tax—and nearly half of U.S. households pay little or nothing—but a refundable tax credit would.  A family owing, say, $1,000 in income tax would still have $4,000 left over from a $5,000 refundable credit to apply toward health coverage, significantly lowering the family’s effective cost and providing direct help for purchasing coverage.

5. Create a safety net for the uninsurables.  One of President Obama’s primary justifications for reforming health insurance was that millions of Americans were being denied coverage because of a preexisting medical condition.  But employer-based coverage, Medicare and Medicaid—covering perhaps 260 million total—accept eligible people with a preexisting condition.  And 35 states have (or had) state-based high-risk pools to provide coverage for the uninsurables who couldn’t get it, plus seven states required health insurers to accept all applicants.  In other words, while being denied coverage because of a preexisting condition was a real issue for some, the vast majority of people could get coverage even with a preexisting condition.

We need to return to that system of high-risk pools that Obamacare is unraveling, with some additional funding and some best-practices to ensure they all work effectively.

6. Privatize Medicare. Republicans have lost their way on Medicare, only proposing to cut benefits and raise taxes.  The better solution, which Republicans used to strongly support, is shifting to a system or personal retirement accounts, both for income and health care after retirement.  The only real conservative approach is to put your own money aside during your working years and buy your own coverage in retirement.

7. Give vets and Medicaid recipients vouchers.  The only health coverage worse than what we do for (or to) veterans is what we give the poor (i.e., Medicaid).  Many states have been clamoring for more flexibility for their Medicaid dollars to experiment with different solutions.  Washington should give them that flexibility.

It could also build on the Medicare Advantage (MA) program by giving vets and the poor a defined contribution to buy into an MA-type private health plan.  More than 25 percent of seniors already choose a similar option under Medicare.  Forcing the poor, and especially our vets, to get substandard coverage is shameful; there’s a much easier and better way.

8. Allow cross-state health insurance purchases.  Allowing people to buy health insurance across state lines is a good idea, though it isn’t a panacea.  That’s because health insurers selling in one state may not have a network of physicians and hospitals in the state where a consumer wants that policy.  But it would work in some states and create more competition in those instances.

9. Push malpractice reform. Republicans have been unsuccessful in reforming the malpractice system at the federal level, even when they controlled both Congress and the White House.  So states have acted on their own, which has lowered malpractice premiums and attracted doctors to those states.  Plus that action has the benefit of driving trial lawyers out of the reformed states.

10. Shrink HHS.  The Department of Health and Human Services has 76,000 full-time equivalent employees and an annual budget of more than $900 billion—and the potential for untold mischief.  Even when the Republican-led House has tried to defund parts of Obamacare, HHS just shifted around millions of dollars within its budget and proceeded largely undeterred.  The department’s spending authority should be dramatically cut in future appropriations bills.  Partially defunding the beast would help limit the damage it does.