Chapter 16:Healthcare Reform

Learning Objectives

• In this chapter, you will learn about:– the nature of reform in the United States– the goals of healthcare reform– various alternative reform strategies

Reform Incentives• As we live longer, the incidence of chronic diseases

such as heart disease, dementia, and arthritis increase dramatically

• We can also expect continued improvement of life-extending technologies, such as mechanical ventilation, artificial resuscitation, and artificial nutrition and hydration

• Using these technologies on sicker patients leads to spiraling costs– Quality and access are important, but the

overriding issue is costs on the current environment

The Nature of Reform• Every Congressional session since 1916 has generated at least one

piece of federal legislation proposing to modify the system in some way • Recent polls show that approximately three-fourths of Americans are

personally satisfied with the health care that they received, rating it excellent or good – In the same polls, 80 percent of the respondents stated that the

system needs some form of reform to make it work better • The real incentives for reform are coming from the middle class and

businesses– Most workers are also feeling the rise of insurance premiums

through larger payroll deductions– Health insurance benefits are perceived as a big problem for most

businesses• With annual premiums rising each year, employee health benefits are

often larger than the firms’ profit margins  

The Goals of Reform• The challenge facing decision makers is one of attempting

to satisfy unlimited demands placed on the finite resources available to society – The needs of the health care sector can be dramatized

by citing individual cases where human welfare is involved and consequently spending priorities are easily shifted toward this sector

• Three issues must be addressed when setting out policies to reform the medical care system: – who is affected– what is affected– who pays for the access to the care

Who is affected? • Most participants in the reform debate agree that the question revolves

around universal coverage • Expanded access will require, at least initially, additional funding • Improved access to care may be accomplished with a mandatory

system featuring centralized control of the third party payment system– An example of the single payer system would be the Canadian

model, which is a universal benefits package and limits the choices available to those who can pay for additional care by making private insurance unable to cover the services that are covered by the governmental program

• Alternatively, expanding coverage to marginal groups defines a different form of universal coverage – Private insurance reform could provide small business owners, their

employees, and dependents access to group health insurance by purchasing through cooperatives that offer group insurance at affordable rates

What is affected?

• The next step is to define a basic benefit package

• While the decision-making process sounds straightforward, there are competing demands which make the process very difficult

• Even though we must live with the ethical consequences of such medical system reforms, we also need to finance the system

Who Finances the System? • Most healthcare systems have some form of

collective funding though a combination of taxes and insurance premiums

• Every reform plan must face the concerns of states, affordability, and overall spending – Inevitably, expanding access and providing

generous benefits will cause costs to dramatically increase

– Individuals spending their own money will react differently from those spending public money in terms of how much they are willing to pay for a reform effort

Individual State Initiatives

• The real battle of reform is fought on the state level – With healthcare costs at the state level rising

to over 35 percent of state budgets, the stakes are high for the states

– While the federal legislation is being developed at a slow pace, individual states are drafting legislation within their borders to improve their medical care systems and control cost increases

The Oregon Health Plan • One of the most innovative approaches to healthcare

reform attempted to date may be the Medicaid experiment in the state of Oregon– It was controversial because of explicit rationing of

services, but had few opponents in the state • The original goal of the Oregon Health Plan was to

provide health insurance coverage for all state citizens through either a private health insurance plan or Medicaid – The reform process began with the Oregon Health

Services Commission placing over 10,000 diagnoses and treatment into roughly 700 diagnoses/treatment regimes

The Oregon Health Plan• The legislature decided to provide a generous

package of care equivalent to a typical group plan – Critics of the approach argue that the process was

flawed from the beginning because the diagnosis/treatment rankings were a result of politicians bowing to pressure from disease constituencies and other special interest groups instead of the stated criteria

– Others argue that the plan’s provisions determine who lives and dies—valuing life in a somewhat arbitrary fashion

• While Oregon made a serious attempt at expanding services to its indigent population, it may not serve as a prototype for the nation due to its relatively homogeneous population

MinnesotaCare • After years of study and many legislative setbacks, Minnesota

legislature passed a comprehensive medical reform law in 1992 – MinnesotaCare was a complex piece of legislation providing basic

medical benefits for low-income families at subsidized rates and modifying insurance standards to lower the cost to small businesses

• In 1987, the Minnesota legislature passed a model healthcare reform bill that provided basic care to pregnant women and young children under the age of eight– Two years after the bill was enacted, the legislature voted to extend

the age of eligibility for children to age 18 • MinnesotaCare provided insurance to approximately 144,000 residents

in 2002

Hawaii’s Universal Coverage• Hawaii legislated a mandatory employer-based

insurance system almost 30 years ago – Under the Prepaid Health Care Act of 1974,

employers are required to provide generous benefits packages for all employees working over 20 hours per week, but dependent coverage is not mandated

• In 1991, the State Health Insurance Program extended coverage to those still uninsured under the Prepaid Health Care Act– A major complaint of the Hawaii plan is its

inflexibility– In practice, all mandatory benefits must be

provided, so any “optional” benefits are considered to be “additional” benefits

Hawaii’s Universal Coverage• Hawaii’s situation may be unique due to the

population’s immobility and geographic isolation • Critics of the Hawaiian system point out that total

healthcare spending has grown faster in Hawaii than in the United States as a whole – Additionally, per capita spending is higher in

Hawaii than in the rest of the country due primarily to higher Medicaid spending

• Despite these concerns, the insurance premiums in Hawaii are among the lowest in the country

Other State Reforms• Most of the other attempts at reform have not been as

extensive as Hawaii or Oregon – Two-thirds of the states have enacted legislation to

authorize small business purchasing pools• Several states, including Maryland, Montana, Vermont,

and Washington, have taken steps to control expenditures on medical care by enacting limits on overall spending and limiting fees charged by practitioners

• Many of the reforms, though, have been piecemeal and only try to improve access to the traditional insurance system

United States Reform Alternatives

• Three alternative strategies routinely compete for acceptance:– the all-government, single-payer option– mandated insurance coverage secured

through place of employment– expanded use of market incentives to

encourage and enable individuals to purchase insurance

• Americans are almost equally split among these alternatives in terms of their preference

Single-Payer National Health Insurance

• Proponents of universal health insurance coverage prefer the single-payer national insurance program.

• Under this system, everyone would participate in a single plan, administrated and financed by the government or some quasi-governmental entity

• Physicians would not bill patients directly • The theoretical model that applies to a single-payer

approach is referred to as monopsony • The main advantage of the single-payer system is

its administrative simplicity – The only paper trail is between the

governmental payer and the provider

Single-Payer National Health Insurance

• Critics say that the government is already too involved in healthcare delivery and the single-payer system adds more power to the governmental side

• The argument for the single-payer system usually focuses on the duplication of services by a system populated by multiple insurers– The elimination of duplication will control

costs due to greater administrative efficiency 

Employer-Based Health Insurance

• Employer-Based Health Insurance  • More than 90 percent of the privately insured

nonelderly population receives health insurance coverage through the workplace (EBRI-2000)

• The insurance is based on three characteristics:– economies of scale are attained when administering

to a large group– the workplace is an ideal place to pool risks because

the workers are on average healthier than nonworkers– there is a favorable tax benefit for health insurance

Employer-Based Health Insurance

• Employer-Mandated Insurance• Proponents of employer mandates have

used this market-based principle to support their plan to provide universal insurance coverage to all working Americans and their dependents – Even strong proponents of the “play or pay”

approach recognize that equity issues arise because there is no mechanism for the unemployed

Employer-Based Health Insurance

• Individual Mandates  • Instead of an employer mandate many reformers prefer an

individual mandate– This is a legal requirement that individuals carry their

own insurance protection, much the way that automobile liability insurance works for all registered vehicles

• By taking the employer out of the business of supplying health insurance coverage, individuals would be more aware of the actual costs of their health insurance

• Implementation of an individual mandate would require that employees who currently receive employer-paid health benefits would received this portion of their benefits as gross income and then purchase insurance using these funds

Market-Based Alternatives • The market approach  • Advocates of the market approach do not see the

growing number of uninsured and higher costs of health care as failures of the market mechanisms– Instead, they see it as a failure of the

government to promote competitive market behavior as the cause of [J3]  rising costs and decreased access to care

• The market approach is most closely associated with the tax code to make people more sensitive to the costs of medical care and health insurance reform, in order to improve access for the uninsured or uninsurable

Market-Based Alternatives• Many market proponents also think that the

major distortion is in the health insurance market is the tax treatment of employer-sponsored health insurance, which creates inefficiencies and inequities in the market

• A problem that limits insurance availability is that individuals and small businesses are fed into small pools for underwriting purposes

• Another important cost control measure is the enrollment in managed care plans

• The market-based approaches are built around the assumption that individual decisions are better than collective decisions

Summary• Healthcare reform is a daunting challenge for U.S. policy

makers– The people want change, but offer little consensus on

how to achieve it– Government action seems to be inevitable, but the extent

of the action is likely to fall far short of what anyone could have imagined shortly after the legislation was first introduced in 1993

• However, it is unlikely that any comprehensive plan for government takeover of healthcare delivery will ever happen– Instead, there will probably be incremental reforms to add

coverage and access to groups at the margin