South-Western College Publishing - Economics  

Policy Debate: Is there a need for health-care reform?

Issues and Background

I will follow that system of regimen which, according to my ability and judgement, I consider for the benefit of my patient, and abstain from whatever is deleterious and mischievous.
~ Hippocrates

Health-care reform was one of the major issues in the 1992 U.S. Presidential campaign. While no major reform bill was passed during Bill Clinton's two terms in office, health-care reform has remained a major topic of congressional debate.

The ultimate source of much of the health-care reform debate has been the rapid rise in the cost of medical services during the past 30-40 years. During most of this period, the rate of medical cost inflation substantially exceeded the overall inflation rate. While the increase in medical costs is partly the result of an improvement in the quality of medical services, it has substantially reduced the ability of non-insured low-income individuals to acquire medical services. In the early 1960s, total health expenditures in the U.S. accounted for approximately 5-6% of GNP. By 1990, approximately 12% of U.S. GDP was devoted to health-related expenditures. (A chart showing health-care expenditures as a share of GDP over time is provided by Physicians for a National Health Program.) This problem is expected to become more severe as the baby-boom generation ages and requires a higher level of medical expenditures.

Traditional private insurance coverage in the United States consisted of a fee-for-service system. Under this system, insurance companies paid all or a given percentage of the costs of most medical services. Individuals selected their own physicians and the physicians decided what services were appropriate. This system, unfortunately, results in a moral hazard problem that exists because individuals who do not face the full cost of medical services (as a result of their insurance coverage) tend to overconsume medical services. Physicians concerned about the rising cost of malpractice insurance might be expected to engage in excessive medical testing (particularly since they know that their insured patients do not have to pay for the tests).

To deal with this moral hazard problem, insurance companies have generally responded in recent years by raising deductibles and copayments. Patients faced with a large deductible or substantial copayments will tend to consume fewer medical services. They will, however, always have an incentive to consume more services than would be consumed in the absence of insurance coverage. As a larger share of the population became covered by private or governmentally provided Medicare and Medicaid insurance programs, medical costs rose rather dramatically during the last 50 years.

In response to higher medical costs (and the consequent increase in the price of traditional health insurance programs), health maintenance organizations (HMOs) and other managed care arrangements have become a dominant feature in the health-care marketplace during the last 20 years. Participants in such plans must first receive the approval of their primary care physician and the insurance company before receiving any specialized medical treatments. Physicians participating in such plans receive fees that are set by the insurance company. These fees are generally less than the fees charged to other patients. While such managed care arrangements have been successful in substantially lowering the rate of medical cost inflation in recent years, they have also substantially limited consumer and physician choice. The approval process required by these plans have also resulted in administrative expenses that are among the highest in the world. Concerns about the quality of care provided under managed care has resulted in pressure for the passage of a Patients' Bill of Rights. In 2001, the House and Senate have passed different versions of this bill. No compromise was reached.

While some of the best health care in the world is available in the U.S., not all individuals have access to the same level of medical care. The infant mortality rate in the U.S. is among the highest among developed economies. In 1990, the infant mortality rate of 9.2 per 1,000 live births in the United States was twice as high as Japan's rate of 4.6. This is partly due to the lower quality of prenatal care received by low-income mothers. (More information on infant mortality rates among developed economies is available in Chapter 4 of International Health Statistics: What the Numbers Mean for the United States.) Unemployed individuals, low-income workers, homemakers, discouraged workers, and members of minority groups are substantially less likely to have insurance coverage.

Several proposals for health-care reform involve a form of national health insurance. A popular variation of this plan involves the replacement of the current system of private health insurance with a single payer system (as in the Canadian system). Other proposals rely on a market-based system of national health insurance in which all companies would be required to provide a standardized insurance plan to all applicants without regard to their health status. In several proposals, all employers would be required to provide health insurance for all of their employees.

Another proposal for health-care reform involves the encouragement of medical savings accounts. Under a medical savings account system, individuals purchase a high-deductible catastrophic insurance policy and deposit the remainder of the funds that would otherwise be used to purchase traditional health insurance or HMO coverage in a medical savings account. The funds stored in the medical savings account would be used to fund current and future medical expenses (until the annual deductible is reached). Funds that remain in this account when the individual reaches retirement age may be used to pay for medical or other retirement expenses. Advocates of this approach argue that it removes the moral hazard problem associated with traditional insurance coverage and results in a more efficient use of medical services. Opponents argue that the encouragement of medical savings accounts through tax subsidies does not remedy the problem of inequitable access to medical services. High-income and healthy individuals gain more from such a system than do low-income individuals and those with chronic illnesses. If this plan is available as an option, healthy individuals would select it while those individuals with higher medical expenses would select traditional insurance or managed care programs. This would raise the cost of alternative insurance programs as healthier individuals opt out of these plans.


Primary Resources and Data

  • American Medical Association
    The American Medical Association (AMA) website contains extensive information on a variety of health care topics. Abstracts and selected articles from AMA journals are available on this site. Information about the AMA's position on a variety of health reform proposals can also be found here.

  • U.S. Department of Health and Human Services
    The Department of Health and Human Services is the executive department charged with coordinating health care policy. This web site contains information about programs sponsored by the Department.

  • Centers for Medicare & Medicaid Services (CMS)
    The Centers for Medicare & Medicaid Services (formerly known as the Health Care Financing Administration) is charged with administering Medicare, Medicaid and Child Health Insurance Programs. This web site contains extensive information about these programs and a large collection of health care statistics and data related to these programs. One of the nice features of this site is its provision of online health care indicators including a medical sector price index, a hospital price index, and a prescription drug price index.

  • Office of Technology Assessment, "International Health Statistics: What the Numbers Mean for the United States"
    This November 1993 study conducted by the Office of Technology Assessment of the U.S. Congress provides a comparison of the state of health care in the United States with health care in other developed economies. Reasons for the relatively poor performance of the U.S. in these international comparisons are examined in this study.

  • Office of Technology Assessment, "An Inconsistent Picture: A Compilation of Analyses of Economic Impacts of Competing Approaches to Health Care Reform by Experts and Stakeholders"
    In this June 1993 study, the Office of Technology Assessment examines alternative estimates of the economic impact of a variety of proposed health-care reform plans. It is found that the existing studies provide widely varying estimates of the costs and benefits of each approach. This document, however, provides a very nice summary of the advantages and disadvantages of a variety of alternative programs.

  • World Health Organization Statistical Information System (WHOSIS)
    The website of the World Health Organization Statistical Information System contains online cross-country statistics for a variety of health-care indicators. Links to other sources of health-care statistics and data are also provided at this site.

  • University of Michigan Public Health Library, "Statistical Resources on the Web: Health"
    This page, provided by the Health Statistics Library at the University of Michigan, contains an extensive collection of links to U.S. and international providers of health-care statistics.

  • Oath and Law of Hippocrates
    This site contains the text of a standard translation of the oath and law of Hippocrates, a celebrated Greek physician. A popular modern version of this oath is also contained on this page.

  • Pam Pohly's Net Guide, "Glossary of Terms in Managed Health Care"
    This glossary of managed-care terms will be useful for those who are unfamiliar with the jargon of the managed-care literature.

  • National Health Service, "NHS in England"
    The documents provided at this site provide a discussion of the evolution of the U.K.'s National Health Service from its inception in 1948 until the present day. Since the U.K.'s system is one of the earliest national health-care systems, an examination of its history can provide useful information about some of the advantages and shortcomings of such a system.


Different Perspectives in the Debate

  • President Bill Clinton, "Health Security for All Americans"
    In this September 22, 1993 speech before a joint session of Congress, President Clinton provides arguments for a system of national health insurance. He argues that the current system is inequitable, encourages medical cost inflation, wastes resources on administrative expenses, and is unnecessarily complex.

  • Linda H. Blumberg and Len M. Nichols, "Health Insurance Market Reforms: What They Can and Cannot Do"
    In this Urban Institute article, Linda B. Blumberg and Len M. Nichols examine the problems associated with the health-care system as it currently exists and discusses a variety of reforms. This article provides a very nice discussion of the current institutional and regulatory structure of the insurance industry. The authors suggest that any insurance market reform should take advantage of economies of size, provide more security to insured individuals, promote competition in the private market, and increase the proportion of the population covered by health insurance. (The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.)

  • Amy J. Davidoff and Genevieve M. Kenney, "Uninsured Americans with Chronic Health Conditions"
    In this May 2, 2005 Urban Institute study, Amy J. Davidoff and Genevieve M. Kenney examine the health status of uninsured individuals in the U.S. They find that nearly half of all non-elderly uninsured individuals experience from chronic health conditions. A substantial proportion of these individuals forgo medical treatments for these conditions due to the cost of the treatment. (The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.)

  • Jacob Alex Klerman, "Health Insurance Among Children of Unemployed Parents"
    In this 1997 RAND Institute study, Jacob Alex Klerman analyzes the problems associated with uninsured children of unemployed parents. He finds that there is a result of government insurance programs, uninsurance rates are slightly lower for children (13%) than for adults (15%). Most of the uninsured children, however, are in households in which one or both parents are employed.

  • Physicians for a National Health Program
    Physicians for a National Health Program is an association of physicians who support a single-payer system of national health insurance. They argue that the current health-care system in the United States provides inequitable access to health care services and has excessively high administrative costs. The physicians argue that mergers among HMOs have substantially reduced competition in many markets and have resulted in less consumer choice. This web site contains newsletters, press releases, essays supporting the physicians' position, and other related information.

  • University of Wisconsin (Madison) - Physicians for a National Health Program
    The Physicians for a National Health Program site at the University of Wisconsin at Madison contains a collection of charts that provide a comparison of U.S. health care with health care in other developed economies. These charts suggest that, as compared to developed countries with universal health-care coverage, U.S. residents: This site also provides other statistics and charts, and a discussion of health-care systems in other countries.

  • David B. Kendall, "Getting on the Fast Track to Universal Coverage"
    In this April 1, 2000 Progressive Policy Institute document, David B. Kendall presents some of the major arguments in favor of universal health-care coverage. He argues that managed care has reduced the rate of medical-cost inflation. Kendall notes, however, that this has come at the expense of consumer choice and has not benefited the substantial share of the population who remain uninsured. He recommends that a health-care tax credit be provided that would make allow more low-income households to receive health-care insurance. He also suggests that a tax surcharge could be imposed on those who do not acquire health insurance.

  • David B. Kendall, "Top Ten Reasons to Enact a Health Insurance Tax Credit"
    In this August 1, 2000 Progressive Policy Institute document, David B. Kendall provides a list of 10 reasons for the adoption of a health insurance tax credit. He suggests that this would be a productive use of a portion of the federal budget surplus.

  • John Locke Foundation, "Health Care Reform"
    In this article, the John Locke Foundation argues that providing consumers with more choice over health-care plans and better information about the cost of health insurance would result in a more efficient health-care market. They recommend that a refundable tax credit be provided for the use of medical savings accounts. It is argued that employees are unaware of the cost of their insurance package when they receive health insurance as part of their benefit package. By establishing a system in which each individual shops around for the optimal health insurance package, a more efficient utilization level would be achieved.

  • American Medical Association, "Expanding Health Insurance: The AMA Proposal for Reform"
    This document describes the AMA's views on health insurance reform. It is argued that the most efficient method of reform is through the use of medical savings accounts. The AMA recommends that the tax code be revised to increase the incentives for low-income households to acquire health insurance. It is also recommended that medical insurance be provided directly to individuals rather than being available through employers. This site provides a set of links to reports that advocate expanded insurance coverage.

  • Len M. Nichols, Marilyn Moon, and Susan Wall, "Tax-Preferred Medical Savings Accounts and Catastrophic Health Insurance Plans: A Numerical Analysis of Winners and Losers"
    In this April 1996 Urban Institute study, Len M. Nichols, Marilyn Moon, and Susan Wall examine the economic implications of the introduction of medical savings accounts combined with catastrophic health insurance plans. Their study indicates that replacing current insurance systems with such a plan would reduce medical expenditures by 4-6%. Healthy workers who currently consume more insurance than is optimal under the current employer-provided insurance system would gain from such a switch to medical savings accounts. Workers with higher medical expenditures would lose under such a plan. If a medical savings plan is introduced as an option, however, the cost of traditional insurance plans will rise substantially as healthier individuals opt out of such plans. (The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.)

  • President's Advisory Commission on Consumer Protection and Quality in the Health Care Industry, "Quality First: Better Health Care for All Americans"
    This 1998 report provides an evaluation of state of the U.S. health care industry. The weaknesses that are analyzed include: avoidable errors that harm patients, underulitization of preventative care, overutilization of some services (such as hysterectomies), and variations in health-care practice that suggest that best practices are not always being followed. This study provides a very comprehensive review of the state of health care (an extensive collection of research studies are cited in this document).

  • Robert Kuttner, "Ignoring Health Care At Our Peril"
    In this article, Robert Kuttner argues that when HMOs were first created, they were generally nonprofit organizations that provided significant benefits to their members by emphasizing wellness and prevention. He argues that contemporary HMOs, however, are profit-oriented institutions that achieve higher profits by providing a lower quantity and quality of medical services to their subscribers. Kuttner suggests that the budget surplus has arisen partly as a result of passing the costs of medical services to the elderly back to their families.

  • Mark A. Hall, J.D. and Robert A. Berenson, M.D., "Ethical Practice in Managed Care: A Dose of Realism"
    In this Annals of Internal Medicine article, Mark A. Hall and Robert A. Berenson discuss ethical issues associated with alternative incentive systems facing physicians in a managed-care environment. They argue that the ethical training of physicians is in conflict with the incentive structures faced by physicians under a managed-care environment. Hall and Berenson argue that in a world of limited resources, some health-care rationing mechanism is required. They argue that physicians should attempt to:
    • maximize the health of the group of patients that the physician is responsible for,
    • provide (or at least recommend) the same medical services for all patients with the same clinical conditions without regard to their insurance status,
    • serve as advocates for appropriate medical treatments for their patients -- the actual decision about coverage should be made by the insurance company, not the physician, and
    • be honest about financial conflicts of interests.
    The authors further argue that HMOs should be required to reveal the incentive systems that they use to encourage physicians to practice lower-cost medical care. In this case, individuals may select the insurance package that they perceive to be optimal with more complete knowledge of the trade-off that they face between the cost of the insurance and the quantity and quality of services that they are likely to receive.

  • Tom Miller, "Dumb and Dumber: Two Wrongs Don't Make a Patients' Bill of Rights",01648.cfm
    Tom Miller critiques an early version of the Patients' Bill of Rights in this July 14, 1999 Competitive Enterprise Institute policy brief. He argues that this proposed law will result in higher costs, fewer choices for patients, and a reduction in the incentive to innovate.

  • Milbank Memorial Fund, "Tracking State Oversight of Managed Care"
    In this July 1999 report, the Milbank Memorial Fund examines state oversight of managed care plans. A summary and comparison of state oversight programs is presented in this document. Names, addresses, and web site urls are also provided for the relevant state agencies.

  • Families USA, "Managed Care"
    Families USA supports laws that give patients and physicians more rights under managed care arrangements. Position statements, research studies, and summaries of news items relating to managed care are available through links on this page.

  • Families USA, "Medicaid and Minority Health: Why Cutting Medicaid Will Exacerbate Health Disparities"
    Families USA argues, in this February 11, 2005 position paper, that proposed cuts or caps in Medicaid spending will have a particularly adverse effect on nonwhite individuals. Blacks, Hispanics, American Indians, and Asians constitite a disproportionate share of Medicaid recipients.In this paper, it is noted that these groups tend to receive experience relatively high rates of many chronic illnesses, and experience relatively high infant mortality rates. Low-income members of these groups also tend to receive relatively low levels of medical care, even with the availability of Medicaid. It is argued that the existing disparities in health outcomes will be worsened if the Medicaid program is scaled back. (The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.)

  • Families USA, "HSAs: Why High-Deductible Plans Are Not the Solution"
    This January 2005 Families USA paper suggest that health savings accounts (HSAs) will not help expand health coverage to low-income households. The tax benefits associated with these plans provide larger benefits to higher income workers who experience high marginal tax rates. These individuals are most likely to be covered by private insurance plans. Low-income households whose income is too low to pay federal taxes will not receive any benefit from such a plan; other low-income households facing positive tax rates will receive only small benefits as a result of the low marginal tax rates that they face. Furthermore, it is noted that low-income households have low levels of savings and are unlikely to be able to save a sufficient amount to adequately cover medical expenses. The introduction of HSAs will also generate an increased adverse selection problem in the insurance market since those with low expected levels of health-care utilization will be more likely to opt for a HSA than a more expensive insurance plan. This will raise the cost of health insurance for older and less healthy individuals. (The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.)

  • Kevin C. Fleming, "High-Priced Pain: What to Expect from a Single-Payer Health Care System"
    Kevin C. Fleming, in this September 22, 2006 Heritage Foundation Backgrounder, raises concerns over the introduction of universal health coverage through a single-payer system. He argues that such a system would be characterized by longer waits for services, a lower quality of care, chronic funding problems, inequitable access to high-quality care, and other inefficiencies. Fleming provides examples from the Canadian and British systems to support his arguments.

  • Jocelyn Guyer and Cindy Mann, "Taking the Next Step: States Can Now Expand Health Coverage to Low-Income Working Parents Through Medicaid"
    In this July 2, 1998 article, Jocelyn Guyer and Cindy Mann note that 1996 changes in federal welfare law allow states to use Medicaid to provide health insurance to low-income working parents. The authors argue that the existence of federal matching funds provides states with more incentives to create such programs.

  • "Study Finds Price Gouging in U.S. Prescription Drugs"
    This July 15, 1998 Public Citizen press release, notes that the U.S. price of eight newer antipsychotic and antidepressant medications was 1.7 to 2.9 times as high as the European prices of these medications. The article argues that this is the result of lower negotiated drug prices under the national health systems existing in the comparison countries.

  • Chuck Appleby, "Labor Unions For Physicians: An Idea Whose Time Is Coming?"
    In the September 1996 issue of Managed Care, Chuck Appleby argues that the growth of managed care systems is encouraging the formation of physician's unions. He notes, however, that antitrust laws limit the ability of these unions to set prices while medical ethics eliminate the ability for physicians to strike.

  • Richard W. Johnson and Rudolph G. Penner, "Will Health Care Costs Erode Retirement Security?"
    Richard W. Johnson and Rudolph G. Penner use a simulation model to project health care costs through 2030. They find that income after taxes and health care costs will be about the same in 2030 as in 2000, despite a substantial projected growth in real wages over this period. The projected higher burden of health care costs are particularly high for lower income households that do not qualify for Medicaid. (The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.)

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