Improving Health and Health Care: An Agenda for Reform (Full Report)

Published December 9, 2015

AEI: Improving Health and Health Care

This is an executive summary of a report co-authored by Joseph Antos, James CaprettaLanhee Chen, Scott Gottlieb, Yuval Levin, Thomas MillerRamesh PonnuruAvik Roy, Gail R. Wilensky, and David Wilson. A full PDF version of the plan is available here.

Despite, and in a sense because of, the enactment of the Affordable Care Act (ACA) in 2010, US health care is still badly in need of reform and revitalization. Instead of more federal regulation and subsidies, what US health care needs is adoption of market principles, starting with broad empowerment of the patient-consumer. The proposals advanced in this volume would replace many counterproductive and outdated federal policies with practical, market-based reforms that aim to provide all Americans with access to high-quality health care at affordable prices.

Replacing the ACA. The starting point for renewing American health care must be replacement of the ACA with a genuine, consumer-driven approach to expanding health insurance coverage. The ACA moved power and authority over the direction of US health care from consumers, employers, and the states to the federal government. A replacement plan must be built on a more decentralized approach, with consumers given the ability to make choices for themselves and authority returned to the states to oversee health care markets.

Most Americans get their health insurance today from their employers, and that should not change with a new reform plan. Employers should be free to organize health insurance offerings that are attractive to their workers. The existing federal tax break for employer-paid premiums should be retained. The only modification should be an upper limit to inject additional cost discipline into the most expensive plans.

Those Americans without access to employer coverage should be given a refundable, age-adjusted tax credit that is set roughly equal to the average tax break for an employer plan. These tax credits could be used to purchase any health insurance plan approved for sale in a state.

All Americans should be given continuous coverage protection in an ACA replacement plan. This rule would protect persons with preexisting conditions from being charged more, or denied coverage, based on their health status so long as they have not experienced long breaks in insurance enrollment.

States could also boost insurance enrollment by assigning persons who are eligible for the tax credits but have failed to pick an insurance policy to a default insurance plan. The upfront deductibles for these insurance plans would be set as necessary to ensure the premiums for enrollment would be equal to the federal tax credit, thus ensuring no additional premium would be required from a person assigned to a default plan.

Medicaid. Medicaid has experienced rapid cost growth over many years, even as the services it provides to lower income households are far from adequate. A fundamental problem is the split financial responsibility for the program. The federal government pays for about 60 percent of all state Medicaid spending, with no upper limit on total cost. The federal government points to its financial stake in the program as a rationale for imposing an extensive web of rules on the states. At the same time, states find it easier to maximize federal Medicaid funding rather than implement difficult measures to improve the cost-effectiveness of the program.

Reform of Medicaid must start with changing how the federal government pays for its share of total cost. The program should be divided into its two distinct subparts, one for able-bodied adults and their children and the other for the disabled and elderly. The federal government should make fixed, per capita payments to the states based on historical spending patterns for the program’s two population groups. States would be given much more authority to manage the program without federal interference.

Able-bodied adults and children who are eligible for Medicaid would get the federal tax credit as a base level of support for health insurance. Medicaid would then serve as a supplement to the credits. The presumption would be that these Medicaid enrollees would be given the same insurance choices as other state residents receiving the federal tax credit.

States would be allowed to implement major changes in Medicaid support for the disabled and elderly without the need of prior federal approval. This would allow implementation of changes giving beneficiaries, and their caregivers, more control over what services they procure, and from whom they procure them.

Medicare. Medicare is pivotal to an effective reform of US health care because of its dominant regulatory role. Medicare’s rules for paying hospitals, physicians, and other service providers heavily influence how care is delivered to all patients, not just Medicare enrollees.

The program would improve if there were fewer regulations and more emphasis on market-based reforms. The starting point should be conversion of the program, on a prospective basis, to a premium support model. Beneficiaries would be entitled to a fixed level of federal support for their insurance and would be given the opportunity to pick from a number competing insurance options, including the traditional program and private insurance plans.

Other changes in Medicare are also necessary, including updating the statutory benefit to rationalize the program’s cost-sharing requirements in a benefit that combines hospitalization coverage with outpatient and physician care, changing the rules for supplemental coverage to encourage cost sensitivity at the point of services, eliminating unnecessary bureaucratic controls, and gradually increasing the age of eligibility.

Health Savings Accounts (HSAs). HSAs should be a central component of health care in the United States. The accounts provide strong incentives for their owners to seek the best value for their health care purchases, and they provide a ready vehicle for providing additional protection against high medical expenses. Existing rules should be modified to allow all Americans to make annual contributions to an HSA, and a new, onetime federal tax credit would provide a strong incentive for those without accounts to establish them. HSAs should also be fully integrated into the Medicare and Medicaid programs.

Additional Reforms. The federal government exerts substantial control over the training of new physicians through outdated funding streams through the Medicare program. There is no evidence that approach improves the quality of the nation’s physician corps. The federal role should be reduced by cutting the funding substantially and converting what remains to a discretionary grant program.

A comprehensive reform plan should also reform the health insurance benefit for federal employees so that it operates like a defined contribution program. The government’s contribution would be fixed for every geographic area of the country and would not increase with the expense of the plan chosen by a worker. Health services for the nation’s veterans should also be modernized so that veterans can more easily access high-quality care in the private sector, with the Department of Veterans Affairs focused more on the services that are essential and cannot be replicated elsewhere.

Federal data on health care costs and clinical outcomes should be made more widely available to private-sector companies and researchers. These data can speed up the process of assessing the cost-effectiveness of various health procedures and products and thus also stimulate better decision making by consumers.

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