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Press Release

The Time for Health Care Reform is Now


For the seventh consecutive year, it appears unlikely that a "Patients' Bill of Rights" will be signed into law. The main criticism of PBOR - as the bill is commonly referred to, in accordance with Washington, D.C.'s love for acronyms - is that it would raise the price of health insurance premiums to a level that would lead some employers to drop health coverage. With an estimated 44 million Americans already without health insurance, a new law to increase the ranks of the uninsured would be counterproductive.

But the persistence of the Association of Trial Lawyers of America (ATLA) kept the issue on the Congressional agenda, and actually led slightly different versions of the bill to pass both houses of Congress last summer. The bill is so attractive to the ATLA because it establishes taxing new regulations on health maintenance organizations (HMO) and then provides a civil course of action to sue health plans that fail to meet them. The House-passed version would limit this litigation gold mine by limiting both punitive and non-economic damages (pain and suffering) to $1.5 million each, compared to the unlimited punitive and $5 million non-economic damages in the Senate version.

While the differences between the bills already made final passage uncertain -- particularly in an election year -- a report issued by the Center for Medicare and Medicaid Services (CMS) in the January/February 2002 issue of Health Affairs has made the chance for a new law even more remote. According to the CMS, formerly known as the Health Care Financing Administration (HCFA), health insurance premiums increased by 8.4 percent in 2000, while aggregate U.S. health care spending rose by 6.9 percent. Most troubling about the growth is that it outpaced Gross Domestic Product (GDP) for the first time in 9 years and now stands at 13.2 percent of GDP.

While this new data is sure to dampen enthusiasm for PBOR on the federal level, it is the budget of state governments that is bearing the brunt of the increase in medical spending. That is because Medicaid spending - which is divided between federal and state governments - increased by 9 percent in 2000 and nearly 11 percent in 2001. Designed to provide health care to low-income Americans who could otherwise not afford it, Medicaid is a non-discretionary entitlement whose spending can only be restrained through structural changes to the program.

During the boom of the 1990s, state governments were not only unwilling to address the pressure increased Medicaid spending put on their budgets, but actually increased total spending by an estimated 63 percent. Due to the current recession and dramatic downturn in state government tax receipts, state governments are now forced to address their profligacy, as most state constitutions require a balanced budget, or greatly limit the state's ability to borrow money.

The knee-jerk reaction of most states to this fiscal dilemma has been to cut prescription drug spending, which increased by 151 percent since 1993. While this may be the path of least resistance - as states can simply institute formularies to stop reimbursements of patented medications - it is the worst course of action state governments can take to address their budget shortfall.

First of all, most of the increase in prescription drug spending is not from price increases - which are typically equal or less than inflation - but from new spending on innovative medications that did not exist in 1993. While it may be tempting to cap the prices on brand name, or patented, prescription drugs, or simply refuse to pay for them, this policy would have the unintended consequence of increasing spending in other areas and may actually increase aggregate health care spending.

For instance, a study by Columbia University economist Frank Lichtenberg found that every $1 in prescription drug spending saved $4 in hospital care. This is because prescription drugs are often used for preventive care, to prevent more debilitating - not to mention more expensive - medical conditions. While a $600 annual prescription for cholesterol-reducing drugs Zocor and Prevastatin may seem expensive, if they can help to avert a $300,000 hospital stay and bypass surgery, they are more than worth the investment.

Moreover, if states decide to cover the drugs but cap the price that drug manufacturers may charge for them, the cost savings will come at the expense of pharmaceutical research, which allows for the cost-saving medications to come into existence. It is difficult to see how any top-down strategy to reduce drug spending will have anything but negative consequences for public health and state budgets.

Instead, state governments would be best served to reform Medicaid to compel its beneficiaries to consume health care services more judiciously. The problem with Medicaid - and most socialized medical programs - is that consumers are insulated from the cost of their medical care. This encourages waste, abuse, and overall imprudence, as beneficiaries are discouraged from seeking ways to reduce costs because it provides no benefit to them.

A better system to provide medical care for those who cannot afford it would be to create refundable medical savings accounts whereby low-income residents would get a specified amount of money for medical care - and catastrophic insurance - in a secure account. Whatever money the beneficiary does not spend can either become theirs at the end of the year, or accumulate to defray the cost of future private insurance premiums.

This strategy could also be implemented on the federal level with Medicare, but also with the nation's entire health care policy. According to the CMS report, of every dollar spent on health care in America, only 17 cents comes out of the pocket of consumers. With the bulk of health care coming from employer-sponsored coverage, most Americans are as insulated from the actual costs of their health care consumption as Medicaid beneficiaries.

If elected officials are interested in real health care reform, they must return control over health care decisions to patients and their doctors. This means re-establishing the link between health care professionals, pharmaceutical manufacturers, and hospitals and the consumers of their services by establishing medical savings accounts (MSAs) and tax credits to cover the cost of catastrophic medical insurance.

Right now, employer-sponsored coverage is the only game in town, so to speak, because the cost of coverage does not count against employees for income tax purposes and employers may write-off premium costs to reduce their own income tax liability. Unfortunately, this system creates two intermediaries between patients and health care - their employer, who must select a health plan for its workforce, and the health insurance company that wins the contract and pays - or hires - medical professionals for the actual care. As a result, both employers and insurance companies seek to reduce their health care expenditures in the aggregate, with little concern for individual needs.

This free market solution to America's health care crisis would improve quality of care, nearly eliminate the ranks of the uninsured, reduce costs, and eliminate the government's role as a brokerage house for rival medical interests. Currently, insurers, pharmaceutical companies, hospitals, doctors, and employers all attempt to manipulate government to shift the burden of rising health care costs on to someone else, or increase their own revenue. MSAs and tax credits would make this influence peddling irrelevant as health care providers would be forced to curry favor with consumers in a competitive market, not public officials in closed-door negotiations.