A Real Cure for Health Care

By Christopher Farrell A decade ago, the nation perceived a crisis in health care. Premium costs skyrocketed for companies offering their workers a benefit plan. The number of uninsured Americans swelled to alarming levels. Bill Clinton defeated incumbent President George Bush in part by promising to bring about national health-care reform. But thanks to a sorry combination of hubris and miscalculation, the reform effort failed badly. Meanwhile, the spread of managed-care networks held costs in check for much of the '90s.

Now, the country is headed back into the soup. Once again, America's health-care system isn't working. Health insurance premiums are soaring, at around a 14% annual rate. Employees are upset at employers that hike their share of the insurance premium dollar. The elderly are angry about the spiraling cost of prescription drug coverage, slated to rise more than 19% in 2003, according to recent survey by Segal Group, a benefits consulting firm.

And patients chafe at the bureaucratic limits imposed by their managed-care providers. Millions of unemployed workers and their families are going without health insurance. Managed care is less and less an effective strategy for containing costs.

SKIRTING REFORM. The term "crisis" is an oft-misused word -- but not when it comes to national health care. The issue will likely move to the top of the Washington policy agenda next month when the Census Bureau releases its latest tally of the number of uninsured Americans, last calculated at more than 40 million.

Yet many of the hot-button medical debates on Capitol Hill skirt genuine reform, such as expanding the Medicare drug-payment benefit and extending federal health insurance assistance to displaced workers. Indeed, the stalled "patient bill of rights" would create additional upward pressure on medical care prices.

That's not reform. The basic problem is that America's health-care system for working-age families is employer-based, and that system is both inefficient and inequitable.

OUTSIZE INFLUENCE. The fundamental flaw is that the company owns the plan, not the worker. Yet even though workers don't own the plan, they pay the full cost of the benefit through reduced wage increases. Worse, losing a job because a company's profits are down during a recession puts a family's coverage at risk. Premiums are lower at big companies compared to smaller ones -- assuming the small business even offers a plan.

Many workers are locked into the wrong job or are afraid to change jobs, just because they can't afford to lose their health benefit. Health-care costs weigh on management's hiring, firing, and promotion decisions. An employment-based system is guaranteed to increase the number of uninsured.

Policy mavens at the conservative Heritage Foundation and the liberal Levy Institute rarely agree on anything. But both think tanks believe this is no way to run a health insurance system.

SYMPTOMATIC RELIEF. "For me, as for many other economists, the connection between health care and a job makes little sense," says Walter M. Cadette of the Levy Institute. Adds Stuart Butler of the Heritage Foundation: "In our view, any attempt to deal with the problem that continues to subsidize employment-based insurance, and merely adds new programs for families most disadvantaged by the current system, deals with the symptoms rather than the cause."

Coverage for health services started in the U.S. some 200 years ago with hospital care for U.S. sailors paid through compulsory wage deductions. Montgomery Ward purchased from London Guarantee & Accident Co. what's considered the nation's first group health insurance policy in 1910. Health plans expanded over the decades with Blue Cross & Blue Shield, HMOs, and group health coverage. Yet even by 1940 less than 10% of the population had some form of health insurance.

The turning point was World War II. Wages were frozen but not employer contributions to health insurance. Companies bid for scarce labor by improving medical benefits for their employees. By 1950, half the population had some type of coverage -- and today close to 60% of working families do. Health-care benefits remain tax-free income to employees.

NEW APPROACHES. What to do? This is a thorny thicket. But here's where to start. Health-care reformers should sever the link between coverage and the employer. They need to think about how to give ownership of health coverage to the consumer.

Using a universal tax-credit system paid in part by eliminating the tax exclusion on employment-based health benefits is one way. Another approach that has been proposed by Victor R. Fuchs, the dean of health-care economists, is a voucher given to all Americans financed by a broad-based tax earmarked for health care, such as a value-added tax.

(A collection of thoughtful research papers that run the gamut from abandoning the employer-based system to filling in the cracks is at esresearch.org, "Covering America: Real Remedies for the Uninsured-A Special Project Report." Another valuable resource for exploring options for a more comprehensive system is the 1999 Kaiser Project on Incremental Health Reform published by the Kaiser Family Foundation.)

COMPETING VISIONS. Overhauling the U.S. health-care system won't be easy -- just ask former First Lady and now New York Senator Hillary Clinton, whose handling of the attempt during her husband's Administration was largely viewed as a colossal failure.

The health-care system represents 14% of gross domestic product. The subject of medicine brings forth all sorts of competing visions about what makes for a good society -- and how to pay for it. Nevertheless, eventually "the inequities and inefficiencies associated with employer-based health insurance will become so apparent as to dictate disengagement," says Victor Fuchs in The Future of Health Policy (Harvard University Press). The crisis is here, and the sooner we all face it, the better. Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online