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The Broken Health Care System

Overview

The Obama Administration has made fixing the broken American health care system the domestic priority of its first term, and this reform cannot come a minute too soon. The US Chamber of Commerce estimates that 46 million Americans currently live without health insurance. A further 25 million have inadequate insurance that does not meet the full scope of their health care needs.

This crisis has only intensified in the wake of the ongoing economic crisis. Four million Americans have lost health coverage since the beginning of the recession, and over the past year, 29 percent of US citizens have had a family member put off medical care based on cost. Despite the crisis and the mounting national debt, the 59 percent of those surveyed believe that health care reform is too important to put off.

The debate on system reform has focused on three topics: Covering the Uninsured, Slowing the Growth of Health Care Costs, and Financing Reform. The Center for State Innovation believes that comprehensive reform depends on adequately addressing all three areas.

Expansion of Benefits

There is a burgeoning consensus in the nation that the United States must find some means of extending coverage to the 15 percent of Americans who go without health insurance; however, there are fundamental disagreements on how to address the issue.

Some parties suggest expanding Medicaid and SCHIP to families with higher income levels as well as categories of people currently ineligible for coverage, such as single adults. As the Kaiser Family Foundation stated “Medicaid is a tested program with an administrative structure in every state that can be readily adapted to serve more of the low-income uninsured.”

Another proposal is to create a Federal Health Insurance Exchange that would facilitate the purchase of health insurance plans for individuals and small businesses. Plans wishing to compete on the exchange would be subject to federal requirements on minimum benefit levels. The Federal Government would set up a sliding scale subsidy to assist low income enrollees with their premium costs. The President has also proposed funding a federal health care plan within the exchange that would keep private competitors honest and ensure that they met minimum benefit standards.

The conversation has also included a discussion of insurance market reform. Some of the proposals discussed include guaranteed issue, community rating, and purchasing mandates.

System Delivery Reform

Waste is rampant in the American health care system. Studies estimate that excess health care spending costs American taxpayers more than $1.2 trillion per year. Though the United States has the highest per capita health care costs in the world, its health care outcomes rank 37th behind Costa Rica and just ahead of Cyprus. Any reform of the US health care system must address the fact that our current reimbursement system creates inefficient incentives that promote specializations at the expense of primary care and fail to attach any financial reward to good health outcomes.

Experts believe that realigning payment incentives is essential to create a functioning, high-performance US health care system. Among the building blocks to more efficient system are:
  • Pay for Performance: Currently health care providers are reimbursed based on the services they provide, not on the outcome of those services. Indeed, ineffective care sometimes results in more business for the provider. A pay for performance system would connect reimbursement rates to health outcomes, with higher performing providers receiving bonuses or higher rates.
  • Payment Bundling: By paying providers a flat rate for each type of health care episode, public and private insurers can promote the efficient allocation of health care dollars. Fee-for-service reimbursement promotes unnecessary care and supports the over-abundance of specialists in the system.
  • Medical Home: A provider using a “medical home” model gives each patient one physician who supervises a team of caregivers responsible for coordinating all aspects of that individual’s preventive, acute and chronic care needs. Decisions are based on the best evidence available and the least wasteful use of medical interventions and technology.
  • Comparative Effectiveness Research: To give providers the information they need to make the best care decisions, private and public insurers should promote and publicize comparative effectiveness research on health care interventions, pharmaceuticals and technology. Wide access to such unbiased research can improve patient outcomes and lower system costs.

Financing

In 2007, health care spending in the US totaled $2.2 trillion, or about 16.2 percent of the gross national product. By 2018, experts expect these costs to almost double to $4.3 trillion. This increase in cost is placing greater and greater pressure on a federal budget in which Medicare alone will account for 33 percent of expenditures by 2035. The administration’s commitment to extend insurance to the uninsured will only add to the federal government’s health care costs.

System delivery reform will account for some savings long-term, but financing an expansion of public health care will require other cost savings or revenue enhancers. Among the options are:
  • Value Added Tax (VAT): VAT’s are modified sales taxes based on the estimated monetary value added to a good at each level of its production. This tax is ultimately passed on to consumers. Many European health care systems are funded by a VAT, and though the tax itself is regressive, the effect of a VAT combined with free health care is a highly progressive fiscal policy.
  • Capping the Income Tax Exclusion on Employee Sponsored Health Care: By excluding the cost of employer sponsored health care from federal income tax, the federal government forgoes $226.2 billion per year. The primary beneficiaries of this exclusion are those with higher marginal tax rates, making it a highly regressive fiscal policy. By capping the exemption, the federal government could maintain the exemption for those who need it, while also garnering hundreds of billions of dollars needed to expand health care to the uninsured.
  • Health Related Excise Taxes: Taxes on sugary soft-drinks, alcohol and fatty foods have been proposed as logical funders for national health reform. They have the dual benefit of promoting healthy behavior and establishing a new revenue stream for the expansion of public health care benefits.