Bush's Health Care Rx: A Diluted Dose Of Market Forces

Everyone knows that markets don't work in health care. Insured patients, health care experts say, have no incentive to shop for the best deal, while doctors have no reason to become low-cost producers. Democrats want the very visible hand of government to regulate the system. But President Bush has a Republican faith in the market's wisdom. So the health care reform proposal that he is set to unveil in his State of the Union speech will rely on market incentives to cut costs and expand coverage.

The President's choice draws an ideological line for what is likely to be the biggest domestic policy debate of the 1990s. While the Bush plan is still taking shape--details aren't expected until at least mid-February--sources say the Administration will rely on a package of reforms rather than the wholesale overhaul being pushed by Democrats.

The jigsaw-puzzle proposal could leave Bush at a political disadvantage. The Democrats' alternatives--forcing employers to provide coverage or setting up a national health care system--offer good sound bites. By contrast, the public may have trouble seeing how the Bush scheme's multiple elements work together. "It's so easy to be a liberal," sighs an Administration official. "Our plan is much more difficult to understand."

PURIST APPROACH. The Administration got a late start on its proposal. Until recently, top White House officials had hoped to avoid any detailed plan until after the election. But the opposition is scoring on the issue, most recently with a series of public forums on health care hosted by congressional Democrats. And Senate Democrats on Jan. 22 added to the pressure on Bush by sending a bill to the floor that would mandate the way business pays for health care. Now, says Richard J. Davidson, president of the American Hospital Assn., "the heat is on. The White House has recognized it has to provide some leadership."

Bush's search for market-oriented reform began with a proposal pushed by the conservative Heritage Foundation that would require everyone to buy insurance. It would provide tax credits to individuals whose medical bills are high relative to their income, while phasing out tax breaks to employees with company-sponsored benefits. The idea: inject cost-consciousness into health care by forcing consumers to comparison-shop.

But the Administration rejected this purist approach as "too radical a shift," says Health & Human Services Secretary Louis W. Sullivan. The White House settled instead for a small step in Heritage's direction by providing some health care credits for low-income households and reducing tax breaks for the wealthy (table).

The main beneficiaries of the Bush plan would be the poor and near-poor who don't qualify for medicaid and have no private insurance. Individuals and families who earn up to 150% of the poverty level ($20,000 a year for a family of four) would get a tax credit. Under alternatives being discussed, the credit might be replaced by a voucher or, perhaps, private insurance policies purchased directly by the government. Families earning up to about $60,000 a year may find it easier to deduct part of their medical expenses on their income taxes.

Even such a relatively modest proposal wouldn't come cheap: 20 million people--more than a quarter of them children--might qualify for the credit or voucher. Bush's plan is expected to cost $100 billion over five years. Yet its top tax credit would be only around $2,500. That's below the $3,100-per-employee average premium paid by small businesses.

For the scheme to work, the government has to provide a credit or voucher big enough so that families can actually buy insurance. So the Administration is zeroing in on cost-containment.

The Bush plan emphasizes managed care. Such arrangements as health maintenance organizations scrutinize the treatment that physicians and hospitals provide. Competition for employers' business among such plans, the theory goes, would encourage plans to reduce costs without sacrificing quality. "The government is sending a message to the insurance industry to market policies that are cost-effective," says Michael D. Bromberg, executive director of the Federation of American Health Systems, which represents for-profit hospitals.

Medicare and medicaid will get the biggest push. Administration officials say they'll propose reducing the federal payment to states over time to encourage state health administrators to enroll medicaid beneficiaries in managed care plans. The government will also offer reduced medicare premiums to seniors who join HMOs.

BIG SAVINGS? The private sector will get a nudge into managed care, too. In recent years, a number of states, responding to lobbying by doctors and hospitals, have restricted the ability of insurance companies to develop managed care plans. Bush is going to ask Congress to pass a law that would preempt the states' right to rein in the insurers. And the Administration is looking at ways to allow tax credits to be used only to buy managed care plans.

The Administration's faith in managed care may not be well-founded. While many corporations are rushing pell-mell into managed care, the results are mixed. Only 29% of employers surveyed by A. Foster Higgins & Co., an employee benefits firm, say their preferred provider organizations helped to control their health-care costs.

Under the Administration plan, employer-provided group insurance would still be the backbone of the health care system. To make it easier for small businesses to provide coverage, the government would encourage them to form insurance-purchasing groups that would have the clout to negotiate better rates. To keep the coverage as cheap as possible, the White House is considering overriding state laws that hamper insurers' efforts to market "bare-bones" policies.

Also on the table is a proposal that would require companies to offer insurance plans while leaving it to the employees to pay the premiums. That could give workers access to group rates, which are considerably cheaper than individual policies. But it's unclear whether employers would feel any need to shop around for policies that families with tax credits could afford. "All you're doing is making the employer a broker for the insurance companies," says Lynn Etheredge, a health policy consultant.

NEW TAXES. To help ensure continuity of coverage for small business, the Administration is adapting a proposal of Senate Finance Chairman Lloyd Bentsen (D-Tex.) to reform the small-group insurance market. It would prohibit insurers from dropping a company because of high medical bills and would limit yearly rate hikes. Employees could switch jobs without fear of losing coverage. Insurers would also be banned from charging employers with sick workers much more than those with healthy ones. But that might result in higher premiums for employers with low claims.

Financing the plan while holding the line on the deficit means Bush will have to impose new taxes. The Administration is mulling making people earning more than $100,000 a year pay taxes on any health benefits worth more than $3,500. The levy at first wouldn't raise much--but the income line could always be lowered to boost the take. It's also thinking about trimming the deductibility of employer-paid premiums. Even touchier is a plan to triple the medicare premiums for those who earn more than $150,000 annually. Medicare cuts of $20 billion are on the drawing board, too.

The complexity of the health care issue all but precludes congressional action before the election. "I see '92 as a year where battle lines are drawn, positions are staked out, and people choose sides," says Jack A. Meyer, president of New Directions for Policy, a social-policy research group.

It's no wonder that Bush regrets the political necessity of putting forward a plan. By doing so, he ensures that the election-year health care debate will be noisy, emotional--and highly partisan.

Before it's here, it's on the Bloomberg Terminal.