Thursday, December 18, 2008


The planets may be aligning in Washington for serious action on health care coverage this year. Major reform is in the air.

But what form should it take?

There’s general agreement on the major goals. Most Americans think all lawful residents should have affordable access to at least basic health services, and insurance protection for heavy medical expenses. But the devil is in the details, and some ideas should be non-starters.

One is Cabinet nominee Tom Daschle’s proposal for a Federal Health Board. This independent agency, modeled after the Federal Reserve Board, would lead to government-determined medical treatment and would be unacceptable to Americans.

Another is President-elect Barack Obama‘s plan for a government-designed “public plan” to compete with private insurance within a government-operated “health exchange.” The problem is the feds would naturally rig the exchange’s rules to favor the government’s plan. The result? Millions of Americans would be pushed into a Medicaid look-alike.

So what is the right answer?

The first step would be to make sure every working family has access to an affordable, basic private plan, regardless of their health status and no matter where they live or work.

To do this, states would be encouraged to work with the insurers within state lines to develop one or more affordable “default” private plans, with agreed-upon minimum benefits and premium rules. These plans might take the form of a high-risk pool or an “industry” plan in which all plans agree to share the insurance risk.

The federal government also could work with large insurers to make additional national default private plans available in any state that wanted them. This would be similar to the national private plans available to members of Congress and other federal workers in the Federal Employees Health Benefits Program (FEHBP), which includes Blue Cross. Significantly, there is no public plan in the FEHBP.

Nobody would be forced to join the default plan, but it would be available. Employers could continue to run their own plan, and many would.

The second step would be to encourage states to organize a “farmer’s market” or “health exchange” to enable families to gain information about plans before choosing one. The default private plans would be included, but so would others. The market also would offer an easy premium payment system.

Given the user-friendly nature of the exchange, some employers - particularly small ones - would decide to make it the vehicle for offering coverage to their workers. This would end the employer’s administrative hassle of arranging coverage, while giving the workers the freedom to choose the coverage that suits them and their families best.

State exchanges would avoid the endless congressional micromanagement that would occur in the highly regulated federal insurance exchange Mr. Obama envisions. But a group of states might decide to organize a regional exchange. And the federal government could provide technical assistance or even an off-the-peg exchange that smaller states could adopt.

The third step would be to reform the tax treatment of health insurance.

Coverage obtained through the exchange should have the same tax benefits as employer-sponsored coverage.

But unlimited tax relief for employer-sponsored insurance also needs to change. Today’s “tax exclusion” gives large breaks to executives and the highly paid but little to lower-paid families and no break for those without an employer-sponsored plan.

The exclusion should be capped in value - at least for upper-income workers - much as tax-free contributions to 401(k) plans are capped. The revenue from the cap would finance tax relief for lower-paid taxpayers to help them pay for coverage, ideally as a credit against premium costs. For the millions of workers who today pay little or no income tax, there should be an equivalent voucher for health premiums funded separately though reductions in wasteful federal programs.

The fourth step would be to redesign Medicaid and the children’s SCHIP program to make them more affordable and enable them to fit into the revamped private system.

At the very least, states should be able to ask for major changes in federal law to redesign their Medicaid and SCHIP programs. If a state can reasonably assure Washington that its redesign can match the coverage of these programs while saving money, it should get the go-ahead by Congress.

Better still, Congress should grant states broad authority to convert much of their Medicaid and SCHIP programs into subsidies for eligible families to buy private coverage. These voucher-style subsidies, in concert with a health exchange offering affordable private options, would provide a more seamless system of health care for working-age families and their children.

There is broad agreement on the need to fill the huge gaps in health coverage.

We don’t need to go down the road of centralized, government-sponsored coverage. With these four steps we can fill the gaps through private coverage chosen by patients themselves.

Stuart Butler is vice president of domestic policy at the Heritage Foundation.

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