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Crash Course

The danger of consumer-driven health care.

A few hundred dollars a year. Maybe more than a thousand. Rex Delph really couldn't be certain how much larger his medical bills would be if his employer, the school board of Knox County, Tennessee, decided to swap health insurance plans. All Delph knew was that even a modest increase could end up financially overwhelming him.

The problem for Delph wasn't so much his own medical bills. The 45-year-old school electrician was in relatively good health, except for a hernia that doctors said he could live with as long as he watched his diet. The problem was his wife, Jacqueline, who had been diagnosed with Addison's disease about two years earlier. Addison's occurs when the adrenal gland fails to manufacture enough of certain hormones. If treated, it's not fatal. (John F. Kennedy lived with it.) But it's also not curable, with symptoms that can include severe muscle weakness, vomiting, and depression. "She's lost so much strength," Delph would later explain. "She can still get around, but she has to be real careful in what she does. She can't go to the amusement park and get all whipped around. She's not supposed to lift anything more than ten pounds."

The standard treatment for Addison's is steroids. And, in Jacqueline's case, they had certainly helped. But the steroids were expensive, as were the checkups to monitor them--not to mention the occasional hospital visits her condition required. The insurance Delph had, identical to the generous policy the county's teachers had won through their union, covered most of these costs. But, this August, the school board, desperate to shave its budget, began talking formally about adopting a new policy with lower premiums but much higher co-payments. This would mean larger out-of-pocket expenses every time Delph or his wife filled a prescription, saw a physician, or went to the hospital.

For employees in good health, the ones who didn't need much medical care, it was actually a pretty good deal. And, when the school board circulated a survey before taking up the matter formally, several of those employees expressed enthusiasm for the lower premiums and the modest, yet much-needed, measure of financial relief they would bring. "What took so long??" one employee wrote, according to an account in the Knoxville News-Sentinel. "This is more affordable for single, 1-parent heads of household. Thanks." But, for Delph, who made around $30,000 a year and whose wife could no longer work, those $200 physician visit deductibles and $20 prescription co-pays loomed large: "Right now, with the bills I've got, we're just barely breaking even," he said. "It would have been a pretty good hardship."

Delph was hardly the only American confronting such a situation. On the contrary, with the economy sluggish and health care costs rising so quickly these last few years, employers have increasingly taken action like the Knox County school board was contemplating: They've passed on some of the increased costs to their employees, as higher deductibles and co-payments. According to a survey of large employers released just two weeks ago by Hewitt Associates, the consulting firm, out-of-pocket medical expenses alone is costing workers an average of $1,366 this year, up from $708 in 2000. And that figure is just the average. People who use a lot of medical services this year will likely pay more--in some cases, a lot more.

Is that the way we want to pay for health care in America? President Bush seems to think so, as does a chorus of Republican officials, conservative intellectuals, and corporate chieftains. They would like to move the country even further in the direction Knox County was thinking of pushing its workers, from a system of comprehensive insurance to one in which most people have insurance covering only the most catastrophic costs--i.e., the really big bills that come from a life-threatening illness or a severe accident. In the scheme they envision, Americans would pay for everything else on their own, preferably by using money they've invested in special, tax-preferred "health savings accounts," or HSAs.

While the champions of this worldview make many claims on its behalf, the most politically important one is that, by encouraging consumers to take more control over how they pay for medical treatment, HSAs, combined with high-deductible insurance, will help keep health care affordable. "With HSAs, we introduce market forces," Bush said during a speech in Pennsylvania last year. "It means you can shop around for the care that's best for you. It means you'll be able to get better health care at better prices, 'cause you're the decision-maker." But, as the Delphs could attest, the transformation Bush and his allies envision could well have a blunter, less appealing effect: It would place the burden for severe medical expenses more squarely on families that incur them. Not only would that force families like the Delphs to choose between taking on debt and forgoing medical care. It would also represent a sharp departure from the philosophy of solidarity and shared risk that has governed America's approach to health care for over 70 years.

The question of how to distribute the financial responsibility for America's health care bill dates back to the late '20s and early '30s. This was a time when widespread use of x-rays, development of sophisticated anesthetic techniques, and other medical advances meant that doctors and hospitals could cure rather than just comfort. But with these new abilities came new costs, and, for the first time, large numbers of people were struggling to pay their medical bills. In 1929, half the country's families would have had to pay the equivalent of one month's income for a hospital stay.

Of course, it was only the families with serious medical problems that ran into such high costs. But that was precisely the problem, according to the Committee on the Cost of Medical Care, a privately funded task force whose 1932 report is considered the first thorough review of health care costs in U.S. history. The Committee determined that, although the total cost of health care in the United States (then around 4 percent of national income) was one the nation could certainly afford, most of the burden fell on a relatively small number of people who, because of accidents or serious disease, required extensive medical care. And, while some people saved money for the possibility of future medical expenses, the Committee concluded, "[T]he unpredictable nature of sickness and the wide range of charges for nominally similar services render budgeting for medical care on an individual family basis impracticable."

Other countries were solving this problem by creating national health insurance systems that covered all (or nearly all) citizens, thereby spreading the financial burden for medical care to the broadest possible group. But, while reformers in this country had been agitating for a similar program since the late Progressive era, even during the Great Depression the opposition of powerful interest groups like physicians, who feared intrusions into their professional autonomy and limits on their incomes, was enough to keep universal health care off the political agenda. (FDR is said to have dropped health care from the Social Security Act, because he feared the hostility from state medical societies might doom the entire package.)

In the absence of national health care, a much different system evolved. It began in 1929, in Dallas, Texas, when Baylor Hospital, desperate to fill its beds with paying customers rather than charity cases, approached the public school teachers of Dallas with a deal: If most of the teachers would agree to pay the hospital a small amount of money every month, then the hospital would agree to provide medical services to any teacher who needed it, anytime. The plan was a hit, and soon hospitals around the country, most of them facing similarly dire financial situations, began copying and expanding the Baylor plan, which eventually became the Blue Cross system. By the 1940s, it was enrolling millions of new people each year--a pace that quickly lured the commercial insurance industry, which had dabbled unsuccessfully with disability-style benefits in the early twentieth century, back into the business.

As private insurance spread, the link to employment became entrenched--in part because large workforces guaranteed a large number of healthy beneficiaries to cover the costs of those few with severe illness, and in part because employers themselves found it advantageous. (As Yale political scientist and occasional tnr contributor Jacob S. Hacker has noted recently, private job-based insurance not only warded off the threat of government intrusions into health care, which business opposed philosophically; it also helped undercut the appeal of unions.) Government encouraged this arrangement by exempting employer health insurance from taxes--in effect, making health insurance connected to a job more valuable than cash on a dollar-for-dollar basis. By the 1970s, the vast majority of working-age Americans had private health insurance through their jobs. They still paid for this coverage indirectly, through the lost wages their employers were spending instead on health insurance. But they shared it among themselves, for relatively modest sums, rather than facing it individually, at potentially crushing levels. And most of these people seemed to think the system worked very well.

But it might have worked too well. Critics had long worried about the "moral hazard" of insurance--the possibility that generous benefits might encourage people to seek care they really didn't need or to consume care with little regard for its cost. In the '70s, an experiment by the rand Corporation seemed to bear this out, at least in part, by demonstrating that, once health plans exposed people to some medical costs--by, say, requiring them to make co-payments for doctor and hospital visits--they used less health care. In previous decades, employers hadn't really obsessed over moral hazard, if only because health care really wasn't that expensive once you distributed the cost broadly. But, by the '70s, with medical costs gobbling up more than 7 percent of national income while global competition was squeezing U.S. manufacturers, employers became anxious to limit the liability for their workers' health care expenses that they had worked so hard to secure a few decades before.

In the 1990s, this mindset led employers to switch their workers into health maintenance organizations (HMOs) and other forms of managed care. Managed care promised to hold down medical bills by restricting beneficiaries' access to medical services--and then bringing down the price of those services through hard-nosed bargaining. Managed care put a great deal more power in the hands of insurance companies. And, at least for a few years, they were successful at holding down the cost of medicine. But managed care's techniques were never popular. Individual doctors and hospitals resented the medical second-guessing, not to mention the bullying about prices. Consumers resented the limits on what doctors they could see and what treatments they could get. Soon, politicians on both sides of the aisle were looking for another way.

Jesse Hixson was a relatively small-time government economist with a big-time economic problem on his hands. The year was 1974, and Hixson, who worked for the Social Security Administration, had been asked to help devise a system for containing the cost of Medicare, the federal health insurance program for the elderly that had been established during the '60s and was already starting to overwhelm the federal treasury.

At the time, Medicare worked a lot like traditional private insurance: It covered pretty much everything doctors or hospitals ordered up, at whatever prices they set. Many experts thought health care providers were the source of the program's trouble--that, in order to control costs, Medicare needed to start demanding hospitals charge less. Hixson, by contrast, focused on the patients, arguing that they had insufficient incentive to question medical decisions or seek out cheaper treatments--a classic example of moral hazard. Private insurance had already been adapting to deal with this problem, introducing larger co-payments or deductibles in an effort to make beneficiaries think twice before seeing a doctor or agreeing to a treatment. Hixson figured he could do that idea one better: He suggested giving Medicare beneficiaries special savings accounts, which they would use to cover medical expenses.

Hixson's idea didn't persuade the Medicare bureaucracy, which eventually decided on a different method of restraining the program's costs. (In the early '80s, the federal government would start paying hospitals based on diagnosis, rather than the services rendered, as a way to force down their charges.) But Hixson kept talking up his idea anyway, and continued to do so even after he left the government to work for the American Medical Association. Hixson eventually got the attention of another economist, John Goodman. Goodman, who ran a Dallas-based conservative think tank called the National Center for Policy Analysis, was philosophically sympathetic to the idea that altering patient incentives was the key to making health care work like a free market again. And, while Medicare might not have been interested in the idea, Goodman figured that private insurers might be. Together with some colleagues, he fleshed out the idea of "medical savings accounts" (MSAs), proposing that they get tax benefits like IRAs. He spread the word around Washington, where his think tank helped coordinate a series of meetings among business leaders and conservative intellectuals. That got the attention of a third key figure, J. Patrick Rooney, chairman of Golden Rule Insurance.

Rooney, who was on his way to becoming one of the nation's better-known right-wing activists, shared Goodman's ideological predisposition. But MSAs had a certain financial appeal to him as well. Golden Rule, which Rooney had rescued from bankruptcy a decade earlier, was in danger of losing ground again because it could not keep up with the large insurers that were erecting huge managed-care networks of doctors and hospitals to lure patients. MSAs looked like an ideal niche business that Golden Rule could capture and parlay into a permanent market presence. Rooney began with Golden Rule's own employees, replacing their traditional insurance with high-deductible coverage plus MSAs, which Golden Rule funded, allowing employees to keep what they didn't spend. Then he went to work on Washington, selling the idea that MSAs could work for the rest of the country if the government made the money in them tax-free, as Goodman had envisioned.

The health savings crusade by Goodman and Rooney had a certain quixotic quality about it in those early years. But that changed in 1993, when President Clinton proposed a comprehensive health care overhaul that would have guaranteed affordable private insurance coverage to every American, with most people likely to get their coverage through managed care. Republicans, convinced that they couldn't beat something with nothing, were desperate for an alternative. And Goodman's plan fit their philosophical outlook perfectly. As they saw it, the Clinton plan took power away from patients by shunting them into managed care plans; the Goodman plan empowered patients by giving them more freedom to choose doctors and pick treatments. The Clinton plan fought high prices by giving government bureaucrats the power to regulate insurance premiums; the Goodman plan fought high prices by giving consumers the power to shop for bargains. The Clinton plan created a fiscally reckless entitlement; the Goodman plan instilled responsibility by punishing the profligate and rewarding the thrifty.

In the end, the Republicans were able to defeat Clintoncare without actually rallying behind an alternative. But the advocates of MSAs had made an impression on the GOP leadership, particularly Newt Gingrich. Gingrich ended up forging a close working relationship with Rooney, who, in addition to sharing the House speaker's passion for school vouchers, was a top source of funding for Gingrich's own political ventures and that of the Republican Party. (In 1993-1994, according to an account in Mother Jones, Rooney and his affiliated political action committees steered nearly $1 million into Republican Party coffers, third only to Amway and Philip Morris.) In 1996, with Gingrich's support, an initiative exempting money in MSAs from taxes became law.

The initiative progressed slowly, at first, because employers weren't all that enthusiastic: Managed care was holding down costs just fine, and, given the tight competition for labor in the strong economy, companies didn't want to risk alienating employees with yet another massive benefits change. In addition, at the behest of Democrats and Clinton, the 1996 law had carefully circumscribed the growth of MSAs: Only individuals and small businesses could sign up. No more than 750,000 could be sold in any year. And the entire program would be up for review in a few years, at which point it might very well be canceled altogether.

All of that began to change in 2000, when Bush began to talk up the idea of health savings accounts during the presidential campaign. He seemed primarily interested in it as a way to counter Al Gore's more ambitious plans to expand health care coverage through government programs, much as the Republicans of 1994 had gravitated to Goodman's plan as a way to defeat the Clinton health care plan. But the MSA concept was also consistent with Bush's "ownership" agenda, since it stressed greater personal stewardship of medical spending. In 2003, Bush and his Republican allies rechristened MSAs as HSAs, lifted the cap on enrollment, ended their temporary status, and tied them to even more generous tax breaks.

Employer attitudes were shifting, too. Managed care wasn't holding down costs anymore, and the economy had slackened, giving employers more leverage to impose benefit changes on their workers. As the business community began talking more about its need to limit its liability, large insurers--everybody from the modern Blue Cross plans to the giant national carriers, such as Aetna and Cigna--began rolling out HSA products to meet the demand. (UnitedHealth simply acquired Golden Rule, for which Rooney collected $500 million.) Some 2.4 million people have now signed up for HSAs and similar forms of coverage, according to the latest estimates by the Kaiser Family Foundation. By 2010, consumers are likely to have amassed between $10 billion and $26 billion in HSAs, according to a recent Wall Street Journal article.

HSA enthusiasts frequently describe the accounts as the key to ushering in an era of "consumer-driven health care." As they see it, traditional insurance has numbed patients to quality as well as costs. HSAs, by contrast, would encourage them to act like real consumers: seeking out the most effective treatments, the most qualified doctors, and the best-run hospitals. Similarly, once consumers realize how much medical treatment can cost, they'll get more serious about healthy living--just to avoid the bills. "We're going to re-center the system on the individual," Gingrich said in a speech last year. "I want to capture you before you're a patient and make sure that you have the right devices at home, you're taking the right medication to avoid getting sick, you have the right supplements, you're eating the right food, you're doing the right exercise."

Pretty much everybody would like to see consumers become more informed about their medical care and develop healthier lifestyles. But will HSAs really accomplish that? There's reason to wonder. Consumers need good information in order for a market to work. And good information on health care is just not that easy to find. Within the federal government, the Centers for Medicare and Medicaid Services recently began publishing information on hospital quality, in the hopes of steering beneficiaries to the best providers. But, while a few basic criteria are helpful in drawing narrow judgments--generally speaking, you want to get a surgical procedure at a hospital that does a large quantity of them--others can be grossly misleading. Does a high mortality rate suggest a hospital has lousy staff? Or does it mean the hospital simply takes on the most difficult cases?

Even some fans of the health savings approach wonder about the ability of patients with limited medical knowledge to make smart decisions about care, particularly since comparison shopping among hospitals can be difficult when you're dealing with an urgent medical situation. "[A]sking consumers to `drive their health plans,'" one HSA promoter, who happens to be a physician, wrote earlier this year in an op-ed, "is like asking blind people to become nascar drivers."

To their credit, some HSA advocates have campaigned hard to improve the publicly available information about medical care, even if it takes the strong arm of the government to do it. But, no matter how much information consumers have, who's to say they will make good decisions? Many experts worry that, by giving patients so much incentive to be thrifty, HSAs will encourage them to scrimp on routine or preventative care--thus increasing the likelihood of large medical bills later. At the same time, they say, they're dubious that the prospect of eventually building up a fat HSA balance will somehow convince people to live healthier lives now. "How rational do you think people are?" asks David Cutler, a Harvard economist and author of Your Money or Your Life. "Think about it this way: The biggest cost of having a heart attack or cancer isn't the financial one. It's the probability that you die. ... There's still a lot of incentive to do the right thing. And yet people don't."

Figuring out whether HSAs will end up making people healthier is ultimately a matter of conjecture. The same cannot be said for its impact on the way the financial burden of medical care falls on different parts of the population. Health care operates by what economists commonly call an "80/20" rule. In any given year, most of the money being spent on medical care in the United States (about 80 percent of the total) is for the relatively small portion of Americans (about 20 percent of the population) recovering from severe accidents, fighting off a life-threatening disease like cancer, or struggling with a serious chronic condition like diabetes.

It's really no different from the situation the Committee on Cost described in the early '30s, except that, now, traditional health insurance spreads the financial burden, using premiums paid by people who don't use many medical services to help pay the bills of those who do. The trouble with HSAs is that they change the equation, dramatically, allowing people in relatively good health to keep much more of their own money. "One hundred percent of the time it makes sense for a healthy person to take the savings account," one benefits consultant explained in The Tampa Tribune. "That's a no-brainer." But, once that happens, there's less money to subsidize care for the people with high medical bills--which means those people must either make up the difference themselves or simply go without care. "A wholesale switch to [HSAs] would redistribute the nation's overall financial burden of health care from the budgets of chronically healthy families to those of chronically ill families," Princeton economist Uwe Reinhardt has written. "One should simply not brush these ethical issues aside." (To see what happened when South Africa tried consumer-driven health care, see David Adler, "Medical Error," page 16.)

In their defense, HSA enthusiasts point out that people with serious medical problems are free to stick with traditional insurance. But, by luring healthy people and their premiums away from traditional insurance, HSAs would still drain money from the existing system, leaving the unhealthy to make up the cost. And, sure enough, it's healthy people who seem to be rushing into HSAs the fastest. When Humana Inc. began offering HSAs to its workforce in 2001, the employees who chose it were "significantly healthier on every dimension measured," according to a study published last year in the journal Health Services Research. And the anecdotal evidence certainly backs that up. Articles quoting enthusiastic HSA enrollees, which seem to appear in some local newspaper almost every day now, inevitably feature people like the 20-year-old worker at a Seattle drive-in restaurant who recently told the Seattle Post-Intelligencer, "If you're a pretty healthy individual, and you don't need to go to the doctor or expect that something might happen, it's a good plan."

Back in Knox County, Rex Delph grasped the implications for people like him. And so, it turns out, did most of his co-workers. The vast majority of employees who responded to the survey opposed the change. "Please consider keeping the insurance we have," one school worker wrote. "Even though the County has a cheaper monthly plan, the out of pocket expense is way out of line for the amount I bring home in my monthly paycheck." Other employees were even more direct: "We make the least salary and can't afford these high deductibles out of pocket.... Being a widow, if I have a major illness, I will not be able to go to the hospital. Please don't change us, I beg you!" In the end, the county listened and did not change the insurance after all.

Of course, most companies don't have to deal with the state regulations (and strong unions) that school boards do. If they want to impose changes in benefits, they'll find a way. But maybe that's not such a bad thing. Pressing employers to keep bearing an ever-larger financial burden on behalf of their workers really does punish them financially--and, contrary to the rhetoric of some critics, in ways that affect more than simply executives and shareholders. In the public sector, it drains budgets and diverts money from other needs. Once officials at the Knox County school board decided to keep the present insurance benefits, they had to cut gifted and talented classes in their middle schools instead. In the private sector, it puts companies that provide good benefits at a competitive disadvantage. It was precisely this issue that sparked a massive strike of grocery workers in California two years ago. With the threat of competition from Wal-Mart, a company that provides relatively low benefits, the established supermarkets in California felt they had to cut benefits, too, or end up with debilitating labor costs.

Eventually, employers are going to find some way out from under the burden of employee insurance, if not by reducing benefits then by offering coverage to fewer workers. (Either that, or--like the U.S. auto industry, which has struggled with the cost of maintaining generous benefits it guaranteed years ago--they are going to risk bankruptcy.) So perhaps the best response to the erosion of job-based insurance is to admit that it's obsolete and come up with an alternative, one that remains faithful to the idea of shared responsibility for medical hardship that Bush and the conservative movement seem so determined to jettison.

After all, not only is the idea of sharing responsibility for health care costs a part of our history, it reflects the attitudes of most Americans today. Polls have shown Americans are in no rush to expose themselves to greater financial risk; on the contrary, whether it's Social Security or health insurance, they seem to prefer greater protection. Unlike the Bush administration, they have the imagination to envision the devastating changes of fortune--a chronically ill spouse or child, for example--that make a communal system not only the right thing to do but also in their own self-interest.

This is why we need to go back to the guiding principle of group health care--that the way to both lower costs and serve as many Americans as possible is to broaden, rather than shrink, the patient pool. One way to do this is through the plan we've been flirting with since the Progressive era--universal health coverage. These days, the case for it seems stronger than ever. Depending on how it's structured, universal health care would either limit or eliminate altogether the employers' responsibility for their workers' health bills, by transferring greater financial responsibility to an even broader base: the entire population, through some combination of taxes and premiums. And it could have modest co-payments and deductibles--large enough to deter moral hazard but not so large that individuals face financial ruin.

This isn't to say universal health insurance makes the trade-offs between cost, access, and quality disappear. On the contrary, it would force a more explicit, inevitably uncomfortable, discussion of how much Americans are willing to pay for basic health care--and what kind of services they would have a right to expect in exchange for that money. It would undoubtedly put more pressure on the medical industry and health care professionals to actually cut their prices, resulting in less income for both. And, finally, it would mean a redistribution of health care money from the wealthy to the poor, because the more expensive medicine gets, the more even modest cost-sharing would expose these people to severe financial hardship. Many of those ideas are anathema to the conservatives. But, if the people of Knox County are indicative, the majority of Americans may disagree.

Jonathan Cohn is a senior editor of The New Republic.