Health & Human Services

Markets, not Mandates

For years, efforts to expand health insurance seemed like an exclusively "blue state" activity. Oregon, Massachusetts, Vermont and Maine enacted sweeping proposals designed to expand...
by | November 30, 2008

For years, efforts to expand health insurance seemed like an exclusively "blue state" activity. Oregon, Massachusetts, Vermont and Maine enacted sweeping proposals designed to expand coverage to the comparatively small percentage of residents who lacked it. Meanwhile, Republican-leaning states, such as Texas, Oklahoma and Georgia, stood by as the numbers of their uninsured climbed.

That is beginning to change. An army of conservative thinkers from a variety of think tanks and academic institutions are bringing health reform ideas to states that are open to market-based solutions. These activists share their liberal counterparts' passion for reforming a broken system but have a strikingly different vision of what's broken. While most Democratic policymakers believe the free market has failed to deliver affordable, high-quality health care, these Republican health policy experts argue that the market hasn't been free to try.

"I have to laugh when people say that markets don't work in health care," says Harvard University business professor Regina Herzlinger. "There are no markets in health care." Traditional markets, she says, "have you and me using our own money and buying things directly from providers of goods and services." The competition that ensues pushes prices down while encouraging innovation. But when it comes to health care, most of the purchasing is done by someone other than the user -- a government agency, an insurance company. The result is a dysfunctional marketplace. The fix, Herzlinger says, is simple. Purchasing of health care should be like shopping at Costco: "People should spend their own dollars and have lots of choices."

One way conservative thinkers want to bring choice to health care is through consumer-directed health insurance plans. These plans already have had a major impact in the private sector. One of the most popular variations involves Health Savings Accounts. These allow people to save money (tax free) from year to year to spend on health costs. Any unspent funds roll over into the next year, and can grow and accumulate until the account holder needs them. Typically, a high-deductible insurance policy stands behind the HSA to cover any major medical event that might occur, particularly one that might require expensive treatments or hospitalization. The theory behind the HSA is that, because people are paying out of their pockets for amounts up to the cost of the deductible, they have an incentive to spend their money wisely. People would price services before they buy them.

Now market-based ideas are starting to take root in the public sector. In particular, two programs -- one in Indiana and one in Florida -- are trying something ambitious. They are bringing market-based solutions to an almost-intractable part of the uninsured problem: those who are too poor to afford health insurance on their own.

Hoosiers in Action

For decades, Indiana was a state with a stable employer-based health insurance system. But in the late 1990s, fast-rising health care premiums led many small businesses to cut coverage. The economic downturn earlier this decade put even more pressure on the ability of businesses to provide coverage. That left Indiana with an uninsured rate of nearly 14 percent -- well below the national rate of 15.7 percent but one state leaders considered unacceptable.

"We just sort of said, it's time," says state Senator Patricia Miller, who in the summer of 2007 shepherded through the legislature a bill that required the governor to develop a plan for expanding health insurance. The governor, Mitch Daniels, who has deep roots in market-based ideas, was willing to raise the state's cigarette tax to help fund an expansion, but he turned the crafting of a solution over to Mitchell Roob, the state's Family and Social Services Administration secretary.

Roob, along with many other health officials in the state, was particularly worried about low-paid, semi-skilled workers. A decade ago, many of these workers -- in Indiana and elsewhere -- got insurance through their employers. When they lost their coverage, they did so only temporarily -- either they were between jobs or working part-time. Today, their employers no longer offer insurance or, if they do, the employee share of the premium is unaffordable. The result is that, in Indiana, 67 percent of the chronically uninsured are the working poor.

Most states seeking to expand health insurance coverage for these workers have generally done so in predictable ways, the most common being to ask the federal government for permission to expand eligibility for the Medicaid program. Since 1993, 40 states have received waivers from the federal government to pursue variations on this approach.

Roob rejected this idea out of hand. He considers Medicaid a program designed for those who have no assets and are destitute. "There would have been zero political support for a pure Medicaid expansion," Roob says. "That would be a surefire political non-starter."

Instead, Roob proposed something very different: Health Savings Accounts paired with high-deductible health insurance. At first glance, HSAs seem an unlikely way to expand health insurance to low-income workers. After all, most of them don't have money to save, nor do they work for companies willing to fund an account for them. To solve this problem, the state created POWER accounts for these workers and is the funder behind them -- up to $1,100 a year per participant. But participants aren't home free. The state asked for and received permission from the federal Centers for Medicare and Medicaid Services to require enrollees to pay between 2 and 5 percent of their income to offset policy costs. At the end of the year, dollars left in participants' POWER accounts roll over -- but only if participants have kept up with their payments and have gotten the requisite check-ups and preventive health measures that are written into the program.

Since its launch in January, more than 70,000 people have applied for the program. Although only about 20,000 people are currently enrolled, Roob expects to meet the program's goal of signing up 132,000 by the end of next year.

Indiana's approach has attracted considerable attention in conservative circles, where the HSA concept is popular. It's worth noting, though, that in some ways, Healthy Indiana's POWER accounts aren't really market-driven at all. People who enroll in Healthy Indiana aren't out comparing the price of flu shots or shopping for bargain tonsillectomies. Instead, after choosing their high-deductible insurance plan, most receive care within that insurance plan's network, the same way people with regular health insurance do. The most important choice individuals make is not between doctor A or doctor B. It's the choice of plans.

"The idea that you promote HSAs and that's the free market -- I'm not impressed by that," says Bob Moffit, who directs the conservative Heritage Foundation's health policy office. "The free market requires a level playing field, not one that favors a certain type of plan."

Indiana's HSAs also impose costs on beneficiaries that traditional Medicaid doesn't, and that has caused critics to question the fairness of the program. A family of four earning $40,000 a year, for instance, has to contribute up to $1,100 per year toward their health insurance premiums.

Critics have questioned whether Indiana is getting its money's worth. "You've got a benefits package that falls short of Medicaid but it's costing you a little more," says Judy Solomon, a senior fellow at the Center on Budget and Policy Priorities. If the question is whether Healthy Indiana is better than nothing, she will say only that it is not ideal.

Voucherizing Medicaid

In Florida, state officials are attempting to bring choice to Medicaid itself. In 2005, then-Governor Jeb Bush and his health agency approached the federal Centers for Medicare and Medicaid Services with a proposal to radically alter Medicaid, which they saw as a failing program.

The Medicaid budget was growing at a rate of 16 percent annually. "Those cost trends," says Holly Benson, who heads Florida's Agency for Health Care Administration, "were unsustainable." In 2005, Benson was a member of the Florida House of Representatives and was deeply involved in shaping the state's approach. In addition to the cost problem, she didn't see how Florida's Medicaid beneficiaries would thrive under the Medicaid system as it existed. The number of primary care physicians who would accept Medicaid patients was declining. Access to specialists was even worse. "We thought they deserved better," she says.

Florida's waiver request asked for permission to eliminate traditional fee-for-service Medicaid in Broward (Ft. Lauderdale) and Duval (Jacksonville) counties. (The change has since been expanded to a total of five counties.) In its place, health insurers would be invited to offer Medicaid recipients in the two counties a menu of health insurance plans, each with a different benefit package. Medicaid beneficiaries would then select the plan that best suited their needs. To help with the process, the state created a counseling center, which people could contact to ask for advice. To encourage healthy behavior, the state also created an enhanced-benefit account. Medicaid enrollees who met health goals could earn up to $125 a year that could be spent on health-related items at stores such as CVS and Walgreens. The federal government approved the waiver in the fall of 2005, and in 2006, the nation's first large-scale attempt to bring competitive consumer choice to Medicaid got underway.

Florida's Medicaid reform waiver had two important conservative goals embedded in it -- offering choice and promoting wellness. But in the actual marketplace, Medicaid reform ran into trouble. Recipients in Broward and Duval counties were most concerned about retaining access to their doctors and medications. Figuring out which plans would allow that was difficult. Beneficiaries who contacted the counseling center found that their counselors didn't have access to drug formulary lists. Worse, most beneficiaries didn't seek guidance at all -- or make a choice.

So the state selected plans for them, and this created a new set of problems. Invariably, many lost access to their doctors. Worse, according to researchers at Georgetown University, provider participation in the new program initially declined. So did access to the most commonly prescribed medications.

To Benson, these early problems are birthing pains that are being resolved. Today, 84 percent of beneficiaries are making choices. "That's pretty incredible," she says. "People are really getting engaged." Benson believes that access to specialists has improved and notes that enrollees who have accumulated and spent money from their enhanced-benefits accounts are highly enthusiastic about the program.

Yet when asked if she will recommend taking the pilot program statewide next spring, Benson hesitates. "My staff is looking at that right now," she says. "We as an agency expect to make recommendations to the governor and jointly with the governor to the legislature next spring.

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