Incremental Health Care Reform

For the 15 years since the last efforts at major federal health reform receded, advocates have waited for the right moment to push again. That time appears be now, as the Obama administration seems committed to health reform.

Further, consensus seems to be emerging among health reform advocates on the structure of reform beyond extension of the State Children's Health Insurance Program (SCHIP).¹ Momentum is gathering around the combination of 2 reforms: making Medicare available to all citizens and strengthening public oversight of the small-group and individual insurance markets through a Massachusetts-style “connector.” The 2 together would create more substantial governmental oversight and control of health care than ever before, but this would occur in what appears to be an incremental fashion and market competition could ostensibly be preserved. As a result, the proposal may be more politically palatable than previous reform efforts. In this Commentary, we review this approach and the factors that give it political momentum.

The familiar answer is that the current US health care system fails to provide reasonable access, delivers relatively poor-quality care, and costs far more than other health care systems. Most health reform advocates in the Democratic Party are motivated by failure to provide universal coverage. They cannot understand how a country as wealthy as the United States can fail to guarantee access to good health care while allowing insurers, pharmaceutical and device manufacturers, hospitals, and physicians to profit. Many would favor a single government payer. The Obama team has rejected this approach but seeks access for the 47 million uninsured.

An even more important reason for reform at this time may be cost control. Every analysis of comparative health systems available reveals that the United States spends far more on health care than any other country.^{2 - 3} Inexorable growth in expenditures threatens the Medicare trust fund and the federal government's budget over the next 2 decades. With the twin demographic juggernauts of an aging population and an obesity/diabetes epidemic naturally pushing more costs onto Medicare, some set of fundamental reforms is necessary.

So where does responsibility for controlling costs rest? Health insurers certainly have the motive, opportunity, and means to take action. They use disease management and wellness programs to promote health. Using information on health care use and maintaining control over payment, they can undertake prior authorization, utilization review, and some case management in an effort to ensure care is necessary and appropriate. This is a proper role for insurers, although their distance from the actual provision of care limits what they can do.

Another, more socially problematic method of cost control for insurers is choosing who will be offered coverage. This is relatively easy to accomplish in the individual or small-group markets in states that have not mandated coverage or community rating of risk pools. Selective coverage is the major reason a solely market-based system alone cannot solve the country's access problems.

The federal government also plays a role in cost control. It does not primarily flex its muscles through systems for utilization management but instead relies on price controls. Medicare and Medicaid to a large extent can dictate price, giving the federal and state governments a powerful lever for cost control.

Lower prices will induce new output, especially in a system layered with opportunities for clinician-induced demand. The government can react with volume performance standards to control increased output, but that then leads to something like the annual passion play that occurs with physician payment increases in Medicare. Prevention and health promotion activities aside, successful cost control will create fiscal losses for physicians and hospitals.

Some have now recognized that a new reform approach might be to have the relative strengths of Medicare and private insurance competing across the same risk pools. This approach does, however, require careful selection of those risk pools and some new regulation similar to those adopted by Massachusetts.

In 2004 and 2005, Massachusetts hospitals, physician groups, and insurers agreed to work together to boost Medicaid payments for private hospitals and physicians, thereby reducing the cross-subsidies that insurers would otherwise have to pay.⁴ At that point, the Massachusetts health care landscape featured 2 major safety-net hospital systems heavily dependent on the Medicaid program, a well-funded but inefficient uncompensated-care pool funded by hospital and insurer assessments, a Republican governor looking for market-based approaches to health care reform, and a federal government with similar leanings.

The solution that pleased nearly everyone in Massachusetts was to undertake new regulation of the small-group and individual markets, convert the money in the uncompensated-care pool into subsidy funding so the uninsured could purchase insurance, and develop a new federal waiver that brought the additional funds needed to provide Medicaid rate increases for private hospitals and physicians. It was an admirable policy set piece, with clinician and insurer lobbyists, Republican bureaucrats, and universal-access advocates all pulling for their goals and ending up in the same place.

What emerged was close to universal coverage, with most of the policy changes occurring in the small-group and individual insurance markets.⁵ This segment has long been a target of reform, given the hectic insurance policy changes that consumers endure and low medical cost ratios that insurers enjoy.⁶ Insurance for small groups and individuals in Massachusetts is now overseen by a connector, an independent state agency that regulates the policies offered. The connector concept also enabled the legislature to forgo difficult policy details, as those would be worked out by the connector board.

Most of the connector's work focuses on providing subsidies for individuals who are nearly eligible for Medicaid based on their income and enrolling them into Medicaid-based managed care plans. But there are individuals who buy connector-regulated policies through private insurers, pleasing at least some market advocates.⁷ More importantly, there is an individual mandate to purchase health insurance so that the insurance pool is not imbalanced by only those who are ill seeking policies. By summer 2008, 2 years into the experiment, only 2.6% of Massachusetts residents remained uninsured.⁸

Although many employers have accepted the connector,⁹ private insurers dislike the additional regulation. However, they can tolerate it as long as the insurance pool is fair, and the individual mandate accomplishes that. Thus, America's Health Insurance Plans, the leading trade group, now has endorsed universal access with an individual mandate.

The problem with holding up Massachusetts as an example for the rest of the country is that the connector-regulated private insurance market (the near-poor, non–Medicaid-eligible uninsured) is small compared with that of other states. Applying the model to Texas, for example, with its vast ranks of uninsured individuals, would seem absurd. Moreover, the majority of insurance in Massachusetts is provided by local nonprofit companies, whereas many other states rely on national for-profit plans. Why would such companies participate in a connector? To the point, who would be the insurer of last resort in a connector outside Massachusetts?

A number of advocates have long sought to reverse the privatization of Medicare and extend government-run Medicare to even able-bodied persons under age 65 years.¹⁰ Rep Pete Stark (D, California) has proposed just such a program, AmeriCare, in each of the last 2 congressional sessions.

A situation in which Medicare competes with private plans would not, at least in theory, offend market advocates. The private plans would wield their various cost-saving management techniques to compete against Medicare's price controls. Importantly, a lower-priced Medicare would fit into a connector concept based on specific segments of the insurance market. The small-group and individual markets have been a great source of profit for many private plans, and those plans might be opposed to competition with a government plan. The key issue will be whether legislators believe that the government/private plan competition can be fair, with government as regulator and competitor.

The federal or state governments could dial up or down subsidies for individuals to purchase Medicare or private plans, depending on their current fiscal state and commitment to access. Reforms aimed at limiting the tax deduction for health benefits would provide more funds for subsidies, as Sen Ron Wyden (D, Oregon) has emphasized.¹¹ The available funds will determine, for example, how quickly the problem in Texas can be addressed: large subsidies will be necessary to make even a very inexpensive Medicare program available to all of the uninsured. Some might prefer using the Federal Employee Health Benefits Program as the stalking horse in a federal connector program, but it does not have the cost advantages (price setting) of Medicare.

The Medicare/connector strategy appears incremental, a key political attribute. The reform could begin just in the market segment (individual and small group) that has most of the uninsured. As Medicare learned to sell, it might move upstream into the midsized and eventually large-group markets. Medicare would increase insofar as it could offer a better premium. But Medicare's cost advantage might mean that many single-payer advocates can now see this as an alternative route to achieving the bulk of their long-term objectives.

Some corporations would continue to purchase private plans,¹² but others could be pushed to the least expensive alternative—and for some that might be Medicare. In the meantime, while Medicare grew, the connector, perhaps reconfigured as a national health board,¹³ would regulate coverage decisions and emphasize the use of evidence-based care. Over time, the federal role could expand substantially.

Physicians and hospitals might well voice concerns about this scenario. They currently cross-subsidize low Medicare and Medicaid rates with private insurance. If private insurance were replaced by Medicare encroachment, these cross-subsidies would evaporate. To remain competitive, Medicare would have to address clinician-induced demand through volume performance standards. Physician payment crises of the past will seem small compared with those of the future, especially if Medicare plays a larger role in insurance. Surprisingly, in the political maneuvering to date, the hospitals and physician organizations have decided not to ally themselves with the insurers. Indeed, the 2 groups played off each other last year in the debate over Medicare Advantage funding.¹⁴

Reform proposals based on twinning Medicare expansions with connector-based oversight of the individual and small-group markets suggest an incremental approach to reform that does not abandon market competition, and hence may be more politically viable than fundamental reform has been in the past. But the reform's passage is not imminent and indeed will be challenging. Because the goal is to cover more individuals while spending less, reform will involve losses for some, sparking resistance.¹⁵ Moreover, many who share the goal of universal access are nonetheless committed to market efficiencies and innovations and will fear these will be lost in a government-dominated approach. This philosophical/political difference will be the critical basis for debate even for an apparently incremental reform plan.