Applying the "Do No Harm" Principle to Health Policy

January 23, 2007 | Author: John Goodman

Published in: Journal of Legal Medicine, Volume 28, Issue 1 January 2007, pages 37 - 52

 

 

Applying the "Do No Harm" Principle to Health Policy ¹

by

John C. Goodman

President

National Center for Policy Analysis

 

"First, do no harm."  This principle is well-known to physicians as part of the Hippocratic Oath.  No similar oath is taken by politicians, of course.  But suppose they did.  Suppose that before they pass any new health legislation, our political representatives were required to reexamine existing laws and make sure that government is not the cause of the very problems it attempts to solve.  What would our health care system look like? 

Health economists at the National Center for Policy Analysis set out to answer that question recently.  They began by identifying five major choices people make and isolating five ways in which public policies interfere with those choices - perversely encouraging people to make socially undesirable decisions.  They then sought to determine what our health care system would look like if government policy were at least neutral. ² 

What follows is a brief summary of that analysis along with some rather surprising conclusions. ³ 

Choice No. 1: To Insure or Not to Insure ⁴

Why do we care whether other people have health insurance?  One reason we care is that uninsured people may incur medical bills they cannot pay from their own resources. When that happens, the cost is often borne by other people either through shifting costs to insured (paying) patients or through free-care programs subsidized by taxpayers.  So the choice to insure or to remain uninsured often means, as a practical matter, the choice to insure or to implicitly rely on the social safety net. ⁵  How do government policies affect our incentives with respect to this choice? 

Subsidies for Private Health Insurance.  Most people who purchase private insurance take advantage of federal, state and local tax subsidies that total about $188.5 billion each year nationwide. ⁶  How much subsidy is available to an individual, however, depends upon how the insurance is purchased as well as their family's tax bracket.  If an employee works for an employer who provides health insurance (an untaxed fringe benefit) as an alternative to higher taxable wages, the employer's premium payments avoid federal, state and local income taxes as well as payroll (FICA) taxes.  For a middle-income family facing a 25 percent federal income tax rate, a 15.3 percent FICA tax and a 5 percent state income tax rate, the subsidy is 45.3 percent -with government paying almost half the cost of the insurance. ⁷ 

To see the financial implications of these subsidies, consider a health insurance plan that costs $6,000 a year.  To enable the employer to pay such a sum, the employee has to produce at least $6,000 of goods and services.  However, without a subsidy, a worker in the 45.3 percent tax bracket would have to earn almost $11,000 (at the margin) in order to be able to pay the taxes and buy insurance with the remainder. ⁸

Generous tax subsidies undoubtedly encourage people who would otherwise be uninsured to obtain employer-provided insurance.  There are two problems, however, with the way these subsidies are structured: 1) the largest subsidies are given to people who need them least, and 2) the subsidies are generally not available to most of the uninsured. 

Under the current system, families who obtain insurance through an employer obtain a tax subsidy worth about $1,482, on the average. ⁹  Not everyone, however, gets the average tax subsidy.  Households earning more than $100,000 per year receive an average subsidy of $2,780.  By contrast, those earning between $20,000 and $30,000 receive only $725.  One reason is that those earning higher incomes are in higher tax brackets.  For example, a family in the 40 percent tax bracket gets a subsidy of 40 cents for every dollar spent on health insurance.  By contrast, a family in the 15 percent bracket (paying only the FICA payroll tax) gets a subsidy of only 15 cents on the dollar. 

The second problem is that people who do not obtain insurance through an employer get very little tax relief if they purchase insurance on their own.  Individuals paying out of pocket for health care can deduct costs in excess of 7.5 percent of adjusted gross income. ¹⁰  For instance, a family with $50,000 in income would not be able to deduct the first $3,750 in health insurance premiums. ¹¹  The threshold for a $100,000 a year family is twice that amount. 

Subsidies for the Uninsured.  Consider now the alternative: free care, obtained through a local social safety net.  What does government do to encourage this choice?  Although no one knows the exact number, public and private spending on free care is considerable.  For expository purposes, I will assume that the country as a whole spends $1,500 per full-time uninsured person per year, or about $6,000 for a family of four. ¹²  

Interestingly, $6,000 is a sum adequate to purchase private health insurance for a family in many cities.  Therefore, one way to look at the choice families face is: They can rely on $6,000 in free care (on the average) or they can purchase a $6,000 private insurance policy with after-tax income.  

The problem with the current system of spending subsidies is that they encourage millions of people to be uninsured.  Why pay for expensive private health insurance when free care provided through public programs is de facto insurance?  Yet society should not be indifferent about this decision.  For one thing, the choice to rely on safety net care is a choice to be a "free rider" at the taxpayers' expense.  For another thing, the two types of care are not equivalent.  The privately insured patient has more choices of doctors and hospital facilities.  Further, safety net care is generally much less efficient.  For instance uninsured patients often use emergency rooms to provide care that is more economically provided in a free-standing clinic.  As a result, per dollar spent, the privately insured patient typically gets more care and better care.  For that reason alone it is in society's interest not to encourage people to be in the public sector rather than the private sector.

Achieving Neutrality.  Suppose the government offered every individual a uniform, fixed-dollar subsidy.  If the individual obtained private insurance, the subsidy would be realized in the form of lower taxes by way of a tax credit.  (The credit would be refundable, so that it would be available even to those with no tax liability.)  If the individual chose to be uninsured, the subsidy would be sent to a safety net agency in the community where he or she lives.  ^{See Figure Ia.} 

 

The uniform subsidy should reflect the value our society places on having one more person insured.  But what is that value?  An empirically verifiable number is at hand, so long as we are willing to accept the political system as dispositive.  It is the amount we expect to spend (from public and private sources) on free care for that person when he or she is uninsured.  For example, if society is spending $1,500 per year on free care for the uninsured, on the average, we should be willing to offer $1,500 to everyone who obtains private insurance.  Failure to subsidize private insurance as generously as we subsidize free care encourages people to choose the latter over the former. 

One way to think of such an arrangement is to see it as a system under which the uninsured as a group pay for their own free care.  That is, in the very act of turning down a tax credit (by choosing not to insure), uninsured individuals would pay extra taxes equal to the average amount of free care given annually to the uninsured.  ^{See Figure Ib.} 

 

How can we fund the subsidies for those who choose to move from being uninsured to insured?  By reversing the process.  At the margin, the subsidy should be funded by the reduction in expected free care that person would have consumed if uninsured.  For example, suppose everyone in Dallas County chose to obtain private insurance, relying on a refundable $1,500 federal income tax credit to pay the premiums. As a result, Dallas County no longer would need to spend $1,500 per person on the uninsured.  Thus, all of the money that previously funded safety net medical care could be used to fund the private insurance premiums. ^{See Figure Ic}.

 

Implementing Reform.  To implement the program, all the federal government needs to know is how many people live in each community.  In principle, it will be offering each of them an annual $1,500 tax credit.  Some will claim the full credit.  Some will claim a partial credit (because they will only be insured for part of a year).  Others will claim no credit.  What the government pledges to each community will be $1,500 times the number of people.  The portion of this sum that is not claimed on tax returns should be available as block grants to be spent on indigent health care at the federal level. ¹³

In a private insurance market, insurers will not agree to insure someone for $1,500 if his or her expected cost of care is, say, $5,000.  But if the safety net agency expects a $5,000 savings as a result of transferring a patient to a private insurer, the agency should be willing to pay up to $5,000 to subsidize the private insurance premium.  The additional, higher subsidy could be incorporated into the tax credit or added as a supplement to the tax credit. 

The Costs of Reform.  A common misconception is that health insurance reform costs money.  For example, if health insurance for 40 million uninsured people costs $1,500 a person, some conclude that the government would need to spend an additional $60 billion a year to get the job done. What this conclusion overlooks is that we are already spending $60 billion or more on free care for the uninsured, and if all 40 million uninsured suddenly became insured they would - in that act - free up the $60 billion from the social safety net. 

At nearly $2 trillion a year, ¹⁴ there is no reason to believe our health care system is spending too little money. To the contrary, attempting to insure the uninsured by spending more money would have the perverse effect of contributing to health care inflation.  Getting all the incentives right may involve shifting around a lot of money - such as reducing subsidies that are currently too large and increasing subsidies that are too small.  It may also mean making some portion of people's tax liability contingent on proof of insurance. ¹⁵  But it need not add to budgetary outlays. 

Choice No. 2: Public or Private Coverage

Many poor and near-poor families have a choice of public or private insurance.  Because of their low income, they can qualify for Medicaid or State Children's Health Insurance Program (SCHIP) enrollment, or they can obtain private insurance (typically through an employer).  Clearly we should not be indifferent about this choice.  Private insurance means people are paying their own way.  Further (as noted) private insurance often means better health care. 

So how does government policy affect this choice?  Unfortunately, public policy overwhelmingly encourages people to drop their private insurance and enroll in public programs instead.  As noted, tax subsidies for private insurance are quite meager for those with near-poverty incomes (basically consisting of the avoidance of the 15.3 percent FICA tax), whereas public programs are free.  Further, except for a few pilot programs underway, ¹⁶ states do not allow Medicaid enrollees to use their Medicaid dollars to buy into an employer plan or purchase private insurance directly. 

Consequences of Perverse Incentives.  Many assume Medicaid insures people who otherwise would not have access to private insurance. ¹⁷  However, Medicaid induces some people to turn down or drop private coverage in order to take advantage of free health insurance offered by the state.  As a result of such crowding out, the cost of expanding public insurance programs has been high relative to the gain.  For example, if for each new enrollee in a public program at least one person loses private insurance, there will be no net reduction in the number of uninsured, despite the higher taxpayer burden.  If for every two new enrollees in the public program one person loses private insurance, the net cost to the taxpayers for each newly insured person doubles. ¹⁸

Economists David Cutler and Jonathan Gruber found that Medicaid expansions in the early 1990s were substantially offset by reductions in private coverage. ¹⁹   For every additional dollar spent on Medicaid, private-sector health care spending was reduced by 50 cents to 75 cents, on the average. ²⁰   Thus taxpayers incurred a considerable burden, but at least half, and perhaps as much as three-fourths, of the expenditures replaced private-sector spending rather than buying more or better medical services. 

A similar principle applies to the State Children's Health Insurance Program (SCHIP).  Take a low-income working family covered by an employer-sponsored health plan.  The employer might have covered some or all of the cost of insurance premiums for the employee and family with pretax dollars.  But paying wages is more attractive to actual and potential employees if coverage is provided by the state.  Thus, SCHIP offers some employees the opportunity to increase wages and reduce their health insurance costs. 

Overall, the number of poor children without health insurance fell from 19 percent in 1997 to 11 percent in 2003.  During this period, enrollment of low-income children in public programs increased from 29 percent to 49 percent. ²¹  At the same time, private insurance coverage fell from 47 percent to 35 percent, although there was little change in the percentage of privately insured children in households at higher income levels.  It appears that the crowd-out of private in­surance due to the expansion of public programs was 0.6, meaning that every percentage point increase in public coverage resulted in a reduction of about 0.6 percentage points in private coverage among low-income children. ²²

Adopting a Policy of Neutrality.  The solution here is very similar to the solution to the previous problem.  If government is spending $1,500 a year per person enrolled in Medicaid, it ought to be willing to spend an identical sum on private insurance instead.  ^{See Figure II.}  On paper, Medicaid coverage often looks more generous than private insurance - covering almost all doctors, all facilities and all procedures at no out-of-pocket cost to the patient, at least in principle.  In practice, many doctors refuse to see Medicaid patients and because of the low rates of reimbursement there is often rationing by waiting.  As a result, a policy that is financially neutral would be one that encouraged private insurance. 

 

Choice No. 3: Individual or Group Insurance

The pros and cons of individual versus group insurance have been the subject of many discussions and debates.  Employers, it is argued, are in a unique position to pool groups of people, and there are also economies of scale in group purchase.  On the other hand, employer-provided insurance is not portable.  People who change jobs often must also change doctors - thus losing continuity of care.  Plus, there is no guarantee that insurance at the new job will have the same coverage for the same conditions as the original insurance. 

Individual insurance has the virtue of portability - people can take their coverage with them as they move from job to job.  Further, in the individual market, people have a better opportunity to purchase insurance tailored to individual and family needs.  On the downside, individual insurance has higher administrative costs ²³ and subjects enrollees to individual underwriting.  But why not let employers buy individual insurance for their employees the way they currently buy group insurance? ²⁴ 

This is not the appropriate place to sort out the advantages and disadvantages of the two types of insurance.  Presumably the market could do that much better than academics.  Unfortunately, the playing field is not level. 

The Bias toward Group Insurance.  As noted, current tax law grants very generous subsidies to employer purchase of health insurance.  Yet those same subsidies are denied to individuals who purchase their own insurance.  In almost everyone's estimation, this is the accidental result of years of tax policy rather than a methodical approach to health policy.  Perhaps unintentionally, the tax-writing committees of the U.S. Congress have shaped and molded our health insurance system. 

Achieving Neutral Policy.  In the case of individual versus group insurance, neutral policy is easy to envision and easy to implement.  A neutral government would give the same tax subsidy to every form of insurance.  ^{See Figure III.}  Accordingly, individual and group coverage would compete on a level playing field.  In such a world, employers would not offer insurance at all unless they had a comparative advantage in doing so in their competition for labor.  Undoubtedly, many large companies do have an advantage - they can do for their employees things the employees cannot do for themselves.  Many small firms, however, have no such advantage and would probably be better off paying higher wages instead of paying for health insurance. 

 

Choice No. 4: Third-Party Insurance or Individual Self-Insurance

In every insurance field, people must decide how much risk to transfer to an insurer and how much to retain.  Often the decision focuses on the size of the deductible.  But there are other ways to divide up responsibilities for risks.  In general, risk is transferred to an insurer in return for third-party insurance.  When risk is retained, the individual is said to self-insure.  In a competitive market, individuals would decide how much risk to transfer to third parties based on their own attitude toward risk and insurance premiums.  Unfortunately, government policies intervene.

The Bias toward Third-Party Insurance.  As noted, every dollar an employer pays in health insurance premiums avoids income and payroll taxes.  For a middle-income employee, this generous tax subsidy means government is effectively paying for almost half the cost of the health insurance.  On the other hand, the government will tax away almost half of every dollar the employer puts into a savings account for the employee to pay medical expenses directly. The result is a tax law that lavishly subsidizes third-party insurance and severely penalizes individual self-insurance. This encourages people to use third-party bureaucracies to pay every medical bill, even though it often makes more sense for patients to manage discretionary expenses themselves. ²⁵

New Opportunities to Self-Insure.  In recent years, a number of formal vehicles have become available to make it easier for individuals to self insure for medical expenses.  These include tax-free Medical Savings Accounts (MSAs), Health Savings Accounts (HASs), Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs). ²⁶  Also, about half the states now have cash and counseling programs for the Medicaid disabled population.  These are pilot programs that allow enrollees to manage their own health care dollars.

All of these are steps in the right direction.  But the restrictions on these accounts are too onerous.  For example, employees cannot even have an HSA unless the employer has a qualified plan and the restrictions in such plans prevent many sensible arrangements.  For example, unlike the Medicaid programs, employers are not allowed to put different amounts in the accounts of the chronically ill to coincide with the severity of their illness.  Also the law requires the same across-the-board deductible for inpatient and outpatient expenses - as if patient discretion were equally appropriate in all cases. ²⁷ 

Achieving Neutrality.  A neutral policy is one that treats third-party insurance and individual self-insurance the same.  For example, if government offers a $1,500 tax credit, that credit should apply to dollars used to pay premiums as well as deposits to HSA accounts. ^{28  See Figure IV.} 

 

Choice No. 5: Decisions in the Market for Risk

As far back as 1980, Census Bureau statistics have shown that less than 1 percent of the population had been denied health insurance because of a health condition. ²⁹  And this was a period of time when there were few legislative remedies.  Even so, this 1 percent is a politically vocal group and in many cases they evoke understandable sympathy.  But rather than deal with this group directly (say by creating risk pools or offering direct subsidies), politicians have the imposed unwise restrictions on the other 99 percent.  

Destroying the Market for Risk.  A proliferation of state laws has made it increasingly easy for people to obtain insurance after they get sick. Guaranteed issue regulations (requiring insurers to take all applicants, regardless of health status) and community rating regulations (requiring insurers to charge the same premium to all enrollees, regardless of health status) are a free rider's heaven. They encourage everyone to remain uninsured while healthy - confident they will always be able to obtain insurance once they get sick.  Moreover, as healthy people respond to these incentives by electing to be uninsured, the premiums that must be charged to cover costs for those who remain in insurance pools rises. These higher premiums, in turn, encourage even more healthy people to drop their coverage.

Federal legislation has also made it increasingly easy to obtain insurance after one gets sick.  The Health Insurance Portability and Accountability Act (HIPAA) of 1996 had a noble intent: to guarantee that people who have been paying premiums into the private insurance system do not lose coverage simply because they change jobs. But a side effect of pursuing this desirable goal is a provision that allows any small business to obtain insurance regardless of the health status of its employees.  This means that a small mom-and-pop operation can save money by remaining uninsured until a family member gets sick.  Individuals can also opt out of their employer's plan and re-enroll after they get sick.  (They are entitled to full coverage for a preexisting condition after an 18-month waiting period.)  A group health plan can apply preexisting condition exclusions for no more than 12 months, except in the case of late enrollees to whom exclusions can apply for 18 months. 

Consequences of Unwise Regulation.  By far the worst consequence of government regulation of the market for risk is the unintended harm done to the very people the laws intend to help.  Precisely because the premium attached to high-risk individuals is much lower than their expected health care costs, insurers seek to avoid enrolling them in the first place.  Precisely because payments to providers also do not reflect expected costs, they too have an incentive to avoid attracting the "hard cases," especially among the chronically ill. 

If health care markets worked the way normal markets do, health insurers and providers would vigorously compete for the business of the sick.  There would literally be a market for sick people.  In normal markets entrepreneurs make profits by figuring out how to better solve other people's problems.  In health care, by contrast, entrepreneurs run from other people's problems. 

The Need for a Market for Risk.  Current policy toward risk encourages all of us to remain uninsured while we are healthy.  The consequences are unfortunate.  People cannot make rational choices about risk if risk avoidance is not available at market prices.  A neutral policy would allow risk to be freely priced in the marketplace, with government intervening to help specific individuals only in special cases. 

Consequences of a Policy of "Do No Harm"

This exercise has had two objectives: 1) to identify ways in which government policies create perverse incentives and problems that many turn to government to solve; and 2) to identify what policy changes would be needed to make government a neutral player in the health care system. 

Under a policy of neutrality, government would no longer be a cause of the problems so many people complain about.  And if government were removed as a source of problems, the resulting system would have some remarkably attractive features.  The following is a brief summary. 

A Form of Universal Coverage.  Under the neutrality reforms envisioned here, government would promise every citizen a fixed sum of money.  Those who choose private insurance would get a tax credit against premiums.  For those who are uninsured, the sum would be used to fund a health care safety net in their locality.  Further, since money follows people, there would always be a minimum amount of funding - regardless of how many people are uninsured.

A Level Playing Field for Public and Private Insurance.  Low-income families would no longer be trapped in public systems where the quality of care is frequently suspect and there is often rationing of care, especially rationing by waiting.  Instead, people would be able to apply funds spent on their behalf to enroll in an employer's plan or purchase health insurance directly. 

A Level Playing Field for Individual and Group Insurance.  No longer would tax policy be biased in favor of an employer-based system in which people lose their insurance whenever they leave or change jobs.  Instead, tax law would grant the same subsidy to all forms of insurance - regardless of how it is purchased.  Further, employers would be able to purchase individually owned, portable insurance for their employees in the same way they purchase group insurance today. 

A Level Playing Field for Third-Party Insurance and Individual Self-Insurance.  No longer would the tax law encourage the HMO form of insurance by subsidizing third-party insurance while penalizing self-insurance.  Instead, all forms of insurance would compete against each other on a level playing field.  The expected outcome: An evolving system under which people manage more of their own health care dollars - especially for those expenditures for which patients can exercise discretion and where it is appropriate for them to exercise discretion. 

A Genuine Market for Risk.  No longer would governments require insurers to charge prices for risk that are totally unrelated to an individual's real health costs.  Instead, healthy people would be able to buy into the system at prices that reflect their lower expected costs.  The insurance they buy would most likely be portable insurance, making possible a long-term relationship with their insurer and with their doctors.  In case of a serious illness, people would be able to transfer to other health plans at market prices (paid mainly by their current insurer, not artificially low prices).  As a result, insurers would actively complete for sick people, including the chronically ill, and providers would compete to deliver that care. 

Conclusion

The system described above would not be a perfect system.  Far from it.  But it would be a considerable improvement over the system we have today.  The bottom line: Much good can come from undoing the harm that unwise government policies routinely cause to the nation's health care system. 

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¹ This is a preprint of an article to be published in the Journal of Legal Medicine © 2007 Copyright Taylor & Francis. The Journal of Legal Medicine is available online at http://www.tandf.co.uk/journals/titles/01947648.asp.  The author would like to thank Devon Herrick for his assistance in the preparation of this manuscript.  Some of the ideas presented here first appeared in John C. Goodman, "Characteristics of an Ideal Health Care System," National Center for Policy Analysis, Policy Report No. 242, April 2002. 

² If people must choose between a socially desirable alternative and an undesirable one, government policy is "neutral" if it gives equal encouragement to both alternatives.  Under a set of neutral policies, government is not solving any problems; on the other hand, it is also not creating any problems. 

³ Some of the ideas presented here first appeared in John C. Goodman, "Characteristics of an Ideal Health Care System," National Center for Policy Analysis, Policy Report No. 242, April 2002. 

⁴ This section is partly based on John C. Goodman, "Solving the Problem of the Uninsured," Thoracic Surgery Clinics, Vol. 15, 2005, pages 503-12. 

⁵ By "social safety net," we mean all federal, state and local government programs (other than Medicaid and SCHIP) that subsidize indigent health care in addition to private-sector charitable funding, including uncompensated doctor services. 

⁶ John Sheils and Randall Haught, "The Cost of Tax-Exempt Health Benefits in 2004," Health Affairs, Web Exclusive W4-106, February 25, 2004.

⁷ Employer premium payments automatically escape federal taxes for any qualified health plan.  The employee's share of the premium can be paid tax-free by using Section 125 plans.  State and local tax law almost always piggy backs on the federal system - exempting whatever federal tax law exempts. 

⁸ Although most of the uninsured have below-average incomes, a considerable number are above-average.  About one-third of the uninsured have family incomes in excess of $50,000 and more than half of those earn $75,000 or more.  See Carmen DeNavas-Walt, Bernadette D. Proctor and Cheryl Hill Lee, "Income, Poverty, and Health Insurance Coverage in the United States: 2004," U.S. Census Bureau, Current Population Reports: Consumer Income, P60-229, August 2005.

⁹ John Sheils and Randall Haught, "The Cost of Tax-Exempt Health Benefits in 2004," Health Affairs, Web Exclusive W4-106-12, February 25, 2004. 

¹⁰ An exception is made for the self-employed, who get 100 percent relief from federal income taxes by virtue of a tax deduction, but no relief from the payroll tax. 

¹¹ Topic 502, Medical and Dental Expenses, Internal Revenue Service, U. S. Department of the Treasury.   

¹² A Kaiser report estimates spending on uncompensated care was $41 billion in 2004.  Of this, $30 billion was on individuals uninsured for an entire year.  In 2004, the U.S. Census Bureau listed 46 million people as uninsured.  A newer report by the National Center for Health Statistics finds in 2005 only 29 million had been uninsured for more than a year at the time of interview.  The Congressional Budget Office, based on analysis of the Survey of Income and Program Participation, puts the number between 21 million and 31 million people.  Therefore, annual charity care spending on the full-time uninsured ranged from $965 per year to a high of $1,424 per year in 2004.  Adjusting for inflation, charity care spending in 2006 would range from $1,049 to $1,548.  See Jack Hadley and John Holahan, "The Cost of Care for the Uninsured: What Do We Spend, Who Pays, and What Would Full Coverage Add to Medical Spending?," Kaiser Family Foundation, Issue Update 2004, May 10, 2004; Carmen DeNavas-Walt, Bernadette D. Proctor and Cheryl Hill Lee, "Income, Poverty, and Health Insurance Coverage in the United States: 2004," U.S. Census Bureau, Current Population Reports: Consumer Income, P60-229, August 2005; Robin A. Cohen and Michael E. Martinez, "Health Insurance Coverage: Estimates from the National Health Interview Survey, 2005," Division of Health Interview Statistics, National Center for Health Statistics, June 2006; and Douglas Holtz-Eakin (Director, Congressional Budget Office), "The Uninsured and Rising Health Insurance Premiums," Testimony before the Subcommittee on Health Committee on Ways and Means, U.S. House of Representatives, March 9, 2004. 

¹³ How would the federal government manage to reduce safety net spending when uninsured people elected to obtain private insurance?  Since much of the safety net expenditure already consists of federal funds, the federal government could use its share to fund private insurance tax credits instead. For the remainder, the federal government could reduce block grants to states for Medicaid and other programs. 

¹⁴ Estimate for 2005.  See Stephen Heffler et al., "U.S. Health Spending Projections For 2004-2014," Health Affairs, Web Exclusive w5.74, February 23, 2005.

¹⁵ See, for example, C. Eugene Steuerle, "Child Credits: Opportunity at the Door," Urban Institute, 1997.

¹⁶ Kentucky is one of the states that will use federal Medicaid funds to purchase private coverage if it is more economical.  South Carolina and Florida also have pilot projects. See National Council of State Legislators, available at http://www.ncsl.org/programs/health/1115waivers.htm.

¹⁷ For instance, it was widely assumed that the 1996 welfare reforms, which limited the eligibility of immigrants for Medicaid, would increase the uninsured rate of that population.  Instead, the immigrant uninsured rate fell slightly as more immigrants purchased private insurance.  See George Borjas, "Welfare Reform, Labor Supply, and Health Insurance in the Immigrant Popu­lation," Journal of Health Economics, Vol. 22, No. 6, November 2003, pages 933-58.

¹⁸ However, the loss of private insurance is likely to cause a small, offsetting increase in government revenues as employers substitute taxable wages for previously untaxed health benefits. 

¹⁹ David M. Cutler and Jonathan Gruber, "Does Public Insurance Crowd Out Private Insurance?" Quarterly Journal of Eco­nomics, Vol. 111, No. 2, May 1996, pages 391-430.  Also see Tanya T. Alteras, "Understanding the Dynamics of ‘Crowd-Out': Defining Public/Private Coverage Substitution for Policy and Research," Academy for Health Services Research and Health Policy, prepared for the Robert Wood Johnson Foundation, June 2001, pages 14-15; and RAND Health, "State Efforts to Insure the Uninsured: An Unfinished Story," RAND, Research Highlights, 2005.

²⁰ Ibid.  Cutler and Gruber found that most of the reduction came from workers deciding to drop private coverage (particularly for dependents) rather than because their employers stopped insurance coverage. 

²¹ Peter J. Cunningham and Michael H. Park, "Recent Trends in Children's Health Insurance: No Gains for Low-Income Chil­dren," Center for Studying Health System Change, Issue Brief No. 29, April 2000. 

²² NCPA calculations based on HSC Community Tracking Surveys, 1997 to 2003, Center for Studying Health System Change (HSC).

²³ The administrative costs for individual insurance are not as high as commonly supposed, when the length of the insurance relationship is considered.  Whereas group insurance is typically renegotiated every year, individuals tend to retain their coverage for several years - spreading out the administrative cost of the initial sale over time. 

²⁴ John C. Goodman, "Employer-Sponsored, Personal and Portable Health Insurance," Health Affairs, Vol. 25, No. 6, November/December 2006, pages 1,556-66. 

²⁵ John C. Goodman, "Health Savings Accounts Will Revolutionize American Health Care," National Center for Policy Analysis, Brief Analysis No. 464, January 15, 2004.  

²⁶ See Michael F. Cannon, "Three Avenues to Patient Power," National Center for Policy Analysis, Brief Analysis No. 430, January 30, 2003. 

²⁷ John C. Goodman, "Making HSAs Better," National Center for Policy Analysis, Brief Analysis No. 518, June 30, 2005.

²⁸ More precisely, true neutrality requires that the HSA deposits be made with after-tax dollars and withdrawals for any purpose be tax-free.  See John Goodman and Mark Pauly, "Tax Credits for Health Insurance and Medical Savings Accounts," Health Affairs Vol. 14, No. 1, Spring 1995, pages 126-39.

²⁹ Karen Beauregard, Persons Denied Private Health Insurance Due to Poor Health, Pub. No. 92-0016 (Rockville, Md.: Agency for Healthcare Research and Quality, December 1991).