Getting businesses out of the health-care business - Nickles-Stearns Consumer Choice Health Security Act - Above The Beltway

Chief Executive, The, June, 1994 by Edwin J. Feulner

Health-care reform continues to be the main event on Capitol Hill, and most of the major contenders are taking their well-deserved lumps.

The Clinton plan is battered and bleeding: too complicated, too bureaucratic, too costly, too limited on individual choice, and too certain to lead to government-directed rationing. Not a pretty picture.

Another leading plan--known as "Clinton-lite"--also is faltering. Why? Because, as The Washington Post has pointed out, the Cooper-Grandy "managed-competition" plan and the Clinton plan "are more alike than either side finds it convenient to acknowledge."

With Congress' Independence Day recess just ahead, maybe it's time for business executives to give their senators and representatives some needed advice: Instead of arguing about business "mandates," let's get business out of the health-care business altogether.

Only one plan would remove business from of the business of health care: The Consumer Choice Health Security Act, sponsored by Sen. Don Nickles, R-Okla., and Rep. Cliff Stearns, R-Fla. This bill, which has 25 Senate and 20 House co-sponsors, is the legislative progeny of a plan my colleagues at the Heritage Foundation devised in 1989 when our experts realized health-care financing was rapidly reaching the crisis stage.

The idea behind the Nickles-Stearns plan is that because people think someone else is picking up the tab for their health care, they don't pay attention to costs. As a result, neither do doctors, hospitals, and others in the medical business. Prices outpace the general rate of inflation, because demand is unlimited.

The Nickles-Stearns plan would remove this demand distortion by ending the current tax exclusion for employer-provided benefits. The additional revenue (some $80 billion to $88 billion per year, state and federal) the government would realize from the expanded tax base would be returned to taxpayers in the form of an individual tax credit or vouchers for the working poor who currently don't have health benefits.

From the day this legislation would take effect, businesses could "cash out" of health care--that is, they could convert the value of their employees' health benefits into cash, increase their wages by an equivalent amount, and get out of the health-benefits business.

Employees would use the additional pay to buy their own health plans, either directly from an insurer or HMO, or through some group with which they feel a special affinity, such as a professional society, a union, a religious organization, a health charity, the state manufacturers association.

If the employees of Citibank, for example, now get a $6,000-a-year health plan as a free benefit, that $6,000 would be considered taxable income under the consumer-choice plan. Each employee would use the pay increase to buy his own health plan. If an employee can find a health plan that meets his family's needs for just $4,200 per year, he pockets the $1,800 he has just saved (less taxes, of course). The health plan would be the employee's--not the company's--and would go with him if he changed jobs.

Consider the effect of such a plan on the cost of health care. Individuals would have as wide a range of choices as the market could provide. This would mean not only intense competition between insurers and health-care providers for the business of each individual and family, it would mean each family could pick the plan that best suits its individual circumstances and pocketbook.

Once consumers are empowered to buy their own insurance without the employer middle man, they'll pay more attention to the money they spend. Normal market forces will impel doctors and hospitals to operate more economically. America's health industry will keep its insurmountable edge in quality and innovation--and add efficiency to the mix.

Wishful thinking? Not at all: A working prototype for such a consumer-choice system has existed for 34 years: the Federal Employees Health Benefits Program. Nearly 10 million government employees and retirees and dependents are now covered. They choose from dozens of plans. Does it control costs? According to a Sept. 1993 news release from the Office of Personnel Management, which administers the program, FEHBP costs this year increased just 3 percent, on average, above 1993 levels. Forty percent of enrollees in FEHBP, the release stated, saw their premiums decrease in 1994.

In a special editorial commentary, Barron's called the Nickles-Stearns bill "the closest thing we've yet seen to our goal for national health care," because it incorporates FEHBP's principles of consumer choice and market competition, which "should become the model for the nation."

On the other hand, the Clinton plan is the precise opposite of a consumer-choice system. It offers just one choice: a standard package of benefits, for which employers would be required to pay 80 percent of the "premiums." Even Congress won't go along with this.

And for good reason. According to an analysis by Lewin-VHI, the nation's leading health-care accounting and econometrics firm, the costs of the employer mandate would reduce the wages of workers in firms without health coverage by more than $1,200 per worker and kill between 155,000 and 349,000 jobs. By contrast, the Nickles-Stearns Consumer Choice Health Security Act would cause no wage or job losses, the Lewin study found.