ealth care reform: a free market perspective

JEfTREY S. FLIER, MD, AND ELEFTHERIA MAR/\TOS-FUloR, MD

Problems with the U.S. health care system have been topics o[ discussion for many years. Escalating expenditurc~ on health and increased numbers of uninsured individuals are generally accepted as the major symptoms of these defects. Health care reform became paramount among social policy issues during the presidential campaign oflll91, and in early IlI!)3, Hillary Rodham Clinton was appointed to head a task force charge I With preparing legislative proposals designed to resolve the crisis. The task force met mostly in secret [or months, and in September 1993 the White House released proposals for unprecedented change in the trillion-dollar health care industry. The dominant theme of this complex legislation involved increased regulation and control of the medical and insurance industries.

The next year witnessed intense and broad-based discussions of the nature of the problem and the merits of the specific legislation, as well as alternative approaches. The initial debate focused on both cost and access; however, over time the focus shifted to assuring universal cover­age. The dominant theme of proposed legislation was to introduce sweeping new regulations and taxes. Cost estimates of the proposed plans were disputed, and no consensus could be reached regarding basic aspects of the legislation. The attempt to produce legislation in 1994 has largely been abandoned, and the focus has narrowed to incremental reform. However, the basic premise of leading proponcnts of refurm, that improvements in the health care system can be accomplisheJ by govern­ment regulation, remains unchanged.

We present this paper from an alternative perspective that vicws symptoms of cost and access as resulting to a substantial degree from decades of flawed public policy, rather than government inaction. How­ever well intentioned, prior policies have caused economic distortions that raised the cost of medical care and reduced the availability of affordable insurance for a majority of the population. hom this perspec­tive, further regulation is likely to exacerbate more problems than it will solve, bringing relief to some individuals while reducing availability to

From tl1e Department or Medicine U.S.F.). Beth lSI el Hospital. Boston. the Department or Meel,clnc (E.M.·F.). Brigham & Women's Hospital nd Res arch Division. Joslin Dt betes C nler. Boston: and tl1e Departnlcnl of MediCine (JS.F. and E.M.·F.), Harvard Medical SchOol. SoslDn. M ~s<'Cnus~ells

Address correspondence and rep"nt requests to Jeffrey S. Filer. MD, 6eth Isro I Hospital. 3::10 Brookline Ave .. 80';ton. MA 0221­

H 0, heall m InlenanCe org nI7'1tlon; GIlP. gr ss dOlTIes II,; proch,"!: IRA. Ind,vtd\l" rellt""'''''l

account

Problems with inflation of medical costs and inCI'eased numbers of uninsured individuals have resulted in widespread calls for reform of the U.S. health care system. Proposed refor'ms have generally emphasized increased regulation of the medical and insurance industries, but disputes over the cost and consequences of these proposal has so far prevented legislation fmID being passed. This paper' is pr'esentcd from an alternative perspective that views the current symptoms on cost and access as the results of decades of Hawed public policy, rather than govemment inaclion. Wc lrace the origins of dysfunclional hcalth carc markcts in prior public policy, and outline an approach to healing the heallh care system based on a new dedication to frec market principles and individual choice.

DIABETES REVIEWS, Volume 2, Number 4, Fall 1994 _ 51) I

------ -TI18 free market and IlealUl care rcrarnl

many others of the healtl1 care they desire, This p<ll'er

reViews scveral aspects 01 the rel'llil1nship hetwcell currenl prohlems and pasl puhlie pll!JCy and lllltiines ,In numher of possible solutil1ns hilsed on free m<ll'ket principles <lnd imliviuu,i1 choice,

IS A FREE MARKET FOR MEDICINE POSSIBLE? A free milrket is chM<leterizecJ Iw v()IUnl<lry Ir<lI1S<lC'­ll()ns hetween hu)'ers <I IIII sellers, protecled hy ,!.:()\'­

ernmenl from im posi tlon of force '1f1d (r(liid (I,))

M,nket pMadlgms vary f!"llm this pure (ilfld currClllly r;tre) form, along <I conlinuum tl1wind SOCliillsnl, 1f1

which u:ntriil <lutlltJrities attempl 10 ascerl'lin the needs of the citil.ens <lnd pruvlde meChMlISI11S In­

tended to satisfv those needs, rhc Americ;ln syslem

loday involves il mixture of m,nkels and legul<ltil1n It is important to determine whether thc defects in our health carc system ;He the result 111 failures l1f mM!-;ets

or f<lilures 111 regulation, The cJominal1t view among

hCillth economists IS th;ll ddects in the 11e,i11.11 care systcm ;He due primarily tu lclilures l1f the market Clll11pOnent, ,Ind some intluentl<ll aUlhoJ'lties view ellcclivc' medical markets as, In principle, impossihle'

(" ::;), These impOrl',1nt claims rest 011 \11'0 <lrgumel'lts,

the claim of a uniquc value of mnlic,i1 c,nc, il11d an

unhricJp.eahlc Information gap hetween p,1Ilent <lIHI provider, These <lttrihules arc said to produc'e "fTl<ll'­

kel f,lIlure," <I slale of SUbuplil11,iI proCIUCl'IUIl <l11l1

distribution ul services, lh<lt JUstlrles gU\'CI'lll1lelll 111­tervenllon to restore "c1liciency,"

Is thc' vicw thal rneche<d sCl'vices (m hedlh Ilsell)

arc inherently more valuahle thal1 uthCl' goods, ser­viccs, and goals valid') Wc find thaI. as judged hv their <tClu,l! choices and aClions, people do l10t ;i11 place lhe

samc value 011 he;l!th, M,lny pcorlc .icllp<lrdizc he;l!lh

hy smoking, unhe,tlthy diels, dallgerous l1llhhies, or unsilfc sc:-;, It is acknowledged thdl Iikstl'le change'S have a grcater impact on health th<ln mallY itllvanecs in mediCil1 technolugy (Il), An importalll elhie,tI poinl emerges (rul11 these Llcts, AnI' hc,tlth reform lhal

Imposes milnd<ttes and gloh;d budgets ,Inll <ltll'l11ptS to treat ,ill individuals (IS though they v,due heil![h equidly wiJl almost certail1ly m,lke it clllTicult 1m [llUSe who value hC;l\th most to ohtain the CMe they desire

Simililf'ly, "lnlormationidll1eljuillity" is Ilot unique to medicine, M,nly other tl'alles ,ll1d IHlll'c:ssions rc'­semble mediCine ill heing tcehnic,dlv uhscul-e to the 1,\)'111(111 Furthermore so Inc governmellt aetiolls, such as banning physici,1I1 advertising (7), and ileting tll limit eMly establishment of prep<lid heillth-e<lre SI'S­[ems (S,I)), !1<l\(' limilccl inlonnation now

Despile government rn;ldhlocks to II1lorm,ltioll,

mill'ke't ,ldapliltlllllS to imperfect information have

evulved over thc past .Ill yeMs, enelJuraging increaseJ p,llicnt ,lutO!lOl11y ,llld Cl1l1sensual doctor-patient re­Lltll1l1slnps, These illclude publiC diseussil1n l1ll11edi­

Gil Inl1lw,llions, Incrcdsillg expectations regarding

illlol'l11ed ((Inselll. ilnd increased scrutiny 01 physlci,ln services by 11C,lllh m,lintellailec organizations

(I HvlUs) dl1ll Illsurers, These adapt'ltiolls l'lluld be strell,illhclled in ,I more ulll1pellllve allcJ decentralized l11<1rkelpl,lcL' <lllclwOlild, we believe, illere<lsnl,illy rCIl­

dn lhe concepl or physlcidn-indlleed demand out­nwded, or dl !cdSI nol subslanti,t1ly ditrerL'1l1 I'rom [lie si!udtioll Ih<tt exisls ill olher SCIVlec nl<lrkels,

AIHlther drgUf11eni dg;linsl medical I1lMkets (51 IS thd I cost consciousness ,1 nd i udgmcn I ;11'<: necess,lrily lin1l1L'd durJl1g illness, Although cen,lIlllv lrue III

c:-;llcme Cilses, mallY medical encuuntcrs du nol occur ,tt times 01' inc,lp;lcily, exlreme dlslress, or even i1lncss Indced, key decisions ilboUl insurance ilnd choice ul'

provide I itrC lypic;t1ly l11ilde when ile,t1thv, M;lny

medic;i1 CIlCOllillns "IHJ pruccdures me elective, Im­pOrt"11tlv, d market suhstdntliilly responsive lu cosl­C'lll1sciollsncs,s doesl1" lelJuire equdl cost senSitivity of ,ill encounters,

Sume ,Irglle th"t cust conscillusness m,lV Ie<td to UlI1Slll11C1'S ehollSill,il to save muncy bv aVllicJing Cilre, with tbe I-esult helllg aVllidilblc mediccil h,tr1n, While

this posSlhility cert<llnly exists, It par;i1lels Illany otllers ill d libn,i1 Sl)C1etv (I (I), wherc individuals l11itke

Inlp(1I1;1llt deciSions regilrding CClreel-, IHlusing, rel,,­

lionshlps, etc .. despitc widelv Vill-Ylllg levels llf judg­11K'ill dllli t'-0od sellse dnc! the evn-presellt plllential ut nrnr alld harm, It I11dy be possible to limit choice <lml lherl'tore 10 prevcnt harmful ou[comes, We

helieve thaI any bcnefits of such elforts arc out­IVclghed by (he loss of personal autonumy and the

hdrmflll, iluninlended, elfects of hureauC!"atiDilion

M;lfket "iml1l:rleelions," even when they exist. 1I1;IY nul he remedlc'll by guverlll11enl inlervenlion, Regula[ors possess (,Ir less than perl'cct knowledge,

F;ICls lhemselves, cunsequenees or the regulalory deciSions, ami the adu,i1 deSires of the citizens being

reglll<lled milV nol be re(1dily knowable, For these and ulher re(1suns, m,ln)' elruns 10 enhance quality or reduce costs thlough regu!;Jlion ,Ire l101ed to !';liI, or

even to produce the opposite results (I J), Regula­tluns Ivpie(1lly hinder developmenl of ellicienl 111;lr­

kels, <I'HI there is a duclll11ented tendency fur lhe inlel'ests ul' the regulated tu end up being pl(1ced "huvc t 110se of Ull1SUl11ers (12), Both l11ilrkc,ts ilnd I cgul"tiulls eiln ['ilil, tile eOllsequences of thc !,ltter itl'e ultel1 l)Jufollllll. Indeed, we believe that the cunell! prublel11s of e()st and ,Iecess have theil' roots in past

publiC pOliCY,

DIABETES REVIEWS, Volume 2, Numb", :\. Fall 1994

Flier anel Maratos Flier

SOME HISTORICAL ROOTS OF THE PROBLEMS OF COST AND ACCESS It is frequently asserted that the U.S he,tlth care system spends an excessive fraction of gmss domestic product (CJDP) on health. Although thc I IS. spends ,I greater fraction of GOP on health than any other country, the unaceepwbility of the 14 r/r, of GT P spent on heallh care is not self-evident. People in ,lmuellt societies will spend more for innovative and etfeetive diagnostics and therapies. An a, mg population ,tlso IllereaSes hCC1lth expenditures. M,lny other factms have been discussed (13). While the fact th,lt medie<tI expenditures in the US. arc higher than other Cl1un­tries is partially explainable. the r~lte of incrcase SillCC the mid-llJ(jOs appears to have exceeded [hal ex­pected from newly avail,lblc tcehnology and demo­graphics alone. Why did this occur') A nlajm factm was public policy that promotcd tirst dollar (,llld low deductiblc) insurance and cost-plus reimbursement. both 01 which undermined market cost-contalilment mechanisms by exceSSively shielding 111()St consumers from exposure [0 or even knowledge of the actual cost of medical care (14).

Cost-Plus Cost-plus hospital reimnursement (full cost plus a small additional payment). initially en<tctl'll by 1he Blue Cross system during the IlJ30s (0). discour<tged financial responsibility (14). Originally the Blue ('ross approach included no co-payments or deduc:tibles, an open panel of physicians and hospitals, ~\nd the direct compensation of providers b. the insurer. Cost-plus relmnursement evolved as the Blue.' rose to promi­nence, assisted, not surprisingly, by <lilies in org,ll1ized medicine (i.e., the Amc rica n Meci ical Assoeiallon) and the hospit'll Industry. Cost-plus served the Inter­ests of providers over the goal of providing maXimally affordable coverRge for consumers. It is import<tnt to realize that this odd outcome was not the result of ,I market failure. The Blues success rL'l[uired explicit legislat\on and tax policies Llvuring them over com­petitors UU5). The establishment of Medicare/ Medicaid institutionalized the usc of tllC cost-plus reimbursement system in 1%5, apparently to gain support of the hospital Industry This public pOliCY contributed powerfully to the explosive Incre,lSe In medlc'll expenditures that ensued.

Although many individuals enjoyed benefits I'rom the services provided under cost-plus, it is now widely <leknowledgcd that this mode of financing accelerated per eapitil spending on health care beyond what most inrJividu<l[s would have chosen ir splllding their OWII

money. Over the P(lst 20 years, efforts to limit the

cost-plus system through regulations like ccrtilicatL:s llf need (14,J(J) and IJhysicialls' Standards Review Organizations (PSROs), designed to eliminate "un­nL:cess<lry" ('<Ire, were tried and failed (17). [n Medi­care. diagnostic-related grollps wcrc initiated to moddy cost-plll.s (10). In contrast to these generilJly unsuccessful efforts to hold down costs through reg­1Ildtion, markets did respond thll1ugh many adapta­tions, Including entrepreneurial efforts such as outpatient surgery centers and free-st'lnding emer­gency facilities, as well as the rise of managed Care. Actually, the 10:)Os markcd lhe rccf1lcq.'.ellee of eOI1l­petitive medical markets <llld nwder'ation of the nlte of nK'died inflation appe<lrs 10 ILlve begun (10).

First Dollar Coverage In the early 20th centurv, health Insurance covered Glt,lstrophie ami chn)nic Illness (:)). Routine care was p'\Il1 out of pocket. Since the !040s puhlle policy stimulated health insurance to evolve toward <I radi­cally dilkrent system that, in addition to covering ealastrophie illness, covers even small expenditurL:s. What caused this change in the <lppmach to insur­ance') hen wage and price controls were instituted during World War [I, govelllment allowed "fringe henehts" [0 Incre,lse as s<darv substitutes (20), thereby pll1moting purch,\se of health benefits by employers. I.~ven ;Ifter price control, ended, employ­er-provided he,l!lh covcragc w,\s granted t<lX exempt status, and tllis lurther stimul<lted the substitution of tax L'xempt medical care for taxablc wages (2lJ).

Although it m<llle sense tor an individu<ll to seek "Iow deductihle" hrst dollm coverage given the ,lVilil­,lble options, tirst dulldr coverage is more costly and inelliclenl th,ln true insur'lI1ee. Since the insured rarely spend their own doll'lrs. this ~\pproach r'emoves ~lny Incentive for cost-conscious medie<d consumption and. over ln11e, eusts rise. In addition. the Illany small CI~III11S tlwt dre covercel by insurdnce r,\ther than out of pocket are, relati\cly speaking, the most expcnsive to process. and the overall administrative cost of proccsslng such small claims increases cost infbtion. Tax suhsidies al\' at the ruot of this demand for nrst dullal cover;lgc. Without tax subsiciy, more individu­als would instead choose high deductible. eatd­slluphie Insurance policies. as tllese <Ire far less expensivc than low deductible or first dollar policics. III sUlT1m~\IY, t<lX Incentives pushed the U.S. toward what is predominantly dT1 employer-based, third pdr­ty-fin,lI1cL:(I, I()\v deductihle insurance system.

Consumers vs. Payers The incentives discusseu above resulted in a f,llling

fraction of health carl' expenditures paid for dlreCllv

-.1~DIABETES REVIEWS, Volume 2, Number 4, Fall 19 4

The free market and health carE: reforrn

by patients as opposed to llmd party payers. Dissoci­ation of cost and service is sometimes eJcslrablc, allowing patients to avoid thc stress of flnancial

dccisions whcn ill. fIowcver, in the absencc of cost consideration, utilization increases, some of it in the

category of medically unnecessary utilization (21). Palients will more likely seck medical ({lrc for minor

problems, and may accept low-risk (but cxpensive)

diagnostic procedures wherc pathology IS unlikely. In hopeless situations, patients {lnd physicians morc

often grnsp at experimental or useless treatments. We tind no moral fault in individuals seeking care,

even exceeding that which mcdical authuritic's find

appropriate, especially if spending their own re­sources seeking hcalth and peace of mind. IlowevCl,

we belicve that globally incrclsed demand for care without cost consciousness is Iitcrelily ullsustalIlable.

Itimately spending will either be limited hy IIHlivid­

uals acting in their own interest (i.e., choosing to usc their resources on somethlIlg other than he,lIth care)

or by bureaucracies reacting to global budget,lrv concerns. The transfer of such Important personal

decisions to bureaucracies wi II encou rage the poli ti­ciLiltion of health ,mel will dcprivc individmds of

~lLItonolllY in a critical sphere of their lives.

Mandated Coverage Mandated benefits requiring insurance to cover spe­cific diseases, disabilities, and scrvices make Insur­ance expensive (j 5,23). Most states mandate coverage

for specific therapies, including pastoral counseling, hairpieces, in vitro fertilization, and Hcupuncture. The

number of such laws increased frum 40 10 nearly 1,000 between 1970 and 1991 (I."i,n). TypiGdly, peu­

pic view such mandates as addressing specific needs,

and they typically enter thc law quietly, through special interest pleading, without much public debate. Unfortunately, the unintended adverse consequences of such mandates arc rarely scrutinized, as th~' victims arc less readily identified than the bcneflciaries. [n

addition to raising the costs of Insurance, these re­quirements only apply to a minority of th' ropulation, because Medicare, Medicaid, most HMOs, and sell·­insured companies (70% of largc corporations), Me

exempt (J5.23). lience, those individuctls for whom high deductible, low cost catastrophic insurancc is most appropriate, i.e., the self-employed clnd employ­ces of small husi nesses that do not otle r I nsu rance, are cJeprived of that choice through government-lIlduced cost inJlation, and as it result. the Itk~'lihood th;lt these

individuals will be uninsured increases.

Government Responsibility for the Uninsured The problem of unmsured Americans has been brought to wide attention through thc storics of tragically ill individuals who suffered as a result of heing uninsured because of preexisting conditions, inability to afford policies, or loss of employer-based Insurance hecause of Joh loss. It is therefore impor­tant to undcrst;lnd the nature and causes of thiS problem. [t is estimated tllat :17,000,000 people arc unillsured at any roint in time, and about half of them rcmain chronically uninsured. However, of the 2[)(l,()()() rcople who become uninsured in any given month, SWlr, arc uninsured for less lhan 5 months and only 15% lack insurance continuously for morc than 2 years (24). Many h,lve recently elwngecJ employment S[,ltUS, and so a Illajor part of this vexing problem results from lack of portability of employer-provided insurance. Most uninsured individuals, whether em­ployed (about 50%) or not, are young (50% below ,1ge 34) and healthy (25). Many fmego expensive Insurance ,It it tllne when they (correctly) view major illness as unlikcly Less than I % of the population below ,\ge (15 is both uninsured and uninsurablc because of a preexist ing condl tlon (26).

t lnforlunately, our government tax policy penal­Izes those I/ldividuals who are least able to afford insurance At present only 25'); of premiums are deductible by self-employed individuals (after deduct­II1g 7% of adlusted gross income), while those em­ployed by small businesses or the temporarily unempl~)yt'd get no tax break. Thus, while health costs rise because of the policies described above, tax treatment t·hat would make Insurance more afford­able is unfitirly and selectively denied to the self­employed, many cmployees of small businesses, and the unemployed. Government further contributes to the insurance deficit by reql1lring hospitals to bear the cost of 'i~'lvices to tvIedicare and Medicaid patients. despitc the decision of government to explicitly un­dcrfund these programs (27). These governmenl­m,lndated but unfunded costs are shifted to those with cOllventlonal Insurance who are often Icast able to pay.

THE RIGHT TO HEALTH CARE I' health care a right" While many have argued that there is a "righl to health care" (28) only limited attempts have been made [0 define the nature of this right. Unlike negative rights that establish boundaries that others must respect. "need confers rights only when what is needed is recognizable as a need by the one who is lu meet it" (2li). Should health care bc

considered a "right," a system of defining medical

DIABETES REVIEWS, Volume 2, Number 4, Fall 1994

Filer Clild Maratos-Flier

needs would therefore be necessary. LJltim,ltely need would be determined by the political process and enforced by the state. Since everyone must have equal acccss to things that arc viewed as rights, fair distri­bution is important. Individuals may find that In the Interest of "fairness," it would not be russlble to pursue, even with their own funds, hcalth Glre that they want. A "right to health care mcly actually diminish what is available

THE ROLE OF THE PHYSICIAN IN HEALTH CARE REFORM Increased g.overnment involvement thre,llens what wc view as several valuable dttributes of thc mcdical pro!'ession, including the Independence or' rractitlo­ners and the ccntral view that physicians must serve as advoC<lles of their patients' interests. Many prorosals for new regulations could acceleratc a trend in which the role of physicians is changing from I:ugely inde­pendent practitioners to employees of larnc corporate entities. Currently, such changes havc Misen prin1<lr­ily through market adaptdtions. Ilowever, an extreme version of this trend could eventuate in a state where physicians wcrc civil service "health providers," re­sronsive entire Iy to the interests of a ., med Ica l-st,1 tc complex." This extreme is cvident in the views 01 a prominent analyst who recently advocated "mandato­ry public servicc by physicians" In the form of ,I physician draft, so as to instill in physicians "a sense of oh"g~ltion and social service," clS well as to bring physicians to locations where they would not volun­tarily choose to reside (30). Some have attempted to justify such manipulations of physicians' lives through lhe claim thaI medical education and medical re­search have received federal subsidies. Hmvever. this justification seems implausible given the retroactive and cocrcive nature of the proposal and the fact that government policies are primarily responsible for the high cost of medical euucation. Such manipUlation 01 physicians would ,liso threaten essential aspcch of thc doctor-patient relationship, which relies heavily on mutual respect and trust, which would be undermined if the physician were serving under duress.

To some degree, HMOs already impose connict­II1g loyalties on primilry carc physici,lns who must serve hoth the system and the patient (31). Hnwcvcr. in today's lIMOs, both paticnts and physicians arc voluntary participants, and the possibliity of leaving the HMO system altogether creates a strong incentive to maintain and improve quality and choicc. The implications of physicians acting as"medical gate­keepcr" would substantially diller if this process wne mandated or made virtually unavoidable by the state,

DIABETES REVIEWS, Volulne 2, Numt.Jer 4. Fall 1994

~lnd rhyslcians would he rressured to lilminish their rolc as patient advocatcs. Both advocates of markets and of governmellt-funded single-r'lyer solutions (32) arc concerncd about this outcomc.

POLITICAL SOLUTIONS: THE BROADER CONTEXT Politicians arc excessively attuncd to short-term promises ,Ind ,Ire tyricaily reluctant to !<Ike long-term responsibility for the consequences of the laws they cn,lcl Supporllni! this situation is the fact that many rolicy decisions arc based upon inadequatc data and potL'lllially enormous cost miscalculations. An eX,lm­ric IS the estimates made In 19h5 th,ll edicare would cost 12 billion doll<lls in I()()() instead of the ,Ictual 1(J7 billion dollars. L.egislation is also InRu­enceu by speci,t1 interests whose agend<ls and modus operandI arc typically well removed from rublic scrutiny. !-'in ally, peorle seek to maximize thcir inter­ests despite r'L'):',U I,ll lon, causing outcomes to VMy from Inl[l,lI estimates as when Medicarc cost controls re­sulted 111 cosl shifting to the rrivately insured (10).

GOALS OF AN IDEAL MARKET-BASED SYSTEM Policics claiming to rrovide health security through governmcnl-assurnj access to comprehensive health care of e,lch person's choice, achieved simultaneously With cost control and hudget caps, cannot, in our view, succeed, although, like most utopian notions, thcy arc arrcahng al first !-,-Iance Altempts to legislate such pollcics would, we believe, lead to accelerating costs, rcduced ,ICCCSS to care through rationing for mallY people, or, pcrhars most likely, an uIlaprcaling eom­hination of both. Our objectlvc is to establish ,In efficienl IllL~dical mclrketrlaee that would increase the access to insurance and care of many individuals now unable to ohtdin these dnd to SII1lu.ltaneously reduce cost inRatioIl. These goals would hc supplemented by financial empowerment of those who remain In need of help. Although eschewing regulation and bureau­crdey, our rdorm <Igenda would require fundamental changes in all components of the medical system (34).

Wildt would ,I system that is evolving in such a direction look like·) first, there would be an evolution (ow,lrd r,ltlents, rather' rh,ln third rarties such as employers dnd large insurers, heln the principdl buyers of health carc and insurancc. ivkdical consum­ers woulu he Ilettcr dble to compare options and rrices hdore rurchasing. Decision-making power rc­garding medical matters woulu shift from impersonal hureaucracies to individuals. SecoIld, most physicians would scrve as principal agents of their patients, and the trend t(,ward physicians being agents of insurers

The free market and health care reform

or government would slow or be reversed. Third, Ihe trend toward hospitals being agents tm the Interests of physicians and insurers would end, and hospilals would increasingly compete for ratlents by impmvlng quality and lowering prices. Fourth, health insurance companies would be in the business of insuring against risk, rather than buying, managing, and 1',1­

tioning health care, Fifth, employers, would <let ,lS agents for thcir employees. t'acilitating inflll'med choices and monitlll'ing insurers. But il employers failed to accomplish these goals, there would be financial incentives to remove them fmm the he<lltl1 insurance equation entirely, Fin(llly, government could be an insurer of last resort: r,llher th,ln pur­chasing health care, it would Inste,ld p,ly insur,lnce premiums for indigent polieyholders and promo(L' policies th,Jt would increase charit,lbk: actiVities.

Tax policy would facilitate these developments by eneour(lging priv;lte "lvings fm small medical ex­penses, private IIlsurance fm l'lrge expcnses, and lifelong savings for medical needs during reliremenL Government would ':'leourage open eumpctition in markets for physici;lns services, huspltal services, and health insurance, It is import(lnl to note that, pres­ently, virtually every private sector actIon in the ,Ibove direction is prohibiled or discouraged by governmenl policy,

Tax Equity Tax equity regarding health expCllses mLlst bc achieved, with hcalth expenditures heing equally de­ductible reg<Jrdless of employmcnt. There h<ls ncvel been a juslitication, at thc level of either poliey or ethics, [or the unemployed, p,trt-time workers, the self-employed, students, and othcrs without employ­er-provided insurance bClng required lo pay for care with after-t<Jx dollars whilc those With employer­provided coverage are able to pay with pretax income. Employecs should h<tve the option of equal tax dc­ductibility for personally purch,lsed roliCles, This would lead to an end to the Jominance of employer­provided insu r,lIlCC, which cont ribu tcd import'l n tly to the crisis of unirl.~ured lndividu,\h

Medisave Accounts MediS<lve accounts, or individual medicil ,Iceounts, are one way to ease an evolution lo a markct-b'lscd, decenlralized solution, With Medisave accounts as ,In option, individuals would he encour;u.,:ed to insure themselves for small medical expense's and rely on catastrophic health insurance policies tor large med­ie,l! exrcnscs (18). This could he enacted through a

minor change in the lax law governini,! health insur­

<Ince Ilow would they work') Deposils could be made

to sLlch accounts directly by ;In individual consumer, by an employer (in lieu of other health bcnefils), or by government (In lieu of Medicare m Medic<lid), ,Ind in each Glse the deposit would be tax exempt, as is now the ca,c for individu,t1 reliremenl accounts (I RAs) Money could be withdrawn only for medical ex­pellses. Unspent balances would accumulate lax [ree, could be uscd for future medical expenses, rolled OVCl il1to :111 I R.A or rCl1sion pl,ln at'ter relirement, <Ind accrued to the holder's eSlate,

M,lIly individudls would likely limit Insurdnec: to high deductible (I.e" $2,llOO-3,()OO), catastrophic cov­erage' to access the :-mlrkedly reduce premiums of such pOlicies. They would then deposit the s,lVed premium (of. for example, an employer-provided iJendit) IIltll personal Medisave accounts. The insur­anec policy wou lei eove I' costly trea tmen ts (i.e., dbove the $2,000 3,000 deductible), while Medisave fumls would be available to pay sIll,iJl bills. Figures derived lrom an Interview with 1. P~ltrick Rooney, chle! executive officer of Golden Rule Insurance, show th,~t, in an average-cost American city (e,g" Indi'lIlap­olis), ,I typical low deductihle ($355) policy for <I

family would cost $'+,100. [n contrast, a $2,000 deduct­ihle pOllcy would cost $1,900, providing a saving of $2,200, roughly eLJu<iJ to the deductible, If added ta.'\ Ill;;e to the MediS<lve ,Iccount, no out-nf-pocker ex­pellse would exist. Companles using this approach, cven without favorable ldx treatment of the depOSits, have alre(ldy reduced health expenditures (35).

Medical I R!\s otfer many potential adv<lntages Slilce the ,Iccounts arc held by the individu<Jl, they address the problem of portabililY, and hal<lnces coulL! bc used to pay pl"Cllliums between jobs. They would markedly reduce the costs attrihuted to ,ldmin­istratlon and hilling, since most routine payments ;lIe directly fmm the consumer without interposition of ,I hilling agent or Insurer. Physician paperwork and <JJmlnistrative hassle would also thcreforc be cx­pected to decre'lsc. Medisave accounts woulel provide a gencral tonic to the economy, engendering in­creased savings. Most important, MedlS<lVe accounts would invigorate patienls' role as health consumers ,Ind cre,lte deccntr"alized mcchanisms for restr,lining cos I.

Licensure Licensure, supported as a mcans to cnsure physician competence ,lIld prcvent Iraud, has been an dlcctivc means for the profession to reslrict Ils numhers ,ll1d limit competition from alternative, often lower cost.

providers (7.-'i(1). CertitiC<ltion might work equally

DIABETES REVIEWS, Volume 2, Number 4, Fall 1994

Filer and Maratos-Flier

well, whik authorizing lncre(lsed services Irom an "rray or Ilon-MD practitioners (37).

Regulatory Barriers Numerous federal and state regulations are barriers to efficient medical services. Examples ,lrC pullcic" thal discriminate ,lg,lInst rural heaJth care facilities (Ji'UlJ). Medicare/Ml:dicaid regulations un Icvcb 01 sl"ll1ng "nd other dctails ot' service are hard to meet in rural economic environment, thus limiting care avail,1ble to ruraJ residents. Other examples arc tax laws and antitrust provisions that impede cost-saving (Illiances between institutions and physicl,lns ,Ind mandated benetit laws that raise costs of catastrophic Insurance. Since many qualitied applicants to U.S. medical schools are turned away, while thousands 01 foreign school graduates gain licensure through ex­amination, it seems logical that new modes of lower cost mcdlcal education should hc allowed to develop In this country.

Aid for Those in Need A free market ror medicine wilJ remove many ,utili­ci,t! impedimcnts to affordable insurance and care, but some individuals will remain unahle, throu~h

misfortune, poor planning, or irresponsihility, to ,If­rord the medical care they need. AlthouiJ,11 we view the position that medical care should be considered a right as inconsistent with a proper conception of h,1sic rights (10), thoughtful means for providing assistance arc hroadly desired. However, reasofl(lble efforts to fulfill this need do not require regulation, fT]Jndalcs, price controls, or outright government takeovcr, any more than efforts to house the homeless or ked the hungry require government control of the markets 101

rOOlI and shelter. The uninsured and uninsurahle can he given

vouchers or tax credits enabling purchase of insur­dIKe (40) ano [unding of medical IRAs. This ap­proach acknowledges that Individuals, even when needy, have diverse desires reg,lrding health ,mel avoids unnecessarily regulating and homogenizing care for dll !\mericans.

FI,iWS in the dcsign and funding of Medicare and Medicaid have fueled the current Crisis of cost and access, and keeping these programs fiscally sound over the next two decades will require fundamental reform. It is frequently noted that, despite the threat that Medicare will have a fiscal crisis within the next lO years, this program is popular with its beneficiaries and the public at large, and is beyond reform for politiCid rcasons. To the cxtent that this is true:. It identifies the real threat imposed by "entitlemcnts"

DIABETES REVIEWS, Volume 2. Number 4. Fall 1994

on a vast scale that, oncc enacted, are ditlicult to 11l0dily or limit. And it may be the case that the political Impossibility of modifying Medicare will change at the point at which the next generation begins to doubt that, despite ever-increasing taxes, they will nevcr receive henefits compdl'ahle to those of the current elders. A complete discussion of short­and long-term solutions to the edlcdl'e prohlem exceeds the scope of this paper. Ilowcver, onc ap­proach to a long-term solution would involve creatlrlg incentives ror individuals to save [or future health needs through Medisavc ,lecounts, since the present system encoura 'es dependence on benefits th(lt may be tiscally insupportable in 10 to 20 years. This is neither sound poliCy nor ethical. After tr'lnsition to d Medisave approach, clderly individuals with insuJli­cient lunds could be given mt':ans-tested vouchers for the purchase of health insurance. Regarding Medic­aiel, Introduction of markct principles inlo the proVI­SllH1 of medical services to the indigent through vouchers andlncentivL's to managed care would move in the right direction. Private options for long-tcrm care should be enhanced by ,dlowing usc or rRAs for this purpose LIS well as changing the tax status or insur,lnce premiums for long-term care.

IMPLICATIONS OF HEALTH CARE REFORM FOR DIABETES CARE As discussed edl'ller, the original Clinton ,ldministra­tlon health care plan and the follow-up plans for health carc reform 11,IVC sought to l'ind a me,lns for providing universal dccess [0 comprehensive bent':fits while sirnultdncuusly controlllf1g he,llth [(Ire costs. Although these plans now aprear to be stalled in congress, future attempts al health care Idorm are certain. Prolessionals concerned with diabetes care must therefore wonder whether efforts to attain both or these goals through government regulation, if cver enacted, would actually permit most people with diabetes to have access to the I-ange of options Cor diabetes managemcnt thdt they now have, including the high intensity of diabetes care currently recom­mended for optim,11 therapy of their disorder. We think nol, for severdl reasons.

It is Important to recognize that therapy necessary to limit complications is expensive initially, and that SdVlrlgS brought about through reduced morbidity are likelv to be recognizcd only in the long term (after close to two decades of treatment). It is diQicult to believe lhat in environmcnts such as HMOs, pre­krred-providcr organiz,ltions, or other capitatecl sys­tems, where toral dollars are limited on a day-to-day hdSis, or In the prescne' of govell1f11cnt-enrmced

-------------- ------The free market and health care reform

premium caps, maximal emphasis would bc placed on funding expensive therapies of chronic dise(lscs where benefits accrue over a long terrn. AdditJOnally, with increased government involvement in distribution of health carc dollars, decisions on funding for specific programs or benefhs will become Irlcreasingly subject to special interest politics. and the allocation of resources will be unpredictable.

Finally, most reformers emphasiz.e the necessity, if cost control is to result from capitated plans, of having primary C8re physicians as providers, with limitations on the access of patients to specialists. Discouraging or prohibiting specialists Irl chronic diseases such as diabctes or rheumatoid arthritiS from serving the role of primary carc giver has also heen discussed. It is difficult to be optimistic about this focus from the perspective of the patient or the health professional interested in diabetes. Primary carc phy­sicians do not typically have either the training, the resources, or the time to implement the therapeutic regimens required for optimal diabetes control (4 \).

The original I !ealth Security Act as proposed by the Clinton administr8tion placed particular empha­sis on the role of primary earc providers acting as '·gatekeepers." In such a paradigm for medical care, self-referral by patients to specialIsts woulu he .... x­pected to be extremely difficult. P8r'I<.!oxlc<t1ly, those patients who value health C8rc the most might find it very difficult t() satisfy their desire to obtain a partic­

ular level of carc. It is clear that patient. with chronic illnesses

represent a spccial challcng\.' for health care rdorm. If patients with di8betes or their advocates choose to believe that such global reforms will produce univer­sal access to eomprehcnsive care whik controlling costs, then they may be l<..'mpted to view such propos­als as being desirable. We, on the otber hand, arc Skeptical of the outcome on any rdurms of this nature, and view the care and welfare for many patients with chronic diseases such as diabetes as being threateneu by unanticipated consequences on reform gone b'ld. For all the reasons discusscu In this article, we favor reforms of the health cme system b8sed on the free market as the hest long-term

solution to the carc of our patients.

CONCLUSION The health policy community has paid insufficient attention to the role of past policies in accelerating costs and diminishing access to Insurance and has been too quick to recommend solutions based un

optimistic projections of new rcgul;ltory dforrs. Re­

form ;InU aid to those in need based on free market

rrincip,t1s are unique in recogniz.ing the values of divcrsity and the dcsir8billty of choice in the highly personal realm of medic81 decision making.. Freed of rervcrsc incentives and regulatory o!lst'lcles, includ­ing those that woulu be exacerbated by much of' the recently proposed reform legislation, markets In med­icine, as in other areas, will outperform politics in making desirable health care avatlable to Americans.

ACKNOWLEDGEMENTS We gratefully acknowledge our many colleagues and friends who read and commented on various drafts of this manuscript including C. Ronald Kahn, Peter Sherllne, William isk8nen, Loren Lomasky, Ross Levattcr, Johanna Pallotta, Alan loses, and Marie Vrabel. We would e\peeially like to thank Gerald IV! Phillips for both his insightful comments and editorial assistClnce

REFERENCES I. D. [lO:IZ "nel L. ("I :1I1C. (Eds.): Mork,",1 LiiJen//islll. A I'amdlpll

F,r II/(' llsi ('mllin'. W:·lShinglon, DC. C~IO In,litule. !<){).'

"1 Friedman. M: C{)I,il{)!ismlllll! FreedOm. Cl.lic"gu, tl... University

of (,hic:'go Pr·cs..,. !%2 3. Arrow KJ: Lnccrt"irlly <lml Ihe welf<lre economics of meulc,,1

care. 11m l:col1 R('I' :,3:l)4 !-l)n, 1%3

-1. /\n£,'11 M: Huw much will hcalth ,,,re rdorm cost·' /Ii /-·l1gl.!

"'!c'; .12K: 17 x- 1771). I ()')3

:' S\:IIT p. The fr:lmcwork of he:dth e<lrc rdorm. N IC·llgl .! Aled 31() 1(,h(, J1'<)3, 1')1).1

b. M:lnning We.;. Keeler EB. Newhou,e J P. SI,N EM, W:IS,er­

man J: 71,,· CoSl.I· oj I'oor I leI/III, H"hill. C"rnlJridgc, Mi\, H"rv:trd t !nivcrsily Prc,s, 1'I') I, p. 22'

7. Kc,sel R: Price disuimin"Iion in mediCinc. } L.m,' Leol1

1:25 2b. 1l)5H H. St"rr P: the SoC/nl ·li.",,,!()rnlOliOIi orAmeriCilI/ Mediullc. New

York, [l<lsic Book.,. I C)X2 lJ. I-Llvlghurst CC: Tile dunging ILleus of decision nl:1king in Ihc

he:r1Ih c.\rc seclllr J f-k{)111I Pillilics Polily L(/II" II :(>')7- 7\,\.

IlJHIJ 10. Lomaskv L. I'crsolls. Highll otlll t/,c II,foral COl/l/l1ul/if.\'. Ncw

York. Oxford: OXflllU Unil"(;fsily Press. IlJti7

II Pcltzm"n SL: TLlW<rrd <I morc gencr:rl Ihcory of rcglll:rlion. ) uf LillI· EUJII 1<J:Augllsl. !lJ7r,

12. 13l1chan<ln .1M (Ed.): 7hemy or f'IINic ClIO/u:. Ann Arhor.

University llf Michigllll Prl'ss, l072 13. N~\ ..:h()lJSC JP: All icol1oda~lic vit:w of hcc.dih COS( cnniailllllcni.

/-Imlt/, .·l}](1I1:I" 12 (Suppl.) 1',' -171. 1l)l)3

1-1. Altman SII. OSilw I::::K: Paying for hospit,d cart:. In l-I<:ullll

Sen·iCC's fln<:arch. K,'\· IV H<:allh Po/rcy. Ginsburg E. ed. (';1111­

III idge. MA. Harvar d University Prcss, I{)9 1

I:'. l-cldslcin. PJ· The rn,,[k~1 for hc:dth imllLlncc: it, perf", ­

Ill:lIlce and slrllclure. In /lealtl, Curl' [COl/ill/iiC.'. Alhuny. NY.

tklm'lr. 1q'l.\

Ih. P,lvloll~, Pnwsncr RIVl: Regulation Ihrou~h the looki"g gltlss: Iwspil:ds, Blue Cros.,. and certilie:rIes (If ne~d. Miclli~~UII l.uII·

1i('I· 79:211.\ 277. IlJSII

17. Fl'ldstcin P.J: Til(' Politics of /lenilli Legislaliot!. AI/ L("ol1olll;C

PCrlpccliI·c ;\nn l\rlJur, NIl. I kalth Administration Press, IIJSS

DIABETES REVIEWS, Volume 2. Number 4. Fall 1994

Flier and Maratos-Flier

10 Stoline AM, Weiner JP: Costs: the payers perspective. In 7he

New I'vledical Markel Place: A Physicians Guide 10 "Ie I·Iealll, Care System of Ihe 1990s. Baltimore, MD. John, Horkins University Pre'ss. 1993

19 F.nthoven AC, Singer SJ: Health care is healing itself. New Ynrk

Times 17 August 1993:AD 20. Fein R: Medical Care. Medical COSls. Cambridge, MA, Harvard

University Press, 1989, p. 122-123 2J Brook RH, Warc JE Jr, Rogers WH. Keeler EB, Davies AR.

Donald Ca, Goldherg GA, Lohr Ki''', Masthay P _, Newhouse JP: Does free care improve adults health 1 Results from a randomized control trial. N Engl} Med 309:4Zfi 34, 1'103

2.1. JC Goodman JC, Musgrave CiL: Regulation of health insur­ance by state governments. In Palient Power: Solvin" America's

/-fe"Ilh Care Crisis. Washington. DC. CillO Institute. I 9CJ2 24. SWJrtz K and McBride T Src:lls without health insurance.

Distrihutions of durations and their link to point-iu-timc estimates of the uninsured. Inquily 27:21\1-21)0,1'190

2'). Foley JD: Uninsured in the Uniled Sllltes: the Non-ddal ..

1'0pul"I/.On Willioul Healtlt Insurance. Washington. DC, fm­plovee Benefit Research Institute, 1991, p. Ui

26. Beauregard K: Persons Denied Privale Healili IIlSllmll,.£, due 10 Poor /-Iea/lh. Rockville. MD. Agency for Health Carc Policy and Research, 1991 (ACHPR report #92-0(10)

27 Feldstein PJ: The Market for Medical Services In /-Iealtl, Core Ecollomic.>. Alhany, NY. Delmar, 19C)3

28. Brennan, TA: Just DoclOn:ng: lvfedical Ethics ill a Liheml Sill/e. Berkley, University of California Press, 1<,)91, p. 22 I

29. Lomasky LE: Pe/:rolls. Righls and lite Moral COllllllullity. New

York, Oxford University Pres,. 1987. p. (,l

~O. Reynolds RC: Make health rdoun WOlk: draft doctors. New York Tinu'.\' I June 199~:Secl. A, p. 15

31. Reagan MD: Physician as g"tckcepel": a complex challenge. N EllgI) Med ~17:IT\J-I734, ['107

12. Himmel,tein DU. Woolhandler S: Clinton plan will restrict health care choice. New York Times 26 Septe:l1lber J993:Secl. E. p. i4

~4. Goodman Je, Mus~rave GL: I'aliell/ [YolVer: Soll'illK Ame!'iw :\. Healtll 'arc Crisis. Washington, DC, Cf-\TO Institute, 1992

.'\5. Davis K: Now the good news on health car.:. Wall S"'eel JOlll7l1il 20 Sept em her I YY~:Secl. /\., p. 12

Jr,. J-1al1lowy R: The early development of medical licensing laws in the United St'ltes. 1075-1900. J LilJe!'tarioll Swdies .1:7.1 119. 1'I7l)

37. U.S. Office of Technology As~essmenl: Nw:'l' I'raoiliollCl's. Plwl'iciulIs .·!.Isistollts. on" Certijied Norse Ivlidwipes: /-leollil T,',-I1I'I010gy Case S/Ildy #.17. Washington, DC, U.S. Govcrn­ment Printing Office. I <.)Rll

30. U.S. Olfice of Technology Asse~smenl. Heallh Care In Ruml ,lmaica Washington. DC, U.S (;overnment Printing Officc. 1<,)90. p. l'il -I'n

J<.). Goodman .Ie, Musgrave GL. Mecting the necds of under­Sl'I'Vcd population,. In PI/tienl POII'a: Solving America's /-Icaltli

Care Crisis. Washington, DC. CATO Institute, 1992 40. Pauly MY. Danwn P, Feldstein P, Hoff J: A plan for respon­

sihle nalional health insurance. /-Ieltl'h ADairs 10:5-25, 1991 4 i. j\knrero DC: urrcnt en-cctiveness of diabetes health care in

the US Diah"les ReI-' 2:292-300. 1994

DIABETES REVIEWS, Volume 2. Number 4, Fall 1994 367