Health Care: Beware the "Little Fix"

Written by David Frum on Monday January 13, 1997

In President Clinton's first term, the Democrats had a vision: a sudden and dramatic takeover of the nation's health-care system that would upend the nation's economy and transform its politics. The plan was candidly megalomaniacal, grandiose, and preposterous. Unsurprisingly, the Democrats were clobbered.

Now, for Clinton's second term, the Democrats again have a vision: a series of opportunistic little interventions, each of which can be described as "modest" and "incremental," that will over time prepare the way for . . . a sudden and dramatic takeover of the nation's health-care system. This time nobody can credit them with candor.

We already have a law mandating a 48-hour hospital stay for new mothers; soon we will have a law mandating a 48-hour stay for women recovering from mastectomies. President Clinton favors a law to compel health-maintenance organizations to describe to subscribers the most expensive possible treatments for their ailments. He wants to oblige employers to maintain the health insurance of workers even after they are fired, and he wants the federal government to ensure health-insurance coverage for everyone under the age of 19, as well as all new mothers.

Unlike the 1993 plan, the president's health-care proposals do not add up to a coherent (if cuckoo) whole. Instead, they represent a series of calculated attacks on what remains of private markets for health insurance, and their effect will be to make private health insurance even more expensive and difficult to obtain.

It may be that the proponents of these suggestions do not mind that outcome. They may believe that the health-care village must be burned down if we are to save it. The more costly and inaccessible they can make private health insurance, the more quickly they can rebuild a constituency for ... a sudden and dramatic takeover of the nation's health-care system.

But whatever the intentions of the proponents of these incremental steps in the wrong direction, Republicans need to be wary. Consciously or not, health- care reformers are pushing America toward a marketplace in which private insurance becomes increasingly unaffordable and more and more Americans depend on government to finance their medical needs. In a future like that, government spending will rise uncontrollably, valuable innovation will be stifled, and quality of care will inevitably deteriorate.

Unfortunately, Republicans are failing to muster sufficient resistance to this grim outcome. If the private market is to be given a fair opportunity to show what it can do to deliver high-quality medicine to all, Republicans will need to think their way to an understanding of health-care reform radically different from that favored by the president and the congressional Democrats. The problem with Bill Clinton's 1993 plan was not that it went too fast, but that it went in entirely the wrong direction. Moving "incrementally" in the wrong direction may be an improvement over rushing to perdition; but it isn't a very big one.

Nobody would deny that America's health-care system suffers serious and seemingly intractable problems. The worst of these problems is that at any given moment some 30 million Americans, including almost 6 million children under the age of 11, have been uninsured for a year or more. These people are not the very poor; the very poor are covered by Medicaid. Typically they are low-wage earners whose employers will not buy insurance for them and who cannot afford to buy it for themselves. Should they get very sick -- should they be hit by a car or suffer a stroke -- they will probably find an emergency room to care for them and hide the expense in the bills of the paying patients. But when it comes to more routine care, and especially preventive care for themselves and
their children, they too often go without.

What these folks need is an inexpensive, uncomplicated health-insurance policy that will cover basic needs at a reasonable price. Right now, health insurance for a family or a membership in an HMO begins at $3,000 a year, a ruinous price for a worker bringing home, say, $18,000 in wages.

Bizarrely, virtually every idea that goes under the rubric of "health-care reform" would raise those prices even higher. Suppose America's working poor were having terrible difficulty affording clothes. It would hardly make sense to pass a law compelling them to shop only at Neiman Marcus or Saks Fifth Avenue. Suppose car prices were rising fast. Who would propose outlawing the sale of used cars? But that, essentially, is what the president's "incremental reforms" do.

In the last session of Congress, Republicans enacted and the president signed the first of these reforms, the Kassebaum-Kennedy bill. Kassebaum-Kennedy said that employers purchase health insurance for their employees, they must be sure to include an ever-growing list of mandated benefits: equal coverage of mental illness, portability of benefits, and so on. But Kassebaum-Kennedy left employers a second option: declining to buy insurance for their workers at all. And obviously, some portion of employers will do just that. In fact, every time some posturing congressman dreams up some new mandated benefit to impose on employers, he is almost certainly guaranteeing that thousands or tens of thousands or hundreds of thousands of marginal workers will lose their insurance altogether.

That is precisely what happened in the 1980s. Despite generally rising wages and benefits over the decade, the proportion of the labor force covered by private insurance actually shrank, as various state legislatures imposed their own local versions of Kassebaum-Kennedy. If Congress and the state legislatures really worried about access to health insurance, they would be taking precisely the opposite course: They would authorize insurers and health-maintenance organizations to sell cheap, stripped-down policies.

Instead, while ClintonCare 1993 aimed to outlaw plush policies, and then to confiscate and redistribute the money thus "saved," ClintonCare 1997 aims to make demagogic points by outlawing cheap policies. He's zero for two. Both sets of restrictions are dangerous and improper. Why shouldn't a software company competing for scarce talent be allowed to compete for workers by offering lavish benefits? How does it serve the public interest to tell a packing company that it must buy its $14,000-a-year workers either a $4,000 policy or nothing at all?

ClintonCare 1997 will do worse, however, than induce employers to cut off the care of their most vulnerable workers. It threatens to stifle improvements in the quality of care for everyone.

When Clinton first took up the cause of health-insurance reform, he was motivated as much by a desire to control rising healthcare costs as by concern for the uninsured. The 1993 Clinton plan was festooned with the usual mechanisms for restraining costs: global budgets and price controls and dozens of other nasties that the designers of the Carter energy plan left behind in the basement of the Old Executive Office Building. Without these mechanisms, it was foretold, health-care costs would go on rocketing upward forever -- for just like energy prices in the 1970s, health-care prices were presumed to move entirely independently of the laws of supply and demand.

In fact, the rise in health-care costs was coming to an end even as the Clinton plan was being drafted. Costs to employers have risen at a clip of less than 4 percent over the past three years, very largely because employers -- in a stunning example of the creative potential of the marketplace -- have switched en masse from traditional insurance to health-maintenance organizations.

All of this must have been intensely embarrassing to the Clinton people. The very thing they believed the country needed was being done -- and without them. So they changed tacks. Instead of imposing managed care on the country, they would save the country from managed care. Just as the health-care market was said three years ago to be indifferent to price, so today that same
marketplace is said to be indifferent to quality. Which failure is the justification for Clinton's "anti-gag-rule" plan to impose a new federal regulatory scheme on health-maintenance organizations.

Again, nobody would deny that managed care has its faults. But what's also clear is that this brand new industry is an intensively competitive and dynamic one. The airwaves are already full of advertisements offering different measurements of the "quality" of plans. In time -- probably not in very much time -- the marketplace will begin presenting consumers with clear indicators of the price/quality tradeoff offered by their different healthcare choices. If the market fails to do so, government intervention might well be called for. But the sort of intervention in the managed-care industry envisaged by President Clinton has a much more grandiose -- and counterproductive -- goal in mind. Instead of alerting consumers to the price/quality tradeoffs of the different plans, President Clinton's anti-gag- rule law would force all HMOs to make one single price/quality tradeoff -- a tradeoff that would again tend to drive the cheapest health-care alternatives off the market.

The president is making in the area of health care the same fatal decision that earlier generations of liberals made in the housing market: the decision to knock down cheap housing without worrying too much where the former occupants would go. And he's making these decisions because in the back of his mind he believes in the same ultimate solution that the old slum-clearers believed in: The government should do it.

A vast expansion of the federal government's power over health care will not require Ira Magaziner to devise some vast intricate plan from scratch. This might come as a surprise to most Americans, but the fact is that Congress has already constructed a national health-insurance program. It's called Medicaid, and it's simply waiting for someone to flip its on switch. Until 1986, Medicaid covered only people on some form of welfare: either Aid to Families with Dependent Children or the Supplemental Security Income program for the old. That year, Congress gave the states permission to expand the program's reach -- at federal expense, since Washington pays between 50 percent and 83 percent of the states' Medicaid bills.

First, states were permitted to use Medicaid to insure children (that is, people under 19) in families whose incomes fell below the poverty line, whether their parents took welfare or not. In 1990, Washington required states to provide Medicaid coverage to all poor children by the year 2002. States were left free to go further still, and some have: In Vermont, children in families with incomes more than double the local poverty line are insured by Medicaid.

When Al Gore and Bill Clinton talk lightly about insuring all children or all mothers, they are thinking of expanding Medicaid even further. It must be clearly understood how frighteningly expensive that project would be. In 1986, when Congress authorized the expansion of Medicaid to non-welfare recipients, the program cost a little more than $27 billion a year. This year, the program will cost $105 billion. By 2002, when the mandate to extend Medicaid to poor children is fully imposed, the program will cost more than $ 133 billion. These are staggering costs too easily breezed by in a campaign speech's applause line.

For while the expansion of Medicaid may seem an uncomplicated and uncontroversial reform, the money must come from somewhere, and the people from whom the money comes will have to cut back on something else -- quite possibly including the health insurance purchases they were contemplating for their own families. Ironically enough, it is the working poor -- the people who are having the greatest difficulty obtaining health insurance -- in whom the burden of financing health care falls most heavily. The very poor get Medicaid. The better-off have their health insurance purchased by employers as a tax-deductible expense and receive it as a tax-free fringe benefit. But waitresses and mechanics, part-time students and shoe salesmen must purchase what health insurance they can purchase with after-tax income. Like Canadian tourists in New York, they're trying to buy something that's already expensive with dollars worth only 75 cents.

American health care is being tugged in two completely opposite directions. Some want to take it further along the road to total state control; others trust that freer competition will improve quality and control costs. Ultimately, there can be no compromise between these two points of view -- the reforms that each seeks to implement are (or should be) unacceptable to the other.

For those who believe in free markets, two reforms should have top priority:

First, ensure that the tax treatment of health care is the same for everyone. For executives to receive health insurance as an untaxed fringe benefit while their cleaning ladies scrape together after-tax nickels to enroll in a cheap HMO is both irrational and unjust.

Second, seek out and eliminate regulatory impediments to the sale of cheap, basic health-insurance pollcies. These impediments are especially common at the state level, where chiropractors, psychologists, and acupuncturists have had great success persuading legislators to require employers who offer health insurance to purchase plans that cover their services. True health- care reformers must resist, no matter how uncomfortable the fight, all the guaranteed minimum treatments that cynical Democrats will introduce in Congress after their success with the 48-hour maternity stay. Down that road lies health insurance so expensive that nobody except the most affluent can afford it.

James Blaine once joked that when Samuel Johnson called patriotism the last refuge of a scoundrel, he overlooked the possibilities of the word "reform." Seldom has that quip been truer than in the case of President Clinton's incremental health "reforms." Regulating and hobbling private health insurance until it collapses -- leaving national health insurance as the only solution -- may be a cunning political strategy for politicians desperate to find some new justification for Big Government. But to call it "reform" you would have to be a very great scoundrel indeed.