The Clinton Plan Mixes the Best of Market Reform and Government Intervention

THE BALTIMORE SUN

For any major change to occur in an area as important as health care, at least three conditions must be met.

First, there must be a sense of crisis: one that affects most segments of society.

Second, there must be leadership from the executive branch. Without it, few initiatives can override the fragmentation of American government and politics.

Third, change this deep doesn't arrive in America when one philosophical side narrowly overcomes another: it comes only with the emergence of broad consensus on how a crisis can be addressed.

The first two conditions have already been met. The Clinton plan -- a unique blend of health care reforms -- has the potential to achieve the third.

For some time there has been agreement on what the current crisis now is. Thirty-seven million Americans are without insurance coverage, and every month another 2 million lose their insurance for some period of time. Millions more have just bare-bones policies, and the rest are (or should be) anxious about maintaining the coverage they have. Costs -- for families, employers and government -- are rising at rates two to three times that of inflation, and in many cases much faster, threatening the ability of private employers to maintain current benefits and diminishing the country's capacity to invest and engage in other public and private enterprises.

The insurance marketplace is also dysfunctional. Competition among insurers over quality, service and price has given way to competition to find the least risky consumers. When 10 percent of individuals account for 75 percent of system costs, competition among insurers will be more over whom to enroll and less over how to care for all enrollees efficiently.

Finally, there are inequities in our current financing structure. It is not just a case of the current system lacking progressivity; it can be outright regressive. Large employers or high-wage firms are more likely to insure their employees with more generous benefits and to pay higher shares of insurance premiums than are smaller or lower-wage employers.

There is even considerable consensus around the cause of the health care crisis. When it comes to health care, the balance of power between the supply and demand sides has been anything but balanced.

Most buyers have little information about the quality of service delivered by health care providers -- doctors, hospitals, health maintenance organizations or insurance companies. It is difficult, if not impossible, to compare the value of all the plans offering marginally different levels of benefits and consumer cost-sharing. In fee-for-service medicine, still the main way we get health care, the incentive is to do (supply) more when less might be acceptable, or even better. And with consumer cost consciousness as low as it is (after all, the employer pays most of the premium, and the insurer most of the bill), the individual consumer has little incentive to question the decision to spend ,, more.

In short, the demand side has had little ability to keep the supply side in check. (Indeed, in the ultimate violation of market economic theory, suppliers largely determine demand, telling us what we need and when we need it.) In the face of this failure, proponents of reform have generally fallen into two categories, each of which has had a political component (access and coverage) and an economic component (cost containment).

Some -- mostly Republicans and conservative Democrats -- have advocated market-oriented solutions. They want reforms that will create a more level insurance playing field to reduce or eliminate the propensity of insurers to compete on risk selection. They may also endorse the creation of modest-sized purchasing pools to strengthen the market power of small employers. However, these reformers have generally been reluctant to endorse the means (e.g., mandates), the government intervention or the expenditures necessary to make the system serve everybody.

By contrast, many moderate and most liberal Democrats have demanded universal coverage and have been willing to impose a mandate on employers or government to get there. Most important, they've believed that the goal of guaranteed coverage with cost control would inevitably mean relying more on government intervention than on market-driven reforms and adjustments.

The Clinton plan represents an attempt to enlist the best ideas of both market reform and government intervention. It embraces the goal of coverage for everybody, and recognizes that some degree of government intervention -- including asking all to pay a share -- will be required to achieve that goal.

But it resists the temptation to micromanage the system, and leaves the bulk of delivery system reform and cost-control tasks to the private marketplace. It embraces means generally associated with conservatives (competition) to achieve ends (guaranteed coverage for all) generally associated with liberals.

The mix of government intervention and market reform is sequential. It begins with intervention to restructure the insurance market -- community rating, competition on price and service, etc. -- and to create health alliances, to strengthen the market power of consumer and employers. It also advocates a limit on insurance premium increases as a guarantee that cost-control goals are reached.

But in between these book-ends of intervention, it expects market competition to be the true engine of reform, the primary means to control costs, improve quality, enhance consumer choice and generally increase the value of our health care dollars. Advocates of both purer government intervention and purer market-based strategies may object to such a hybrid. But there are sound political and policy reasons for avoiding the purism of either approach.

On the competition side, the Clinton plan borrows heavily from managed competition. It creates purchasing cooperatives, called health alliances, run by boards of employers and consumers, that contract with competing health plans to deliver a federally guaranteed set of standardized benefits. Consumers may choose any plan offered by the alliance. Though the plans are allowed to charge different premiums, they must accept all who choose to enroll (capacity allowing). They are paid by the alliance on a risk-adjusted basis. Plans that enroll higher cost populations will be compensated for doing so.

Applying these rules and principles will force health plans -- HMOs, preferred provider arrangements, conventional fee-for-service insurers -- to compete on price, service and quality before a more informed, cost-conscious consumer. Such competition should produce not just lower prices, but greater efficiency and value in the delivery of care as well.

Of course, many market-oriented advocates won't be satisfied. They will object, for one thing, to the exclusion of most health care benefits from taxable income. And they're right that the exclusion subsidizes benefits compared with other commodities, and that consumers would be more cost-conscious if they had to pay for their share of health plan costs with after-tax dollars. But it would be difficult, if not impossible, for the president to offer a proposal that would be viewed by many as a heavy tax on middle-income Americans.

As an alternative, the Clinton plan says that if employers contribute more than 80 percent of the average premium cost, they must offer the employee choosing a lower-cost plan the difference -- in cash -- between the cost of that plan and the employer's contribution. In this way the employee will always have some economic incentive to choose a lower-cost plan.

Many market-oriented reformers may also oppose the Clinton plan's proposed limit on health care spending. They fear that it might restrict the flow of capital to health plans. Moreover, a fear that future premium increases will be restricted could deter health plans from pricing aggressively, thus undermining the capacity of managed competition to achieve cost-reduction goals.

These are real worries, and the exact positioning of spending caps will have to be closely watched. But the targets are only safety nets for -- not the driving force of -- cost containment: If the competitive mechanisms work as the market-oriented reformers expect, they won't be exceeded.

The reassurance of a spending limit is essential because if government is going to ask all businesses and individuals to purchase health care, and provide subsidies to those who cannot afford their share, then the government must also guarantee the participants that increases in their payments will stay within reasonable bounds. Without such a guarantee, reform would have no chance.

For the government interventionists, the Clinton plan also has much to offer. They will like the universal coverage, the proposals for community rating and other insurance reforms and the limit on health care spending. They'll also appreciate the ability of states to choose the single-payer approach. And while LTC some might prefer that all individuals be in one pool, they will also recognize that regional health alliances will be large, composed of all except those individuals who work for employers of 5,000 or more and those in Medicare.

Still, many who have advocated more regulatory approaches -- especially those who favor the Canadian-style "single-payer" approach -- may be dissatisfied with a plan that relies so heavily on market forces. Specifically, they may object to the way in which health plans are allowed to compete on price. Such competition, they fear, could produce a two-tiered system in which low-income individuals become isolated in lower-cost -- and lower quality -- HMOs.

The president's plan includes a variety of measures aimed at preventing such an outcome: Many low-income individuals will be subsidized to average-cost, not just lowest-cost plans; quality measures and consumer satisfaction measures can warn against declining quality and access in lower-cost plans; and a fee schedule, above which no physician can charge in fee-for-service plans, may make them more affordable to middle- and even lower-middle-income people.

But, ultimately, the alternative to price competition is one price // for all, and it is difficult to envision such a model in the American scheme. Finding the balance between providing an acceptable level of care for all and a price the nation could afford might prove impossible. Thus the Clinton plan's compromise: guarantee all the same benefits, delivered in a quality setting; allow those who wish to pay more for the same benefits delivered with more amenities and options the right to do so.

To win support from both sides of the health care debate, the president's supporters will need to convince skeptical individuals and organizations that the plan is truly a synthesis of the best each approach has to offer rather than a political compromise between them; that good politics, in this case, is also the best policy. They will have to convince both sides that their glasses are three-quarters full -- that the market vs. government intervention debate is no longer, if it ever was, a zero-sum game.

Walter Zelman, architect of California's Garamendi plan, helped draft the Clinton health care proposal. He wrote this article for The New Republic.

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