Healthcare Reform: A Looming Policy Disaster

Peter Orzag, the Obama administration's budget director, said in an interview with Wolf Blitzer (6/13/09) that "the key driver of our long-term debt is healthcare." Mr. Orzag couldn't have been more correct in this remark; however, he and the administration's plans to address this problem are likely to only exacerbate the issue.

The key element of the administration's proposal is the creation of a government subsidized health insurance plan to compete with private insurers. The goal of this plan is to provide tax-payer funded healthcare coverage for those without insurance and those struggling to pay the high cost of their existing premiums.

While this proposal would decrease the number of uninsured patients in the country it would likely do so without offering any tangible benefit to the average patient it insures or society at large. In addition, the plan would increase total government and all-purpose healthcare spending without addressing the underlying causes that have led to the current level of spending.

Market-based solutions that reward personal responsibility and emphasize transparency in healthcare pricing, along with meaningful, nationwide tort reform are the only options that are ultimately sustainable and compatible with a free society.

A fair critique of the administration's healthcare plan must assess the cost to provide government subsidized coverage to the uninsured versus the cost of doing nothing. Proponents of the administration's plan argue that taxpayers already pay for the uninsured through uncompensated care received by the uninsured when they show up in emergency rooms.

Most supporters of government subsidized insurance attempt to make the case that offering uninsured patients government subsidized healthcare coverage will save taxpayers in the long run. This will occur if patients receive less expensive outpatient care, which prevents them from seeking more costly care through emergency rooms. While this theory sounds enticing it is not supported by the data.

Hadley et al. reported that in 2008, government spending on uncompensated care provided to the uninsured accounted for <2.5% of total healthcare spending. Through their analysis of over 100,000 patients the authors were able to analyze "how the probability of using any care and the amount of care received increase as insurance status varies from being uninsured all year to being fully insured."1 Their conclusions; if all uninsured people were fully covered, their medical spending would increase by $122.6 billion per year and would add 5% to national health care spending.

While an increase of $122.6 billion dollars annually represents a significant increase in annual healthcare spending it must be noted that Hadley's data restricts its cost estimation to individuals currently uninsured. The cost to the government and taxpayers will be much higher than Hadley's estimate because a significant percentage of insured individuals will drop their private coverage to join the government plan; this is inevitable and termed crowd-out.

The state of Massachusetts provides a case study in what is likely to happen if the administration creates a new government subsidized insurance plan. In 2006, Massachusetts passed sweeping healthcare legislation which included the creation of a new government subsidized insurance plan called Commonwealth Care. The plan was projected to cost taxpayers $725 million per year;  however, by 2008 the cost had risen to $869 million representing a 20% increase over the projected yearly costs!

In Massachusetts, the total cost containment projected to occur through the expansion of healthcare coverage to the uninsured has not materialized and emergency room visits have not decreased. While this has come as a surprise to state legislators and government planners, it should have been predicted based on studies showing that preventive care and the expansion of health insurance don't necessarily save money.

A recent publication appearing in the New England Journal of Medicine concluded that broad generalizations could not be applied to the potential for preventive measures to save money. Cohen et al. conducted a systematic review of the cost-effectiveness literature.2 The authors found that the majority of preventive measures reviewed did NOT save money and many of the measures had a relatively small impact on affecting overall healthcare outcomes.

The conclusions reached by Cohen et al. support the notion that simply expanding coverage for the uninsured will increase healthcare spending without significantly affecting healthcare outcomes. This notion was supported by Levy and Meltzer3 who performed an extensive analysis on the impact that health insurance has on health. The authors found that in specific sub-populations,  such as pregnant women, health insurance can affect health outcomes (specifically infant mortality) however, those findings could NOT be generalized to other populations. They concluded that there was "very little convincing evidence to demonstrate that having health insurance improves population health on average."

To answer the question of how health insurance affects health, Levy and Meltzer recommend that society invest in social experiments. The only true social experiment to date is the RAND Health Insurance Experiment where health insurance coverage was randomly assigned to individuals and subsequent health outcomes were compared across experimental groups. These groups were assigned health insurance with different levels of cost-sharing. The RAND experiment found NO significant effect of insurance generosity on various measures of health status for the average adult however, total healthcare spending increased significantly as cost-sharing decreased.

The lesson from the RAND experiment is that providing FREE care costs more than providing catastrophic care, with little or no impact on overall health outcomes. This lesson should inform us as we move aggressively on healthcare reform in the coming weeks and months.

Andrew Foy, M.D. and Brent Stransky are co-authors of the forthcoming book, "The Young Conservatives Field Guide." They can be contacted through their website at
www.aHardRight.com or through facebook at A Hard Right.

1. Hadley J, Holahan J, Coughlin T, and Miller D. Covering The Uninsured In 2008: Current Costs, Sources Of Payment, And Incremental Costs. Health Affairs. 2008. 27(5):399-415.

2. Cohen JT, Neumann PJ, and Weinstein MC. Does Preventive Care Save Money? Health Economics and the Presidential Candidates. N Engl J Med. 2008. 358(7):661-663.

3. Levy H, and Meltzer D. The Impact of Health Insurance on Health. Annu. Rev. Public Health. 2008. 29:399-409.
Peter Orzag, the Obama administration's budget director, said in an interview with Wolf Blitzer (6/13/09) that "the key driver of our long-term debt is healthcare." Mr. Orzag couldn't have been more correct in this remark; however, he and the administration's plans to address this problem are likely to only exacerbate the issue.

The key element of the administration's proposal is the creation of a government subsidized health insurance plan to compete with private insurers. The goal of this plan is to provide tax-payer funded healthcare coverage for those without insurance and those struggling to pay the high cost of their existing premiums.

While this proposal would decrease the number of uninsured patients in the country it would likely do so without offering any tangible benefit to the average patient it insures or society at large. In addition, the plan would increase total government and all-purpose healthcare spending without addressing the underlying causes that have led to the current level of spending.

Market-based solutions that reward personal responsibility and emphasize transparency in healthcare pricing, along with meaningful, nationwide tort reform are the only options that are ultimately sustainable and compatible with a free society.

A fair critique of the administration's healthcare plan must assess the cost to provide government subsidized coverage to the uninsured versus the cost of doing nothing. Proponents of the administration's plan argue that taxpayers already pay for the uninsured through uncompensated care received by the uninsured when they show up in emergency rooms.

Most supporters of government subsidized insurance attempt to make the case that offering uninsured patients government subsidized healthcare coverage will save taxpayers in the long run. This will occur if patients receive less expensive outpatient care, which prevents them from seeking more costly care through emergency rooms. While this theory sounds enticing it is not supported by the data.

Hadley et al. reported that in 2008, government spending on uncompensated care provided to the uninsured accounted for <2.5% of total healthcare spending. Through their analysis of over 100,000 patients the authors were able to analyze "how the probability of using any care and the amount of care received increase as insurance status varies from being uninsured all year to being fully insured."1 Their conclusions; if all uninsured people were fully covered, their medical spending would increase by $122.6 billion per year and would add 5% to national health care spending.

While an increase of $122.6 billion dollars annually represents a significant increase in annual healthcare spending it must be noted that Hadley's data restricts its cost estimation to individuals currently uninsured. The cost to the government and taxpayers will be much higher than Hadley's estimate because a significant percentage of insured individuals will drop their private coverage to join the government plan; this is inevitable and termed crowd-out.

The state of Massachusetts provides a case study in what is likely to happen if the administration creates a new government subsidized insurance plan. In 2006, Massachusetts passed sweeping healthcare legislation which included the creation of a new government subsidized insurance plan called Commonwealth Care. The plan was projected to cost taxpayers $725 million per year;  however, by 2008 the cost had risen to $869 million representing a 20% increase over the projected yearly costs!

In Massachusetts, the total cost containment projected to occur through the expansion of healthcare coverage to the uninsured has not materialized and emergency room visits have not decreased. While this has come as a surprise to state legislators and government planners, it should have been predicted based on studies showing that preventive care and the expansion of health insurance don't necessarily save money.

A recent publication appearing in the New England Journal of Medicine concluded that broad generalizations could not be applied to the potential for preventive measures to save money. Cohen et al. conducted a systematic review of the cost-effectiveness literature.2 The authors found that the majority of preventive measures reviewed did NOT save money and many of the measures had a relatively small impact on affecting overall healthcare outcomes.

The conclusions reached by Cohen et al. support the notion that simply expanding coverage for the uninsured will increase healthcare spending without significantly affecting healthcare outcomes. This notion was supported by Levy and Meltzer3 who performed an extensive analysis on the impact that health insurance has on health. The authors found that in specific sub-populations,  such as pregnant women, health insurance can affect health outcomes (specifically infant mortality) however, those findings could NOT be generalized to other populations. They concluded that there was "very little convincing evidence to demonstrate that having health insurance improves population health on average."

To answer the question of how health insurance affects health, Levy and Meltzer recommend that society invest in social experiments. The only true social experiment to date is the RAND Health Insurance Experiment where health insurance coverage was randomly assigned to individuals and subsequent health outcomes were compared across experimental groups. These groups were assigned health insurance with different levels of cost-sharing. The RAND experiment found NO significant effect of insurance generosity on various measures of health status for the average adult however, total healthcare spending increased significantly as cost-sharing decreased.

The lesson from the RAND experiment is that providing FREE care costs more than providing catastrophic care, with little or no impact on overall health outcomes. This lesson should inform us as we move aggressively on healthcare reform in the coming weeks and months.

Andrew Foy, M.D. and Brent Stransky are co-authors of the forthcoming book, "The Young Conservatives Field Guide." They can be contacted through their website at
www.aHardRight.com or through facebook at A Hard Right.

1. Hadley J, Holahan J, Coughlin T, and Miller D. Covering The Uninsured In 2008: Current Costs, Sources Of Payment, And Incremental Costs. Health Affairs. 2008. 27(5):399-415.

2. Cohen JT, Neumann PJ, and Weinstein MC. Does Preventive Care Save Money? Health Economics and the Presidential Candidates. N Engl J Med. 2008. 358(7):661-663.

3. Levy H, and Meltzer D. The Impact of Health Insurance on Health. Annu. Rev. Public Health. 2008. 29:399-409.