Medicaid Reform Around the States: The Good the Bad and the Ugly

(Note: The following is the text of Michael Tanner’s comments at a March 5, 2007, Issues and Ideas forum hosted by the Mackinac Center for Public Policy. He was introduced by Jack McHugh, legislative analyst for the Center.)

Welcome and thank you all for coming. We’re here today to talk about health care rationing. That may sound odd but actually that’s what the entire health care debate is about. Like all good things, health care is a scarce good and no matter how much of our GDP we decide to dedicate to it there will always be more demand than supply. It will be rationed either by market-like processes that give individuals greater choice and freedom, or by politicians or bureaucrats that are armed with government mandates. I believe, and our speaker today believes, that maximizing choice and freedom yields better outcomes for individuals and society than government mandates. This is not a liberal vs. conservative issue by the way because it’s possible for everyone to have access to care, including the poor and the indigent, within a system of market competition and incentives. We’re in the early stages of a national discussion about how to do that. Some states in our laboratory of democracy have launched experiments along these lines. Others are moving in the opposite direction. As the director of health and welfare studies at the Cato Institute, a nonprofit research institute in Washington, Michael Tanner is well placed to observe these experiments. His job is to lead research on new market-based approaches that emphasize freedom, choice and individual responsibility rather than government control. Michael’s the author of a number of books including "Healthy Competition: What’s Holding Back Health Care and How to Free It." And he’s appeared in nearly every major newspaper including The New York Times, The Washington Post, The L.A. Times, The Wall Street Journal and USA Today. Michael Tanner appears regularly on network and cable TV news shows and his latest book, just out, "Leviathan On the Right" was reviewed in the New York Times Review of Books yesterday. So I invite you all to give a warm welcome to Michael Tanner.

Thank you very much for that kind and entirely deserved introduction. I have to say it’s a much better introduction than I received the other day when the fellow said, "and now here’s Mike Tanner, a man who needs no introduction which is a good thing because I’ve never heard of him." I also do have to thank you for taking me away from the balmier climes of Washington, D.C., and bringing me here. I have to say you folks do cold well. Actually, it is a thrill. It’s been about 10 years since I’ve been to Lansing and I’m always appreciative to come back. It’s a lovely city. I will add a little caution. I not only live but I work in Washington, D.C., so it’s always a thrill to be somewhere else. I do actually get to travel a great deal in my job to go around the country looking at state health care reforms and even go worldwide to look at the health care systems in a number of countries and I get to see what goes on in the rest of the world.

I was actually not so very long ago in England. I don’t know if any of you have ever been to London, but if you ever get a chance, go to Hyde Park. In Hyde Park they’ve got a Speakers Corner there where they have actually built a soapbox into the sidewalk and anyone can come along and you can get up on the soapbox and you can start talking. You can just go on for as long as you want and it doesn’t even matter if you know what you are talking about. So it’s just like Congress in that regard. The day I was there, a fellow got up on there and he had gathered a crowd around him and he was going on when I walked up. Anyway and he was in the middle of it and he would say, "When the common man takes over we’ll all be drinking champagne." Well, from the back of the crowd there came this voice, a little man spoke up and said, "Yah, but me and me mates sort of likes our brew." Well, the speaker sort of ignored him and said, "When the common man takes over we’ll all be wearing tuxedos." There came that man from the back of the crowd again saying, "Yah but me and me mates sort of likes our tweed." Now the speaker was sort of upset now but he plowed on and said, "When the common man takes over we’ll all be smoking big cigars." Well, sure enough, there goes that little guy in the back again who says, "Yah but me and me mates sort of likes our pipe." Well, the speaker just jumped down off the soapbox and he forced his way through the crowd and he found that little man and he grabbed him by the lapels and he said, "When the common man takes over, you’ll do as you’re damn well told." And I think that’s really appropriate to think about when we talk about health care reform because so many proposals are put out there that at least purport to be done in the name of the common man, that they’re going to somehow make things better for the least fortunate among us; that they’re going to make it easier for the poor and disadvantage to get access to health care. But in the end, the proposals will mean we’ll all be doing as we’re damn well told.

The one common characteristic of national health care systems around the world, of government-run health care, is that it denies care. It denies choice and it denies access to care. Right now, as we speak, 1 million Britons are on the waiting list for entrance to national health care hospitals in Great Britain. And every year 100,000 surgeries are cancelled in Britain because the patients on the waiting list got too sick to go forward with the procedure. In New Zealand, a country with just 3 million people, 90,000 people are on the waiting list for care. In Sweden, the waiting list for heart surgery is 26 weeks and to get hip replacement surgery it’s over a year. And today in your neighbor Canada, 800,000 people are on the waiting list for health care. Recently, the Canadian Supreme Court struck down a portion of that country’s Medicare law. Their national health care system was struck down by the Canadian Supreme Court, a portion of it, and in that ruling the Court said "access to a waiting list is not access to health care." They went on to say that it was undeniable, in fact it was undisputed that the Canadian government in the case that some of the people on the waiting list for health care in that country were in pain and that some would die because they didn’t have access to the care they needed.

For all the problems that the United States health care system has and I’m not going to deny that we have many problems and I’ll talk about some of them in a little bit, but for all those problems the U.S. health care system is still the best in the world. You know of the last 25 Nobel laureates in medicine, 17 either live in the United States or practice here. They are either American citizens or they practice here. Of the new medicine introduced worldwide over the last 30 years, more than half are patented in the United States. And of the top 20 non-pharmaceutical breakthroughs in medicine in the last quarter century, half were introduced in this country. From around the world when you get sick this is where people will come to be treated. Tens of thousands of people come every year to this country from someplace else in order to have their health care needs met. In fact, one out of every seven Canadian doctors sends a patient to the United States for treatment every year. If you’re sick this is still the place you want to be.

You know, you hear critics of the American health care system point to things and say well, other countries have longer life expectancies and lower infant mortality rates and that’s true, but those are terrible ways to compare health care systems. In fact, even the OECD (Organisation for Economic Co-operation and Development) who puts out these statistics says that you shouldn’t do cross country comparisons using these types of statistics because there are so many exogenous factors that play into these results. If you just want to look at the life expectancy and infant mortality between rural Minnesota let’s say, and inner city Detroit, they are vastly different but with essentially the same health care system. They don’t tell you anything about health care because you have factors like violent crime, drug abuse, the poverty that leads to low birth weight babies, whether or not you attempt to intervene to save low birth weight babies, all of those sorts of things enter into those statistics. But if you look at statistics that measure things like the same disease across country, you see that the United States does very well indeed. Take for example, one example, prostate cancer. In the United States, one out of every five men, 20 percent of men, diagnosed with prostate cancer will die from the disease ultimately. In Canada it’s over 25 percent; in France and Germany it’s over 30 percent and in Britain it’s over half of those diagnosed with it will die from it. Why? Well, by and large the answer in other countries to someone with prostate cancer is to do nothing. It’s called watchful waiting as a procedure. It’s essentially you know prostate cancer is not a cost effective disease to treat. It by and large occurs in very old people and it’s a very slow progressing disease, so by and large they don’t treat it. But the same is true for many other diseases. The same is true for colon cancer, the same is true with breast cancer, AIDS, heart disease, almost any disease you can find that you are better off having that disease in the United States. You are far more likely to survive by being treated for it in the United States than you are in any other national health care system around the world. Even infant mortality, if you take low birth weight babies at any given weight they are far more likely to survive in the United States then in any other country.

Now, that doesn’t mean we don’t have problems in the United States as I said with health care, we do. For example, the one you hear about all the time is that we have far too many people who lack health insurance. Now I would like to submit to start with a couple of heretical views on this. The first is that getting everybody insured should not be the holy grail of health care reform. Sure we would like to see more people with health insurance, but the idea of what should drive the entire health care debate is finding a way we could put a piece of paper in every person’s hand that says they have health insurance I think is badly misguided and leads to a host of bad decisions down the road. Because simply giving people a piece of paper that says they have insurance does absolutely nothing about giving them access to health care to begin with. After all, these national health care systems around the world all the people are theoretically insured. We’ve all promised them that they have health insurance and yet when it comes time that they need health care they don’t get it. We need to talk about when we talk about health care reform is how we can reduce the cost of health care so that more people can afford it, how we can assure access to care and how we can assure better quality of care. That is not the same thing as universal health insurance.

The second thing that we should know about is that the number of uninsured is often greatly exaggerated. We hear for example that there are 46 million, 48 million, I forget the exact number, of Americans without health insurance. Well, that’s true but it’s misleading because that represents essentially a snapshot in time. That’s how many people lack health insurance today. It tells us absolutely nothing about whether or not they had health insurance yesterday or whether they will have health insurance tomorrow. And in fact the vast majority of them were insured and will be insured again. They move in and out of the insurance market because we link our health insurance so closely to employment. When you lose your job you lose your insurance so then you get another job and you get insurance with that job and you move in and out of the market place. And in fact only about 15 percent of all those without insurance will be uninsured for two years or more. About half will be uninsured for four months or less. So it’s not necessarily a crisis. Obviously if you get sick during that period it’s a problem, but most of them are not sick. 80 percent of the uninsured that responded to a survey say that their health is good or excellent. Many are young people who simply have made a decision not to purchase insurance for one reason or another. In fact it’s often a rational decision if you just got out of college, if you want to spend your money on other things, you know if you don’t get hit by a truck or something you really are not going to need health care and we price insurance so high because of the regulations and the mandates so in many cases it’s a rational decision for these folks not to purchase insurance. Many of the people without insurance are actually relatively well off. Something like 15,000 of them earn more than $75,000 a year. They’ve simply chosen to self-insure, if you will, rather than to turn to insurance. So when we look to the people who are uninsured we should recognize that they’re a small group of people who have substantially low income or serious health problems and we need to find a way to bring those people into the health insurance market. But we shouldn’t make insuring every last American the sole purpose of health care reform. Now pursuing this holy grail of health care, states while traveling down a number of roads I think are serious mistakes and I’d like to offer some warnings about them.

The first of course is simply go to a single-payer system. Put government in charge of health care. The idea being that the health care system should be run by the same people who run FEMA somehow baffles me. As I’ve said, the common characteristic of these national health care systems is that they end up denying care and there is a very good reason for it. Assume you can provide all the health care everybody wants for free. Someone’s going to have to pay for it and there’s a finite limit as to how much the taxpayers are willing to pay. If you want to just take one example, Dennis Kucinich is pushing a national health care plan. It’s been scored to cost $7 trillion more than our current health care over the next 10 years. John Edwards says there’s a slightly cheaper one out there. It’s only going to cost $120 billion in new taxes per year he estimates. You know eventually the taxpayers say no and we end up cutting back and rationing out health care. All you have to do is look at the health care systems we have right now. The Veterans Administration is chronically under funded. They’re always saying they don’t have enough money and we see what it leads to in terms of Walter Reed with the new scandal which just came out.

The Medicaid system was always under funded and cuts back on provider payments. We’re running into the system now with Medicare which is $70 trillion, that’s trillion with a T, under funded in terms of its unfunded obligations going into the future. How do they react to that? Well, we’re going to cut back on reimbursements to physicians and hospitals and all the fight over that. All of which leads to the rationing of care. So I think a single-payer system should be a non-starter. It should really not be serious health policy. But there’s a number of steps short of that that people are looking at that are equally problematic.

One of course is different types of mandates. An employer mandate is being talked about. Several states, like "ArnoldCare" in California is talking about this idea of an employer mandate and several other states are looking at it that will simply require all the businesses in the state offer health insurance to their employees and if they don’t do that then they will have to pay some sort of a fee or tax into a pool that will then cover their employees for them. This just sort of ignores the laws of economics, I think, if you will. The fact is that from an employer point of view, they provide a certain amount of compensation to their workers based on that worker’s productivity and they don’t care how that compensation is divided. It makes absolutely no difference to them whether that compensation is in the form of wages, terms of health care, pension benefit, a free employee parking space, taxes they have to pay or anything else. In fact I believe Mackinac put out a terrific thing on what a W-2 form would really look like if you listed all the compensation on what employees are actually paid and what they actually see in their paycheck. If you simply mandate an additional expense on them by mandating they provide health insurance, you’re raising the amount of compensation that has to be paid to that employee but you’re not doing anything in raising that employee’s productivity, so the business is going to have to cut back some other way. They can cut back by a sense of fewer jobs, fewer new hires, they can have future smaller wage increases, they can contribute less to the employee pension system, they can cut back in terms of other benefits, but in some way the workers themselves will end up paying the cost.

We sort of act like there is this free radical money somehow floating around that we can somehow catch onto. The reality is that the money being spent on the health care system is all spent ultimately by the employee and we can just shift around as to the collector. In a single-payer system, the employee simply pays it through higher taxes and in an employer mandate the employee pays it through lower wages or some other way that that’s done or you can make them pay it themselves but in the end it’s the employee who always ends up paying. The second way if you’re not going to go with an employer mandate… I’ll say one other thing about Michigan before I think about employer mandates, for all the sound and fury it’s simply not going to take affect because almost no employer mandate or in fact none that I’ve even seen stands up to a court challenge. They’ve tried these in several other states and whether it’s the Wal-Mart law in Maryland or other attempted employer mandates of pay or play plans they always run a foul of ERISA (Employee Retirement Income Security Act) and federal courts strike them down. I’ve never seen any employer mandate crafted in a way that could stand up to an ERISA challenge. So in the end you go through this and everybody feels good and you go to court and it gets thrown out and it just happens repeatedly. Well if that’s not going to happen then the other way to go is to an individual mandate.

This is just what Massachusetts just did, part of its health care reform there, a requirement that everyone in the state must purchase health insurance or they face some kind of fine or penalty if they don’t. I see a lot of problems with this approach as well. Superficially I think it’s appealing. It’s sort of an individual responsibility question and after all the fact is if I don’t have insurance and I walk out of here today and I get hit by a truck and get taken to the local hospital the cost of treating me is going to be passed on to you folks either through higher taxes or higher insurance premiums and so on and so people say well why shouldn’t I be required to have health insurance. I think there are some problems. First of all, I think that that problem of uncompensated care is again overstated. If you actually looked at the cost of uncompensated care around the country, the various studies show that it amounts to somewhere between 3 percent and 5 percent of total health care spending. Now that’s a real problem but it’s not a crisis again. Should we really set up all the problems that stem from an individual mandate in order to solve the problem that 3 percent to 5 percent of total health care spending? And in fact they’ve actually looked at who have actually ended up in the hospital emergency room are getting treated. The Study of Health Affairs looked at who actually shows up in hospital emergency rooms for treatment and they found out that there was actually no difference between whether the people were insured or uninsured in terms of the usage of people who used the emergency rooms. It was actually people on Medicaid that were most likely to use hospital emergency rooms. There was a gap there. People who received Medicaid were far more likely to go to a hospital emergency room for treatment then either people who didn’t have insurance at all or people who were insured. So I think in order to solve that little problem you’re starting off with something that is really substantial and in the words of the Congressional Budget Office an unprecedented challenge to individual choice and individual liberty. This represents the very first time that an individual has ever been, simply by virtue of living in a state, simply by the fact that you reside in a state you are required to purchase a specific product that the government has designed. And I think that that is a substantial imposition on individual liberty. Now people say, Gov. Romney, who I have debated on this several times, it’s just like an auto insurance mandate and you are required to have auto insurance to drive your car. The difference is if I don’t want to drive I don’t have to have insurance. Now if I don’t even own a car and I take the bus every day there’s no requirement for me to have auto insurance. Second, I’m not required to insure myself. I’m required to insure against running over someone else and hurting them. So this is substantially different in terms of quality. What it does, the auto insurance analogy does show the difficulty in actually implementing this.

That’s the second problem I’m having with this. The fact is that 47 states have an auto insurance mandate. In all 47 of those states the rate of people who are uninsured motorists is higher than the rate of people who don’t have health insurance, which indicates that enforcing these mandates is a little bit difficult. And in fact, the idea that we are going to track down every last person, that you’re going to track down the homeless and the mentally ill, illegal aliens and you’re somehow going to find all of them and you’re going to make sure they have their health insurance is real mythology. You know, I asked them how they were going to do it and they say well, we’re going to require that when you file your income tax, you put it on your income tax form. Well, first of all, thousands of people in every state aren’t required to file at all so what do you do with them? Second, thousands who were required to file, don’t file. And if you can’t track them down you’ve got a problem. Heck in Massachusetts nine members of the state legislature didn’t file their state income tax last year. So the idea that you’re going to track all these folks down and then what are you going to do to them? In some states they are going to take away your driver’s license so they’ll just drive without a license. Other states they’ll say oh, we’ll have a penalty. In Massachusetts they take away your personal income tax exemption first and the second year you’re fined half the cost of an insurance policy. Well, again, what happens if you don’t pay any income tax? How does that have any sort of an incentive and the people you were worried about not having any insurance are the very people who aren’t going to file their income tax, so I don’t know how that’s going to work. Second, you end up with the worst of both worlds with this sort of penalty. It’s half the cost of an insurance plan. So it’s large enough to be onerous but smaller than the cost of actually buying insurance. So people will say so well say I’ll pay the fine and I won’t buy the insurance which would cost me twice as much so you just punish people enough to hurt them without enough to actually get them to do it. So I think it’s not going to work very well.

It does lead into the next problem which is, OK we have people who can’t afford to buy health insurance which is the number one reason people who say they don’t have it is because they can’t afford it so we’ll subsidize it for them. We’ll find someone to do that. If you’re going to have an individual mandate you’re going to have to do subsidies. And in fact in Massachusetts they subsidize people up to $62,000 a year for a family of four. Which I think is a substantial level of bringing welfare into the middle class if you will, really subsidizing people at a very high level. If you are going to do these subsidies you can look at them in a lot of ways. You can subsidize the way Massachusetts is going to do. The more common way to look at these subsidies is to look at the Medicaid and SCHIP (State Children’s Health Insurance Program) programs as subsidies. Here what you’re seeing is people saying well we can raise the eligibility level for these programs, I understand here you’re trying to move it up to 200 percent of poverty. Some states are going even higher, 300 percent of poverty which is substantial income. I think you need to look very carefully at any sort of effort to do this. Even when you combine it with very positive market-oriented reforms, some states like Florida and others try to ease the pain of Medicaid eligibility by saying we’ll combine it with market reforms, we’ll voucherize it, we’ll add health savings accounts to it, we’ll do it thinks that add market incentives to it. I think you have to approach this very, very cautiously. Because as you raise eligibility, you find that people who would otherwise be buying health insurance and employers who would otherwise provide health insurance stop. Why should an employer provide health insurance if the state will take care of that cost for them? Why should I go out and buy health insurance on my own if now I can get it through the Medicaid system? Every study that’s been studied out there, you know, Robert S. Johnson did a big study, survey, all find that this dumping takes place and the higher that you move up the income level in terms of providing these subsidies the more that dumping occurs. It happens substantially in the SCHIP program, it happens in the Medicaid program. The only thing that basically keeps it from happening more often now is that Medicaid is such a lousy program. And the fact that people say well I don’t want to be in Medicaid because even if I have to pay on my own putting me in Medicaid is a terrible program I’d rather be on my own so if you make Medicaid a good program and you add all these things to it that would improve it to make it more like private insurance you risk increasing the level of dumping that’s going to take place along the way as you do that. And I urge you to be very, very careful as you do that.

One thing you should realize is that Medicaid is welfare. We tend to not think of it that way but it is and in fact in terms of its value Medicaid is worth twice as much to a family that receives it as TANF (Temporary Assistance to Needy Families). In general, the value of the Medicaid payment is worth twice as much as the cash payments received through TANF. And as welfare it contains all the problems associated with welfare in terms of discouraging work, family formation and all the disincentives that go with welfare. Medicaid should be treated like welfare so I would urge you that as you move forward with any Medicaid reforms you consider putting the same types of restrictions in terms of time limits, family caps, work requirements and all the rest that go with your welfare reforms should be applied in exactly the same way to your Medicaid reforms.

Let me also mention a little bit in terms of another area where we have problems with our health care system and that’s cost. I’m a bit of an agnostic on the overall cost of our health care. People always warn me, they come out with these alarming figures that say America spends 17 percent of GDP on health care. We spend more on health care per capita than any country in the world. It’s true. We spend more on tennis shoes than any country in the world and I haven’t heard anyone talk about the great tennis shoe crisis. Frankly I don’t know how much we should spend on health care. You know, Bangladesh spends 1 percent of its GDP on health care. Would we all be better if we were getting health care in Bangladesh? I don’t think so. There isn’t a right number, there is no magic number, there is no expert that can get out there and determine who much per capita to spend on health care or on anything else. The fact is the market decides that. The problem is that they’re are not necessarily being decided by markets in this country and more than that because of the way we have third- and fourth-party health insurance in this country we are shifting those costs around to people where people who are incurring the costs are not necessarily paying for it. They are shifting those costs to other people and that’s raising the cost of insurance out of the reach of people who would otherwise want to be able to afford it.

In particular I think we need to be very careful and we need to be looking at the regulations that drive up the cost of health care in this country. We had a study done by Richard Conover from Duke that showed that health care regulations in this country add about $130 billion a year I believe it is, and all of that passed on to the cost of insurance and raise it. Things like mandated health insurance benefits, which I know you’re trying to deal with in your state, add significantly to the cost of health care. Community rating and so on add to the cost of health care. We need to look at that.

Again I would add one caution in terms of this. I know one approach being suggested in terms of fixing the regulatory problem with health care particularly in the small group and individual market is to create what’s called a connector which is some sort of artificial marketplace that could then be used for two good things. One, it could be used through Section 125 plans to enable people to purchase health care on an individual basis with getting around the federal tax law that penalizes you for actually purchasing health insurance and allows you to on a pre-tax basis, to move you to the connector and the second is it rationalizes what is a pretty dysfunctional marketplace right now for the small group and individual insurance market because of the way the regulatory mechanisms work. And I know it’s been suggested that here you would have some sort of a bare bones plan that would be offered through this connector and it would enable people to get low cost insurance and high deductible insurance. I think if that is all a connector did then that would marginally be a good thing. I have a grave concern that what you’re doing in setting up this mechanism is creating a new regulatory body that will then intervene in the health care marketplace. Particularly if you allow this connector to pick and choose which plans it will sell and which plans it won’t. I usually like to be very careful in making slippery slope arguments because I think that that could be abused but if you look at the history of these connectors they are pretty slippery.

Now Massachusetts, when the governor, now they pioneered the connector and when the governor put forward his plan for the connector there he said we’ll have exactly this, a bare bones plan that will be offered no health insurance mandate. By the time it finished passing the legislature every single mandate was put back in. And in fact not only did they put every mandate back in but even before the ink was dry on the legislation the special interests had descended on the state capitol and were demanding the inclusion of new mandates. After all you now have a captive market. People could no longer be disciplined by the market by saying, people could no longer say it’s too expensive I won’t buy it. And they now have this system set up that if you go through the connector the only place you can go to get the subsidies so on and so forth it forces people to buy the product that the connector is creating. Every special interest sees a chance to go down and get their product put into that mandate so all the dentists to go down and say we need to have dental care included. You even saw the Christian Science practitioners down there demanding that Christian Scientist healers be included in it. No wonder the minimum cost of this plan when the Governor announced it the plan would cost no more than $250 a month already estimated to cost now $380 a month and the costs are rising. I think you need to be very, very careful about how you are setting this up and I would suggest the one thing you could do is simply take away any regulatory power and require that any connector that you create must sell any insurance product that is otherwise for sale in the state rather than allowing it to pick and choose winners and losers in creating sort of a honey for the bees of special interests or creating a new trough for the pigs to feed at.

Now mostly I’ve spent my time here and I always feel bad when I come to a state because I spend almost all my time telling you what you shouldn’t do. Frankly there’s not a lot of choice on that. I understand why states and state legislators and others get frustrated with what’s going on in Washington. The absolute inability of Washington to wrestle with the issue of health care reform but the fact is the real problem with health care in this country can only be fixed at the federal level. The fact that they stem from federal tax law and federal anti-trust law, federal regulations and the Medicare system and so many things of that nature that you really can’t fix at the state level. So I urge you not to let your frustration drive you to do something that you’ll later regret. In health care reform the first rule of thumb should be is to follow the Hippocratic Oath and "first do no harm" and the vast majority of what state legislators can do ultimately is bad policy. But there are a few things that you can do and I would urge you to do them. You can deregulate your health insurance market. I would urge you to look at repealing mandated health insurance benefits and allowing people to buy low cost, bare bones health insurance particularly young and healthy people. You want to get them into the insurance market when they’re young and healthy not have them wait they’re old and sick The best way you can do this is to enable them to buy low cost health insurance and buying a bare bones policy will say they don’t have enough health insurance is better than having none. So if you could lower the cost of health insurance I think you would be much better off for these folks striking out the mandated benefits is a good way to do it.

A better way of doing it, I understand the political problems of going out there and trying to fight particular mandates and say we’ll take the podiatrist out and the podiatrists will go crazy on you and I understand how difficult that is. So here is a suggested way you might be able to get around that. Change your insurance law to allow for sale in this state any insurance product that is approved for sale by any state in the union. Right now you have to buy insurance that is approved by the Insurance Commissioner in the State of Michigan. But why shouldn’t a person go to say Idaho, a state that has the least mandates in the country, find an insurance product that is for sale and approved by the Insurance Commissioner in Idaho and buy that insurance product. Or small business being able to go to Illinois or to Wisconsin or to wherever and be able to buy insurance there. A simple change in the law would allow that to happen. There’s a federal bill that would create this power by John Shadegg of Arizona but you don’t need to wait for the federal government to act on that, that’s something you can introduce on the state legislative level. There is an excellent study coming out on how this can be done from the Goldwater Institute in Arizona and I would urge you to track that down. It should be published shortly. It would not only allow individuals and small businesses to be able to buy insurance at low cost it would create an enormous incentive of regulatory competition, the same way you have tax competition between states to get business to come in or whatever you would find regulatory competition on health insurance. People would be competing to have the best health insurance climate so that people would buy health insurance from their state. You will find that some states would be out there to become you know like South Dakota is for credit cards, some state would be the health insurance industry and states would be competing to do that and I think that would be a terrific thing if you did that.

The second thing I would say you could apply to your Medicaid rules the same rules you applying to TANF. Prove Medicaid to be what it is in terms of welfare. Third is you can set up policies to enable people and small businesses through their 125 plan to purchase health insurance on a pre-tax basis. Fourth, you can expand health savings accounts, encourage state employees to purchase them, bring them into your system, and make sure you have the tax advantages and regulations right so they can be expanded as much as possible. Fifth you could offer a state tax break for people who purchase individual health insurance. You could simple create a standard tax deduction for people who purchase health insurance regardless of where they get it or how they get it.

I think these could be small incremental steps in the right direction. I think that in the end they will help, they won’t solve all the problems but they also won’t hurt the health care system that we have today. In the end, ‘first do no harm’ then do what good you can. I think that is the message I would like to bring to you today. With that I would like to close and take any questions you might have. Thank you for listening to me. Thank you.

Questions and Answers

Question: You aren’t really high on what’s going on in Florida and I understand South Carolina is doing some similar kinds of things, Kentucky just did something I believe, can you expand on that a little bit?

Answer: Sure, in my opinion it’s sort of third and fourth best solutions. They’re looking at their Medicaid situation and they’re saying Medicaid is doing two things. Number one it’s breaking the states budget and in most states, I’m not sure what it is here in Michigan but in most states Medicaid is now exceeding education and in almost every state it soon will be the top line item in every state’s budget. It is really breaking state budget banks. Second, they are under enormous pressure to expand it. They’re under enormous pressure for two reasons. One is general impression, the problem of covering the uninsured. The second is if you expand Medicaid and SCHIP you can get federal dollars so there’s a shell game going on which says essentially we’ll put people into our system and we’ll make other states pay for it by expanding it. The best example of this is "ArnoldCare" in California. Talk about a clever shell game he’s got here. Essentially what he does he puts more people into the Medicaid system thereby getting more federal reimbursement and then he taxes back the federal reimbursement by a tax to health care providers so he gets the money twice if you will. He gets other taxes from other states; taxpayers from Michigan have to pay for California health care plan which makes it very popular for California legislators. So states are being driven to do this so what they are looking at is saying OK we’ll do the increase but we’re going to put in these market type of reforms. We’re going to offer health care vouchers to get people into the system. That way they can get into the private health care systems, they can actually get a continuity of care. Medicaid is traditionally reimbursed so low for primary care physicians that most won’t take Medicaid patients, people get bounced around from doctor to doctor, they end up at the emergency room so rather than do that we’ll try to get people into the private health insurance market either by subsidizing their purchase of care, voucherizing it in some way, bringing them all in.

Second, we know that there’s a problem in that if people aren’t paying any money they tend to over consume so we’ll create things like health savings accounts which are great incentives for people not to over use the Medicaid system, we’ll say if they don’t use it they can have these savings program. The danger is you’re actually creating a better health care plan now within the Medicaid system then many of these people were getting from their small business or out on their own and you’re actually going to see an increase I think in usage which I think is very dangerous. So it’s sort of a second, third and fourth best solution to the problem. I think combined you can do that. I think they are actually good reforms but you need to combine them with these welfare reforms to keep people from doing the dumping which is a real danger that you get small businesses even actually some larger size businesses dumping. People complain about the Wal-Mart effect which is actually badly misnamed. Wal-Mart actually doesn’t actually dump all that many people on the Medicaid system primarily because they have so many part-time workers and so on. They actually do provide a very good health care benefit for their full time workers. But people complain about that all the time. If you really want to see that happen, raise your Medicaid eligibility 200 percent or 300 percent of the poverty level and see how many people are dumped into the Medicaid system.

Question: It seems in Michigan that the marketplace really is saying that is the problem because employers who can provide insurance are saying that it costs too much and they’re covering the trade off for those that don’t have insurance if you look at the uninsured it’s portrayed as a big problem. Medical bills are the largest cause of individual bankruptcy. How does a business compete with transplant companies that have national health care. It seems like its unfair competition

Answer: Well to some extent these companies are the victim of their own bad decisions over time. I understand here in Michigan the biggest issue is the auto industry which has made terrible decisions in terms of health care benefits it has provided to employees. It provides the most gold plated insurance plan imaginable to its employees so legacy costs that they’re bearing is a huge problem. Where I think they go wrong is the idea that they could deal with it directly by telling their employees that they won’t provide for these gold plated policies anymore and cutting back on medical benefits. They don’t want to do that because they might make the unions angry, they don’t want to deal with a strike, they don’t want to be the bad guy. So what they would do is have the government do it and they’ve all rushed to Washington now saying we need a single-payer plan because then the government will pay for it, the monkey is off their back. The employees will still end up paying for it through higher taxes but at least the company didn’t have to tell them they were going to have to pay more so there sort of get to play good cop gets bad cop. It’s not any new money it’s still coming out of the employee’s pocket they just didn’t have to be the one to make them do this. So I think that they are simply trying to get someone to bail them out of the bad decisions they’ve made in the past and don’t want to have to play the bad cop themselves. Beyond that I would just say that the study on the largest number of bankruptcies has been pretty well debunked. That study does not necessarily hold water. Not to say that that’s not a problem with people who don’t have health insurance and have to pay the bills. I would say it does debunk one thing that people who don’t have health insurance don’t have access to care. The very fact that they don’t have access to care but are worried about the bills means that they are getting treated so they do have access to care. We require in this country that hospitals provide care for people who need it by law and we don’t have the same legal requirement on doctors but very few doctors would turn people away. So people do get the care, in terms of the fact that it’s a cost to them, I think you’re right. I want to make health insurance more available but I think the question is, is it a big enough problem that we should risk destroying the health care system that we have in order to get there and that I don’t think is the trade-off involved.

Question: Taxpayers that have their own health care insurance, long term insurance or choose not to have either, how are they better off when their taxes go up and have to pay for other people?

Answer: They’re obviously not better off if we have to pay for other people. Uncompensated care is a problem. The question is and I come back again to the fact is if people don’t buy health insurance and they get sick we bear the cost of paying for them if they don’t. Now I’ll just add a couple of cautions on that. One is what you hear about the costs that hospitals have to pay for uncompensated care, it’s wildly exaggerated. They usually put out their charges not their actual costs and the charges are unrelated to the actual costs of treating a person but it’s what they would charge you if you had insurance and so on. It’s a meaningless number and it’s a much too high number. If you actually look at cost it’s lower but it’s real and I think that it is a problem. It’s about 3 percent to 5 percent of health care spending. Again the question is to what extent are you willing to disrupt the entire health care system for something that you’re not going to solve in its entirety. You’re always going to have some uninsured people. Again you’re not going to reach down to the homeless person, the illegal immigrant or whatever to get them insured no matter what you do. Even Canada has about 1 percent of its population that’s uninsured despite the fact that it has universal health care. You can’t reach everybody but let’s just assume you can bring that cost down from 3 to 5 percent to 2 to 4 percent. How much damage to the health care system are you willing to do in order to solve that problem? This may ultimately be one in which we’ve just got to suck it up and eat the fact that we’re just going to have this added cost that we’re going to pay for because we’re a compassionate society and we’re not going to let people die because they don’t have health insurance. We’re going to have to pay that cost; we’re going to have to eat it somehow.

Question: What aspect of health care should people, and I didn’t hear you talk about as part of the problem or solution is the tort reform for malpractice happening. Where do you see that fitting in, going forward?

Answer: That is also generally not as big a problem as I think the doctors portray and a bigger problem then the lawyers portray. What you’ve got here are two powerful special interests that sort of butt heads on it and the actual studies if you look at them get lost in the process. The actual cost of malpractice in terms of health insurance premiums adds about 1 percent to the cost of health insurance premiums. Just by way of comparison I just saw an article indicating that there’s a push now in your state to make mental health parity. To require mental health parity insurance. that adds about 10 to 15 percent to the cost of an insurance policy. So you’re adding a 1 percent cost for malpractice. Defensive medicine which is the added procedures being done in order to avoid being sued does add a substantial amount. That might add about 10 percent to the cost of health care overall. That is due in part to malpractice and part to the fact since the patient’s not paying for it let’s sort of collude with the doctor and say lets have the added test, why not. The doctor says I want you to have this extra text even though I don’t think it’s necessary because I don’t want to take the chance of getting sued. The patient says I’m not paying for it so what the heck so go ahead and give it to me. To some extent if you change tax law and if you change insurance back to what insurance was supposed to be which is to protect against catastrophic risk not to pre-pay health care; if you did those sorts of things you would go a long way towards limiting that. Then I would think you would want to have some sort of tort reform that basically goes back to the assumption of risk. Back to informed consent. If a doctor tells you that if you have procedure A you might have outcome Y and you have outcome Y you can’t go back and sue. You were told. You know malpractice is to protect against malpractice, not to protect you against the bad outcome that occurs from your health care. And finally on the doc’s side I think they need to look at the fact that they insist on community rating of malpractice premiums. For the same reason community rating is bad for health insurance it’s a bad idea for malpractice insurance. Those physicians who have a terrible record should pay more for their insurance than those doctors who have clean records should. We need to look at that.

Question: I just wanted to add — what should the auto industry do? My husband is a union representative and he was not born when they started collective bargaining so he’s in between. He understands the legacy costs. What should they do?

Answer: What I’m going to tell people is bad news essentially. To put it in a larger context I will answer your question. It’s a very good question but I don’t have an answer that will make anybody happy. Americans want four things from their health insurance and they are mutually exclusive. Americans want all the health care they want, they want it now, they want it with the doctor of their choice and they want it for free — can’t have it. In the end someone is going to have to pay more and I’m afraid that that someone is going to be the individual. And what that’s going to mean I think is the need for the auto industry and everyone else to begin to move insurance back to what insurance really was meant to be. The idea of insurance is that it takes an event that had a low likelihood of it happening and a very high cost if it does happen and it spreads that risk out. If you have auto insurance it’s designed that if you get your car totaled it fixes it. It does not pay for your oil change and your fill up. Health insurance increasingly pays for your oil change and your fill up and if you total your car you don’t get anything. We need to turn that around. What that means is moving to a much higher deductible insurance policy, something that is truly catastrophic and the individual is going to have to bear much more of the routine cost. And I think that that means employers such as the auto industry and others are going to have to offer those type of insurance plans which means that they’re going to have to pay higher wages to individuals in order to compensate for at least part of that exchange of cost. The tax laws to really make that effective the federal tax laws would have to change. Right now if they do that, if they cut back on the health care policy they give you higher wages you have to pay taxes on the higher wages you didn’t have to pay taxes on the health care benefits that you got so you would actually lose out if the companies do that. We need to change federal tax law to make that possible to do that. For the people who are stuck in the legacy plans, in the end I think the government’s going to have to end up eating some of those costs and bailing people out in terms of some way. I actually don’t think they should but I think we’re going to end up doing it one way or another because if they dumped the plans the individuals are going to be on the government programs and we’ll have to pick up the costs in taxes; if we go to single payer we’d have to pick it up, if we move to some sort of an employer mandate businesses we would pick it up. We’re going to end up eating those costs in some way. So I’m not sure what kind of mechanism is best in terms of trying to off load some of those costs is but we could look at what is the minimizing way of doing that. But the one think we need to do is to start changing over now so that we don’t just keep adding on more and more of those costs which we’re not doing.

Question: The second part of my question, I’m going to tell my age, the Kaiser Plan that was started in California and the State of Michigan and the city of Detroit we jumped on board in the 70’s and my friend created a company called Michigan HMO and that was supposed to spread out like you said some of that cost of health insurance. You’re saying that that HMO model is not working?

Answer: HMO’s came in with the idea saying they were going to squeeze the waste out of health insurance and they did. But once you squeezed the waste out you are back to regular rising health care costs. If you actually looked at your health insurance premiums what you saw in the 80s it went down as HMOs came in, bottomed out, moved right back up again and even in managed care is rising at the same rate as fee for service medicine. Basically once you squeezed out that initial level of waste you were still left with the fact that most health care costs, the biggest reason health care costs are rising in this country is because they can. Essentially health care from an economist standpoint and I’m an economist, we call it a normal good. It means that your income rises, you spend more on it. We’re a wealthy country we want to spend money on health care. We want to save people who in other countries would let die. We want to do that so we spend that money. We want all the latest technology, we want those extra tests we want to do all that sort of thing so that drives up the cost and managed care doesn’t really weed it out. I’m going to take you back to health care economics 101. I’m going to give you a formula and if you remember anything about health care remember this formula. It’s VA+VI=C, the basic health care equation. VA is the actual value of whatever health care you’re receiving. If you get a bone set, if you get cancer cured, come back from a heart attack, whatever it is, that’s the value of what you are receiving. And please if there’s any Austrian economist in the room who wants to tell me there’s no such thing as actual value we can talk about that later. VI is the idiosyncratic value to you. Everybody’s different. How much pain are you willing to suffer vs. do you have to have that headache treated or do you go on with it. Some people are different, I don’t like pills. How much time are you willing to miss from work? Are you afraid of hospitals, whatever it is to you? C is the cost. When VA+VI, when the actual value plus the idiosyncratic value to you equals the cost of what you’re buying you’ve purchased the optimal amount of it. Remember that it could have no actual value it could just have an idiosyncratic value it could be like a placebo whatever it is it will equal the cost of what you buy and actual amount. The problem is when you have the VA+VI exceed the cost you will over purchase and if its cost exceeds the actual value then you under purchase health care. Because you don’t bear the cost of any of your health care purchases, it’s paid for by your employer or whatever, the cost is almost always less than the value and there’s a tendency to over consume. Someone has to step in then and break that link. And what happens is that someone can be the government which is what happens in a national health care system where they create a global budget and they come in and say you may want that procedure but you can’t have it or managed care can step in or the insurance company can step in and break that link and say you might otherwise want to get that test but first you’ve got to go through our gatekeeper. First you’ve got to get past these other things that might stop it. My answer is instead of letting someone else step in and break those let’s move that C back up to where it’s approximating the value again and let you make the decision. But you be the individual that steps in and makes those decisions.

Question: I’d just like to leave here with a close personal story. Two weeks ago I happened to overhear a conversation at Starbucks with two guys from Sweden. I said excuse me but you gentlemen sound like you’re from Sweden and they said Yah. May I ask you something about your taxes? Oh, well what’s the low side? Hans or whatever his name says, Oh about 29 percent. How about your sales tax? Twelve percent on food items, 25 percent on non-grocery items. I said you know you guys had a big election there a couple of months ago so what were the major issues? Well, the taxes are getting out of sight, government corruption and the health care is deteriorating dramatically. I said really, how bad is it getting? He said rationing is getting more extensive, more limitations in terms of what the government is going to cover, waits are longer and the big joke in Sweden right now is do you have a Polish doctor. I said really and he yes they are importing more doctors from Poland, electricians, plumbers, whatever. I said well at least you guys produce some pretty good hockey players. Well but they don’t stay in Sweden anymore. I said thank you very much for Nik Lidstrom. Well I leave you with that personal story and you can take that, the one thing that people talk about when they talk about national health care, free health care, just start talking about the taxes people pay in countries like Canada. I met a single school teacher from Canada several years ago and I said what kind of taxes do you pay and she said I’m a single school teacher, federal and provincial taxes alone take 45 percent of my paycheck. We don’t get the deductions you Americans get. That’s pretty much my bottom line.

So those are some great stories and you can tell everyone here to use them.

Answer: Absolutely right and those things have an effect on individuals on job creation. If you look to Europe in terms of job creation they’re virtually not creating private sector jobs at all. France is a great example it has created over the last 10 years 50,000 private sector jobs. We would consider that a bad month.

Let me give you one last thought to close on. In the end I think politics and health care comes down to one final question. Who decides? Now if you take all the various isms that are out there politically you know, socialism, Marxism, libertarianism, democratism, whatever it might be I don’t know, throw all the isms in there. In the end they come down to that single question, who decides? Do you decide what to do with your life and the decisions you make in it or does someone else make those decisions for you? In health care do you get to decide what procedures you want, do you get to decide what doctor you want to go to, do you decide how you’re going to get treated for various diseases or does someone else get to make that decision for you? That’s what politics is all about and that’s what the health care debate is really all about. And I come down on the side saying it should be you because no one knows better than you what is right for your life. And health care is the most personal most private decisions you make. I’m not about to turn it over to a government equivalent of the registry of motor vehicles.

Thank you all very much.

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Michael Tanner is director of health and welfare studies at the Cato Institute, a non-profit public policy research foundation headquartered in Washington, D.C.