Monday, June 9, 2014

As readers of this blog will have observed, I have become increasingly disillusioned with what we now refer to as Obamacare, which for all its regulatory complexity, fails to solve the basic problem of our healthcare system: many Americans are uninsured because of the lack of affordable options. Calling the legislation the Affordable Care Act doesn't create affordability.

Accordingly, I've been looking at more conservative proposals, in particular a paper by Kim  Hagopian and Dana Goldman, published in National Affairs, and a publication from the American Enterprise Institute, titled Best of Both Worlds.

Both proposals provide the kind of innovative approaches needed to provide truly affordable healthcare for all Americans, but may fall short by being overly complex while possibly failing to guarantee a reasonable level of basic coverage. The NEW VISION presented in this and the following three blog posts builds on these innovative approaches to provide a truly comprehensive and competitive model that offers rather more generous basic benefits, with a very strong emphasis on premium support.

for American Healthcare


The United States healthcare system is sick, and the so-called Affordable Care Act is not going to make it well.

The symptoms are obvious. 40 million people remain without coverage[1], national healthcare expenditures continue to grow significantly faster than Gross Domestic Product[2], and the overall system is riddled with inequities. It’s a very sick system indeed, and one that’s not getting better.

Millions of Uninsured – In their efforts to pitch Obamacare to a skeptical public, Senate Democrats described[3] the key goal of the ACA as “Quality, Affordable Health Care for all Americans [emphasis added].” The Congressional Budget Office provided a more realistic appraisal: it forecast that some 30 million individuals (including 7 million undocumented immigrants) would still be without coverage after Obamacare was fully implemented.

Recent estimates[4] imply that even this number may be optimistic, underestimating those without coverage by as many as ten million. The incompetent implementation of and other exchanges, the forced cancellations of existing policies, and the high costs of Obamacare-mandated benefits have all helped discourage even those who tried from becoming insured.

Escalating Spending -- American healthcare expenditures have grown from some $250 billion in 1980 to an estimated $3 trillion in 2014[5], an average rate of increase of approximately 8 percent a year, during a 35 year period in which GDP growth averaged just 6 percent. Our per capita healthcare spending now exceeds $9,000[6], two and a half times more than the average of other OECD nations[7], and increasing much faster than most.

In spite of its title, the Affordable Care Act will do little to change this trend. The Department of Health and Human Services, the federal agency responsible for ACA implementation, expects an acceleration in spending as the effects of the Act become apparent[8], and projects that by 2022 national healthcare spending will be an astounding $5 trillion, with government (aka taxpayers) funding almost half the total.

Lack of Fairness – To an objective outside observer, our healthcare system has the appearance of an ill-regulated casino. Coverage and costs vary wildly, with little relevance to the needs of the individual. Simply switching from one job to another more-or-less identical one and keeping the same healthcare benefits can cost an employee thousands of dollars in increased taxes, while taxpayers may subsidize one senior’s care by up to $5,000 a year more than that of another in the same city and with the same health status, and an unfortunate low-income individual may discover he or she has lost all coverage by managing to increase monthly income by a dollar or two. Obamacare adds its own inequities with fines for those without coverage, mandated benefits for those who don’t need them, and base coverage levels that are unaffordable for many.

The Bottom Line -- It shouldn’t be surprising that our healthcare system shows such symptoms of sickness. It’s one that’s not only unfair, it’s unnecessarily complex, it unreasonably restricts choice for most people, it discourages personal responsibility, and it does far too little to gain the business advantages of competition.


The NEW VISION for American Healthcare, outlined in the next four sections, will give basic insurance coverage to every under-65 legal resident of the United States. It will give over-65s the assurance that Medicare will remain fiscally viable. It will remove much of the “stigma” of Medicaid by making mainstream health plans affordable and available to low-income families. It will cut costs by reducing some of the burdens of mandates, medical liability, and monopolies. The NEW VISION will emphasize personal responsibility and transform an inefficient over-regulated system into a competitive marketplace through four mechanisms:

·         Premium support for all – Every American, old or young, rich or poor, will receive appropriate federally funded premium support. For seniors, this will reflect benchmark costs by area for existing Medicare benefits. For under-65s, it will be based on redirecting existing federal subsidies (for employer-paid coverage and Obamacare exchanges) and Medicaid monies to provide no-cost basic coverage based on individual needs.

·        Competition and choice – A critical element of the NEW VISION will be maximizing the benefits of competition—just as airline deregulation led to greater operational efficiency and lower fares[9]. Under-65 consumers will have access via new regional exchanges to all coverage options in their area, not just the few offered by government agencies or their employers, seniors will be able (with the help of local guides where necessary) to see all available choices through the same new exchanges, and insurers will be able to offer coverage above the premium support level with minimal restrictions.

·        Focus on individual needs – Rather than today’s typical “one size fits all” approach, most deductibles will be tied to income—meaning that lower-income individuals will be spared the financial hazards of huge out-of-pocket costs—while premium support levels will rise with age, as do medical expenses and insurance costs.

·        Reducing regulatory burdens – Consistent with enhanced competition, changes will be made to requirements for mandated benefits and services and medical liability rules. At the same time, anti-monopoly rules will be strengthened and the roles of primary care providers reinforced.


Spending for Parts A, B, C, and D of Medicare of $600 billion a year[10] makes up the largest part of the United States budget after Social Security and Defense[11] and is the fastest-growing contributor to the deficit. Covering those over-65 or with permanent disabilities, Medicare serves 50 million Americans and comprises more than one-fifth of national healthcare expenditures.

Funding for Part A comes primarily from payroll taxes, while Parts B and D (and the physician and drug components of the Part C Medicare Advantage program, in which some 25 percent of beneficiaries are enrolled) are paid for by a mix of premium payments and general revenues. Separate “trust funds” are maintained for Part A and (combined) for Parts B and D.  

What’s the Problem?

Simply put, Medicare is eating up the federal budget. Already consuming more than 16 percent of all government spending, Medicare costs are projected to increase at more than 7 percent a year over the next decade[12], significantly faster than GDP or federal revenues, and the single fastest major component of federal budget growth.

It’s not just a budget problem. The Part A trust fund is projected to be totally depleted by 2026. After that point, payroll tax revenue will be insufficient to cover spending and the trust fund will be essentially bankrupt. Even the 2026 date may prove to be over-optimistic, since it assumes the complete success of the Medicare-related clauses of the Affordable Care Act[13].

There’s a major fairness issue, too. While the original intent of Medicare Advantage was to help control spending by offering private plans as competition to the traditional fee-for-service (FFS)  program, it has resulted neither in uniformly cost-effective private plans nor more control of FFS spending (as recently demonstrated by reports of Medicare payments in the millions of dollars to some physical therapists and ophthalmologists[14]). Average per capita Medicare spending in an area can vary by thousands of dollars a year, depending whether seniors are enrolled in the original program or in one of several MA plans offering similar benefits.

What’s the NEW VISION Alternative?

In common with other proposals[15][16], it is to convert Medicare to a premium support program. Unlike other proposals, however, it does not include the threat of benefit reductions if spending caps are exceeded, while adding a new safeguard to ensure that the sickest lower-income beneficiaries are not bankrupted by the effects of multiple hospitalization deductibles.

Under the NEW VISION model, the second lowest priced of all available plans in each Medicare area (based on private plan premiums and estimated FFS costs) will be set as the benchmark. Beneficiaries will be able to choose any private plan or the traditional FFS option, with the government contributing premium support up to the benchmark amount. Those choosing an option priced at or below the benchmark level will incur no additional cost, while those selecting more expensive plans will pay the difference.

Two respected sources provide some indication of the magnitude of the potential savings:

  • ·         The Congressional Budget Office[17] estimated that private plans in a premium support structure would reduce their rates by some 5 percent. With MA spending running at around $150 billion a year, the reduction—which does not consider the spending reductions resulting from switching plans—translates to some $7.5 billion annually.
  • ·         The Kaiser Family Foundation[18] estimated using 2010 data that 60 percent of current beneficiaries are not in one of the two lowest-cost plans in their areas. For those in the FFS program, Medicare paid an average $720 a year per person more than the cost of the benchmark plan. For those who opted for a private plan, Medicare paid an average of $1.044 a year more. Extrapolating from these numbers and inflating costs to current levels, Medicare costs currently exceed benchmark plan costs by $44 billion a year.  

Switching to the NEW VISION premium support model will result in spending reductions between these two numbers, depending what percentage of higher-cost beneficiaries decide to switch to benchmark plans (thereby potentially raising the benchmark). A fifty-fifty split will reduce spending by $20-30 billion annually, or some 5 percent of total Medicare costs, sufficient to make any threat of benefit reductions unnecessary for the foreseeable future.

One additional change is proposed: reducing the Part A deductible for low-income seniors, thereby cutting the odds of bankrupting those who incur multiple hospitalizations. This is a very modest spending proposal, but one that is consistent with NEW VISION principles and—most importantly—a humanitarian change for those most in need of help.

Implementing the NEW VISION for Medicare

Switching Medicare to a premium support model will involve relatively few infrastructure changes. CMS already develops projections of FFS Medicare costs by area, while private plans must already go through a premium bidding process (although the switch to premium support may present some actuarial challenges as numbers of seniors move from or to competing plans).

More efficient plan selection by beneficiaries will require some form of exchange, with the logical option being to piggy-back on the regional exchanges proposed for private insurance in the next section, along with assistance from human guides in navigating on-line choices.

The biggest issue for policymakers will be timing. Other proposals have suggested—in order to avoid any possible political backlash—delaying implementation so that no current beneficiaries are affected. The NEW VISION proposal, adding new catastrophic coverage and avoiding any threat to cap benefits, should be more acceptable, but ultimately this may come down to a choice between political expediency and Medicare bankruptcy.


Coverage paid for by employers and individuals remains the largest part of our insurance system, and is also, on a per capita basis, the fastest growing and—many would argue—most inequitable.

.In spite of the seeming ever-increasing role of government in the healthcare system, the majority of Americans still have private health insurance paid for, in whole or in part, by their employers, or—for some 20 million individuals—entirely by themselves. Out of a total United States population of 318 million, some 170 million are covered by private insurance, with total premium costs of more than $970 billion, while a further 40 million are uninsured. In addition to premiums, Americans also pay some $350 billion in out-of-pocket payments, typically because they have not reached their deductible limits or because they are uninsured.

What’s the Problem?

The most obvious issue is that healthcare costs—of which private insurance spending forms the largest part—are consuming more and more of the American economy. Private insurance spending has skyrocketed from $69 billion in 1980 to today’s $970 billion[19], a staggering 1300 percent increase over a period in which GDP increased by just 170 percent[20].

Notwithstanding the Affordable Care Act, there are still tens of millions who find coverage unaffordable. When these individuals receive care they cannot pay for, the resultant bad debts are passed on to the rest of us in increased charges or in higher costs for Medicare and Medicaid.

Our private insurance system is rife with other inequities, with the most obvious being the tax exclusion (or subsidy) for employer-sponsored insurance (ESI)—the replacement of which Presidents Reagan and Bush, and presidential candidates McCain and Romney all endorsed. More or less as an accident of history, dating back to World War Two wage restrictions, health insurance payments are treated as deductions from income for employers but are also excluded from income for employees. In effect, the 40 percent of the under-65 population without ESI who must use after-tax income if they want private insurance, are subsidizing those with ESI.

The loss of government revenues resulting from allowing some workers but not others to exclude premiums from income is huge. Including lost federal income taxes and payroll taxes, and taking into account the untaxed premiums for the self-employed and Section 125 plans as well as ESI, the total is now some $330 billion a year[21].

Economists generally accept that the ESI subsidy increases healthcare costs for everyone by leading to purchase of more coverage (including lower deductibles and co-pays), which in turn leads to greater utilization of covered services, as well as the use of more expensive providers (thereby encouraging higher unit prices). Higher prices are also encouraged by lack of competition: employers typically offer few plans to their employees, and are generally loath to switch insurers if this would result in employees having to change physicians or other providers.

The ESI subsidy has other economic consequences. Fear of losing insurance keeps employees in jobs they dislike, while at the same time small businesses not offering ESI are at a disadvantage in attracting talented workers. Because the tax exclusion is regressive, lower-paid employees gain less in reduced taxes than those better paid, while because premiums are generally the same for all employees younger workers effectively subsidize their older co-workers’ coverage.

What’s the NEW VISION Alternative?

The NEW VISION model builds on other recent proposals[22][23] to replace today’s expensive and unfair private insurance system by one that provides a base level of coverage to every under-65 American. Compared with the other proposals, the NEW VISION alternative will provide more generous base coverage and better reflect individual needs. It will be fully financed by redirecting current subsidies for ESI and Obamacare, along with some Medicaid monies.

Under the NEW VISION model, almost all non-Medicare individuals will receive a premium support “voucher” to be used to purchase coverage through a regional insurance exchange. The voucher may be used simply to purchase basic coverage from an array of available options or applied to the purchase of broader coverage, with the difference paid by the individual (or an employer). The average value of a voucher (in 2014 dollars) will be approximately $2,500 for an individual and $9,000 for a family, with specific values dependent on age and income.

The total cost for 240 million people[24] will be $600 billion a year, with funding from three sources:

  • ·         Redirecting the ESI and related tax subsidies -- $330 billion (total cost of the present ESI tax exclusion)
  • ·         Redirecting the Obamacare exchange subsidies  -- $120 billion (estimated by the CBO[25] to total $1,197 billion over the 2015-2024 decade)
  • ·         Redirecting approximately 30 percent of Medicaid funding -- $150 billion

Replacing the ESI tax subsidy by the NEW VISION model will result in a much fairer private insurance system, with every American receiving a level of no-cost basic coverage, averaging 55 percent actuarial value (i.e. total premiums cover 55 percent of total medical expenses), slightly less than the Obamacare bronze level. Ending the ESI subsidy will not only be more equitable, it should also lead to lower healthcare expenditures as individuals buy only what they need, while being totally portable—insurance would belong to individuals, not to employers.

Premium support will be age- and income-dependent, thereby removing another of the ESI system’s inequities—and in a more rational and comprehensive manner than the Obamacare exchange subsidies, available only to a limited number of lower-income individuals and families. Specifically, premium support will be set by a two-step process. First, for each individual, an “affordable deductible” will be determined based on family income in the prior year, using a formula similar to that proposed in other models[26][27]. An unadjusted premium support amount will be set based on the second-lowest priced coverage for the base plan at this deductible level in the area. An age adjustment will then be applied to this amount (since medical costs increase with age). Thus, an older lower-income individual will have a lower deductible and a higher premium support amount than the average person, while a younger higher-income individual will have a higher deductible and lower premium support level than the average.

The base level of coverage will cover (after application of the deductible) hospital and physician and lab services, pharmaceuticals, and other services. In common with today’s typical high-deductible plans, a small number of primary care visits will not be subject to the deductible.

What will the NEW VISION model achieve?

·         Every American will be protected against the threat of bankruptcy resulting from catastrophic medical expenses.
·         Enhanced competition will force insurers and providers to be efficient and effective.
·         Universal base coverage will minimize cost-shifting and adverse selection effects.  
·         Every individual will be able to select insurance based on their needs—for some, the no-cost base coverage will suffice, while those wanting broader coverage will pay only the difference between the premium support and the higher premium.
·         Provider bad debts—typically passed on to Medicare, Medicaid, and private insurance plans —will be much reduced.
·         Employers will no longer have to bear the costs and complexities of insurance administration—we don’t expect Aetna or United Healthcare to build automobiles or airplanes, so why do we want Ford and Boeing to be in the insurance business?
·         The population will be healthier and, as a result, more productive.

Implementing the NEW VISION for Private Insurance

Putting the NEW VISION in place for private insurance will involve three overlapping steps
First, employers currently offering ESI will inform their employees of the full value of their insurance benefit, potentially prior to increasing wages to balance ending ESI coverage. “Full value” means the cost of coverage taking into account employee age and any other rating factors.

Second, contractor-operated regional exchanges will be created, linked to a modified version of the existing federal “hub.” Regional exchanges are preferred to national or individual exchanges in order to minimize duplication of effort while simultaneously providing adequate back-up.

Third, the ESI and Obamacare subsidies, along with some components of Medicaid) will be phased out and the NEW VISION premium support model implemented, and exchange enrollment will begin. (Those failing to enroll will be auto-assigned to the lowest-cost available plans.) Employer transition is expected to be rapid, with most immediately replacing their ESI benefit with increased wages, rather than waiting for the erosion of enrollment as younger, healthier workers opt out of employer coverage.


Conceived as a modest add-on to the 1965 Medicare legislation, the Medicaid program was designed to consolidate and fund what was previously a grab bag of state and local healthcare programs for low-income Americans. Medicaid spending has since, along with the Children’s Health Insurance Program (CHIP), ballooned to almost $500 billion[28] annually, with growth forecast to continue at some 6 percent a year[29] (but with average per enrollee costs increasing only at 3 percent). Funding is a joint federal-state responsibility, with the federal share tied to each state’s average per capita income. Overall, the federal government currently covers 57 percent of the total cost.

Medicaid serves two distinct low-income populations: children and families, including pregnant women; and the aged and disabled (including some 9 million “dual eligibles” for whom Medicaid pays Medicare premiums and certain other costs). As a result of the Affordable Care Act, low-income childless adults are now also eligible for Medicaid in many states.

There are major differences in enrollee costs between the two primary populations. Projecting from 2011 data[30], 2014 costs are estimated as:

  • ·         Aged and disabled: $16,500 (aged), $18,500 (disabled) per enrollee – total $325 billion
  • ·         Children and families: $3,000 (children), $4,500 (adults) per enrollee – total $175 billion

Medicaid legislation specifies certain mandated eligible groups and benefits, but allows states considerable flexibility to expand eligibility and to provide optional benefits. Additionally, states may apply for so-called “1115 waivers” and “1915 waivers” to further vary benefits and eligibility. Accordingly, no two states have identical Medicaid programs, and there are major differences between the most and least expansive programs.

What’s the Problem?

The most obvious issue is Medicaid’s 6 percent growth rate and its impact on federal and state budgets.  Although the growth rate is nominally similar for states and the federal government (except for the impact of optional program expansions, notably those allowed by the Affordable Care Act), in practice the effect on states is much greater. While Medicaid represents 8 percent of federal spending, it averages 24 percent[31] of state budgets (including federal funding). The impact of Medicaid growth on states is made even more serious because—as opposed to the federal government—most states are constitutionally required to balance their budgets.

As an entitlement program, Medicaid’s costs are closely tied to the number of potentially eligible low-income enrollees, and therefore to state and national economies. It is estimated that, for every one percentage point increase in the unemployment rate, Medicaid enrollment nationally grows by 1 million[32]. The result is a double hit to government budgets in an economic downturn: Medicaid expenditures rise just as revenues fall.
There are fairness issues, also. Compared with other industrialized nations, the United States is unusual in having a separate healthcare program—with the reputation of providing inferior care—for its lower-income citizens. There are major differences in care between states, also. Living on one side or the other of a state border can mean the difference between being eligible or not, or in the range of services covered. Even where Medicaid eligibility is more generous, many potentially eligibles are not enrolled; in particular, it is estimated that more than 70 percent of uninsured children are eligible for Medicaid or CHIP but not enrolled[33].

The Affordable Care Act is expected to exacerbate one problem in those states that opt for expansion: while Medicaid theoretically provides more generous coverage than other forms of insurance, in practice enrollees may have serious difficulty gaining access to care. The budgetary constraints that states are forced to impose on the program mean that in many states providers are unwilling to accept Medicaid patients or may impose other barriers to access.

What’s the NEW VISION Alternative?

The NEW VISION model for Medicaid reflects the major differences in population characteristics and service needs of the two primary groups of Medicaid enrollees, the aged and disabled, and children and families (plus low-income adults).While other proposals[34][35] have recommended converting the entire existing Medicaid program to a block grant model, the NEW VISION alternative proposes this only for the aged and disabled groups.

For children and families and low-income adults, the existing Medicaid program will be replaced by reliance on the NEW VISION private insurance model, which will provide the option of no-cost access to mainstream low-deductible (for those with low incomes) coverage. States will, however, also have limited block grant funding to supplement premium support amounts for those receiving cash assistance or with state-determined extreme needs. In addition, at least one plan in each area will be designated as “low income preferred” (LIP), and temporarily limited to those with incomes below 133 percent of FPL. This approach has several benefits:

  • ·         Coverage for low-income children and families will be universal based on reported income; no eligibility determination will be required, except for use of block grant fun
  •       While LIP plans will be designed as cost-effective options for the low-income, they will not be mandatory. For example, a family may prefer to remain in its prior plan even though it may mean additional costs.

  • ·         Continuity of care will be facilitated since patients will be continuously covered—an important issue for this group, in which families currently move in and out of Medicaid with changes of income. The level of coverage may vary; the fact of coverage will not.
  • ·         Availability of limited block grant funds will give states flexibility to assist those with emergency needs, and, in particular, those whose financial or health situations change substantially since determination of their premium support amounts.

Compared with the current Medicaid structure, coverage will be better tuned to income, avoiding the sudden elimination of coverage when income exceeds Medicaid eligibility standards. Those families with incomes below 100 percent of FPL will, assuming they choose an LIP plan, gain essentially the same coverage as under today’s typical state Medicaid program, but with nominal copayments. Families with incomes between 100 and 133 percent of FPL will be subject also to a small deductible, with the deductible gradually increasing above 133 percent of FPL.

For the aged and disabled, the NEW VISION approach is to switch to a block grant model. More specifically, states will be provided with annual grants, with annual increases limited to projected GDP growth. States will be required to match the grants at a rate equivalent to the current FMAP rate. This approach balances several factors:

  • ·         Aged and disabled enrollment is expected to increase at approximately 1 percent a year, with per capita costs increasing at 3.5 percent annually[36]. GDP growth through 2010 is forecast to average 4.2 percent a year[37]
  • ·         This population is relatively stable and less economy-dependent than children, families, and adults
  • ·         A block grant approach (as used in Rhode Island and other states) is expected to encourage better coordination of care and more use of social services to minimize medical events

To protect the interests of the aged and disabled enrollees, states will be required to report their provision and use of matching funds, and on the health and social status of those receiving aid.

Implementing the NEW VISION for Medicaid

Implementing the NEW VISION will require no new monies (or yield any dramatic savings in the initial year), but will involve redistribution of traditional Medicaid funding. For a state with the national average FMAP rate of close to 60 percent and a “traditional Medicaid” budget of $10 billion, the new distribution will look like this:

·         Aged and disabled – $6.5 billion ($3 billion federal block grant, $3.5 billion state funds)
·         Redistributed to private insurance premium support -- $3 billion (all federal funds)
·         Children and families emergency needs fund -- $0.5 billion (all state funds)

In the implementation year total federal funding will be calculated as the prior (traditional Medicaid) expenditures times GDP growth plus 1 percent, split fifty-fifty between the block grant and the contribution to private insurance premium support. In subsequent years the block grant will increase at the GDP growth rate, while the premium support contribution will increase at the GDP plus 1 percent rate. States will be required to match their funding growth at these same rates. Compared with today’s Medicaid program, state and federal savings will come from the differences between these rates and current growth forecasts of approximately 6 percent.


The United States healthcare system is enormous and hugely complex, consisting of some 5,000 hospitals, more than 800,000 physicians, approximately 60,000 pharmacies, and hundreds of thousands of other providers, all regulated by a complicated patchwork of federal and state laws and regulations.

It’s a changing picture. The delivery of healthcare has moved from a cottage industry structure in which most hospitals were community-based and not-for-profit and most physicians were solo practitioners to one in which hospitals aggressively compete for patients (whether they are for-profit or not) and physicians find they must organize into groups (sometimes controlled by a hospital or HMO) in order to survive. At the same time, federal and state regulations play a larger and larger part in the operation of any medical practice.

What’s the Problem? What’s the NEW VISION Alternative?

For all their world-class capabilities, our hospitals, physicians, and other providers operate in an environment unlike that of any other professional business, offering services mandated by state legislatures rather than medical professionals, providing care dictated by liability concerns more than patient needs, and with limited or ineffective price competition.

The following three sections address three major issues affecting costs and describe NEW VISION approaches to each to enhance delivery system cost-effectiveness and competition.

Benefit Mandates 

The Problem -- State legislatures have imposed numerous benefit mandates requiring state-regulated insurers (as opposed to self-insured employers covered by ERISA) to pay for various treatments and services. Typically, such mandates are imposed following lobbying efforts by professional associations or groups of concerned citizens. The most recent national count[38] of such mandates shows some 2,200, an average of more than 40 per state, ranging from a low of 13 to a high of 69. Some of these mandates, like emergency services or prescription drug coverage, merely duplicate what is ordinarily covered. Others, however, like the several that apply to just one or two states, reflect much more narrow or atypical medical concerns.

The problem, obviously, is that mandates tend to increase the cost of insurance. Various studies[39][40] have attempted to estimate the added costs of mandates, but the fact that many mandates are essentially redundant (since they relate to services covered in a normal insurance policy) can make such estimates misleading. A 1999 study[41] estimated that mandates in Maryland—a “middle of the road” state in terms of numbers of mandates—added between 11 and 22 percent to insurance costs, primarily because of dental care, psychiatric hospital stays, and psychology visits. 

The Affordable Care Act requires that states pay for mandated benefits for individuals with small group and non-group insurance if the mandates exceed a package of covered services known as “essential health benefits.” Unfortunately, CMS has interpreted the essential health benefits as being state-specific, defined by typical coverage, and therefore usually including all mandated benefits.

The NEW VISION Alternative – Under the NEW VISION model, premium support for basic private insurance will be federally funded, and allowing states to impose their own mandates would be inappropriate. Accordingly, no differences in federally supported benefits between states will be allowed, although states could mandate and fund their own additional benefits. The equivalent of the ACA’s “essential services” will, however, include all benefits mandated by at least two-thirds of states, reflecting a reasonable consensus of opinion.

Tort Liability

The Problem – More than 50,000 medical liability claims are filed every year, with payments made in some 10,000 cases[42]. Both numbers currently show downward trends, as a result of tort reform in some states, greater provider awareness of patient safety issues (particularly in hospitals), and a tendency for physicians to practice “defensive medicine.” Even so, a 2011 study[43] reported that 75 percent of physicians in "low-risk" specialties and close to 100 percent of physicians in "high-risk" specialties could expect to face a malpractice claim during their careers.

The impact of tort liability on healthcare costs has been the subject of several articles, with a fairly wide range of conclusions. Two analyses[44][45] of these findings estimated that tort liability added 2.4 percent to national healthcare costs, but that tort reform would cut total costs only by 0.5 percent ($72 billion and $15 billion in 2014 dollars, respectively). The relatively small savings from reform reflects the difficulty of changing physicians’ approach to care from one biased towards defensive medicine, and also the reality that some part of the defensive medicine trend is due to fear of any kind of malpractice claim, regardless of the amount involved..

The NEW VISION Alternative – The NEW VISION approach of federal funding for basic catastrophic coverage dictates a federal approach to tort reform, something that the American Medical Association and others have pressed for. A tort reform package similar to that[46] on which the 0.5 percent savings were based will include caps on non-economic and punitive damages, a statute of limitations, and the replacement of joint-and-several liability by a fair share rule. The projected 0.5 percent savings is small in percentage terms but will yield $15 billion in lower costs if implemented immediately.  


The Problem – Historically, some providers, especially in smaller communities, have enjoyed monopoly status simply because their market is too limited to allow competition. However, monopolies are becoming more and more common for other reasons, as providers join together through mergers and acquisitions, and in partnerships and corporate forms. In some cases, such consolidations are justified by improvements in medical effectiveness as individual providers work more closely together. In other cases, however, the primary motivating factor appears to be the economic benefit from reduced competition and increased market dominance.

Although not true monopolists, other hospitals and physician groups obtain market power through achieving “must-have” status, meaning that employers and consumers demand their inclusion in insurers’ networks because of their reputation or specialization.

The American Enterprise Institute quotes[47] a study which found that large multi-hospital systems have been able to increase prices by 17 to 34 percent compared with non-system hospitals. Other studies have produced similar findings, typically noting that the most dominant providers in a market —especially hospitals—are best able to negotiate higher prices from insurers.

One growing trend is the acquisition by hospitals of physician groups. From the physicians’ viewpoint, being hospital-owned provides capital, while the hospital gains a guaranteed referral mechanism. There are obvious medical advantages to having some specialists closely allied with the hospital where they operate, but there is also evidence[48][49] that the specialists may feel pressured to perform more services in the hospital setting.

The NEW VISION Alternative – The NEW VISION emphasis on price competition in both the Medicare and private insurance markets is expected to give both consumers and insurers greater incentives to avoid high-cost providers, as monopolists typically are. In this environment, insurers will offer narrower network options where possible, and will negotiate aggressively to reduce prices proposed by “must have” providers.

Even so, there will be a need for more aggressive antitrust action by the FTC and the courts, neither of which—with few exceptions[50]—seems to have applied the same standards as for other industries. While theoretically the FTC can order divestitures, in practice this is unlikely to happen except in the case of very recent acquisitions, with one possible exception. There are no persuasive medical arguments for hospital ownership of primary care practices and these should be required to be divested. A second step is proposed: where a single hospital group controls more than three-quarters of a market, it should meet minimal standards for charity care greater than those expected of an institution with competition. The third proposed step is to adjust Medicare payments to reduce the gaps between primary care and specialist physicians and between in-hospital and non-hospital treatments in order to make hospital acquisitions of physician groups less attractive.


[1] Gallup Well-Being survey report, April 7, 2014
[2] Department of Health and Human Services, National Health Expenditure Projections 2012-2022
[3], “Responsible Reform for the Middle Class”
[4] Gallup Well-Being, ibid
[5] Department of Health and Human Services, National Health Expenditures 1960-2012
[6] Department of Health and Human Services, ibid
[7] OECD, “Health Data 2013, How Does the US Compare?”
[8] Department of Health and Human Services, National Health Expenditure Projections, 2012-2022
[9] Bloomberg Businessweek, January 20, 2011
[10] Kaiser Family Foundation, “Medicare: A Primer”
[11] Center on Budget and Policy Priorities, March 31, 2014
[12] Department of Health and Human Services, National health Expenditure Projections, 2012-2022
[13] Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2013 Annual Report, May 31, 2013.
[14] New York Times, “Sliver of Medicare Doctors Get Big Share of Payouts”, April 9, 2014
[15] “Guaranteed Choices to Strengthen Medicare and Health Security for All: Bipartisan Options for the Future” proposed by Senator Ron Wyden (D-OR) and Representative Paul Ryan (R-WI), December 15, 20
[16] “The Domenici-Rivlin Protect Medicare Act” proposed by Former Senator Pete Domenici and Dr. Alice Rivlin, initially released November 1, 2011 and updated June 15, 2012.
[17] Congressional Budget Office, Designing a Premium Support System for Medicare. December 2006.
[18] Kaiser Family Foundation, “Transforming Medicare into a Premium Support System: Implications for Beneficiary Premiums,” September 2012
[19] Department of Health and Human Services, National Health Expenditures 1960-2012
[20] US Census Bureau
[21] K. Hagopian and D. Goldman, “The Health Insurance Solution,” National Affairs, updated to reflect 2011-2014 premium increases
[22] K. Hagopian and D. Goldman, “The Health Insurance Solution,” National Affairs
[23] “Best of Both Worlds,” American Enterprise Institute, August 2013
[24] Total of those with private insurance plus the legal uninsured plus Medicaid children and families
[25] “The Budget and Economic Outlook 2015-2024, CBO, February 2014
[26] K. Hagopian and D. Goldman, “The Health Insurance Solution,” National Affairs
[27] “Best of Both Worlds,” American Enterprise Institute, August 2013
[28] Department of Health and Human Services, ibid
[29] “2012 Actuarial report on the Future of Medicaid,” CMS, Office of the Actuary
[30] ibid
[31] National Association of State Budget Officers survey
[32] “Medicaid: A Primer,” Kaiser Commission on Medicaid and the Unemployed, page 4
[33] ibid
[34] “A Long-Term Plan for Medicare and Medicaid,” Alice Rivlin and Paul Ryan, November 17, 2010
[35] “How block grants can make Medicaid work,” Paul Howard, Manhattan Institute
[36] “2012 Actuarial Report on the Future of Medicaid,” CMS, Office of the Actuary.
[37] Department of Health and Human Services, National Health Expenditure Projections, 2012-2022
[38] Council for Affordable Health Insurance, April 2013
[39] ibid
[40] “Mandated Benefit Laws and Employer-Sponsored Health Insurance,” January 1999, Health Insurance Association of America
[41] Ibid
[42] “Health Care Reform and Medical Malpractice Claims,” Mark Rothstein, National Institutes of Health, 2011
[43] New England Journal of Medicine, 2011
[44] “National Costs of the Medical Liability System,” Mello and others, Health Affairs, September 2010
[45] Congressional Budget Office, letter to Senator Hatch, October 9, 2009
[46] Ibid
[47]“Best of Both Worlds,” American Enterprise Institute, August 2013
[48] “In New York, a Heart Surgery Factory with Obscene Levels of Pay,” Bloomberg News, March 6, 2014
[49] “Overseer Finds Kickback Plan at University,” New York Times, November 14, 2006
[50] “FTC Successfully Obtains Divestiture of Physician Group Acquired by Hospital System,” Mintz Levin, January 30, 2014