Spending Storm

Hurricane Katrina has created a spending storm on Capitol Hill, with intense battles over how to deliver aid that reflect basic differences in political philosophy.

Traditionalists would increase spending on existing programs – which already is happening big time – but others would create new incentives by lowering taxes, getting government regulation out of the way, and empowering people to make their own choices through vouchers and credits.

For example:

  • Rep. Mike Pence of the Republican Study Committee wants to turn the storm-ravaged Gulf “into a magnet for free enterprise.” He would make the entire region a flat-tax free-enterprise zone, with low tax rates and waivers for regulatory obstacles to rebuilding.

  • Congressman Mike Rogers has introduced the Health Opportunity Account Act (H.R. 3757) to allow states to bypass the waiver process and give Medicaid beneficiaries access to spending accounts to finance their healthcare.

Our friend David Kendall of the Progressive Policy Institute suggests building on the tax credits allowed in the Trade Assistance Act to provide assistance for Katrina victims in obtaining health insurance.

Even the much-criticized $2,000 debit card for Katrina victims has a silver lining: It’s a defined contribution that lets people decide what relief they need. Given proper implementation and screening, the idea of defining government relief in dollar terms and getting regulatory barriers out of the way could signal a good new approach to how government helps people.


Competition, from where? A recent paper by the World Bank looks at the growing interest in “medical tourism,” driven largely by the huge price differentials in costs between first- and third-world countries. Researchers cite as an example, “an inpatient knee surgery, 400,000 of which are preformed annually in the US, costs over $10,000 in the US, but less than $1,500 at the best hospitals in Hungary or India.”

Why travel? “The consumers who travel abroad for health care?are those whose care is inadequately covered by health insurance, or those who face long waiting periods in their home country.” They say that the “adequately insured” do not travel.

The U.S. could save at least $1.4 billion a year if more people in public and private plans were given incentives to travel abroad for just 15 “low-risk” treatments. The authors offer an international price comparison between the U.S. and 20 other countries for these medical procedures.

They say that developing countries “have hospitals that are comparable to some of the best medical facilities in industrial countries” with surgical outcomes on par with the best hospitals in the U.S.

Hospitals concerned about competition from the specialty surgical centers down the street need to look up. CBS’s “60 Minutes” recently produced a powerful segment on medical tourism which suggests that international competition in health care has only just begun.


And speaking of prices: University of Alabama economics professor Mike Morrisey has produced a new monograph reviewing three decades of literature on price sensitivity in the health sector, recommending changes that would allow prices, deregulation, and information to increase efficiency.

He made a presentation to a packed auditorium at the American Enterprise Institute on Thursday, making a strong case that market-based reforms can be used to slow the growth of health costs and expand access by making health insurance less costly. New data out this week show that employer health insurance costs are moderating at the same time companies are introducing consumer-directed health plans. (See below for our summary.)

The famous RAND health insurance experiment remains the touchstone, showing that use of medical services is strongly influenced by people’s out-of-pocket costs.

While critics say that “all employers are doing is shifting costs to their workers,” we respectfully disagree: The employee share of health costs has remained stable, even as overall insurance costs have risen. The crucial difference is a switch in incentives to make some of this spending more visible. Engaging people in spending decisions is the key.

Grace-Marie Turner


  • Employer health benefits 2005 annual survey
  • Medicaid: Empowering beneficiaries on the road to reform
  • Higher income Americans without health insurance: Nominally but not really a growing problem
  • H.R. 2355 Health Care Choice Act of 2005
  • Federal Employees Health Benefits Program: Competition and other factors linked to wide variation in health care prices
  • Two new health policy books

Source: The Kaiser Family Foundation and the Health Research and Educational Trust, 09/14/05

Employer-sponsored health insurance premiums rose to $10,880 for family coverage and $4,024 for individual coverage in 2005, according to an annual survey released this week by the Kaiser Family Foundation and the Health Research and Educational Trust. Premiums increased an average of 9.2%, compared with 11.2% in 2004, making this the second consecutive year of a slower rise in premiums. The survey includes a wide range of information on trends in employer-based health coverage, including data on high-deductible health plans, health savings accounts, and health reimbursement arrangements. The report notes that “20% of employers who offer health insurance now provide a high-deductible health plan option. Jumbo firms – those with 5,000 or more workers – are significantly more likely than smaller firms to offer a high-deductible plan option, with 33% offering one in 2005.”
Full text: www.kff.org

The authors of this study have also written an article for Health Affairs titled “What High-Deductible Plans Look Like.” It documents the availability, enrollment, premiums, and cost sharing for health reimbursement arrangements and health savings accounts.
Full text: content.healthaffairs.org

Author: Merrill Matthews, Ph.D.
Source: Testimony before the House Committee on Energy and Commerce, 09/08/05

The Medicaid program is “too monolithic and rigid to adapt to changes such as consumer-driven care and increased plan flexibility that are transforming employer coverage and the insurance industry,” said Merrill Matthews, director of the Council for Affordable Health Insurance, in testimony before the House Committee on Energy and Commerce. Matthews detailed lessons that can be learned from welfare reform and suggested that the states be given the flexibility to match the program to varying populations, adjust co-pays and out-of-pocket costs according to a beneficiary’s means, and reward good behavior.
Full text: energycommerce.house.gov

Author: Hanns Kuttner
Source: The University of Michigan, 08/09/05

University of Michigan economist Hanns Kuttner challenges recent reports that the fastest growing uninsured population is upper-income Americans. “Changes in income, nominal and real, not changes in the share who have health insurance, have driven the increase in the number of people without health insurance in higher-income households,” Kuttner concludes. Between 1993 and 2003, “the percent of uninsured among those with incomes over $75,000 was less than one percent higher.” Kuttner refutes an earlier study by the BlueCross BlueShield Association that the number of higher income Americans without health insurance is a growing problem. He recommends, instead, focusing on households with incomes between $50,000 and $75,000, where the rate of uninsurance grew from 8.2% in 1993 to 12.5% in 2003.
Full text (pdf):www.umich.edu

Source: Congressional Budget Office, 09/12/05
The Congressional Budget Office has concluded that the Health Care Choice Act of 2005 (H.R. 2355), which would allow cross-state purchasing of health insurance, would increase federal revenues by $12.6 billion between 2007 and 2015. The reason: “H.R. 2355 would reduce the share of employee’s compensation that is tax-advantaged (health insurance premiums) and would increase the share that is taxable (wages and salaries).” CBO assumes that employers will drop coverage as healthier people buy individual coverage, leaving behind a higher-cost pool of workers. CBO says that roughly 1 million people would lose employer-sponsored health insurance coverage as a result of H.R. 2355, causing an increase in Medicaid spending of $1 billion over 9 years. [Note: This shows the danger of static analysis and the importance of coupling the bill with other initiatives.]Full text (pdf): www.cbo.gov

Source: U.S. Government Accountability Office, 08/05

A GAO report prepared for Rep. Paul Ryan found that hospital prices varied by 259% and physician prices varied by about 100% in Preferred Provider Organizations in the Federal Employees Health Benefits Program in 2001. The GAO sought “to determine (1) the extent to which hospital and physician prices varied geographically, (2) which factors were associated with geographic variation in hospital and physician prices, and (3) the extent to which hospital and physician price variation contributed to geographic variation in spending.” GAO said the variation in prices was affected by market characteristics. “Metropolitan areas with the least competition had, on average, 18% higher hospital prices and 11% higher physician prices than areas with the most competition.” The GAO also found that across metropolitan areas, total health care spending per enrollee varied by over 100%: “price contributed to about one-third and utilization to about two-thirds of the variation in spending between metropolitan areas in the highest and lowest spending quartiles.”
Full text (pdf): www.gao.gov

The Cato Institute has published a new book by Michael Cannon and Michael Tanner titled Healthy Competition: What’s Holding Back Health Care and How to Free It. The authors “explain how market competition makes products of ever-increasing quality available to an ever-increasing number of consumers. They demonstrate how market competition can do the same for medical care and health insurance.”
This book can be purchased at: www.catostore.org.

And the American Enterprise Institute has a forthcoming book, Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System, by R. Glenn Hubbard, John F. Cogan, and Daniel P. Kessler. The authors “propose five key policies to build a better health-care system: (1) health-care tax reform, (2) insurance reform, (3) improvement of health-care information, (4) control of anticompetitive behavior, and (5) malpractice system reform?And, by cutting the cost of care by $60 billion per year, these reforms would make health insurance affordable for at least 6 million–and perhaps as many as 20 million–uninsured Americans.”
More information can be found at: www.aei.org.


21st Century Health Care Terrorism: The Perils of International Drug Counterfeiting
Hosted by the Pacific Research Institute and the Center for Medicines in the Public Interest
Tuesday, September 20, 2005, 8:00 am to 2:00 pm
Washington, DC

For additional details and registration information, go to: politicalcap.com/pri. If you are unable to be there you can still attend virtually via PRI’s audio weblink. To register for the audio weblink (at no charge) please visit www.videonewswire.com.

State Policy Network’s 13th Annual Meeting
September 29, 2005 – October 01, 2005
Charleston, South Carolina

For additional details and registration information, go to: www.spn.org.

2005 Consumer Directed Health Care Conference & Expo
December 7-9, 2005
Washington, DC

For additional details and registration information, go to: www.cdhcc.com

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at http://www.galen.org/.

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