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A New 'Definition' For Health Care Reform

James C. Capretta, Tom Miller | 01/18/2011 |

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The principal divide in American health care policy is over what to do about rapidly rising costs. On one side are those who believe the solution is to enhance the government's power to direct the system's resources and enforce budgetary controls. This point of view animated the drafting of the recently passed health care law. On the other side are those who believe the answer is a functioning marketplace for insurance and care, not coercion and heavy-handed regulation. The key to such a competitive market is cost-conscious consumers, something sorely lacking today.


Pro-competition, pro-consumer-choice advocates should press for reforms that would begin to convert existing, federally subsidized arrangements from open-ended benefit guarantees into "defined contribution" programs. The comprehensive and strategic approach we propose would apply defined contribution financing by taxpayers to all three major insurance coverage platforms -- Medicare, Medicaid and private health insurance.


However, this wholesale shift has not yet occurred in the health care context, largely because the vast majority of Americans are in comprehensive insurance arrangements that are heavily subsidized by the federal government. Further, these subsidies are generally without limit. Incentives for employers as well as workers and consumers to economize and seek better value are thus substantially muted by existing government policy.

The new health care law would make matters worse by moving millions of new enrollees into heavily subsidized, third-party insurance arrangements (either through Medicaid or state health benefits exchanges) -- the very kind of open-ended financing arrangements at the heart of today's cost escalation problem.


A similar but improved "premium support" structure could be developed for the overall Medicare program, as was recommended by a majority of members of the 1999 National Bipartisan Commission on the Future of Medicare. To properly move the broader set of Medicare-covered health benefits toward this defined contribution approach requires inclusion of the traditional fee-for-service Medicare program, not just private plan alternatives, in the competitive marketplace. Medicare fee-for-service, currently run by the Centers for Medicare and Medicaid Services, would instead be administered on a regional basis. Congress could still set its basic rules of the road and operating policies. But the program's administrators would need to be given more leeway to respond to new market signals and competitive pressures. They would be running a public program that must sustain itself entirely from the government's fixed contribution and beneficiary premiums, while meeting the same requirements applied to its private plan competitors. In paying hospitals, physicians and others, these fee-for-service programs would need to move away from imposing fees and toward an approach that would reflect market prices needed to build a network of willing providers.


Moving toward a universal, fixed dollar tax credit would represent a different, but real, "universal coverage" alternative to the new health law. Every American household would get a tax credit that could only be used to purchase health insurance and health care services. Any household that didn't buy coverage would lose the entire value of the credit. The number choosing to do so would likely be very small.


For the full column, visit Kaiser Health News, where it was originally published.

James C. Capretta, fellow at the Ethics and Public Policy Center and project director of, and Tom Miller of the American Enterprise Institute are co-authors of "The Defined Contribution Route to Health Care Choice and Competition."

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