November 01, 2004
Both Bush And Kerry Miss The Mark On Health Care (Post #9 of 9)
Posted by Nick Infusino

My Solution

Neither candidate's plan adequately addresses the health care crisis because both plans would only serve to put a Band-Aid on the gaping wound that is health care. The health care solution should be left to the states because, as in the words of Justice O'Connor, "[t]his federalist structure of joint sovereigns preserves to the people numerous advantages. It assures a decentralized government that will be more sensitive to the diverse needs of a heterogeneous society; it increases opportunity for citizen involvement in democratic processes; it allows for more innovation and experimentation in government; and it makes government more responsive by putting the States in competition for a mobile citizenry." Gregory v. Ashcroft, 501 U.S. 452 (1991).

By leaving the health care issue to the states, the health care crisis can be solved by creating a "race to the top" as states compete for businesses. This competitive field would create a broad spectrum of plans as states try to balance the advantages of being a magnate state for businesses and fending of the "brain drain" against the costs of expensive health care coverage. This spectrum will range from states taking no action to states requiring all employers to provide health care coverage. It is between these two poles that the greatest innovation would occur.

Detractors to my proposal would be quick to point out that nothing currently stops states from taking action. This is why the federal government needs to provide an incentive-based system in which the federal government gives grants to states for enacting a certain minimum level of insurance. The federal government also needs to act in a reinsurance capacity to insure state insurance funds in cases of default (much like the PBGC does for pensions). By explicitly deferring the problem to the states and creating an incentive program, the citizens of each state would be forced to urge their state legislators to take action (much like the federal government did with workers' compensation). The incentive program is important to counteract a "race to the bottom" propensity that leaving the issue to the states may have.

The states are the most appropriate level for solving the health care crisis because they have the ability to react to the diverse needs of its citizens. A state can outline problems faced by its citizens and balance it against the needs of employers in the state. California is currently attempting to make this analysis. In Proposition 72, California is looking to force employers with 50 employees or more to provide health insurance to its employees. California is betting that the needs of the state's uninsured far outweigh the cost of losing some businesses. The gamble on California's part is that many businesses would not be able to leave the state because the state provides strategic benefits that other states cannot. Thus, if employers are locked in the state, California can force them to provide employee benefits against their will. The employer would then spread the cost to all consumers by raising the price of their products (much like strict liability does in product liability law).

Proposition 72 is just the tip of the iceberg of what states can do. California is looking to implement a cost spreading method by forcing certain employers to insure. Under my system, California could then use the federal grants to provide tax credits to its employers.

Competition between the states would ultimately promote a "race to the top." If proposition 72 is passed, a boarder state may attempt to compete for those disgruntled businesses by implementing state provided insurance. A state has many options in providing insurance because they are large enough to be actuarially sound in order to self-insure, or the state can use its immense bargaining power with the insurance industry to get the best possible rates (bargaining position is created because the state regulates the insurance industry).

Once a state chooses one of these two routes, they have a multitude of options to fund the plan. The state could raise income taxes, sales taxes, death taxes or real estate taxes if the state wishes to spread the cost to the population as a whole. Another option that the state could implement is to attach "sin taxes" to certain hazardous products. A state could raise the tax on tobacco, alcohol, fast food etc. in order to create a disincentive to use these products and to have its funding derived from companies whose products have a direct detrimental affect on health care costs. Finally, a state could tax businesses heavier than individuals in order to make employers bear the costs. States will try to find the combination of funding methods that provides the most revenue and causes the least amount of harm.

Next, a state is in the best position to reduce the cost of health care because they control many of the factors that underlie the cost of health care. For example, if a state is self-insured, it may choose to have state-run health care facilities to help reduce these costs. The state could implement strict tort reform to reduce the costs of litigation that state-run facilities would face (or tort reform for health care providers as a whole). States are also in prime position to reduce the cost of health care because they have ability to control levels of competition. A state can choose to increase the number of applicants admitted into state run medical schools and increase the number of licensed physicians in the state. This increased competition should help reduce the costs of health care. Under my system, a state would have to weigh the cost of health insurance against the costs of having a lower quality of health care against the costs of limiting patients' ability to obtain relief in cases of negligence. The state is in the best position to conduct this balancing test since the citizens of the state have far more access to state politicians than they do for federal politicians. Thus, citizens would be able to get their voices heard and each state can determine the best route for its citizens. (Also note that states could use its health care system to solve other problems such as high levels of unemployment, "brain drain," or to promote the state as a small business magnate).

Many of the proposals that I have spent the last eight days bashing could also be implemented by the state to reduce the costs of health care coverage. The federal government should keep HSA's because this would help enable people to adjust their savings in accordance to their state's plan. Individual states could enact AHP's to allow small employers to band together to utilize "power in numbers", so long as the AHP does not discriminate based on age or race. States could also provide tax incentives to get employers to act. In all, states are in a better position to implement many of these proposals since they can formulate a comprehensive plan that provides the greatest benefits.

There are numerous flaws with my plan so I will try to address some of them. First, I limited the scope of these posts to employer provided health insurance. There will be some complexity when dealing with Medicaid, Medicare, SSI etc. This complexity is outside of the scope of these posts. My proposal is also inconsistent with business trends towards globalization, since it increases the administrative costs of a national employer. Yet, national employers already face a multitude of state laws and have survived thus far. Another critique to my proposal is that competition may make some states irrational actors causing them to provide greater benefits that the state can afford thereby causing defaults. To combat this problem, the federal government will have to create minimum funding standards and create an agency to inspect the state's books. If a state falls below the minimum-funding threshold, then that state will no longer be eligible for federal health care grants. Also, the federal reinsurance function would help cover states in cases of default.

In summation, the states are the most logical actors to cure the health care crisis because they control virtually all the factors that contribute to the high cost of health care. State creativity will allow for 50 experiments in developing the best possible system. Data will show which states proposals are working and which are failing. The states would then be able to use this data to tweak its systems. This experimentation in combination with the market forces derived through competition between the states provides us with the best chance of solving the health care crisis.

I would like to thank Gordon for providing me this opportunity to post on his site. This was a wonderful learning experience for me. It was really interesting to receive feedback from around the country on a daily basis. Many of these comments forced me to think harder about the health care issue and to rethink some of my ideas. I would also like to thank everyone who read these ramblings and commented on them.

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