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Health Reform in One Lesson

I've been following the national health care reform debate for nearly 20 years, and you know what? It turns out to be very simple. Cut through all the bureaucratic jargon and mind-numbing acronyms, and there are only two basic ideas in health policy: HMOs and HSAs. That's it.

If you understand the essential difference between an HMO (health maintenance organization) and an HSA (health savings account), you have a kind of map or compass that can help you navigate the entire massive, complicated health policy debate. It's a lesson is so simple that housewives, janitors, and even many college professors can understand it.

So here it is, health reform in one lesson: "All health care reform proposals boil down to either HMOs or HSAs."

Want to learn more? Read on.

What's an HMO?

An HMO is a managed care plan that limits choice of physicians in exchange for lower costs -- or to put it more politely, a health insurance arrangement that charges you a flat monthly fee, in exchange for a promise to keep you as healthy as it can. The essence of the HMO is the assumption that a health insurance company can manage your health care better than you can. 

HMOs save money, at the cost of patients. They ration care. They deny access to certain treatments deemed too "costly" by insurance-company bureaucrats or -- if the HMO is regulated by the government -- by government bureaucrats. 

HMOs first appeared in the mid-twentieth century, as an attempt by employers to get control of their workers' health costs. Then, in 1973, President Richard Nixon joined forces with ultra-progressive Massachusetts Senator Ted Kennedy to give federal subsidies and legal protections to HMOs. Within 15 years, HMOs had become the dominant model for providing health insurance in the U.S.

The political Left and most Beltway Democrats love HMOs because they're a great tool for centralizing power in the government, and thus for enhancing the power of the Party of Government. (I use the word "love" here somewhat equivocally, for reasons that will become apparent.) 

What's an HSA?

An HSA is a special kind of savings account that enables you to pay for your medical expenses with untaxed dollars. The money deposited in your HSA is exempt from federal income and payroll taxes, and the funds you withdraw from it are not subject to income taxation if made for qualified medical expenses, as defined in the internal revenue code. You can not only purchase medical goods and services from your HSA, you can pay health insurance premiums out of it as well. The money in your HSA is your property, not your employer's or anyone else's. Contributions are limited by law: the 2012 statutory limits are $3,100 for an individual and $6,250 for a family.

In order for your HSA to qualify for special tax treatment, you must also be enrolled in a consumer-driven health plan (CDHP), a health plan with a high deductible. The "deductible" is the amount, under your health plan, that you must pay for out of pocket, before your insurance kicks in. 

Why do we have such accounts? Because our income tax laws discriminate against people who buy health insurance outside the workplace and/or pay for medical goods and services out of pocket. That discrimination causes all kinds of problems, as we'll see. HSAs help mitigate those problems. If the tax code's discriminatory approach to health insurance and health care were to end, HSAs would no longer be necessary.

HSAs reflect the opposite assumption from that underlying HMOs. HSAs assume that normal, intelligent adults can manage their own health care decisions, and will generally do a better job of this than strangers could, because of the natural human tendency to spend more wisely when one's own money (and health) is at stake.

HSAs promote patient-centered rather than government-centered care. The Left and most Beltway Democrats hate HSAs because they de-centralize power and expand individual liberty. 

HSAs save money, to the BENEFIT of patients. By becoming better shoppers, comparing prices and seeking out useful information, patients with HSAs make the whole system more efficient. HSAs drive waste out of the system.

In respecting our freedom and ensuring there's more health care to go around for everyone, HSAs represent a truly compassionate approach.

HSAs were first created in 2004, and today more than 13 million Americans have one. The positive effects of more patients shopping more wisely for care is beginning to be felt in the National Health Expenditure statistics, which show a measurable slowing of medical inflation. Most health policy experts agree that at least part of this improvement is due to a noticeable increase in "consumer-driven" behavior associated with HSAs.

If everyone had an HSA, would we still need health insurance? Yes. We would still need insurance to help us pay for the costs we can't cover through our own resources. Some health care therapies are very, very expensive. Most of us will never be rich enough to pay for such therapies entirely out of our own savings.

So health insurance companies are a necessary evil. But how involved should they be in trying to manage our health care? As little as possible!  In my own opinion, we should keep insurance companies as far away from the doctor's office and the surgical suite as we can. The best way to do that is to minimize the roll of insurance in paying for health care. 

Pro Tip: Never, if at all possible, let a bureaucrat get between you and your health care.

At the root of everything I've said so far is an important distinction: the distinction between health insurance and health care. People need health care. They only need health insurance as a tool to help ensure that they can obtain the health care they need, when they need it. 

The fact is not everyone needs the same amount or kind health insurance. And my contention, again, is that most of us are better off with as little insurance as possible.

The key is freedom. People should be left free to make their own arrangements. They should be free to buy health insurance, if they want. They should be free not to buy health insurance, if they want. They should be free to enroll in HMOs, if they want. They should also be free not to enroll in HMOs, if they want, or to disenroll from their health plan, of whatever type it may be.

Freedom is an essential, natural right. Why? Because we are endowed by nature with the rights to life, liberty, and the pursuit of happiness. This means we have no "right" to health care, in the sense that government must provide it to us. Rather, we have a "right" to pursue health care, in freedom, according to conscience, provided we don't trespass on the rights of our neighbors. 

I can offer to pay you for a medical service. I cannot force you to provide that service for free. Slavery is illegal, thank goodness.

The same principle applies to government-run health insurance programs like Medicare and ObamaCare. We should should be free to enroll, not enroll, or dis-enroll from them, as we please.

Anything short of that isn't freedom -- and isn't compassionate.

The HMO-ification of America

For decades, thanks to government policy, health care costs have been rising more rapidly than general inflation.  In the 1980s, to save money, employers began shifting their their workers into HMOs en masse, in hopes the rationing would spare the bottom line. Patients understandably rebelled. In the '90s, the pendulum swung back, but only partway. There was a big movement of workers into PPOs (preferred provider organizations). PPOs can be viewed as "soft HMOs," HMOs that don't try to manage very aggressively, they just pay your medical bills.

Meantime, during the twentieth century, most countries moved to some form of national health insurance, which is really just the HMO concept writ large. National health insurance (aka socialized medicine) rations care, just like our homegrown American HMOs, except there's not even a pretense of choice or competition. It's all one big HMO.

This is what I mean when I say the Left "loves" HMOs. What they really love is the idea of putting us all into "one big HMO." But if, to get there, we must first pass through a temporary stage in which a number of HMOs compete with one another, under government rules, then they are fine with that.

Insight for Advanced Students: The liberals don't care what we do, as long as it's mandatory.

American progressives have been trying to establish national health insurance in this country for a century. FDR pushed for it in the 1930s, unsuccessfully, as did Harry Truman in the '40s. JFK and LBJ pushed for it in the 1960s -- and got part of the way there, with Medicare, which functions, in its own way, like a big HMO. They also enacted Medicaid, which has been evolving in that direction. Then, in the 1990s, Bill Clinton tried to put us all into HMOs via HillaryCare -- and, quite famously, failed. Come 2007, RomneyCare (reviving the Heritage Foundation's counter plan to HillaryCare) effectively "HMO-ified" Massachusetts. And now ObamaCare, enacted in 2010, will HMO-ify all of America, if we fail to repeal it.

Back in the '60s and '70s, in the wake of Medicare's creation, the Left looked to the Kennedy-Nixon HMO legislation as the next stepping-stone to their ultimate goal of national health insurance. But when patients rebelled against HMOs in the '80s, the Left blamed the evil profit motive and turned against the insurers, touting instead "managed competition," i.e., centralization with a human face. Ever since, the Left has been touting "managed competition," and so have some on the Right. HillaryCare, the Heritage Foundation plan, Medicare Part D, RomneyCare, ObamaCare -- they're all specimens of this same concept. They're all versions of ... you guessed it ... the HMO.

What does "managed competition" manage, exactly? HMOs.

Sense a pattern?

Among the many interesting things tucked away in ObamaCare's 2,801 pages is a set of provisions promoting something called Accountable Care Organizations, or ACOs. Folks on the Left tout ACOs as a great new idea that will fix our ailing health care system. 

ACOs are -- you may want to sit down for this -- a variant of the HMO. 

[Fore more on ACOs, see this piece by Loren Heal.]

How to Reverse the HMO-ification of America

The only sure way to reverse the HMO-ification of America is to encourage personal saving for health care (as through HSAs) and more reliance on cash.

That brings us to high deductibles. 

The deductible is the part of the bill you pay first, before your insurance kicks in.

Deductibles are good, because they keep us on our toes. "How much will this cost, doc?" 

Unfortunately, ObamaCare will effectively abolish high-deductible health insurance and Health Savings Accounts (HSAs).

You read that right: abolish.

Therefore, the first, indispensable step to a patient-centered health care system is to repeal ObamaCare. 

At the same time, we must wean people -- gently, voluntarily -- off of low-deductible health insurance, while encouraging and enabling them to save for their own health care expenses.

In doing this, we need to address the root cause of today's health care financing problems, which is the U.S. tax code. The tax code includes a massive, largely invisible subsidy for employer-sponsored group health benefits. This subsidy, known to policy wonks as Section 106, is why the United States has the world's only employer-based health benefits system -- a system relied upon by one-half of our population.

But that tax code subsidy is also the culprit behind today's rapidly rising medical costs, high number of uninsured people, and folks finding themselves unable to obtain affordable insurance due to preexisting medical conditions. Why? Because Section 106 encourages OVER-insurance and low-deductibles. People don't pay full attention to the costs of health care, because they don't have to: their insurance will cover it.

So what, then, is the remedy to our health care woes? Here's my own recommended set of prescriptions:

1) Make the tax treatment of health care fair, so it no longer distorts people's choices in the free market.

Fairness and prudence both dictate that, in subsidizing health coverage, the federal government should not discriminate between group health benefits and individually owned health insurance. Rather, the federal government should give everyone the same tax relief for the purchase of health insurance, regardless of how it's obtained, be it through an employer or directly in the private marketplace. There are a number of ways to achieve this goal. The most elegant way woudl be to abolish the income tax altogether or else replace it with a true Flat Tax (no deductions, credits, or exemptions). 

Short of that, we could allow employers to contribute, tax free, directly to an employee's private, individually owned health insurance plan. This would help level the playing field between group and individual insurance. At the same time, we should make all medical expenses, including premium payments, 100 percent tax deductible. This would help level the playing field between insurance and out-of-pocket spending on medical care.

2) Increase HSA contribution limits.

3) Let Medicare seniors have HSAs.

4) Let Medicare seniors opt out of Medicare, either entirely or on a service-by-service basis.

Government should respect and protect people's inalienable right to direct their own medical choices. And because the Medicare bureaucracy, a monopoly, has a strong tendency to ration care and impose destructive price controls, we should inject some healthy competition into the system. Therefore, we should: 1) Let seniors disenroll from Medicare without losing their Social Security retirement benefits. (I would not, however, let seniors recoup their lifetime's worth of FICA tax payments, since those "contributions" have no actual connection to the amount of Medicare benefits they receive.)  2) Allow doctors to charge market rates for medical goods and services, and allow seniors to voluntarily pay out pocket for them, regardless of Medicare's price controls.

It Really Is That Simple

So now you know the secret of health policy. Everything boils down to HMOs versus HSAs. One of these two approaches -- HSAs -- promotes lower costs and better health outcomes by expanding personal freedom. The other -- HMOs -- does the opposite.

And that is "health reform in one lesson."

Dean Clancy is FreedomWorks' Legislative Counsel and Vice President, Health Care Policy. He leads our efforts to reverse the government health care takeover and build a patient-centered system.


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Patient-Centered Care: The Future Is Now

Freedomworks' Five-Point Plan to Fully Repeal ObamaCare

FreedomWorks: Our Favorite Bills to Replace ObamaCare

What Should Replace ObamaCare

FreedomWorks' Health Care Strategy Memos

Ten Things Everyone Should Read About Health Care

Health Reform in One Lesson

Ed F Bias

I have had the opportunity to switch to an HSA and appreciate your attention to that market. The basics are that it is insurance. You cover the basics yourself and the insurance covers you in the extreme case that you have expenses over 5,000 (plans between 3-10K usually). It is not "healthcare coverage" is is "healthcare insurance".

One thing you mention is the tax rules and those do need to change. Why can't a company cover my monthly plan and pay into my HSA? The worst impact of this may not be obvious but it is the most basic...freedom. Once you get long term sickness (cancer, stroke, heart disease, arthritis, back pain) you are stuck in large company plans. You cannot get personal coverage and will likely not receive the continued coverage unless you stay in a large enough insurance pool. This locks you into a limited set of jobs; often staying put; and keeps you from ever branching out on your own.

Your HSA is your health care annuity and goes with you. Your plan is individual and paid for through higher salary or directly by your employer. You still maintain the freedom to go anywhere.

What is not addressed is the risk of being dropped and insurance companies off-loading your risk. HSAs work for those that are healthy and we shift the unhealthy to the government plans. This may be the costs we pay for Medicare type coverage but to shift away from socializing the risk we need address this concern. The left moves to creating controls on the industry to make sure that they payout the majority of what they take in with the idea that this will create balance between healthy and unhealthy customers. But does such a plan promote keeping people healthy. Pharmaceutical companies want you on lifetime prescriptions. Does anyone want me healthy and benefit from me being healthy? Just me and my lifetime HSA.

What about requiring continued care by the company that insured you at the time of the illness? Why can they right you off? If they have to cover you, they may want to help you get healthy. Maybe the market for evaluating risk would allow that "future risk" be transferred to your next insurance company by paying off a annuity of sorts. The market needs to protect us from a contract that allows one side to cancel that contract if you become a expense to them. That is not insurance.

HSAs are close. They "feel" right, They promote better behavior among the American people which will keep money in may hands and bring down prices. But what about those that get sick and become unprofitable? I am not sure they promote the right behavior within the insurance and pharmaceutical companies.

jhep3304's picture
Jon Halsey

Since we are rapidly approaching the point of having more retirees than workers your solution point #3 needs some explaining. I had a choice of plans and providers when I chose my Medicare Advantage plan. How do you propose to affect the millions who already have a medicare plan? At 71 I am in reasonably good heath despite having had a prostectomy to remove cancer and having a cholesterol problem. I have no problem with paying in full for my twice annual check-ups but needed the insurance for the surgery. It seems to me that this is what insurance is for and is basically how my Advantage program operates with the exception of paying for the cholesterol meds.

Ed F Bias

Adding to this...Who sold you a Medicare Advantage plan? Why is this plan needed? It is needed because Medicare continues to cut what it is willing to pay. So though you have guaranteed coverage from the government you have to carry supplemental coverage. Under ObamaCare the government continues to cut what it is willing to cover (that 716Billion number you keep hearing about) and more people require plans like Medicare Part A and those insurers make more money out of your pocket. Wonder why AARP supports Obamacare, more customers requiring higher levels of care in their plans. They are the worst of the worst.

So is this better coverage for more people? No it is socialism in is basic form, redistribution of the economy's resources to an equal level for all. But with government that level is more expensive and at a lower basic care level then it is already in the private sector. So we will all be covered at a basic level, but will have to buy our own insurance to cover all the gaps. So we have a new tax to give us what most of us already had and we have to pay for reasonable coverage we desire.

Dean Clancy's picture
Dean Clancy

I should add: If we don't make Medicare voluntary, the problem of government rationing of care within Medicare will become acute.

Dean Clancy's picture
Dean Clancy

Medicare is currently a big monopoly. It's so generously funded, no private insurers can compete with it on a level playing field. And individuals are forced to participate. (If you try to dis-enroll from Medicare Part A, you'll be forced to pay back all of the Social Security retirement benefits you've ever received!) You are correct that private insurers can offer Medicare's benefits within a government-regulated environment called "Medicare Advantage." But that's still a monopoly system. By making Medicare truly voluntary, the bureaucrats and politicians will have to start considering the needs of patients, and not just thinking about saving taxpayer money and buying votes.