The return of healthcare inflation and the reported abuses of managed care have led to renewed calls for healthcare reform. Accompanying these pleas are assertions that private, market-based healthcare insurance is a failure. But the shortcomings of privately funded healthcare insurance are not the result of market failure; they're the predictable result of a market that serves the needs of employers who purchase healthcare insurance and not the needs of employee-consumers who use it.
Except for large companies, most firms offer only one healthcare insurance option and have sound business reasons for doing so, such as administrative simplicity and increased buying power. Rarely do employee preferences factor into the decision. When they do, greater weight is given to the executives' preferences than to those of the rank and file.
Employer-sponsored healthcare coverage also allows employees to remain largely unaware of healthcare's costs and reduces employees' healthcare choices.
Ask anyone who is not self-employed how much health insurance costs. If an employee can cite a figure, it is the part of the premium he or she pays, not the full cost. No wonder most people remain unmoved by arguments that increased regulation is contributing to rising healthcare insurance costs.
Dissatisfied employees, who directly pay only a fraction of their healthcare insurance costs, pressure elected representatives to mandate less-restrictive access to specialists, minimum hospital lengths of stay, out-of-network coverage and other benefits. Employers faced with the prospect of funding these benefits complain to their trade groups, and the usual assortment of power brokers is recruited to beat back legislation intended to fix the problem.
Given the different agendas of employers and employees, it's no surprise that the only lasting improvements resulting from these confrontations are to the second homes of lobbyists.
A different approach. Consider what would happen if employees selected and directly paid for healthcare insurance. Workers would not be restricted to options offered through their employers but could buy from any number of insurance companies. Some people would choose expensive plans that covered all medical costs regardless of the physician or hospital used. Other consumers would endure the most cumbersome managed-care bureaucracy in exchange for the lowest possible premium.
The majority of people would select an option somewhere between these extremes. They would like to be free of restrictions but would come to realize that these privileges are not without expense and that it makes sense to weigh costs and benefits.
We would also find that we cannot determine ahead of time who most values what and is willing to pay for it.
In short, consumers would place different values on the various "rights" that healthcare reformers would have us universally adopt. Healthcare insurers would respond by offering a broad range of plans and prices.
To move from an employer-sponsored healthcare insurance market to an effective consumer-based system, four major changes would need to occur:
* Tax deductibility of premiums. Congress should make healthcare premiums tax-deductible only when they're paid directly by workers. Employers would increase employees' pay by the amount the employers pay for the workers' healthcare insurance. Employees would see the full cost of health insurance deducted from their paychecks.
* Community rating vs. medical underwriting. Medical underwriting determines the cost of healthcare coverage based on the health status of the insured group. It is an expensive, time-consuming process that discourages insurance companies from entering the small-group and individual markets.
Community rating, on the other hand, would establish the price of insurance based on the average costs to deliver healthcare to a geographic area. Requiring that healthcare premiums reflect the community's rather than an individual's healthcare costs removes an expensive barrier to providing individual coverage.
* Mandatory coverage. A well-functioning healthcare system must require all workers to obtain and pay for healthcare coverage for themselves and their dependents. A high-deductible policy can be had for roughly half the price of comprehensive coverage but still protects from financial ruin policyholders who require costly care.
* Regulation. Shifting from an employer-based system to an individual consumer market will require government to play a new role-the kind of structure brought to the market for Medigap policies, which are sold to Medicare enrollees to cover the portion of retirees' healthcare costs not covered by Medicare.
Medigap reform brought increased market competition by establishing a system in which every Medigap policy has a letter designation: C policies cover the unpaid portion of hospitalization and physician's fees, but do not cover prescriptions; I policies include coverage for everything in C policies, plus prescription benefits.
The federal government could encourage competition in the healthcare insurance market while simultaneously strengthening consumer protection with a similar approach to commercial healthcare coverage. For example, policyholders with B plans must obtain approvals or referrals from a primary-care doctor to have specialty-care covered. C policies might not have this "gatekeeper" requirement.
A final word. It's time to abandon the idea that a legislative aide or human resources director will envision one healthcare insurance plan to satisfy everyone at an affordable price. We should focus on developing a market in which success depends on meeting consumers' differing healthcare needs at prices they are willing to pay.
Brian Scullion is chief medical officer at Vita Healthcare in Chicago.