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08/23/94

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Health insurance link to employment should be dropped, Fuchs says

STANFORD -- When Victor Fuchs, a distinguished Stanford economist, proposed an alternative comprehensive health care plan last week, his ideas made it into a prestigious medical journal but "didn't make Washington's radar screen," according to Gail Wilensky, a Maryland-based health policy analyst who once advised President Bush on health care issues.

Washington policy makers have "moved out of the realm of discussing health care and are really into partisan politics related to the next presidential campaign," added Judy Miller Jones of the National Health Policy Forum at George Washington University.

In the Aug. 17 issue of the Journal of the American Medical Association, Fuchs proposes to reform the health care system by disconnecting health insurance from employment. Under his proposal Americans would pay for a basic level of health coverage through a value-added tax on the goods and services they buy. They would get a voucher for basic health care, choose among competitive, physician-led integrated-care systems and buy additional coverage if desired.

Under Fuchs' proposal, each integrated medical care system would be required to offer a basic plan plus a variety of options. The basic plan would require some copayments to discourage wasteful use of care. Insurance coverage for the options - a private hospital room, a wider choice of physicians or a still-experimental technology - could be purchased by patients at their discretion, with after-tax dollars.

This is not unlike Stanford's current Triple Option health plan, which offers those who choose it three levels of coverage, Fuchs and others said. Employees and their families choose a primary care physician for their basic health care. If not satisfied, they can seek treatment from other doctors and specialists but will have to pay a higher percentage of the cost.

"Any plan that will work needs to provide Americans with more than one level of care option," said James Mark, a cardiothoracic surgeon at Stanford Medical Center and former chief of staff at Stanford Hospital. "I don't think that's an awful thing. As long as everybody gets good care, some can pay for amenities or to jump the queue."

Serious health care reform proposals such as Fuchs' plan are not getting congressional attention now, said Richard Brody, Stanford professor of political science, because "most Americans do not feel a sense of crisis when it comes to health care." Although middle-class workers, such as those at Stanford, are unhappy with some aspects of their employer-based health insurance, he said, they are not so unhappy that they want to risk fundamental change.

"That makes it hard to build a coalition for dramatic policy change, and every political coalition seems to be trumpable and unstable," Brody said.

New taxes to pay for a health care plan or new mandates on employers requiring them to purchase coverage for their employees and their families - what Fuchs calls an "implicit" rather than an explicit tax - are political pills no one seeking re-election wants to swallow, Brody and other congressional observers say.

"At the moment, any proposal to add another element to the tax system would be considered political death," added Robert Hall, Stanford professor of economics and a senior fellow at the Hoover Institution.

Fuchs, the Henry J. Kaiser Jr. Professor at Stanford with appointments in economics and the school of medicine, agrees that any plan that "openly embraces the tax route, as opposed to hidden taxes, is not going anywhere in Congress until the dust clears." The president-elect of the American Economic Association is proposing the tax to have it waiting in the wings when more serious reforms become necessary.

"None of the proposed plans [in Congress] will finance coverage efficiently and equitably, and slow the rate of growth of health care spending," he wrote in JAMA.

Impetus for this kind of reform will likely remain because health care costs are growing at twice the rate of inflation, and the proportion of Americans without coverage continues to grow, said Alain Enthoven, another Stanford health care economist whose ideas on managed competition were an early influence on the Clinton health care proposal. Enthoven has since become a critic of the Clinton plan because of changes that he said undermine its intent to curb runaway costs.

"All in all, I think Victor's idea is a serious one that deserves serious thought. It's something we might come back to in a few years," Enthoven said.

But Enthoven, like Fuchs and Jerry Mashaw of Yale Law School, says he is worried that Congress may pass a bill this term that will cause more harm than good.

"I'm afraid that what will pass will eliminate a lot of [insurance companies'] refusals of coverage [to people with pre-existing health conditions] and also include requirements that people can keep their insurance when they change jobs," said Mashaw, a law professor at Yale who has followed the health care debate and has made his own reform proposal, which also is getting nowhere in Washington. "All the middle-class fears will have been solved then, and we'll be left without the political muscle" to contain medical costs or to assist those who currently cannot afford insurance.

The current Democratic bills being touted in the Senate and House are "worse than nothing" because they don't curb health care costs, said Enthoven, who was among those to urge Sen. Dianne Feinstein, D-Calif., to withdraw her support for the administration's proposals and to join a non- partisan group of lawmakers meeting to draft an alternative.

Some, like Stanford's Alan Garber, believe that cost controls might result from the marketplace with or without government intervention. "Health care delivery has been changing rapidly, and changing for awhile in the Bay Area and the West generally," said Garber, an internist and economist on the faculty of Stanford Medical School with a courtesy appointment in the Economics Department. "I'm optimistic costs will come under control over the next few years, but the one thing that won't happen without government action is universal coverage. The reason there is so much debate in Washington, aside from the specifics of each plan, is that it costs a lot to have universal coverage, and the people who vote and pay taxes largely have complete health insurance already."

Value-added tax

The cornerstone of Fuchs' proposal is a value-added tax (VAT), a funding mechanism used throughout much of Europe. VATs subtract a company's cost of purchases from its gross receipts to calculate a tax base. The revenue from the proposed VAT would be earmarked to purchase vouchers for a basic benefit package for every American. This proposal wraps substance around a plea Fuchs made in an open letter to President Clinton in JAMA on April 7, 1993, to disengage health insurance from employment.

"Sooner or later," Fuchs said in the letter, "the inequities and inefficiencies associated with employment-based health insurance will become so apparent as to dictate disengagement. Today, workers' choices of jobs, decisions about job changes and timing of retirement are frequently influenced by health insurance considerations."

Surveys suggest that between 10 and 20 percent of the people covered by health insurance say they are in "job lock," says Yale's Mashaw. "They may not be uninsurable," he said, but their job options are influenced by insurance.

As medical costs have climbed, another troubling trend has emerged. Employers already exclude job applicants because of their potential for above-average health risks, said Jones, who provides health policy education to congressional staff and federal agencies. In a recent survey, University of Chicago researchers reportedly found 30 percent of occupational physicians said their company wouldn't hire someone with high blood pressure.

Getting Americans to give up employer- based health care may be difficult politically, Mashaw and others said. Many workers are "under the fiscal illusion" that they are not paying fully for their health care because their employer does not report the full cost on their paystubs, he said.

Fuchs believes that such "explicit subsidies" of health care costs distort incentives and are inevitably expensive to administer.

To illustrate his criticism of Democratic congressional proposals, Fuchs offered the following example: "A family with an income of $14,000 per year might be eligible for a health insurance subsidy of $5,000, but this subsidy would vanish entirely if the family's annual income increased to $28,000. This 'tax' of $5,000 on the additional income would come on top of Social Security and income taxes as well as other lost benefits such as food stamps. In total, families with annual incomes between $14,000 and $28,000 would be allowed to keep only about 25 cents from each additional dollar of income."

By contrast, with a uniform VAT and voucher system, no consumer could escape contributing to the system through tax loopholes, and the burden would increase roughly in proportion to family spending, he said. Everyone, in turn, would receive the same benefit - a voucher for a basic benefit plan.

"The link between the earmarked value- added tax and the basic plan," Fuchs said, "would create a healthy tension between the desire to increase benefits and the need to pay for the increase in a responsible and equitable manner."

Similar ideas were considered early in the Clinton administration, Mashaw said, along with a single-payer system such as that in Canada. They were not debated in detail because of the administration's early support for a managed competition plan. Several medical lobby groups contacted by Campus Report last week said their organizations had taken no position on a value-added tax or voucher plan.

In a country where even presidential Cabinet nominees are tempted to not pay Social Security taxes for their nannies, Enthoven said, the value-added tax is desirable for its "self-enforcing features." And, "over people's lifetimes, a value- added tax is about proportional to people's incomes, but in the short run, it taxes consumption rather than savings, and that's a positive effect, because we need to have a higher savings rate in our country."

A value-added tax proposal would face two major shortcomings: It would require new tax accounting and it would be somewhat hidden from public view, where some fear it would become major pork barrel material for Congress.

"The Treasury Department has played around with a value-added tax for 30 years, and virtually every time they decided the path of political wisdom was not to propose it," said Yale's Mashaw. "It requires a whole new set of books that nobody in this country is keeping now. The National Association of Manufacturers, small businesses and the taxpayers' associations would scream not only against the tax but against making them fill out new forms."

Cost controls, technology evaluation

To control the escalation of health care costs, Fuchs proposes a series of measures to make health care decisions more rational. He would accelerate the creation of integrated health care systems, create an independent technology assessment center, reduce government subsidies for training specialist physicians and radically change malpractice laws.

Integrated health care systems can control costs, Fuchs argues in the current JAMA, because physicians' decisions are the major determinant of the cost of care. Only in an integrated system do "physicians have the incentive, the information and the infrastructure needed to make these decisions in a cost-effective way."

Such systems should be physician led and not dominated by a few large insurance companies, Fuchs added. While physicians will be interested in making a good income, he said, "there is a vast difference between a profit-maximizing corporation and physicians who strive to balance their obligations to patients, the organization and themselves."

The technology assessment center would be funded with less than 0.1 percent of health care spending and could tame what Fuchs called "the most important factor accounting for the increase in health care spending," the rapid change in medical technology. Through intramural and extramural research, the center would develop data on the cost-effectiveness of various technologies and offer a rational basis for deciding which services would be included in the basic plan. A second benefit of the center, Fuchs said, would be providing legitimacy for physicians who want to practice cost-effective medicine.

"Technical assessment is important," agreed Enthoven, because "it's very hard for any one health plan not to provide an unproven technology if patients want it and believe it would help them."

In one California case, for example, a woman's heirs successfully sued a health care provider that had refused to provide autologous bone marrow therapy, an expensive, controversial treatment in which a cancer patient's bone marrow is removed, he or she is aggressively treated to kill the cancer and then the marrow is returned to the patient.

A technology assessment board might include some consumers as well as doctors, said Garber of the Stanford Medical School. "It would not only look at effectiveness of treatment but also their cost-effectiveness," something no one health insurer can afford to do now and which anti-trust laws prevent the industry from doing together.

Individuals and insurance providers would make their decisions independently about what types of treatment they wanted to provide or buy, Garber said, "because you don't want some centralized body making the decisions for every region, every group."

In his current JAMA article, Fuchs writes that a new technology assessment center - along with elimination of subsidies for the training of specialists - would "help to contain costs without the imposition of controls or caps that might stifle innovation and progress."

A new approach to health care, Fuchs writes, "would provide universal coverage for basic care, free health insurance from employment and slow the rate of growth of spending while preserving some choice, flexibility and the capacity for further change.

-kpo-

Don Gibbons of the Medical Center News Bureau contributed to this story.

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