In the area of health care reform, Cato has had remarkable success in familiarizing the public, media, and policymakers with the free-market alternative to managed health care proposals — medical savings accounts (MSAs). The essence of this market-based approach to controlling health care costs was first identified by Cato’s scholars in the 1980s, translated into a book in 1992 called Patient Power, and incorporated into nearly every bill put forth in 1994 in opposition to Clinton’s managed-competition plan. Because the Cato Institute had the initiative and resources to clarify the health care reform issue before the Clinton administration issued its proposal, Cato’s scholars were in a unique position to help avert a national policy disaster.

Cato's efforts to popularize the free-market, MSA approach to health care reform in 1994-1995 centered on the distribution of Patient Power to doctors, patients, and policymakers. Michael Tanner, the department's director, also testified before the Senate Special Committee on Aging and the Senate Finance Committee on the need for healthcare, specifically Medicare, reform, and testified before the National Bipartisan Commission on Medicare reform. Additionally, Tanner wrote op-eds that appeared in Washington Times, the Wall Street Journal, and USA Today and oversaw the production of numerous policy studies relevant to health care issues. By September 1995, MSAs were incorporated into Congress’s landmark $270 billion Medicare reform bill. To date, articles and op-eds by Cato health scholars have appeared in the Washington Post, the Boston Herald, the San Francisco Chronicle, and National Review magazine. Most recently, MSAs made prominent appearances in the health care platform proposals by both leading candidates for the Republican presidential nomination, Governor George W. Bush and Senator John McCain.

Focal Points

Fixed-Dollar Tax Credits and Defined Contribution Alternatives for Health Insurance. The freedom to choose one's own doctors and health services is being increasingly restricted due to our tax laws. The tax bias favoring employer-sponsored health insurance virtually forces Americans to purchase their health insurance through their employers, but, according to a recent study, only 64 percent of working families who are offered employer-sponsored insurance have a choice of health plans. Moreover, only 49 percent of families offered employer-paid coverage can choose between a health maintenance organization (HMO) and other kinds of less-restricted plans. Consequently, many Americans are being shepherded into restrictive and inadequate health insurance plans that do not respond to their personal health needs. To compensate, state governments and, more recently the federal government, have imposed mandates on benefit packages and other regulatory restrictions on the operations of health insurers, but politicized command-and-control regulation has only driven up health costs, forcing more people to lose health insurance. A crucial way to restore more access to and freedom in health care is to provide every working American family the option of choosing a fixed-dollar tax credit to purchase basic health insurance, whether on their own or through an employer or other organization.

Another intriguing and thus-far underutilized portion of section 106 of the Internal Revenue Code allows an employer to extend the advantages of the tax exclusion to this relatively new alternative arrangement. The employer may choose to reimburse employees for some or all of the health insurance premium expenses they incur when the latter select other health plans that are not sponsored by the employer. However, this fixed reimbursement under a defined contribution approach remains tax-advantaged only if the employer makes those premium reimbursement payments directly to the employee's insurer, without the money passing through the employee's hands.

A recent study by Booz-Allen & Hamilton concluded, "A large-scale conversion of employer-sponsored health plans to defined-contribution formats is inevitable." Further clarifying the tax treatment of employers' defined contribution payments and removing other regulatory uncertainties would accelerate the move to an employee benefits environment in which workers more directly control their health care benefits and insurance choices. A fixed-dollar tax credit option could jump start this process by ensuring sufficient consumer demand for individually selected insurance arrangements and providing a competitive alternative to employer-sponsored group insurance.

Cato will continue to direct attention to the importance of more neutral tax treatment of health insurance purchasing options, advocating patient choice and freedom over government manipulation of the health insurance market.

Medical Savings Accounts. Many health care consumers have lost the freedom to choose doctors, insurance plans, treatments, and care options. Today, more and more legislators, business leaders, and public citizens are turning their attentions to the MSA alternative.

A recent survey of 500 company benefit specialists found that 42 percent of them would recommend a tax-advantaged MSA to a typical medium-to large-sized firm. Thirty-nine percent would recommend an MSA to their own firm. Eighty-one percent would recommend adding the MSA option to existing managed care plans of medium-to large-sized firms. A Rand Corporation study earlier this year concluded that, in the long run, tax-advantaged MSAs could attract 56 percent of all employees offered a health plan by small businesses.

Although Congress did pass a very watered down medical savings account bill in 1996 for small employer groups and self-employed individuals, as well as another MSA pilot program for Medicare beneficiaries, it has also enacted several other health care measures over the last five years (portability requirements, centralized standards for electronic health data, a new government-run children's health insurance program) that move us step-by-step back in the direction of a Clinton-style national health care system. More such initiatives remain under consideration, including patients bill of rights legislation that would impose a host of crippling regulations on private health plans. Cato's scholars will continue to argue against any legislative actions that would increase regulatory controls in the healthcare marketplace. Cato's scholars will also spell out a positive market-based alternative based on expanding MSA's, changing the tax treatment of health care, and deregulation.

Medicare Reform. Even with recent improvements in the short-term financial outlook for Medicare, it remains progressively unsustainable on a long-term basis. The 1997 Balanced Budget Act achieved some modest savings through arbitrary price controls, but it has severely damaged private competitive insurance alternatives to the traditional Medicare program. Congress must begin dealing honestly with the entitlement crisis. The 1999 bipartisan commission on Medicare offered a number of promising reforms, but further actions to follow up on them and overhaul Medicare have languished in Congress. Instead, Congress has focused on expanding the Medicare entitlement to include prescription drug coverage, instead of dealing with the structural and demographic problems plaguing Medicare. Cato's scholars will continue to advocate major structural reform in the program and ensure that even more comprehensive free market options are considered.

FDA Reform. Pharmaceutical and medical device manufacturers literally have done more than almost any industry to alleviate pain and suffering and extend both the length and quality of human life. Yet it takes, on average, over five years for a new product to be introduced into the market during which time individuals die who could have benefited from the product. Furthermore, the average cost of developing a new product is reaching $400 million. This upcoming year, the Cato Institute will explore new locations for risk assessment and the possibility of moving pharmaceutical and medical device approval into the private sector. An Underwriters Laboratory model is most appealing, but other alternatives also deserve exploration.

E-medicine and Other Health Delivery Advances. The internet has changed the way America and the world does business. Information is more easily and readily disseminated, and medical professionals are incorporating new technologies into life-saving therapies and sharing research findings and alternative methods of care across the globe. Moreover, health-care internet companies like iVillage and Healtheon/WebMD, Corp. are educating patients who, in turn, are becoming more active and informed participants in their own health care. Other on-line companies are finding innovative and more cost-effective ways of simplifying the medical supply chain. E-Commerce is advancing the health industry, and new possibilities for private enterprise and a more patient empowered health system abound. The Cato Institute will study the implications of web-based processes and new technology on the health care sector, highlighting harmful government regulations as well as patient privacy and protection issues.

International Comparisons. With information technology comes new opportunities for international trade and dialogue. While the health care systems of all developed countries are failing, private companies are filling in, providing new communities with better products more tailored to their unique needs. New, multinational markets are emerging in fields like organ transplantation, laser eye care, pharmaceuticals, and prosthetics--areas, in short, where nationalized health care systems have failed most pronouncedly. Cato scholars will explore the dynamics of free trade on better health, using comparative frameworks of independent enterprise and nationalized health services to demonstrate that patient empowerment comes not from a bureaucratic infrastructure but a free market unhindered by government interference.