President Clinton signed the Kassebaum/Kennedy bill, as embodied in the 349-page House/Senate Conference Report on HR 3101, on August 21, 1996.(1) The provisions of the bill will become effective on July 1, 1997. The exception is the four-year Medical Savings Account Demonstration project, arguably the most “controversial” provision. It will become effective January 1, 1997.

Over the next several weeks, in the wake of the election, analysts; media commentators, and members of the business, insurance, and medical communities will be talking about its impact on domestic politics as well as its impact on the American health care system. Meanwhile, legal teams from the various professional associations will be poring over the new law, trying to ferret out the meaning of some of the more abstruse provisions of this highly technical document. You can be guaranteed they will find “things”; the unexpected always happens in the legislative process. Beyond that, over the next few months, the executive branch, particularly the Department of Health and Human Services (HHS) and the Internal Revenue Service (IRS) will be writing the federal regulations, for review and comment, to implement and enforce various provisions of the legislation. And, The Federal Register will be packed with pages detailing the details of the Kassebaum/Kennedy legislation. Allow me to share with you some preliminary observations:

1. The bill is the lowest common political denominator.

It was the only vehicle that Republicans and Democrats, liberals and conservatives and moderates could agree to vote on and pass into law this year. It passed the Senate by 98 to 0; the House 421 to 2; only liberal Democrats Pete Stark of California and Pat Williams of Montana voted against it in the House of Representatives. Congressman Stark is well known, especially to members of the medical profession, as a major congressional champion of a single-payer system.

In one respect, it is a limited bill. It has a very narrow focus, namely, health insurance regulation. Regardless of the particulars of health insurance rules, they are not decisive in terms of the structure of the market. What is decisive with respect to the structure of the market is the tax treatment of health insurance and medical services. At best, and putting the very best face on it, this bill should only be seen as a down payment on real market reform. And real market reform will come only with tax reform. In that respect, we have not even begun to reform the American health care system. We have a very long way to go in achieving real market reform in health care. The good news is that the debate on the tax treatment of health insurance and health care services is unavoidable, precisely because the debate on tax reform, including the debate on the flat tax, is unavoidable.

2. The American people should not expect dramatic changes resulting from the President signing the Kassebaum/Kennedy bill.

We will not see a drop in health care costs. Unfortunately, we probably will not see a drop in the rate of uninsurance. Also, we will not see true portability in health insurance, like you have in auto insurance or homeowners insurance or life insurance, the kind of portability that we take for granted in all of these areas. The reason: Americans will still not be able to own their own health insurance policies, like they can in other areas of insurance, and take it with them when they change jobs. Policies will still remain the property of employers.

Once again, we should remember that insurance regulation, no matter how well- or ill-intentioned, does not and cannot fix the major distortions in the broken health insurance market. Only changes in the federal tax treatment of health insurance can do that. This bill does not do that.

3. There are certain features of the Kassebaum/Kennedy bill that will help millions of Americans who already have insurance at their place of work.

The bill sets up unprecedented federal ground rules for the health insurance market, so that Americans who are working will be able to keep health insurance from job to job. In this way the new law does address the very real worries of millions of Americans who will lose health coverage if they get sick or lose their jobs. It does this by establishing rules to guarantee, through regulation, portability of health coverage. With guaranteed issue, health insurance companies must sell you policies in the individual market after you have exhausted your COBRA coverage. With a limitation on exclusion on pre-existing medical conditions, they cannot deny you or your employer a policy because of your medical status. With guaranteed renewability, your insurance company in the individual market cannot drop you if you get sick.

The bill, therefore, will make health insurance coverage more available in the individual market. It will not, however, make it more affordable.

4. In fixing some problems in the health insurance market, the bill could create some others.

  The American health insurance market is one of the most highly regulated sectors of the American economy. This regulation is overwhelmingly done at the state level, and state regulation imposes rules on insurance ranging from rate setting for doctors and hospitals to mandating that companies include very specific benefits, everything from in vitro fertilization to psychological counseling. These state regulations are costly for individuals, families, and small businesses. In the state of Maryland where I live, these mandates add about 25 percent to the costs of health insurance premiums. Furthermore, the bill creates two potentially serious problems:

• First, the Kassebaum/Kennedy bill adds a new Iayer of federal regulation on top of the existing morass of state rules. The concern among conservative economists at The Heritage Foundation and elsewhere is that the new federal rules will drive health care costs up. The reasons: nobody, no matter how sick, can be denied health insurance; nobody’s health insurance can be canceled, except for cause, such as fraud; your medical conditions are henceforth not a barrier to health insurance. Once again, many medical professionals find these changes desirable.

These new federal rules may establish equity of sorts among patients — which is what they are designed to do — but, taken alone, without any other offsetting market changes, they will add to the cost of insurance. We don’t all automatically win. There will be losers with this bill: those who become uninsured because of premium increases or because individual insurers in this new and even more highly regulated environment may withdraw from the market.

How much will costs go up? Nobody knows for sure but there are a range of estimates. The American Academy of Actuaries says that it will be a modest increase, between 3 and 5 percent. Individual insurers say we will see anywhere from 10 to 30 percent increases in the individual market. The increases and adjustments are hard to predict in a rapidly changing employer-based market. But, in any case, we should be going into this with our eyes open.

• Second, the bill sets up a vast, federal data collection apparatus at the federal level, including the storage and sharing of patient records. Each person will have, under the bill, a “patient identifier” code, and this is designed to simplify the administration of the system. In the text of the conference report, the Congress restates its good intention to protect privacy. Good intentions are not enough. As the Washington Post pointed out recently, unauthorized leaks could result in confidential data being sent into electronic mailboxes all over the country.

At The Heritage Foundation, my colleagues are more than a little nervous about this, to put it mildly. Federal government officials who can abuse FBI files are perfectly capable of abusing personal medical records. This is not paranoia. Americans occasionally have a right to be afraid of the federal government, because occasionally the federal government is scary.

This is only the first controversial issue to surface with the passage of the Kassebaum/Kennedy bill. There will doubtless be others. A “technical corrections” bill will likely be introduced early next year to fix the glitches created by various provisions of Kassebaum/Kennedy. Two items should be at the top of the agenda: First, further modification or elimination of unnecessary fines and penalties on doctors. Our colleagues at The Heritage Foundation have opposed, on sound federalist principle, the nationalization of criminal law, usurping or overriding the authority of the states. There are today over 3,000 criminal laws. The Kassebaum/Kennedy Bill has added a half dozen more of them. While Members of Congress insist that they have heard the message from physicians justifiably angry over the imposition of new fines and penalties amidst the growing underbrush of thorny and complicated rules and regulations, and claim to have “fixed” the problem, more can be done to protect honest physicians from overzealous bureaucrats, both at HCFA and in the private sector. If Congress remains conservative, the deregulation of the medical profession should be a top priority, just as the deregulation of agriculture and communications has been a top priority in this Congress. Second, no personal medical record should be turned over to any public or private agency without the express, written permission of the patient.

5. The Kassebaum/Kennedy Bill could have, but didn’t, advance health care reforms that would have made the American system work better for individuals and families.

• First, the bill is not nearly generous enough in providing tax relief to individuals and families, regardless of where they work or even the status of their employment. It increases the deductibility for the self-insured from 30 percent to 80 percent — by the year 2006! While this is a step in the right direction, in itself it is no big deal. It falls far short of tax equity for individuals and families — and there is not much pizazz in waiting ten years for the full implementation of a measure that will approach a bare modicum of tax equity.

Real tax relief either in the form of tax credits or vouchers for low income persons, would be a far more generous approach. It would expand personal choice for individuals and families, and make health insurance and health care itself more affordable. In any case, tax credits would be more equitable than deductions, especially for lower-income and lower-middle income working families.

• Second, a related item, the MSA demonstration program looks as if it were designed to fail. We hope it doesn’t fail. But that’s how it looks. The four-year demonstration project imposes a cap of 750,000 policies that get tax equity, including the self-employed and individuals in firms with anywhere between 2-50 employees. And it is hobbled by literally dozens of statutory conditions on employers and insurers, too extensive and intricate to enumerate here; and it requires a tight policing of these policies by the IRS.

With all of the attendant paperwork, two problems are immediately evident: (a) small employers such as plumbers, electricians, and wholesale merchants are wrestling with too much government paperwork now. And this program, with its strict reporting requirements and conditions, is hardly designed to make it an attractive option for harried small businesses; (b) such an artificially small pool of potential policyholders — over a four-year period — is not likely to be inviting to a broad spectrum of commercial insurers. This means that only a small number of insurers currently specializing in high-deductible policies, who are also willing to put up with the government’s regulatory regime, will venture to participate. The likely result: premiums will be higher than if the option was open to a much broader competition.

In looking at this demonstration project, a question immediately comes to mind. Does it appear to be inspired by Adam Smith, the father of the scientific study of a free market economy, or Senator Ted Kennedy of Massachusetts? The question answers itself. If you are interested in demonstrating the dynamism of the market, the powerful and fruitful collision of the forces of supply and demand, designed to unleash free market forces, this is not it. It’s a political compromise. Others can judge who got the best of the compromise; the free marketers or the regulators?

The very premise of a demonstration program for Medical Savings Accounts is baseless in the first place. The value of a free market does not need a test. We know how direct payment for services works in virtually every other sector of the economy, even in the purchase of complex services. It does not take a demonstration project to figure out that if you pay a doctor a dollar directly, rather than passing it through the administrative bureaucracy of an insurance company, you are going to pay less. Over 2,500 companies already have adopted MSAs, and we know that they are very popular with employees and have been successful in controlling costs in the companies where they are used. And, as for adverse selection, employers have managed risks with managed care, and there is no reason why they can’t manage risks with medical savings accounts. Moreover, they are popular with employees, even though their savings accounts are subject to federal and state taxation and thus are hobbled by an unfair discrimination in tax treatment.

And one other thing. Congress is imposing a demonstration program on MSAs when it has refused to do so in so many other areas of health policy that are, on the face of it, far more controversial than direct payment for medical services out of an account structured like an IRA. The downright silly RBRVS, for example, used as the basis for paying doctors in Medicare was, unlike the DRG system for hospitals, never subjected to a demonstration program. Managed care plans, which have been getting in trouble with the public for kicking young mothers and their newborns out of the hospital after 24 hours in order to cut down on health care costs, are likewise recipients of favorable federal tax relief. And in the last few years, employers have pushed millions of employees into such plans and Congress never even considered a demonstration program, making a firm determination about whether they should extend favorable tax treatment to managed care plans. The reason: employer-based insurance, simply because it is employer based, enjoys official approval, regardless of what form it takes, and plans outside of the place of work, are still subject to discrimination by the federal tax code. Only tax equity will resolve these problems. Congress should not be in the business of deciding what form of health care delivery is best for consumers. That’s the job for consumers.

The opposition to individual tax relief and Medical Savings Accounts is grounded in fear; not a fear that they are a bad idea or will fail, but rather that they are an excellent idea and will succeed. Once individuals and families have individual tax relief, they will pick and choose their own plans and policies, their own doctors and medical treatments and procedures. Liberals in Congress know that once families start exercising this level of personal choice, they will never — politically — be able to take that freedom of choice away. Families with Medical Savings Accounts are hard, if not impossible, for regulators to regulate; huge, consolidated managed care networks, dominated by a few large insurers in any given area of the country, are comparatively easy to regulate. It is also easy to transition from such a consolidated corporate system into a single-payer system. Indeed, the 1342-page Clinton plan was little more than a coordinated attempt to speed up the enrollment of all Americans in such highly regulated plans, regardless of the serious quality questions that aggressive use of managed care, aggravated by the fiscal limitations of a global budget and untamed by consumer choice, would necessarily raise.

The short-term value of Medical Savings Accounts, even in the truncated form found in Kassebaum/Kennedy, is that it will give individuals and families a chance to get out from under the expanding managed care bureaucracy in employer-based health insurance, escape corporate restrictions on physicians and medical treatments and services, and enable patients to re-establish a professional relationship with their doctors. That is the kind of medicine Americans want.

We have a lot of work to do.

References

1. Moffit R. What to do about the Kassebaum-Kennedy bill. Heritage Foundation Issue Bulletin, No. 226, June 5, 1996.

 Dr. Moffit is Deputy Director of Domestic Policy Studies at The Heritage Foundation. His address is The Heritage Foundation, 214 Massachusetts Ave., N.E., Washington, DC, 20002-4999. (202) 546-4400.

Originally published in the Medical Sentinel 1997;2(1):26-28. Copyright ©1997 Association of American Physicians and Surgeons.