Recent Developments in Health Law: The Bush Administration's Health Care Proposal: The Proper Establishment of a Consumer-Driven Health Care Regime

“Reforming Health Care for the 21st Century,” The White House National Economic Council (February 2006), available at <http://www.whitehouse.gov/stateoftheunion/2006/healthcare/healthcare_booklet.pdf> (last visited June 7, 2006).

President James Earl Carter, State of the Union Address, 1979, available at <http://www.let.rug.nl/usa/P/jc39/speeches/su79jec.htm> (last visited June 7, 2006).

“Reforming Health Care for the 21st Century,” supra note 1, at 1 (data compiled by the Centers for Medicare and Medicaid Services). In actuality, the introduction of managed care caused health care expenditures to level off during the mid 1990s. Other than this brief period, however, costs have been steadily climbing.

Id., at 2 (data compiled by the Kaiser Family Foundation/Health Research and Education trust).

“Kaiser Public Opinion Spotlight,” Kaiser Family Foundation website, available at <http://www.kff.org/spotlight/health-costs/6.cfm> (last visited June 7, 2006).

Warren E. , American Bankruptcy Institute Law Review 12, no. 1 (2004): 37–38.

Murray A. , “Health-Care Fixes Should Focus on Quality,” Wall Street Journal, February 1, 2006.

See generally, Abramson J. , Overdosed America (New York: Harper Collins, 2004): at 44–47.

Starfield B. , “Is US Health Really the Best in the World?” JAMA 284, no. 4 (2000): 483–485.

World Health Organization, World Health Report 2000, Health Systems: Improving Performance, available at <http://www.who.int/whr/2000/en/whr00_en.pdf> (last visited June 7, 2006).

Schumann R. E. , “Compensation from World War II through the Great Society,” U.S. Department of Labor: Bureau of Labor Statistics (2003), available at <http://www.bls.gov/opub/cwc/cm20030124ar04p1.htm> (last visited June 7, 2006).

Kendall D. B. , “A Health Insurance Tax Credit: The Key to More Coverage and Choice for Consumers,” in Hertz-Linger R. , ed., Consumer-Driven Health Care: Implications for Providers, Payers and Policymakers (San Fransisco: Jossey-Bass Publishers, 2004): at 755.

Id., at 755.

Internal Revenue Code. U.S. Code, Title 26 § § 106 & 162 (2005).

The employer exclusion reduces income tax revenues by between $93 billion and $126 billion per year. Including payroll taxes, the total revenue loss could be as much as $190 billion per year. See Burman L. E. and Gruber J. , “Tax Credits for Health Insurance,” Discussion Paper No. 19 (2005): at 6. Available at <http://www.urban.org/UploadedPDF/411176_TPC_DiscussionPaper_19.pdf> (last visited June 7, 2006).

Staff of the Joint Committee on Taxation, Excerpt from “Estimates of Federal Tax Expenditures for Fiscal Years 2005–2009,” in Graetz M. J. and Schenk D. H. , eds., Federal Income Taxation: Principles and Policies (New York: Foundation Press, 2005): at 41–46.

Burman and Gruber , supra note 17. There is one notable exception to this rule: if an individual itemizes deductions, then health care expenses are deductible to the extent that such expenses exceed 7.5% of one's adjusted gross income (anything above 7.5% of AGI is deductible). Internal Revenue Code. U.S. Code, Title 26 § 213 (2005). Although the availability of this deduction somewhat mitigates the tax code's favoritism for employer-sponsored coverage, it falls far short of rectifying the problem. On average, thirty-two percent of individual income tax returns itemize deductions, and of this group, fifteen percent take the medical expense deduction. See “OTC Tax Deductibility,” Consumer Healthcare Products Association, available at <http://www.chpa-info.org/web/press_room/position_papers/tax_deductibility.aspx> (last visited June 12, 2006). Furthermore, the deduction only kicks in once an individual has spent (and received no tax benefit for) 7.5% of his AGI on health care.

See, e.g., Herzlinger R. , ed., Consumer-Driven Health Care: Implications for Providers, Payers and Policymakers, supra note 13, chapters 1–8.

Glazer J. and McGuire T. G. , “Private Employers Don't Need Formal Risk Adjustment,” Inquiry 38, no. 3 (2001): 260–269. In order to avoid this “race to the bottom,” employers may self-insure or offer plans from only one insurer. In theory, since an insurer contracting with a self-insured employer does not bear any risk (it acts merely as a third-party administrator or TPA), it has an incentive to design truly innovative plans that contain employers' costs. This point, however, is problematic for two reasons. First, as the employer bears all health care costs, it possesses an incentive to retain healthier workers and allow the sick to find alternative employment. Second, the payer may be merely a TPA in this context, but it is likely bearing actuarial risk in other contexts, and a desire for policy uniformity may decrease innovation in the TPA market. This second point applies with equal force when an employer does not bear any risk but contracts with only one insurance company.

Id., at 265.

Id.; Herzlinger R. E. , “Let's Put Consumers in Charge of Health Care,” Harvard Business Review, July, 2002.

Herzlinger , supra note 22.

Consider, for example, the ubiquitous allegations that specialty hospitals cherry pick the best patients. See Casalino L. P. Devers K. J. , and Brewster L. R. , “Focused Factories? Physician-Owned Specialty Facilities,” Health Affairs 22, no. 6 (2003): 56–67, at 62–63. The incentive to treat healthier patients is the greatest for physician groups who enter into capitated contracts.

Herzlinger , supra note 22.

Id. In any given year, twenty percent of the average insurer's client base consists of new enrollees. Herzlinger R. E. , “The Frayed Safety Net,” in Herzlinger R. , ed., Consumer-Driven Health Care: Implications for Providers, Payers and Policymakers (San Francisco: Jossey-Bass Publishers, 2004): at 44.

For a discussion of insurers' supply-side approaches to managing care, see Bohmer R. M. J. , “Changing Physician Behavior,” Harvard Business School Case #9-699-124 (revised March 22, 2000).

Burman and Gruber , supra note 17, at 10–14 (discussing all three reasons the tax code's favoritism for employer-sponsored coverage primarily benefits wealthier Americans).

Id., at 6.

“Medicare Prescription Drug, Improvement and Modernization Act of 2003,” Pub. L. No. 108-173, 117 Stat. 2066 (2003) (codified at 26 USCA §§ 139A, 223, 4980G; 42 USCA §§ 299b-7, and various parts of 42 USCA § 1395), available at <http://www.ustreas.gov/offices/public-affairs/hsa/pdf/pl108–173.pdf> (last visited June 7, 2006). For a detailed explanation of the current law surrounding HSAs, see “Health Savings Accounts,” The Department of the Treasury, 2006, available at <http://www.ustreas.gov/offices/public-affairs/hsa/pdf/HSA-Tri-fold-english-06.pdf> (last visited June 7, 2006).

One can contribute up to the amount of the health plan deductible but no more than $2,700 per year for self coverage and $5,450 per year for family coverage.

Only certain types of health insurance premiums may be purchased with HSA funds. These include premiums for individuals receiving unemployment benefits, COBRA premiums, certain long-term care premiums, retiree health benefit premiums and Medicare premiums.

These are the 2006 amounts. The numbers are adjusted annually for inflation.

“Reforming Health Care for the 21st Century,” supra note 1, at 7–8.

As discussed supra at page 10, since foregone tax revenue can be conceptualized as a direct subsidy, taxpayers partially fund the purchase of employer-sponsored health insurance. Out-of-pocket expenses, however, are not deductible from income (such purchases are made with income that has already been taxed by the federal government) and therefore remain unsubsidized by the government.

“Medicare Prescription Drug, Improvement and Modernization Act of 2003,” supra note 30.

“Reforming Health Care for the 21st Century,” supra note 1, at 8.

Id., at 9.

29 U.S.C. § 1002 (2006); see also Hylton M. O. , “The Changing World of Employee Benefits,” Chicago-Kent Law Review 79 (2004): at 625, 645.

“Reforming Health Care for the 21st Century,” supra note 1, at 11.

Lansky D. , “Providing Information to Consumers,” and Power J. D. III , “The Role of Information – J. D. Power's Paradigm Lessons from the Automotive Industry,” both in Herzlinger R. , ed., Consumer-Driven Health Care: Implications for Providers, Payers and Policymakers (San Fransisco: Jossey-Bass Publishers, 2004): 410–427.

Consumer Reports website, at <http://www.consumerreports.org/main/home.jsp> (last visited June 7, 2006). J. D. Power and Associates website, at <http://www.jdpower.com/cc/index.jsp> (last visited June 7, 2006).

The one notable exception is The New York State Department of Health Cardiac Surgery Reporting System (CRS), which collects and tracks clinical data on cardiac surgeries performed in New York hospitals. See Herzlinger R. E. and Bokser S. , “Note on Accountability in the U.S. Health Care System,” Harvard Business School Case #9-302-007 (revised August 19, 2004): at 4; Bohmer R. M. J. Nembhard I. M. , and Galvin R. , “Bridges to Excellence: Bringing Quality Health Care to Life,” Harvard Business School Case #9-604-030 (revised January 20, 2005): at 2.

“Reforming Health Care for the 21st Century,” supra note 1, at 11.

Id., at 11–14.

Id., at 14.

Id., at 12.

Under Internal Revenue Code §§ 4980G and 4980E, an excise tax is imposed on an employer who fails to make comparable contributions to the HSAs of its employees.

See Burman and Gruber , supra note 16, at 10.

Herzlinger R. E. and Parsa-Parsi R. , “Consumer-Driven Health Care: Lessons from Switzerland,” JAMA 292, no. 10 (2004): at 1213–1220.

The literature dealing with the subject suggests that risk adjustment would only be needed for capitated physician groups (those that accept fees on a per-patient basis rather than a per-episode basis). See, e.g. Kuttner R. , “The Risk-Adjustment Debate,” New England Journal of Medicine, 339, no. 26 (1998): at 1952–1956. Contrary to this assumption, for many procedures, healthier patients require less time per episode of care while less healthy patients have the potential to generate large opportunity costs for providers. Thus, fee-for-service providers may also lack the proper incentives to design quality-enhancing/cost-reducing treatments for the sick. Furthermore, physician compensation cannot be neatly compartmentalized into fee-for-service medicine on the one hand and capitation on the other. Rather, there is a continuum with very discrete, episode-based compensation (e.g. charging per X-ray) on one end, hybrids (such as billing for a surgery and all follow-up visits) in the middle, and lifetime capitation on the other end. Under the current regime, long-term capitation contracts are rare because employees frequently change insurers. With the implementation of individualized insurance purchasing, however, it is likely that provider groups will begin offering longer term (and potentially lifelong) agreements. Perverse incentives to selectively treat the healthy and screen out the sick increase as one moves from the episode-based end of the spectrum toward the capitation end. This analysis suggests that risk adjustment at the level of the provider can be implemented in one of two ways. First, one can simply risk adjust physician groups who choose to accept capitated reimbursement, paying them more or less depending on the health needs of the population they enroll. Under such a regime, one must determine whether longer capitation agreements will command a higher multiplier. With many chronic illnesses, what is cost effective over the short term may not be cost effective over the long term, and thus, physicians who are capitated over a shorter period of time may have an incentive to forego medically appropriate treatment. Increasing the multiplier for long-term capitation agreements, however, may not be desirable. Reduced reimbursement for short term contracts may make those providers skimp even more. Additionally, if cost and quality data are readily available to consumers, providers will have a natural incentive to enter into long term agreements. Physician groups who believe that they can improve outcomes and lower costs by managing care over the long term will set prices that capture such value, and informed, value-conscious consumers will select health plans accordingly. Second, one can create a risk adjustment mechanism that modifies reimbursement for all providers, including those who charge on a fee-for service basis. The exact, numerical adjustment, however, need not be the same for all types of compensation arrangements. The multiplier could be calibrated according to (a) the extent to which unhealthy patients require more time per treatment and (b) the compensation agreement's place along the capitated/fee-for-service continuum.

Herzlinger R. E. , “Scare Stories, Opponents, and the Role of Government,” in Herzlinger R. , ed., Consumer-Driven Health Care: Implications for Providers, Payers and Policymakers (San Fransisco: Jossey-Bass Publishers, 2004): at 175.

There is some literature which suggests that this may be the case. Consider the following quote from Robert Kuttner's 1998 article in the New England Journal of Medicine: “In general, only large provider organizations have the sophistication to bargain effectively with health plans for health-based risk adjustment. Most doctors' groups, in economic parlance, are ‘price takers’; they have too little bargaining power to do other than quibble marginally with the going rate. According to Richard Dixon, medical director of the National IPA [independent practice association] Coalition, there is little adjustment of payments by managed-care organizations on the basis of diagnosis or case mix, despite enormous variation among different doctors' caseloads. Dixon attributes the failure of most medical groups to adjust according to risk to a familiar litany. ‘The typical medical group is undercapitalized and doesn't have either the technical or epidemiological skills to implement even a rudimentary system of risk adjustment,’ he said in an interview. He cited one doctors' group that participated in a detailed analysis of data on patients’ encounters with physicians. The value of the medical services provided ranged from about $3 per member per month to $27 per member per month among different primary care doctors in the group. But all were being compensated in the narrow range of $10 to $12 per member per month.” Kuttner , supra note 51.

Glazer and McGuire , supra note 20.

Id., at 265–266.

“Reforming Health Care for the 21st Century,” supra note 1, at 11.

Herzlinger R. E. , “A Health Care SEC: The Trust, the Whole Truth, and Nothing but the Truth,” in Herzlinger R. , ed., Consumer-Driven Health Care: Implications for Providers, Payers and Policymakers (San Fransisco: Jossey-Bass Publishers, 2004): 797–810.

The Kaiser Commission on Medicaid and the Uninsured, The Cost of Care for the Uninsured: What do We Spend, Who Pays, and What would Full Coverage Add to Medical Spending? Issue Update, 2004, available at <http://www.kff.org/uninsured/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=35965> (last visited June 7, 2006).

“Hidden Costs, Value Lost: Uninsurance in America,” Institute of Medicine 2003 Report, available at <http://www.iom.edu/CMS/3809/4660/12313.aspx> (last visited June 7, 2006).

Hodge S. A. , “Fiscal Facts: Countdown to Tax Reform, Part II: Taxpayers and Non-Payers,” October 13, 2005, Tax Foundation website at <http://www.taxfoundation.org/news/show/1111html> (last visited June 7, 2006).

“Reforming Health Care for the 21st Century,” supra note 1, at 12.

Internal Revenue Code. U.S. Code, Title 26 §1(a) (2005).

DeNavas-Walk C. Proctor B. D. , and Lee C. H. , “Income, Poverty, and Health Insurance Coverage in the United States: 2004,” U.S. Census Bureau (2005), available at <http://www.census.gov/prod/2005pubs/p60-229.pdf> (last visited June 7, 2006): at 18, table 7. (20% of Americans making between $25,000 and $49,999 are uninsured, 12.5% of people making between $50,000 and $74,999 are uninsured, and 8.2% of individuals making more than $75,000 are uninsured.)