Such health care decisions can only be made ethically by the individual patients and their families themselves, under a system in which they have the right incentives to weigh costs against benefits and decide what care they prefer. Indeed, the federal ADA seems to effectively embody these ethical views as a matter of federal anti-discrimination law, given the federal interpretation of the ADA discussed above.

When the government usurps these health care decisions with rationing dictates, it usurps the essential freedom of the people to control one of the most fundamental and intimate aspects of their lives - their own health and its care. A free society must maintain the freedom of the people to control their own health and care.

It may be objected that with the medical services priority list Oregon is only deciding which services it will subsidize and which it won't. But this system still goes too far in usurping the autonomy and freedom of individuals, involving the government in decisions it cannot make on a ethical or even informed basis. The government can validly limit its subsidies by deciding how much it will provide and then allowing the recipients to make their own choices among health services with those funds.

The problem can perhaps be seen more easily by examining some of the statements made on behalf of the medical services priority list. The state Department of Human Resources says that the benefit package based on the list priorities excludes coverage for "conditions for which treatment is generally ineffective."(7) But surely we do not want the government to decide which conditions can be effectively treated and which can't, in place of ourselves and our doctors. Similarly, the Department says that the benefit package excludes coverage for "conditions which get better on their own" and "conditions for which home treatment works." But, again, surely we don't want the government to decide what conditions this applies to, rather than ourselves.

Mandatory HMOs

The Oregon Health Plan includes another powerful rationing mechanism in addition to the medical services priority list. Health services covered under the Oregon Plan are to be provided primarily by HMOs or similar managed care arrangements, regardless of whether the covered individuals want to be in an HMO or not.

HMOs can work well in an open market where patients have other options, keeping HMO rationing in check. But under the Oregon Health Plan, the patients cannot choose among other options. They can only choose among a limited number of HMOs. These HMOs will consequently have much greater market power to ration and deny care. This power will be enhanced because the HMOs will be backed by the government as they carry out government cost control policy. These HMOs, and not individuals and families, will limit care in accordance with the government's artificially imposed resource limits.

Rationing Technology

The Oregon Health Plan has initiated still another rationing offensive with the Health Resources Commission. As indicated above, this Commission is charged with developing a process for "allocating" medical technologies in Oregon. This will again involve the government in deciding who will have access to these medical technologies and when. This process can only result in denying access to the latest, most advanced, most sophisticated technologies and treatments. In addition, incentives to develop new medical tools or treatments will be significantly reduced under the "cost control" mantra.

The Employer and Individual Mandates

The employer mandate is a false promise. The cost of that mandate will ultimately be born by workers, not employers. Employers can pay no more in total employment costs than the productive output of the worker, or else go bankrupt. The employer mandate increases the cost of labor both absolutely and relative to other inputs, hastening substitution that causes job losses. If the employer is forced to pay more for a health insurance mandate, the employer will reduce the wages he would otherwise pay by the costs of the mandate, to return total employment costs to the level of worker productivity. Workers ultimately bear the costs of the mandate in lost wages or lost jobs.

Numerous econometric studies have estimated the likely loss of wages nationwide that would result from the similar employer mandate in the Clinton health plan. These studies generally estimate that workers across the country would lose about $100 billion a year in wages because of the Clinton mandate.(8) Oregon could expect a proportionate loss of wages from the employer mandate in the Oregon Health Plan.

Where employers may not be able to reduce wages to offset the mandate costs, they will simply lay off workers. With total employment costs above productivity, employers would suffer a loss by continuing to employ workers. This is most likely to occur at the lower income levels, where the minimum wage, payroll tax and other requirements may prevent a sufficient reduction in wages. The job losses resulting from the employer mandate would consequently be concentrated mostly at the lower income levels.

Econometric studies have also estimated the job losses that would result from the similar Clinton employer mandate. These studies estimate that 1 - 2 million jobs would be lost nationwide.(9) Indeed, one study estimated the job losses state-by-state, and indicates that Oregon would lose 11,900 jobs under the Clinton mandate.(10) Similar job losses would necessarily result under the employer mandate in the Oregon Health Plan.

The employer mandate is effectively just a hidden tax on workers, inefficiently causing a significant loss of jobs besides. The individual share of the mandate is just a direct tax on workers. These taxes would force workers to pay for the benefits that the government decides they must have, rather than the benefits workers themselves may choose. The Oregon Health Plan benefits package includes many benefits that workers may not need or want. Among these are unlimited abortions, drug and alcohol rehabilitation, broad, open-ended mental health services and counseling, and many routine services that are cheaper to pay for directly rather than through insurance. While workers could buy coverage for additional benefits, they could not replace benefits in the mandated benefit package they don't want with other benefits they do want.

The mandated benefit package means not only a loss of freedom of choice, but it also means higher costs as workers are forced to pay for benefits they may not want. For example, mandated drug and alcohol rehabilitation benefits in other states have been found to raise premium costs by 6 - 8 percent.(11) Mandated benefits for outpatient mental health services have been found to raise costs by another 10 - 13 percent.(12)

Ironically, for all this trouble, the mandates will not effectively achieve universal coverage. As a practical matter, the government will just not be able to track down and force everyone into health coverage. Even Hawaii, where employer and individual mandates have been in force for 20 years, has only 93 percent coverage.(13) Moreover, in the 41 states where auto insurance is mandated as a condition of driving, almost 15 percent of drivers remain uninsured.(14)

Indeed, mandates are entirely unnecessary in achieving universal coverage. The reforms discussed below will effectively achieve universal coverage without mandates, succeeding where mandates can't.

Costs: The Proof is in the Pudding

While one of the initial goals of the Oregon Health Plan is cost control, costs have only soared since the health plan was adopted. In the 1991 - 1993 biennium, before the Oregon Plan was adopted, Medicaid cost the state $306.1 million. Without the Oregon plan reforms, the state's share of Medicaid spending was projected to increase to $388.5 million for the 1993 - 1995 biennium. But with the Oregon plan reforms, budgeted state Medicaid spending soared to a projected $516.7 million during the 1993 - 1995 biennium, an increase of two-thirds in just one budget cycle. But the increases are not over. For the 1995 - 1997 biennium, state Medicaid costs are projected to increase to $708 million, another sharp increase of about 40 percent.(15)

Total Medicaid spending for the state, including the Federal share, is increasing at the same pace. In the 1991 - 1993 biennium, total Medicaid spending for Oregon was $808.8 million, with an expected increase to about $1 billion for the 1993 -1995 biennium. But with the Oregon Health Plan reforms, expected Medicaid spending jumped to $1.34 million for the 1993 - 1995 biennium, or an increase of about two-thirds over the 1991 - 1993 cycle. In the 1995 - 1997 biennium, total Medicaid spending in the state is projected to increase to $1.9 billion, again a jump of about 40 percent.(16)

Moreover, during the first 6 months under the Oregon Health Plan, enrollment soared past projections. As of August 1, 1994, 84,253 new beneficiaries had signed up under the expanded Medicaid program, about 40 percent (24,083) more than projected.(17) This raises questions over whether future spending increases will exceed the already soaring projections.

Worst of all, the powerful cost increasing incentives under the Oregon Health Plan are only starting to take effect. The root cause of rapidly rising health care costs in the U.S. is universally recognized as the third-party payment problem. Because someone else is generally paying the bills in health care -- either an insurance company or the government through Medicaid or Medicare -- consumers lack normal market incentives to keep costs down. They do not seek to avoid unnecessary care or to question the cost of their care, or to reject care when the costs exceed the benefits. Even more importantly, since consumers lack concern over costs, doctors and hospitals do not compete to reduce costs. Rather, since consumers primarily choose doctors and hospitals on the basis of quality and not cost, doctors and hospitals primarily compete to increase quality. This is unlike other natural markets where there is full competition over both cost and quality. The result is runaway costs.

Perversely, the Oregon Health Plan greatly expands rather than counters these cost increasing incentives:

Through the expanded Medicaid program, and the planned employer and individual mandates, third-party coverage and the third party problems would be extended to the currently uninsured.

The mandates would require workers to buy a benefit package that includes coverage for benefits and services many workers do not buy now, as indicated by the discussion above. The perverse third-party payment incentives would consequently be further extended in regard to these additional mandated benefits.

The mandated benefit package would inevitably have low deductibles and co-payments, as in the current Oregon Health Plan benefit package. This would maximize the third-party payment problem and its cost-increasing incentives for virtually everyone.

The only counter to these cost increasing incentives is to force those covered by Medicaid under the Oregon Health Plan into HMOs which have great power and incentive to ration their health care. The cost increasing factors in the health plan reforms would consequently be offset only to the extent of such rationing, which is the wrong way to control costs. Moreover, the Oregon Health Plan does not yet force workers not on Medicaid into such HMOs.

The Oregon Health Plan includes another important factor that would cause many if not most families to pay more. As indicated above, the mandates would force workers to pay for expensive benefits they may not need or want, adding to the cost of their coverage. Indeed, expensive benefits for drug and alcohol rehabilitation and mental health services are to be added to coverage next year for those under Medicaid in the new Oregon Health Plan system. These benefits would increase per capita costs in that system by 21 percent.(18)

The Power to the People Plan

All of the above problems of the Oregon Health Plan can be eliminated, and the goals of universal coverage and cost control far more effectively achieved, through the package of reforms described below. These reforms do not completely reject the current Oregon Health Plan, but instead retain the desirable elements, while removing the undesirable elements. We call this package of reforms the "power to the people plan" because it is based on maximizing freedom of choice and control for each individual patient and consumer.

1) Medical Savings Accounts

Medical Savings Accounts (MSAs) are designed precisely to correct the problem of third-party payment incentives at the root of rapidly rising health costs. Instead of paying all their health care dollars to an insurance company, employers and workers would pay only a small portion of those funds for a catastrophic policy with a high deductible, perhaps $3,000 per year. The remainder would be contributed to an MSA for each worker. These MSA contributions, and returns on MSA investments, should be exempt from state income tax as employer contributions for traditional third-party insurance currently are. Workers could then directly pay health expenses below the deductible with MSA funds. Such withdrawals for health expenses should again be exempt from state income tax as are health insurance benefits.

Workers could withdraw any remaining funds at the end of the year as a reward for keeping medical costs down. These withdrawals would be subject to normal tax treatment just like other income. Alternatively, the worker could keep the funds in the MSA for future expenses or withdrawals.

With workers paying for non-catastrophic expenses out of their own MSA funds, they would have normal market incentives to control costs. They would avoid unnecessary care, and providers with excessive charges. They would be more likely to only consume health services where the benefits exceeded the costs. Probably more importantly, with this new consumer cost concern, doctors and hospitals would ethically compete to reduce costs as well as maintain quality instead of competing through the political process as another special interest group. Costs would consequently be controlled through incentives and competition, consistent with consumer preferences. In the process, workers would gain control over the bulk of funds that now go to insurance companies. Workers would be able to use such funds to their own best benefit, and would gain directly to the extent they were successful in controlling costs. Medical Savings Accounts are rapidly being adopted across the country with great success, even without the equal tax treatment under current law, as described above. A prime example is Golden Rule Insurance Company in Indianapolis. The company offers 2000 employees a traditional insurance policy with a $500 deductible and a 20 percent co-payment up to a maximum of $1,000 out of pocket. Or workers can choose an MSA. In that case, the employer deposits $2,000 into the account and provides the employee with complete catastrophic coverage above a deductible of $3,000. Maximum out-of-pocket expense is again $1,000.

In 1993, 80 percent of Golden Rule employees chose the MSA. At year-end, they withdrew an average of $602 per employee in remaining funds in their accounts. Moreover, health costs for the company were reduced by 40 percent. In 1994, 90 percent of the employees have chosen MSAs.

Other companies have tried similar approaches and also have had impressive results:

Dominion Resources, a utility holding company, deposits $1,620 a year into a bank account for the 80 percent of employees who choose a $3,000 deductible rather than a lower deductible. As a result, the company has experienced no premium increases since 1989, while other employers have faced annual increases averaging 13 percent.

Forbes magazine pays each employee $2 for every $1 of medical claims they do not incur up to a maximum of $1,000. As a result, Forbes' health costs fell 17 percent in 1992 and 12 percent in 1993.

Beginning in 1982, Quaker Oats implemented a high-deductible policy and paid an annual $300 into the personal health accounts of employees, who get to keep any remaining balance. Although the IRS recently forced the company to abandon this plan, it was highly successful; over the past decade the company's health costs grew an average 6.3 percent per year, while premiums for the rest of the nation grew at double digit rates.

The United Mine Workers recently adopted a similar approach for their union members. Last year their health plan had first-dollar coverage for most medical services. This year they negotiated a plan with a $1,000 bonus at the beginning of the year coupled with $1000 deductible insurance coverage. Employees get to keep whatever they don't spend.

Finally, Jersey City in New Jersey recently proposed MSAs for its city workers.(19)

State law should allow MSAs for all workers and independent individuals and families as described above. Individuals with freedom of choice vouchers, as described below, should be allowed to use them for MSAs as well. This is the most effective means for controlling health costs, and the only viable way of doing so consistent with individual freedom of choice and control over health care.

2) Adopt Freedom of Choice Vouchers for Those on Medicaid

Instead of developing the medical services priority list and forcing the poor into HMOs to receive the government's chosen services, the Oregon Health Services Commission would provide vouchers to all of those eligible for Medicaid assistance under the current Oregon Health Plan. The vouchers would be equal in amount to the capitation fees the Commission would pay to HMOs for coverage for beneficiaries under the current Medicaid assistance plan. The poor would then be free to purchase the coverage of their choice from any source. They could choose an HMO or other managed care arrangement. They could choose traditional fee-for-service coverage. Or they could choose a Medical Savings Account, as described above. This would give the poor maximum freedom of choice over coverage, benefits, insurers, services, providers, and all other health care factors. But it would cost no more than the current plan because the vouchers only equal the capitation fee that would otherwise be paid to HMOs under the current system. Indeed, with the MSAs, costs may be substantially reduced, as described below.

In future years, the Legislature, in coordination with the Commission, would determine the voucher amount based on the available resources and the amount necessary to buy essential coverage. Such vouchers would allow more budgetary flexibility to adjust the subsidy to available resources than the cumbersome medical services priority list.

3) Abolish the Medical Services Priority List

As discussed above, the effort to prioritize all health services on a single list is an intellectually misbegotten central planning enterprise. As a practical matter, the government cannot develop the information to perform the effort effectively. Moreover, doing so would only involve the government in ethically objectionable health care rationing that restricts the freedom of people to control their own health and. In addition, as a practical matter, this whole effort has failed to reduce costs significantly.

The medical services priority list and all efforts to develop it should consequently be scrapped entirely.

4) Provide for Universal Coverage

Instead of employer or individual mandates, universal coverage would be achieved under the power to the people plan through the following moderate changes in the current Oregon Health Plan.

Guaranteed Renewability. The Oregon Health Plan provides for guaranteed renewability of insurance sold to small businesses. This should be extended to all health insurance. Under this provision, insurers would be prohibited from canceling coverage for someone after they become sick, or in raising their rates more than for others. Instead, insurers would be required to renew coverage for all who desire at the same standard rate increases for everyone with the same policy.

Health insurance that can be canceled or subject to discriminatorily higher premiums after someone becomes sick is not insurance at all. It does not cover high health care costs, which is the protection people seek from health insurance. Just as insurers cannot be expected to issue fire insurance after a house catches fire, they cannot be allowed to cancel such insurance after a covered home catches fire. Guaranteed renewability, therefore, prohibits essentially fraudulent health insurance contracts.

Portability. Simple, non-burdensome regulation would provide that individuals covered by any employer group insurance policy would have the right to convert their coverage to an individual health policy when they leave their employment, as long as they or their new employers continue to pay the premiums. This would ensure that individuals could take their guaranteed renewable insurance with them from job-to-job. This provision has been developed and endorsed by the American Legislative Exchange Council (ALEC), a nationwide organization of over 4,300 state legislators. With this provision and guaranteed renewability, everyone who has insurance coverage would be assured of keeping it.

Health Insurance Vouchers. The freedom of choice vouchers Already described above would enable the poor to buy the guaranteed renewable coverage as well. This would ensure that no one would lack essential coverage because they didn't have sufficient funds.

State Uninsurable Risk Pool. The Oregon Health Plan already includes a risk pool created by the Legislature in 1989. Those who have been denied health insurance are subject to exclusion of pre-existing conditions, become uninsurable because they have gotten sick, or who have to pay charges well above standard premiums, can obtain coverage from the Oregon Medical Insurance Pool.

The premiums for the coverage are set at 150 percent of standard rates because of the high risk medical conditions of the applicants. Even this would not be sufficient to pay health costs for the uninsurable. Consequently, the pool is currently subsidized by a tax on all health insurance premiums in the state sufficient to cover remaining medical costs for those in the pool. This year, about 3,600 Oregonians are covered by this pool.

Such pools are already in existence in 28 states and work well to target assistance for the seriously ill in need.(20) The health insurance vouchers should be coordinated with the pool to provide sufficient funds so that no one in need would be excluded. If health insurance is considered socially beneficial, the current tax on insurance premiums is counterproductive. These pools should therefore be funded from general state revenue, rather than the current, paradoxical premium tax.

These provisions would achieve all the social policy goals of universal coverage, without mandates, new bureaucracies, government rationing, reduced quality of care, lost freedom of choice, and a general government takeover of the health care system. Those who had insurance would be able to keep it. Those without sufficient funds would be given the means to buy it. And those who didn't buy it and became too sick to buy it later would be able to obtain coverage through the risk pool. Consequently, everyone would be able to obtain essential health insurance. Moreover, the financing for essential health care for all would be assured.

5) Repeal the Employer and Individual Mandates

As discussed above, the employer mandate is a false promise as its costs are born by workers in lost wages, inefficiently causing a loss of jobs in the process. Moreover, the mandates are a tax on workers that forces them to pay for the benefits that the government and the special interests choose for them, rather than the benefits they choose, adding costs to pay for unnecessary expensive benefits they may not need or want. Moreover, the mandates would not even be effective in achieving universal coverage, and are not needed to do so. With the universal coverage provisions described above, the employer and individual mandates should consequently be repealed.

6) Cancel Wasteful New Benefit Spending Mandates

As described above, the benefit package for Medicaid under the Oregon Health Plan is currently slated to expand next year to include coverage for drug and alcohol abuse rehabilitation and open-ended mental health services. This would add substantial and unnecessary new costs to already out-of-control spending under the program, increasing per capita costs under the government's own estimate by 21 percent. As described above, such coverage could be purchased directly or with vouchers, if desired, by consumers.

7) Repeal Medical Technology Rationing

As described above, the Oregon Health Plan has created a Health Resources Commission that has begun the process of rationing health care technology in the state, which can only reduce access to the best, most advanced, most sophisticated medical services and treatments for the middle class and the elderly. This ethically objectionable rationing initiative oppressively restricts freedom of choice and control by individuals over their own health and care. Better and more effective means of controlling costs have been advanced above. Consequently, the Health Resources Commission should be abolished; all efforts to ration health care technology should be abandoned.

8) No New Taxes

The government should commit to carrying out these reforms without any new taxes. This would be feasible given the changes mentioned above. Since new taxes would further shift costs from some Oregonians to others, if new spending under the Oregon Health Plan is a priority, then it should be financed by reductions in other state spending.

Conclusion

The health policy question before the state is this: Who should control your health, its care, and your spending - you or the government? The Oregon Health Plan moves that control towards the government. The alternative power to the people plan shifts that power and control to you, each individual patient and consumer. The choice is yours.

About the Author

Peter J. Ferrara is (as of 1994) a senior fellow at the National Center for Policy Analysis. He is a graduate of Harvard Law School and Harvard College. (As of 1997 he is general counsel and chief economist at Americans for Tax Reform.)

Endnotes

1. "Oregon Health Plan will cost $1.9 billion during 1995-97" Oregon Health Forum, Vol. 4, No. 5, May 1994, p. 1; also Vol. 4, No. 9, September 1994, p. 3.

2. Joshua Wiener, "Oregon's Plan for Health Care Rationing," The Brookings Review, Winter, 1992, p. 36.

3. David Stipp, "Prevention May Be Costlier Than a Cure," Wall Street Journal, July 6, 1994, p. B1.

4. See discussion of the impact of the ADA in Oregon Health Services Commission, Prioritization of Health Services, Report for the Governor and Legislature, 1993, pp. 7-18.

5. "State Crunches Oregon Health Plan Numbers," Oregon Health Forum, Vol. 3, No. 4, April, 1993, p. 2.

6. Tom Mason: "Touted Oregon Health Plan Holds Fatal Flaws," The Oregonian, Nov. 25, 1992.

7. Office of Medical Assistance Programs, Department of Human Resources, The Oregon Health Plan, p. 16.

8. See discussion in Peter J. Ferrara, "The Health Policy Debate: Options for Reform," National Center for Policy Analysis, Backgrounder No. 131, July 7, 1994, pp. 2-3. 9. See discussion in Ibid, pp. 3-5.

10. Richard Vedder, PhD and Lowell Gallaway, PhD, "Concealed Costs: The Real Impact of the Administration's Health Care Plan on the Economy - A State-by-State Analysis", American Legislative Exchange Council, 1994.

11. John Gabel and Gail Jensen, "The Price of State-Mandated Benefits," Inquiry, Vol. 26, No. 4, Winter, 1989.

12. Ibid.

13. Ibid, Vedder/Galloway, "Concealed Costs: The Real Impact of the Administrations Health Care Plan."

14. Insurance Information Institute, "Compulsory Auto Insurance," Insurance Issues Update, January, 1993.

15. "Oregon Health Plan will cost $1.9 billion during 1995-97," Oregon Health Forum," Vol. 4, No. 5, May, 1994, p. 1; also Vol. 4, No. 9, September 1994, p. 3.

16. Ibid.

17. "The Oregon Health Plan," Oregon Health Forum, August, 1994, p. 6.

18. Cooper and Lybrand, Oregon Health Plan Medicaid Demonstration, Analysis of Federal Fiscal Years 1994 and 1995 Average Costs, April 19, 1993.

19. For further discussion of Medical Savings Accounts, see the following books and articles by John C. Goodman and Gerald L. Musgrave: Patient Power: Solving America's Health Care Crisis; "Medical Savings Accounts: An Idea Whose Time Has Come," National Center for Policy Analysis, No. 128, July 22, 1992; "The Economic Case for Medical Savings Accounts," paper presented at the American Enterprise Institute, April 18, 1994; "Medical Savings Accounts: The Private Sector Already Has Them," NCPA Brief Analysis No. 105, April 20, 1994.

20. Ferrara, "The Health Policy Debate," pp. 33-35.

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