A Free-Market Approach To Controlling Health Costs

HAD it not been for the Clinton administration's insistence that health-care reform could be accomplished only by replacing the existing system with one dictated by the federal government, we might today be celebrating the passage of legislation rather than doing post-mortems on the Clinton scheme.

The health-care task force headed by Hillary Rodham Clinton spent many weeks behind closed doors, unburdened by any contact with the real world of individuals and physicians who must make daily decisions. Once the plan was unveiled, support for it went downhill steadily. The more that people realized it would cost jobs, cause rationing, and force those already covered by insurance into a compulsory low-benefit program in order to cover those not covered, the more they registered their disapproval; Congress finally gave up trying to resuscitate the patient.

The American people, through poll after poll, said they want to make their own health-care decisions and not have them dictated by government bureaucrats. There is a practical alternative: establishing a health care market-based system that can check escalating costs, make coverage accessible to all, and preserve individual choice and avoid the rationing that would inevitably accompany government control.

Health-care costs can be controlled only if people pay for their health care with their own money. As Milton Friedman put it, ``People are more careful with their own money than with other people's money.'' Health-care costs can be controlled not only without reducing the quality of anyone's health care but while actually increasing disposable income.

Among the several health-care bills that will be introduced when the new Congress convenes in January, probably the single most promising market-based reform will be medical savings accounts (MSAs). Seven states enacted MSA legislation this year: Arizona, Colorado, Idaho, Illinois, Michigan, Mississippi, and Missouri. Eight states passed resolutions asking Congress to adopt MSAs. The Ohio Department of Health is evaluating the use of an MSA program for the state's employees. Grass-roots enthusiasm for the concept is growing dramatically. In 1995, another 27 states are expected to consider MSA legislation.

MSAs were considered by several congressional committees this year, and the House Ways and Means Committee bill actually included a provision for them. But congressional proponents of the Clinton plan and of fully nationalized health care kept the spotlight on those proposals, rather than on practical, market-based solutions.

What makes medical savings accounts attractive? Typically, a company pays approximately $4,000 a year for an employee's health insurance policy. With an MSA, the employer would purchase each year a high-deductible (e.g., $2,000) health insurance policy for the employee for about $2,000. The employer would deposit another $2,000 in an MSA for the employee. From this interest-earning account, the employee pays his or her medical bills up to the deductible limit of the insurance policy. If costs exceed the deductible, the policy takes over. If the year's costs are below the deductible level, the employee keeps the unspent money. On Jan. 1 of the following year, the employer puts in another $2,000 and the cycle starts over.

This system will restore the connection between rational individual choice and public purpose, rewarding wellness and frugality, rather than waste. Those with MSAs are likely to pay closer attention to personal decisions affecting health to stay well - and save money.

MSA legislation can allow for ``portability'' so that the policy moves with the employee. The legislation should also encourage companies and individuals to convert their current health insurance to an MSA program. And, while it is considering MSA legislation, Congress should make Medicare and Medicaid flexible enough so that interested recipients could convert their coverage to MSAs.

Medical savings accounts won't solve every problem in the system. Other reforms are needed. For example, health insurance should be available to high-risk individuals at affordable rates. And people who purchase their own health insurance should be able to deduct the cost of the premiums.

The march toward full conversion to a market-based health-care system begins in January. While it may take a decade to become fully effective, the payoff will be substantial and it will be broadly based. The soaring medical-care cost curve will come down. At the same time, health-care delivery will continue to improve. As that occurs, we will be able to afford to broaden subsidies to provide coverage for those who lack it.

The recent requiem for government-controlled health care presents an opportunity to pass proposals that will transform the US health-system into what it can be: not only the world's best provider of health care, but also one in which costs are under control and there is greater access for all.

With more than 40 states actively advocating market-oriented reforms, the tide is clearly running in favor of MSAs. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.