The President and Democrat Congressional leaders have a vision for health care reform this year. While still blurred at this time, it is clear that they favor maintaining the tax preference for employer-sponsored coverage versus individual coverage. Similar in concept to the 2006 Massachusetts legislation, they would like to create a “national health insurance exchange” to facilitate the purchase of coverage by people who are currently uninsured and by people who may want “new health insurance.” Like the Bay State, subsidies would be provided to people with income below certain thresholds. Approved private plans would be available through the exchange. Private plans would have to meet federal criteria for what should be insured and for how much. The plans would need to be offered to all applicants at rates that would be substantially community rated — pushing the price far above costs for the young and/or healthy absent any significant taxpayer subsidy. The Democrat leadership also favors the creation of a public insurance alternative to compete with private plans.

The legislative text that emerges in the next month or two will likely require large employers to offer coverage to employees or pay some penalty. (They almost all offer coverage now.) Small firms will likely be offered tax subsidies to offer coverage. Expanded eligibility for Medicaid and SCHIP also are likely as a further step towards universal coverage. The proposal will no doubt include a bundle of initiatives with the hope of slowing medical cost growth throughout the system.

Regardless of what else may surface when specific text is proposed, any public insurance alternative should be repudiated. It cannot be credibly claimed that a public insurer can compete fairly with private plans. In response to criticism that a public insurer, like Medicare and Medicaid, would shift costs to private payers (its ostensible competitors), the idea is now being floated that the public insurer would agree to pay the same rates to medical providers as private insurers. That idea is neither credible nor practical (each private insurer negotiates it own rates with hundreds or thousands of providers). Even if it were credible and practical, a public insurer would still be backed by the federal purse and prone to deliberate if opaque under-pricing of private plans, which would be heavily regulated, thus preventing them from competing effectively on service and innovation.

In short, a public insurance alternative is a bad idea. Congressional Republicans and moderate Democrats should reject any plan that contains it. Even without a public insurance alternative, a national insurance exchange with federal standards and regulation of private plans would essentially centralize coverage design, pricing, and regulation, substantially displacing state authority. A national exchange would produce less choice and innovation, if not sooner, then certainly later. This idea also should be rejected.

While not on the table, the alternative approach to improving health care and its financing is to increase reliance on markets and incentives. What changes might help?

First, we should modify the tax treatment of health insurance to end the preference for employer-sponsored coverage versus individual coverage. This outmoded and anomalous tax preference stimulates excessive coverage and utilization of health services for many workers, in part by making the true cost of coverage opaque to employees. It simultaneously discourages people without employer-sponsored coverage from buying any coverage. These inefficiencies could be remedied, without increasing taxes, by replacing the current tax exemption for employer-sponsored coverage with a refundable tax credit for group or individual coverage. The results plausibly would include more efficient choice of cost-sharing arrangements – larger deductibles and co-payments for non-catastrophic expenditures – and greater willingness of workers to choose managed care arrangements that reduce use of services for which the benefits do not justify the costs.

The argument that eliminating the tax preference for getting health insurance at work would threaten the viability of the employer-sponsored market is a red herring. While the individual market would grow, the employer-sponsored market would remain preferable for workers as long as it provides real economies, and it certainly will for a significant majority of medium to large employee groups.

A second, market-oriented reform would be to repeal or constrain regulations that currently drive up the cost of individual and small group health insurance, especially for relatively young people in states with community rating requirements and multitudes of state mandated benefits. Along with growth in the demand for individual coverage that would be stimulated by changing the tax rules, the results would likely include significant innovations in plan pricing and design, including improved portability of coverage throughout a person’s life, as well as the possible development of pricing and coverage terms that provide significant incentives for becoming and remaining healthy. These changes could be accompanied as needed with increased funding for state mechanisms providing guaranteed access at subsidized rates to persons with severe, chronic health problems.

While on the table last fall, the market-oriented approach was neither clearly nor passionately articulated. If the Congress can avoid enacting misguided changes that will be impossible to roll back, the day could come when it market-oriented reforms are given a chance.  Wouldn’t that be prudent before taking irreversible steps toward quasi-socialized health care?