1. See John Goodman and Gerald Musgrave, "The Changing Market for Health Insurance: Opting Out of the Cost-Plus System," National Center for Policy Analysis, NCPA Policy Report No. 118, September 1985.

  2. For a historical analyses of how these changes were brought about, see John Goodman, Regulations of Medical Care: Is the Price Too High? (Washington, DC: Cato Institute, 1980). A different perspective, one more sympathetic to the suppression of market incentives, is contained in Paul Starr, The Social Transformation of American Medicine (New York: Basic Books, 1982).

  3. In 1983, Medicare adopted a prospective payment system (PPS) of reimbursing hospitals based on diagnostic-related groups (DRGs). Under the system, Medicare quit reimbursing hospitals based on costs and began paying fixed prices (determined in advance) for different procedures. At the time this change was made, many thought that the new system represented a market-based approach to health care. However, Medicare does more than limit what the federal government will pay. It also is a price-fixing scheme in which patients and providers are denied the opportunity to negotiate market prices. Moreover, prices are fixed based on average hospital costs. If the hospital marketplace were truly competitive, Medicare's DRG prices would have disastrous consequences for patients. Above-average-cost patients would not be able to get treatment. (This issue is considered at greater length below.) Because hospitals are steeped in the tradition of cost-plus medicine, however, the DRG system has had a greater impact on shifting costs to other payers than it has on changing the way medicine is practiced. During the 1980s, most private insurers (including Blue Cross) also quit reimbursing hospitals on the basis of cost. Most now pay on the basis of hospital charges. As we move into the 1990s, however, more private insurers are copying Medicare's method of payment. Many now pay a fixed price per procedure or a fixed price per diem.

  4. See "The Politics of Medicine" in John Goodman, National Health Care in Great Britain: Lessons for the USA (Dallas: Fisher Institute, 1980), ch. 10.

  5. An exception is insurance for tort liabilities, which has many of the defects of health insurance and leads to many of the same problems.

  6. There are a few exceptions, such as policies that indemnify patients in the form of a fixed sum of money per day spent in the hospital, a fixed sum of money for a procedure or a fixed sum of money for a diagnosis (e.g., cancer).

  7. To our knowledge, no one has studied the market for cosmetic surgery. This is unfortunate because most of what employers and insurers have unsuccessfully tried to accomplish for other types of surgery over the past decade has occurred naturally – with few problems and little fanfare – in the market for cosmetic surgery.

  8. For a more complete discussion of how an ideal health care system would function, see John Goodman and Gerald Musgrave, Solving America's Health Care Crisis (Washington, DC: Cato Institute), forthcoming.

  9. Employee Benefit Research Institute, "A Profile of the Nonelderly Population Without Health Insurance," EBRI Issue Brief, No. 66, May 1987.

  10. Aldona Robbins and Gary Robbins, "What a Canadian-style Health Care Scheme Would Cost U.S. Employers and Their Employees," National Center for Policy Analysis, NCPA Policy Report No. 145, February 1990.

  11. The deduction must be periodically renewed by Congress and is not a permanent feature of the tax code.

  12. For example, 89 percent of Americans who have health insurance acquired it through an employer. See EBRI, "A Profile of the Nonelderly Population Without Health Insurance," Table ?, p. 3.

  13. Ibid.

  14. The value of the benefit equals 1/(I-t), where t is the marginal federal income tax rate plus the combined employer-employee Social Security payroll tax rate. For a worker in the 15 percent bracket, t = 0.15 + 0.153. For a worker in the 28 percent bracket, t = 0.28 + 0.153.

  15. See the discussion in Stuart Butler and Edmund Haislmaier, A National Health System for America, rev. ed., (Washington, DC: Heritage Foundation, 1989).

  16. See the discussion in Butler and Haislmaier, A National Health System for America, ch. 3.

  17. People would be free to purchase any insurance policy with any deductible. Insurers would be required to give their customers a form stating the amount of premium that qualifies for a tax credit under federal tax law.

  18. These calculations are based on policies sold by Golden Rule Insurance Company, the largest seller of individual and family policies in the country. Other insurance companies sell similar policies at similar prices. See John Goodman and Gerald Musgrave, "The Cost of Low-Deductible Health Insurance," National Center for Policy Analysis, forthcoming.

  19. As of 1989, Golden Rule Insurance Company no longer sells policies with a 5100 deductible. People who previously had such policies, however, may renew them at the indicated prices.

  20. The concept of health saving savings accounts was originated by Jesse Hixson, currently a health policy economist with the American Medical Association. The idea first appeared in print in John Goodman, Peter Ferrara, Gerald Musgrave and Richard Rahn, "Solving the Problem of Medicare," National Center for Policy Analysis, NCPA Policy Report No. 109, January 1984. The idea achieved further impact through John Goodman and Richard Rahn, "Salvaging Medicare With An IRA," Wall Street Journal, March 20, 1984. That same year Singapore introduced a program under which all workers are required to contribute 6 percent of salary to individual Medisave accounts – a program that has been highly successful and eliminates the need for most third-party health insurance.

  21. See John Goodman, Aldona Robbins and Gary Robbins, "Mandating Health Insurance," National Center for Policy Analysis, NCPA Policy Report No. 136, February 1988.

  22. For a discussion of Medisave accounts in Singapore and the advantages they create, see John Goodman and Peter Ferrara, "Private Alternatives to Social Security in Other Countries," National Center for Policy Analysis, NCPA Policy Report No. 132, April 1988.

  23. This is the estimate of the Employee Benefits Research Institute. Other estimates place the number of uninsured people at about 31 million.

  24. See John Goodman and Gerald Musgrave, "Freedom of Choice in Health Insurance," National Center for Policy Analysis, NCPA Policy Report No. 134, November 1988.

  25. Ibid.

  26. Kenneth H. Bacon, "Business and Labor Reach a Consensus on Need to Reduce Health Care Costs," Wall Street Journal, November I, 1989.

  27. Employee Benefits Research Institute, "A Profile of the Nonelderly Population Without Health Insurance," EBRI Issue Brief, May 1987, No. 66, p. 7.

  28. For a discussion of these issues, see Stuart Butler and Ed Haislmaier, A National Health System for America, (Washington, DC: Heritage Foundation, 1989), ch. 3.

  29. Illinois Health Care Cost Containment Council, A Report of Selected Prices at Illinois Hospitals: Outpatient Services, August 1989.

  30. These projections are based on assumptions used in the Social Security Administration's pessimistic projections. See Goodman and Musgrave, "Health Care after Retirement," National Center for Policy Analysis, NCPA Policy Report No. 139, June 1989. Table III, p. 6.

  31. Ibid.

  32. Jonathan C. Dopkeen, Post-retirement Health Benefits, Pew Memorial Trust Policy Synthesis, 2, Health Services Research, Vol. 21, No. 6, February 1987, p. 810.

  33. 'This is the estimate of the House Select Committee on Aging. See Employee Benefit Research Institute, Measuring and Funding Corporate Liabilities for Retiree Health Benefits (Washington, D.C.: EBRI, 1988), p. xv.

  34. Ibid., p. xvi.

  35. Variously called Medical IRAs, health care savings accounts, health bank IRAs and Individual Medical Accounts (IMAs), the concept of savings for post-retirement medical care has been used in proposals to supplement Medicare and to privatize or replace Medicare. It has have been endorsed by politicians reflecting a wide range of political perspectives. The original proposal to create such accounts and use them as a vehicle to privatize Medicare was made in John Goodman, Peter Ferrara, Gerald Musgrave and Richard Rahn, "Solving the Problem of Medicare" The proposal received considerable visibility based on the summary that appeared in John Goodman and Richard Rahn "Salvaging Medicare With an IRA." Subsequently, Colorado instituted a MIRA provision at the state level. Yet another version of the idea appeared in Peter J. Ferrara, "Averting the Medicare Crisis: Health IRAs," Cato Institute, Cato Policy Report No. 62, October 31, 1985. Ferrara's version of the proposal became the basis for a bill that has subsequently been introduced in several sessions of Congress, with bipartisan support among conservatives arid liberals.

  36. In principle, there could be three types of deductible deposits, all made to the same account. One type of deposit is for savings for current medical expenses. A second type is for funds to supplement Medicare during retirement. A third type is to replace Medicare. Institutions which manage these accounts would keep separate balances (or each of the three purposes.

  37. For a similar proposal, see Peter 1. Ferrara "Health Care and the Elderly," in Butler and Haislmaier, National Health System for America, pp. 85-57.

  38. Nancy M. Kane and Paul D. Manoukian, "The Effect of the Medicare Prospective Payment System on the Adoption of New Technology," New England Journal of Medicine, Vol. 121, No. 21, November 16, 1959, p. 1379.

  39. Eric Munoz, Eugenio Barrios, Houston Johnson, Jonathan Goldstein, Morton Slater and Leslie Wise, "Race, DRGs, and the Consumption of Hospital Resources," Health Affairs,Spring 1989 p. 187.

  40. Kane and Manoukian, "The Effect of the Medicare Prospective Payment System on the Adoption of NewTechnology," p. 1381.

  41. Ibid., p. 1379.

  42. Ibid., pp. 1378-1383.

  43. See Goodman, National Health Care in Great Britain, pp. 121-122.

  44. More precisely, the current system ignores contractual waivers of tort liability claims. What is needed is a legal change requiring the courts to honor certain types of contracts under which tort claims are waived in return for compensation.