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Economist Butler: Give States Maximum Flexibility Under Health Reform

Stuart Butler has seen health overhaul plans come and go during the three decades he has tracked health care policy at the Heritage Foundation. But this time is different, says the organization’s vice president of domestic and economic policy studies. With legislative activity now entering the “endgame,” he says, it’s important to focus on how crucial issues might be resolved. 

In a wide-ranging discussion with KFF Health News, Butler, who holds a Ph.D. in U.S. economic history from the University of St. Andrews in Scotland, talked about the proposal to have the federal Office of Personnel Management (OPM) have a role in expanding insurance coverage to more Americans; the increasingly heated debate over the roles of the federal government and the states in implementing any legislation, and the merits — or demerits — of an individual mandate. He also predicted that the nation’s employer-based health insurance system will continue to change, with or without health care legislation. 

Whatever happens, he says, the full impact won’t be known for years. “One way or the other, this is not going to end it,” he said.  “Obama is not going to be the last president to deal with health care reform.”

Here are edited excerpts of the discussion:

Q: What do you think about the plan to replace a proposed government-run plan –a  public option — with a proposal to have the OPM manage national plans from private insurers?

A: A lot of members (of Congress) are drawn toward this OPM alternative as a very different way of doing things than a public option would be. I think that they are going to find that that’s not the case. There is and should be a debate about the public option and about single payer and I’m all in favor of having that debate. But I think what always bothers us is when something is suggested as an alternative and it isn’t really. People need to know that. And if members don’t want to have a public option and all that entails, then they really need to make some changes to any OPM alternative for it to really be an alternative.

Q: What should or shouldn’t the OPM model try to accomplish?

A: OPM has enormous powers to negotiate with the private plans, which it really doesn’t use. It can’t become a method of simply taking over large chunks of the health insurance industry. It must not have an open-ended financial pipeline to the Treasury, that’s a very critical issue. Because if you had an OPM alternative and the White House starts to use the powers OPM currently has, plus new powers from statute, and it also has access to credit through the Treasury you really do have a different dynamic in terms of the financing in the long run.

Q: What other aspects of the legislation are you focusing on?

A: I think the exchange issue is another one. I’ve personally always supported exchanges, because I think in a market-based system – in a choice system – you do need a sort of a shopping mall system. You do need the equivalent of Expedia so people can compare. You do need rule-setting, much like a stock exchange for buying and selling companies. So, as an element in any kind of choice and market system, an exchange is a critical. So then the issue is how you design it. What powers does it have? What requirements does it put in place? 

The issue I think, then, is where the exchange should be. I think a system that allows different ways of organization and fine-tuning is critically important. Therefore I favor, very much, a state-based system generally as opposed to a national exchange, which I think can easily become a highly restrictive institution that actually frustrates the kind of continuous experimentation and learning that you get in a competing state system.

Q: What, then, are the appropriate state and federal roles in health reform?

A: That’s a critical issue: Who is ultimately responsible for the cost between the federal government and the state? You neither want a situation where the federal government carries the whole cost of something but the state can make all the decisions, because then they’re a complete free-rider. And you don’t want the opposite either.

Over time, variation and the ability of states to learn from each other, and to have some appropriate level of transference of resources is more likely to lead to a better outcome for everybody than to say, “We’re going to start by making it the same everywhere.”

Q: How effective do you think the individual mandate [to buy health insurance] is going to be?

A: From a technical point of view, I don’t agree that an individual mandate is necessary to make the insurance system work. I mean, there’s several arguments for a mandate and we’ve explored them all and we’ve been on both sides sometimes. But I think the argument you hear from the insurance companies — that we need everybody in America forced to buy our product for us to be able to work — is something that should cause people to be skeptical from the outset. 

Going in and forcing people to buy something that they rationally don’t want to buy has got a lot of problems. And certainly if you don’t combine that with an adequate subsidy level, I think that’s profoundly wrong.

Q: How can lawmakers — tussling among themselves — sell reform to the public?

A: With enormous difficulty. Let’s realize what’s going on here. There must be big change in our system. We can talk about what that change should be, but our system is profoundly inadequate to reach the objectives we want. And there’s a lot of agreement on what it should be. We should not have an employment-based (health insurance) system in the United States. The idea that your access to health care depends on who hires you is ludicrous in a modern society. (And) we need a defined contribution by society for our health care.

Q: Do you think a lot is going to change for people with employer-sponsored health insurance if health care legislation passes?

A: I think there will be changes. An enormous number of people are going to think that they’re worse off either because their employers dropped a plan they liked, (they lost) a pediatrician they loved or they’re paying for something they’ve already got and they don’t see why they should have to do this.

I think in all probability, the costs of providing benefits through the place of work — because of the taxes and the requirements and the mandates and so on — is going to go up. We’re going to see an acceleration of a trend (in which) total compensation, while rising with productivity, the portion in cash income is going to continue to decline.

What’s actually going on is a decision by the government to say the amount of your compensation that’s going to come in the form of health care determined by us is going to increase. Now as an economist, I look at something like that and say that means the preferences you would have had otherwise, in terms of cash and benefits, are going to be different than what you would have negotiated otherwise.

It’s  not going to generally raise the living standards of people by distorting the structure of the U.S. economy in this way. We can and should make changes in the health care system but they involve a cost to us and should be seen that way.