The Defined Contribution Route to Health Care Choice and Competition

Most Americans are in government-subsidized insurance arrangements that largely insulate them from the cost of insurance and care. Open-ended federal support for health insurance coverage through Medicare, Medicaid, and the tax exclusion for employer-sponsored insurance (ESI) plans is the major reason the federal budget today is in deep deficit, and why the long-term outlook is even more daunting. Medicare's incentives for rising volume, unlimited federal funding for state-run Medicaid plans, and a tax subsidy for employer plans that grows with the expense of the plan all point in the same direction: rapidly rising health care costs.

As part of the American Enterprise Institute project, Beyond "Repeal and Replace": Ideas for Real Health Reform, health policy analysts James C. Capretta and Thomas P. Miller observe that the recently enacted Patient Protection and Affordable Care Act does little, if anything, to break with these longstanding policy problems. Indeed, the real point of the new health law is not to change course at all but to ensure the uninsured are also enrolled in expansive and heavily subsidized third-party insurance arrangements.

The coauthors argue that a more sustainable, marketbased, and patient-centered version of health reform must instead convert existing defined benefit promises into "defined contributions" that individuals and their families then can use to enroll in coverage arrangements of their choice. Capretta and Miller recommend that Medicare subsidies should no longer hide the true cost of promised benefits but provide beneficiaries incentives to obtain the most value for them. They find that a move to replace both traditional Medicaid assistance and the tax preference for ESI with defined contribution payments would open up new possibilities for explicit and beneficial coordination between the Medicaid program and the coverage normally offered to working-age Americans.

The coauthors conclude that placing limits on what is provided through defined contribution payments, even with special provisions for additional help to low-income households, will set in motion a dynamic that will yield benefits across the entire health care system for all Americans.

Click here to read the full paper as an Adobe Acrobat PDF.

Thomas P. Miller is resident fellow at AEI. James C. Capretta is a fellow at the Ethics and Public Policy Center.

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