For twelve years Vermont's state government has aggressively moved ever further into the state's health care market. A review of the events of these twelve years produces six major policy principles that underlie this progressive government intervention. They can be fairly summarized as follows:

1. Health care is "delivered". Patients are passive vessels into which competent professionals pour the elixir of "health care". Since "there is no such thing as an informed consumer of health care" (Howard Dean MD, 1992), health care should be delivered through managed care organizations, where treatment decisions are made by gatekeepers with incentives (or instructions) to restrain costs. Individual choices about health care and health insurance should be discouraged, because individuals make choices with only their own interest in mind, rather than the good of society as a whole.

2. The measure of social progress is the number of people whose health care expenses are covered by some form of "insurance", whether it is true actuarially-based insurance offered by an insurance company, or a promise to provide needed care offered by an HMO, Medicare, Medicaid or the Veterans Administration.

3. The ultimate goal of health policy should be "universal coverage", a medical-financial system comprehensively managed, through regulations, price controls, budget controls, reimbursements, taxes, and rationing, by a government "Authority". Only such a system can assure cost containment (that is, can ration care to match available revenues.)

4. Until such time as a "universal coverage" system can be put in place, the state should enroll more and more people, of higher and higher incomes, in taxpayer-paid Medicaid. Since the federal government pays 60% of Medicaid costs, every effort must be made to qualify proposed expansions with HCFA. State-managed health care programs like Medicaid are a bargain for state taxpayers. Since the state drastically underpays for hospital services, the remaining unpaid costs can be shifted to private health insurance premium payers. Many persons who then become uninsured because they can no longer afford the higher premiums can then be covered by expanding access to the government program which produced the cost shift. This process steadily puts more and more Vermonters into taxpayer-financed health care. This constitutes desirable progress toward a single payer system.

5. Blue Cross, Vermont's only domestic health care insurer, has a special social mission. The Commissioner of Insurance must take all necessary steps to protect the financial stability and soundness of Blue Cross. This necessarily requires that the commissioner become deeply involved in its management decisions. An important part of the Blue Cross mission is to offer health care coverage to all customers at the same "community rated" price, regardless of the costs incurred by different kinds of customers. Thus the healthy and the sick, the old and the young, the rural and the urban, the male and the female, must all pay the same premium for the same coverage. This policy disallows any consumer discount for healthy behavior, because such a policy would create a financial advantage to people who take better care of their health, and reduce the premiums paid by them to cover the costs of other people who do not take care of their health.

6. Since by community rating Blue Cross can't compete with private carriers who charge customer groups on the basis of their expected claims -- the practice long observed in life, auto, workers compensation, and property and casualty insurance - the law must prohibit all carriers from using actuarial or experienced-based distinctions. This is the only way that Blue Cross can survive with its social mission intact. If competing insurers withdraw from the state rather than conform to this law, so much the better. Their political opposition to the expansion of government health care will thereby disappear, smoothing the path toward a single payer health care system.

What These Policies Have Produced

As a result of these policies, the political leadership of Vermont state government has brought about

• a massive exodus of commercial health insurers, and the collapse of a competitive health insurance market.

• an unfair burden on healthy young families, who are forced to subsidize the health care costs of sicker older people even though the older people are in their peak earning years and have long since paid off their education loans and home mortgages.

• an unfair burden on people who practice a healthy lifestyle, who are forced to subsidize others who smoke, drink to excess, use drugs, are obese, and underexercise with little regard to their health.

• the steady conversion of privately insured Vermonters into uninsured Vermonters, and then into government-insured Vermonters.

• the effective elimination of one of the most promising health insurance reforms of the 1990s, the Medical Savings Account, from the Vermont market.

• the recurring - and sometimes extralegal - regulatory rescue of Blue Cross, which has become a virtual ward of the state.

• the costly overutilization of health care by government-certified patients who have come to regard it as "free".

• serious and chronic state underpayment of hospitals and nursing homes for ever-increasing Medicaid services, which forces them to shift costs onto privately insured patients, thus driving up premiums and causing more Vermonters to drop their increasingly unaffordable coverage.

• serious and chronic state underpayment of doctors and dentists for ever-increasing Medicaid services, which forces them to limit the number of Medicaid patients they will treat, or to refuse to treat Medicaid patients at all.

• binding state control of hospital budgets, making hospital management and capital investment subject to political approval.

• an increasing cost burden both on businesses competing in interstate commerce, and on small businesses serving a local market, leading to reduced job growth and reduced employee insurance coverage.

All of this has been accomplished under constant pressure from political leaders for the expansion of government health care, with the goal of creating a state single payer health system that is managed by political appointees, provides virtually free health care for all Vermonters who are below Medicare age and do not work for large employers, does away with private health insurance, puts the state in control of all health care providers, requires them to ration care to meet politically-determined budgets, and sends the bills for everyone's health care to the taxpayers.

The past twelve years have seen some success in expanding health care programs to serve more Vermonters, instead of meeting their needs through traditional charity care. But the result of this "success" has been the progressive destruction of a competitive health insurance market, an increasingly serious shifting of costs to health care providers and their private pay customers, and the rapid escalation of health insurance costs for employers and employees alike.

True Health Care Reform

Two of the key features of true health care reform are equalizing the tax treatment of medical expenses and minimizing third-party payment for insurance claims. Both of these needed reforms, however, will require national action. There are nonetheless a number of steps that can be taken by the Vermont legislature to effect a market-based health care system.

A sound reform of health care in Vermont, including a badly-needed revival of a competitive health insurance market, should be based on these principles and policies.

1. The primary responsibility for maintaining wellness and paying for health care rests with the informed individual and family, not with the government. Over a lifetime - and especially up to Medicare eligibility age - individual choices are directly related to the great majority of health problems. The opinions of some doctors and program managers notwithstanding, patients are not mere passive receptacles for the delivery of health care. They are conscious human beings whose understanding, involvement and cooperation are essential to maintaining or restoring wellness. People who regularly make important decisions about family, career, and investments must be considered competent to recognize the essentials of healthy lifestyle choices and effective self-treatment for non-acute conditions.

2. Wellness can be significantly increased and demand for expensive health care can be significantly reduced if individuals are educated as to the personal health consequences of their choices, especially those relating to smoking, drinking, drug use, exercise, nutrition, and sexual activity. The explosion of health care information through periodicals and internet sources has led to a corresponding increase in patient awareness of health care considerations, self-medication, and lifestyle modification. Every public and private program, including especially high schools, should offer a strong health consumer education component, and reward individuals and families who make healthy choices.

3. Health insurance exists to protect individuals from unexpected occurrences. It was never intended to pay for expected and predictable wear and tear. First dollar or low deductible coverage leads directly to costly overutilization of health resources; the patient believes he or she is getting "free" care and thus consumes more of it, even though it yields little or no improvement of health outcomes. Such coverage should be strongly discouraged, even to the point of imposing a surtax on the premiums of first dollar policies.

4. Individuals and families should be encouraged to create tax-favored medical savings accounts. MSAs are coupled with a relatively inexpensive high deductible major medical insurance policy. Funds deposited in an MSA can be used to pay for such routine expenses as physical examinations, immunizations, vision care, prescription drugs, nutritional supplements, and all medical costs until the annual deductible is reached. MSAs give families a financial incentive to use preventive care to maintain wellness. As balances in their MSAs increase, they can switch to higher deductible coverage and pay lower premiums without giving up major medical protection. In addition, many doctors will give up to a 25% discount for patients who pay for treatment at the time of service, a practice that an MSA makes easy. (Tax-deductible MSAs are available under Federal tax law for the self-employed and employees in firms with no more than 50 employees. The deduction carries through to state tax law because of Vermont's piggyback income tax feature. Unfortunately the restrictions enacted by Congress in 1996 have discouraged their use. None of Vermont's few remaining insurers actively markets MSA plans.)

5. The legislature should repeal community rating. Insurance carriers ought to be allowed to distribute the cost of insurance fairly among recognized actuarial categories such as age, gender, geography, and occupations. This traditional method of pricing coverage justly assigns costs in proportion to expenses incurred. Community rating has the regrettable effect of overcharging younger, healthier, but poorer families in order to subsidize older, sicker but wealthier (and thus more politically influential) families. Government mandates which have the effect of making the poor subsidize the rich are inherently unacceptable. Such mandates should be doubly unacceptable when their hidden purpose is to create a virtual monopoly for one struggling but politically influential health insurance company. The law should be changed to allow Blue Cross to use age and experience rating as well, while retaining its exemption from the premium tax through some transition period to subsidize its existing high cost books of insurance.

6. Insurance carriers should also be allowed to offer healthy lifestyle discounts. Auto insurance carriers offer discounts for safe driving records, the absence of traffic violations, security devices, and airbags. Property insurers offer discounts for fire protection. Most commercial health insurers offer discounts or "preferred" policies for non-smokers, etc. but such discounts are currently illegal in Vermont.

7. Government mandates that force insurance customers to buy coverage they do not want and will never use should be rolled back. These include pregnancy benefits, excessive drug and alcohol abuse coverage, and mental health parity. Lower income families ought to be able to buy a minimum-benefit policy that does not require them to subsidize the health care costs of others who choose to practice unhealthy lifestyles, or pay the costs of normal pregnancy and childbirth. By thus reducing the cost of basic coverage, thousands of Vermonters who have been incorporated into Medicaid will once again be able to pay their own way.

8. The state should resolve to pay the true cost of services provided to Medicaid patients by hospitals, nursing homes, and medical professionals. There is always some room for debate over what such "true cost" is, but the present practice of paying less than half of the going rate for Medicaid patients requires other patients to absorb a hidden tax on their own premiums to make up for what the government declined to tax openly. Unless the state resolves to pay its fair share for the care of "government patients", providers will simply decline to provide treatment. In the case of hospitals, it is not possible to turn away patients; thus they - and probably many doctors as well - will eventually be forced to serve state-designated patients at state-specified prices. Bargaining over these price schedules will in time make Vermont's medical profession into the equivalent of a trade union, with predictably consequences for professionalism..

9. Medicaid for acute care patients (other than the elderly or institutionalized) ought to be converted into an MSA-style program, with the state providing sliding scale subsidies for individual accounts. The MSA offers real incentives for involving customers in maintaining their own wellness, because they will not only live healthier lives but will benefit financially. It would almost certainly be less expensive for the state to fund MSAs and buy corresponding catastrophic coverage for such Medicaid-eligible Vermonters, rather than continually expand managed care or first dollar fee for service coverage. Since the taxpayers would fund these MSAs, there would presumably have to be some limitations on the use of the account balances. Allowed uses might include the purchase of long term care insurance, continuing education and job training, or other investments in family earning power, wellness, and independence.

10. The state should explore a program for the recapture of unpaid medical bills of persons who choose to spend their resources on things other than adequate health insurance. Such a program would be similar to an ordinary credit card account. The amount left unpaid by the patient would be debited to his account, and added back, over a period of years, to his reportable Vermont income. The amount added each year would be related to the patient's expected income level as indicated by previous returns. The proceeds after administrative costs of the additional income tax would be shared with the providers. Such a program could not realistically be expected to recover a large fraction of unpaid bills, but it would forcefully emphasize the individual's responsibility for paying for care received. In so doing it would have a positive influence on patient behavior. The tax-based recovery could of course be avoided if the non-payer relocated outside of Vermont.

11. The legislature should create a high-risk pool to cover the health care costs of the medically uninsurable - persons with known, costly health care problems who have been denied coverage by an insurer. Over 100,000 people in 28 states now participate in such pools, commonly called Health Insurance Plans (HIPs), which date back to 1978. A typical HIP requires insureds to pay 150% of the average premium for a comparable coverage, with premium subsidies available for low-income insureds. It offers them a choice of competing insurance plans, including MSA plans and HMOs. Its costs are funded by assessing the premium receipts of all health insurers, a practice now supported by the companies themselves. Typically the fraction of the population covered by a HIP is around one percent. An added advantage of the HIP pool is that it makes it unnecessary to mandate guaranteed issue on insurers. However, the HIP must be viewed explicitly as a means of covering only the medically uninsurable, not as a vehicle for expansion of government-financed health care.

12. The legislature should examine and tighten tort liability standards governing medical malpractice to reduce the exposure of health professionals, hospitals, nursing homes, and HMOs to predatory tort suits. Provisions for arbitration of malpractice claims were included in Act 160 (1992) but were never put into practice because the universal access plan contemplated by that act was never adopted. The growing enthusiasm among trial lawyers for suing HMOs - and through them, the employer contracting with the HMO - makes this step one of top urgency.

13. The state should actively promote the purchase of long term care insurance. Act 160 of 1996 requires the state to "propose and implement methods that permit strategies to provide alternative financing of long term care services by shifting the balance of the financial responsibility for payment for long term care services from public to private sources by promoting public-private partnerships and personal responsibility for long term care." In November 1997 the Department of Aging and Disabilities announced that it would implement a public education initiative to enhance the public's understanding of the need, cost and options for financing long term care. Unfortunately no such initiative has been launched.

14. Vermont's nine independent community-based free clinics merit continued state support. These clinics offer primary and preventive health care, wellness counseling, pharmaceutical assistance, and referrals to free or discounted specialist services for needy, uninsured Vermonters. They make use of the volunteer services of health care professionals, including complimentary treatment practitioners, students and community residents. Patients pay "what you can, when you can". In 1999 the free clinics and the Burlington Health Center shared $500,000 from the state's tobacco settlement fund, and received grants from foundations, federal programs, and community contributions. The grassroots free clinics serve a population that is often transient, between jobs, or otherwise hard to enroll in Medicaid, and do it as a genuine community service. A portion of the tobacco settlement fund should be set aside every year to assist the free clinics and encourage new clinics to organize in underserved parts of the state. AHS should refrain, however, from incorporating the free clinics into a bureaucratic system.

15. The legislature should, as essential housekeeping, revisit Act 160 of 1992 and systematically repeal all the provisions that failed, were ignored or abandoned, produced grievous consequences, or appear to commit the state to moving toward a government-controlled health care monopoly. Typical of the provisions meriting repeal is the statement of policy: "Comprehensive health planning through the application of a statewide health resource management plan linked to a unified health care budget for Vermont is essential."

The only realistic alternative to such a market-based system is a totally government controlled system, which is the logical outcome of today's health care policy. Under such a system government is the single payer for all non-elective health services; private health insurance is illegal; patients receive only such care as the government agrees to pay for; hospitals and nursing homes operate on mandatory government-fixed budgets; medical professionals work for the government; doctors, dentists, nurses, and technicians are unionized to protect their interests against a monopoly employer; and the bill for all covered health expenses is sent directly to the taxpayer. Why any reasonable person would favor such a system, variations in which are currently collapsing in Great Britain, Canada, and Russia, is hard to imagine.

Effecting a thorough-going market-oriented reform will require a major rethinking of public policy toward health care, and considerable political courage on the part of elected officials. Both are long overdue.

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The Ethan Allen Institute is Vermont's free-market public policy research and education organization. These proposals are based on the Institute's report Reviving Health Insurance in Vermont (2000).