ealth care reform:

a free market
perspective
JEfTREY S. FLIER, MD, AND ELEFTHERIA MAR/\TOS-FUloR, MD

Problems with inflation of medical

costs and inCI'eased numbers of
Problems with the U.S. health care system have been topics o[ discussion uninsured individuals have resulted
for many years. Escalating expenditurc~ on health and increased numbers in widespread calls for reform of
of uninsured individuals are generally accepted as the major symptoms of the U.S. health care system.
these defects. Health care reform became paramount among social policy Proposed refor'ms have generally
issues during the presidential campaign oflll91, and in early IlI!)3, Hillary emphasized increased regulation of
Rodham Clinton was appointed to head a task force charge I With the medical and insurance
preparing legislative proposals designed to resolve the crisis. The task industries, but disputes over the
force met mostly in secret [or months, and in September 1993 the White cost and consequences of these
proposal has so far prevented
House released proposals for unprecedented change in the trillion-dollar
legislation fmID being passed. This
health care industry. The dominant theme of this complex legislation
paper' is pr'esentcd from an
involved increased regulation and control of the medical and insurance alternative perspective that views
industries. the current symptoms on cost and
The next year witnessed intense and broad-based discussions of the access as the results of decades of
nature of the problem and the merits of the specific legislation, as well as Hawed public policy, rather than
alternative approaches. The initial debate focused on both cost and govemment inaclion. Wc lrace the
access; however, over time the focus shifted to assuring universal cover­ origins of dysfunclional hcalth carc
age. The dominant theme of proposed legislation was to introduce markcts in prior public policy, and
sweeping new regulations and taxes. Cost estimates of the proposed plans outline an approach to healing the
were disputed, and no consensus could be reached regarding basic aspects heallh care system based on a new
dedication to frec market principles
of the legislation. The attempt to produce legislation in 1994 has largely
and individual choice.
been abandoned, and the focus has narrowed to incremental reform.
However, the basic premise of leading proponcnts of refurm, that
improvements in the health care system can be accomplisheJ by govern­
ment regulation, remains unchanged.
We present this paper from an alternative perspective that vicws
symptoms of cost and access as resulting to a substantial degree from
decades of flawed public policy, rather than government inaction. How­
ever well intentioned, prior policies have caused economic distortions
that raised the cost of medical care and reduced the availability of
affordable insurance for a majority of the population. hom this perspec­
tive, further regulation is likely to exacerbate more problems than it will
solve, bringing relief to some individuals while reducing availability to

From tl1e Department or Medicine U.S.F.). Beth lSI el Hospital. Boston. the Department or Meel,clnc
(E.M.·F.). Brigham & Women's Hospital nd Res arch Division. Joslin Dt betes C nler. Boston: and tl1e
Departnlcnl of MediCine (JS.F. and E.M.·F.), Harvard Medical SchOol. SoslDn. M ~s<'Cnus~ells
Address correspondence and rep"nt requests to Jeffrey S. Filer. MD, 6eth Isro I Hospital. 3::10
Brookline Ave .. 80';ton. MA 0221­
H 0, heall m InlenanCe org nI7'1tlon; GIlP. gr ss dOlTIes II,; proch,"!: IRA. Ind,vtd\l" rellt""'''''l
account

DIABETES REVIEWS, Volume 2, Number 4, Fall 1994 _ 51) I

 TI18 free market and IlealUl care rcrarnl
------ -
many others of the healtl1 care they desire, This p<ll'er
reViews scveral aspects 01 the rel'llil1nship hetwcell
currenl prohlems and pasl puhlie pll!JCy and lllltiines
,In numher of possible solutil1ns hilsed on free m<ll'ket
principles <lnd imliviuu,i1 choice,
IS A FREE MARKET FOR MEDICINE POSSIBLE?
A free milrket is chM<leterizecJ Iw v()IUnl<lry Ir<lI1S<lC'­
ll()ns hetween hu)'ers <I III I sellers, protecled hy ,!.:()\'­
ernmenl from i m posi tlon of force '1f1d (r(liid (I,))
M,nket pMadlgms vary f!"llm this pure (ilfld currClllly
r;tre) form, along <I conlinuum tl1wind SOCliillsnl, 1f1
which u:ntriil <lutlltJrities attempl 10 ascerl'lin the
needs of the citil.ens <lnd pruvlde meChMlISI11S In­
tended to satisfv those needs, rhc Americ;ln syslem
loday involves il mixture of m,nkels and legul<ltil1n It
is important to determine whether thc defects in our
health carc system ;He the result 111 failures l1f mM!-;ets
or f<lilures 111 regulation, The cJominal1t view among
hCillth economists IS th;ll ddects in the 11e,i11.11 care
systcm ;He due primarily tu lclilures l1f the market
Clll11pOnent, ,Ind some intluentl<ll aUlhoJ'lties view
ellcclivc' medical markets as, In principle, impossihle'
(" ::;),
These impOrl',1nt claims rest 011 \11'0 <lrgumel'lts,
the claim of a uniquc value of mnlic,i1 c,nc, il11d an
unhricJp.eahlc Information gap hetween p,1Ilent <lIHI
provider, These <lttrihules arc said to produc'e "fTl<ll'­
kel f,lIlure," <I slale of SUbuplil11,iI proCIUCl'IUIl <l11l1
distribution ul services, lh<lt JUstlrles gU\'CI'lll1lelll 111­
tervenllon to restore "c1liciency,"
Is thc' vicw thal rneche<d sCl'vices (m hedlh Ilsell)
arc inherently more valuahle thal1 uthCl' goods, ser­
viccs, and goals valid') Wc find thaI. as judged hv their
<tClu,l! choices and aClions, people do l10t ;i11 place lhe
samc value 011 he;l!th, M,lny pcorlc .icllp<lrdizc he;l!lh
hy smoking, unhe,tlthy diels, dallgerous l1llhhies, or
unsilfc sc:-;, It is acknowledged thdl Iikstl'le change'S
have a grcater impact on health th<ln mallY itllvanecs
in mediCil1 technolugy (Il), An importalll elhie,tI poinl
emerges (rul11 these Llcts, AnI' hc,tlth reform lhal
Imposes milnd<ttes and gloh;d budgets ,Inll <ltll'l11ptS to
treat ,ill individuals (IS though they v,due heil![h
equidly wiJl almost certail1ly m,lke it clllTicult 1m [llUSe
who value hC;l\th most to ohtain the CMe they desire
Simililf'ly, "lnlormationidll1eljuillity" is Ilot unique
to medicine, M,nly other tl'alles ,ll1d IHlll'c:ssions rc'­
semble mediCine ill heing tcehnic,dlv uhscul-e to the
1,\)'111(111 Furthermore so Inc governmellt aetiolls, such
as banning physici,1I1 advertising (7), and ileting tll
limit eMly establishment of prep<lid heillth-e<lre SI'S­
[ems (S,I)), !1<l\(' limilccl inlonnation now
Despile government rn;ldhlocks to II1lorm,ltioll,
mill'ke't ,ldapliltlllllS to imperfect information have
evulved over thc past .Ill yeMs, enelJuraging increaseJ
p,llicnt ,lutO!lOl11y ,llld Cl1l1sensual doctor-patient re­
Lltll1l1slnps, These illclude publiC diseussil1n l1ll11edi­
Gil Inl1lw,llions, Incrcdsillg expectations regarding
illlol'l11ed ((Inselll. ilnd increased scrutiny 01 physlci,ln
services by 11C,lllh m,lintellailec organizations
(I HvlUs) dl1ll Illsurers, These adapt'ltiolls l'lluld be
strell,illhclled in ,I more ulll1pellllve allcJ decentralized
l11<1rkelpl,lcL' <lllclwOlild, we believe, illere<lsnl,illy rCIl­
dn lhe concepl or physlcidn-indlleed demand out­
nwded, or dl !cdSI nol subslanti,t1ly ditrerL'1l1 I'rom [lie
si!udtioll Ih<tt exisls ill olher SCIVlec nl<lrkels,
AIHlther drgUf11eni dg;linsl medical I1lMkets (51 IS
t hd I cost consciousness ,1 nd i udgmcn I ;11'<: necess,lrily
lin1l1L'd durJl1g illness, Although cen,lIlllv lrue III
c:-;llcme Cilses, mallY medical encuuntcrs du nol occur
,tt times 01' inc,lp;lcily, exlreme dlslress, or even i1lncss
Indced, key decisions ilboUl insurance ilnd choice ul'
provide I itrC lypic;t1ly l11ilde when ile,t1thv, M;lny
medic;i1 CIlCOllillns "IHJ pruccdures me elective, Im­
pOrt"11tlv, d market suhstdntliilly responsive lu cosl­
C'lll1sciollsncs,s doesl1" lelJuire equdl cost senSitivity of
,ill encounters,
Sume ,Irglle th"t cust conscillusness m,lV Ie<td to
UlI1Slll11C1'S ehollSill,il to save muncy bv aVllicJing Cilre,
with tbe I-esult helllg aVllidilblc mediccil h,tr1n, While
this posSlhility cert<llnly exists, It par;i1lels Illany otllers
ill d libn,i1 Sl)C1etv (I (I), wherc individuals l11itke
Inlp(1I1;1llt deciSions regilrding CClreel-, IHlusing, rel,,­
lionshlps, etc .. despitc widelv Vill-Ylllg levels llf judg­
11K'ill dllli t'-0od sellse dnc! the evn-presellt plllential
ut nrnr alld harm, It I11dy be possible to limit choice
<lml lherl'tore 10 prevcnt harmful ou[comes, We
helieve thaI any bcnefits of such elforts arc out­
IVclghed by (he loss of personal autonumy and the
hdrmflll, iluninlended, elfects of hureauC!"atiDilion
M;lfket "iml1l:rleelions," even when they exist.
1I1;IY nul he remedlc'll by guverlll11enl inlervenlion,
Regula[ors possess (,Ir less than perl'cct knowledge,
F;ICls lhemselves, cunsequenees or the regulalory
deciSions, ami the adu,i1 deSires of the citizens being
reglll<lled milV nol be re(1dily knowable, For these and
ulher re(1suns, m,ln)' elruns 10 enhance quality or
reduce costs thlough regu!;Jlion ,Ire l101ed to !';liI, or
even to produce the opposite results (I J), Regula­
tluns Ivpie(1lly hinder developmenl of ellicienl 111;lr­
kels, <I'HI there is a duclll11ented tendency fur lhe
inlel'ests ul' the regulated tu end up being pl(1ced
"huvc t 110se of Ull1SUl11ers (12), Both l11ilrkc,ts ilnd
I cgul"tiulls eiln ['ilil, tile eOllsequences of thc !,ltter itl'e
ultel1 l)Jufollllll. Indeed, we believe that the cunell!
prublel11s of e()st and ,Iecess have theil' roots in past
publiC pOliCY,
DIABETES REVIEWS, Volume 2, Numb", :\. Fall 1994

SOME HISTORICAL ROOTS OF THE PROBLEMS
OF COST AND ACCESS
It is frequently asserted that the U.S he,tlth care
system spends an excessive fraction of gmss domestic
product (CJDP) on health. Although thc I IS. spends
,I greater fraction of GOP on health than any other
country, the unaceepwbility of the 14 r/r, of GT P spent
on heallh care is not self-evident. People in ,lmuellt
societies will spend more for innovative and etfeetive
diagnostics and therapies. An a, mg population ,tlso
IllereaSes hCC1lth expenditures. M,lny other factms
have been discussed (13). While the fact th,lt medie<tI
expenditures in the US. arc higher than other Cl1un­
tries is partially explainable. the r~lte of incrcase SillCC
the mid-llJ(jOs appears to have exceeded [hal ex­
pected from newly avail,lblc tcehnology and demo­
graphics alone. Why did this occur') A nlajm factm
was public policy that promotcd tirst dollar (,llld low
deductiblc) insurance and cost-plus reimbursement.
both 01 which undermined market cost-contalilment
mechanisms by exceSSively shielding 111()St consumers
from exposure [0 or even knowledge of the actual cost
of medical care (14).
Cost-Plus
Cost-plus hospital reimnursement (full cost plus a
small additional payment). initially en<tctl'll by 1he
Blue Cross system during the IlJ30s (0). discour<tged
financial responsibility (14). Originally the Blue ('ross
approach included no co-payments or deduc:tibles, an
open panel of physicians and hospitals, ~\nd the direct
compensation of providers b. the insurer. Cost-plus
relmnursement evolved as the Blue.' rose to promi­
nence, assisted, not surprisingly, by <lilies in org,ll1ized
medicine (i.e., the Amc rica n Meci ical Assoeiallon)
and the hospit'll Industry. Cost-plus served the Inter­
ests of providers over the goal of providing maXimally
affordable coverRge for consumers. It is import<tnt to
realize that this odd outcome was not the result of ,I
market failure. The Blues success rL'l[uired explicit
legislat\on and tax policies Llvuring them over com­
petitors UU5). The establishment of Medicare/
Medicaid institutionalized the usc of tllC cost-plus
reimbursement system in 1%5, apparently to gain
support of the hospital Industry This public pOliCY
contributed powerfully to the explosive Incre,lSe In
medlc'll expenditures that ensued.
Although many individuals enjoyed benefits I'rom
the services provided under cost-plus, it is now widely
<leknowledgcd that this mode of financing accelerated
per eapitil spending on health care beyond what most
inrJividu<l[s would have chosen ir splllding their OWII
money. Over the P(lst 20 years, efforts to limit the
DIABETES REVIEWS, Volume 2, Number 4, Fall 19 4
Flier anel Maratos Flier
cost-plus system through regulations like ccrtilicatL:s
llf need (14,J(J) and IJhysicialls' Standards Review
Organizations (PSROs), designed to eliminate "un­
nL:cess<lry" ('<Ire, were tried and failed (17). [n Medi­
care. diagnostic-related grollps wcrc initiated to
moddy cost-plll.s (10). In contrast to these generilJly
unsuccessful efforts to hold down costs through reg­
1Ildtion, markets did respond thll1ugh many adapta­
tions, Including entrepreneurial efforts such as
outpatient surgery centers and free-st'lnding emer­
gency facilities, as well as the rise of managed Care.
Actually, the 10:)Os markcd lhe rccf1lcq.'.ellee of eOI1l­
petitive medical markets <llld nwder'ation of the nlte
of nK'died inflation appe<lrs 10 ILlve begun (10).
First Dollar Coverage
In the early 20th centurv, health Insurance covered
Glt,lstrophie ami chn)nic Illness (:)). Routine care was
p'\Il1 out of pocket. Since the !040s puhlle policy
stimulated health insurance to evolve toward <I radi­
cally dilkrent system that, in addition to covering
ealastrophie illness, covers even small expenditurL:s.
What caused this change in the <lppmach to insur­
ance') hen wage and price controls were instituted
during World War [I, govelllment allowed "fringe
henehts" [0 Incre,lse as s<darv substitutes (20),
thereby pll1moting purch,\se of health benefits by
employers. I.~ven ;Ifter price control, ended, employ­
er-provided he,l!lh covcragc w,\s granted t<lX exempt
status, and tllis lurther stimul<lted the substitution of
tax L'xempt medical care for taxablc wages (2lJ).
Although it m<llle sense tor an individu<ll to seek
"Iow deductihle" hrst dollm coverage given the ,lVilil­
,lble options, tirst dulldr coverage is more costly and
inelliclenl th,ln true insur'lI1ee. Since the insured
rarely spend their own doll'lrs. this ~\pproach r'emoves
~lny Incentive for cost-conscious medie<d consumption
and. over ln11e, eusts rise. In addition. the Illany small
CI~III11S tlwt dre covercel by insurdnce r,\ther than out
of pocket are, relati\cly speaking, the most expcnsive
to process. and the overall administrative cost of
proccsslng such small claims increases cost infbtion.
Tax suhsidies al\' at the ruot of this demand for nrst
dullal cover;lgc. Without tax subsiciy, more individu­
als would instead choose high deductible. eatd­
slluphie Insurance policies. as tllese <Ire far less
expensivc than low deductible or first dollar policics.
III sUlT1m~\IY, t<lX Incentives pushed the U.S. toward
what is predominantly dT1 employer-based, third pdr­
ty-fin,lI1cL:(I, I()\v deductihle insurance system.
Consumers vs. Payers
The incentives discusseu above resulted in a f,llling
fraction of health carl' expenditures paid for dlreCllv
-.1~
 The free market and health carE: reforrn
by patients as opposed to llmd party payers. Dissoci­
ation of cost and service is sometimes eJcslrablc,
allowing patients to avoid thc stress of flnancial
dccisions whcn ill. fIowcver, in the absencc of cost
consideration, utilization increases, some of it in the
category of medically unnecessary utilization (21).
Palients will more likely seck medical ({lrc for minor
problems, and may accept low-risk (but cxpensive)
diagnostic procedures wherc pathology IS unlikely. In
hopeless situations, patients {lnd physicians morc
often grnsp at experimental or useless treatments.
We tind no moral fault in individuals seeking care,
even exceeding that which mcdical authuritic's find
appropriate, especially if spending their own re­
sources seeking hcalth and peace of mind. IlowevCl,
we belicve that globally incrclsed demand for care
without cost consciousness is Iitcrelily ullsustalIlable.
Itimately spending will either be limited hy IIHlivid­
uals acting in their own interest (i.e., choosing to usc
their resources on somethlIlg other than he,lIth care)
or by bureaucracies reacting to global budget,lrv
concerns. The transfer of such Important personal
decisions to bureaucracies wi II encou rage the poli ti­
ciLiltion of health ,mel will dcprivc individmds of
~lLItonolllY in a critical sphere of their lives.
Mandated Coverage
Mandated benefits requiring insurance to cover spe­
cific diseases, disabilities, and scrvices make Insur­
ance expensive (j 5,23). Most states mandate coverage
for specific therapies, including pastoral counseling,
hairpieces, in vitro fertilization, and Hcupuncture. The
number of such laws increased frum 40 10 nearly
1,000 between 1970 and 1991 (I."i,n). TypiGdly, peu­
pic view such mandates as addressing specific needs,
and they typically enter thc law quietly, through
special interest pleading, without much public debate.
Unfortunately, the unintended adverse consequences
of such mandates arc rarely scrutinized, as th~' victims
arc less readily identified than the bcneflciaries. [n
addition to raising the costs of Insurance, these re­
quirements only apply to a minority of th' ropulation,
because Medicare, Medicaid, most HMOs, and sell·­
insured companies (70% of largc corporations), Me
exempt (J5.23). lience, those individuctls for whom
high deductible, low cost catastrophic insurancc is
most appropriate, i.e., the self-employed clnd employ­
ces of small husi nesses that do not otle r I nsu rance, are
cJeprived of that choice through government-lIlduced
cost inJlation, and as it result. the Itk~'lihood th;lt these
individuals will be uninsured increases.
Government Responsibility for the Uninsured
The problem of unmsured Americans has been
brought to wide attention through thc storics of
tragically ill individuals who suffered as a result of
heing uninsured because of preexisting conditions,
inability to afford policies, or loss of employer-based
Insurance hecause of Joh loss. It is therefore impor­
tant to undcrst;lnd the nature and causes of thiS
problem. [t is estimated tllat :17,000,000 people arc
unillsured at any roint in time, and about half of them
rcmain chronically uninsured. However, of the
2[)(l,()()() rcople who become uninsured in any given
month, SWlr, arc uninsured for less lhan 5 months and
only 15% lack insurance continuously for morc than 2
years (24). Many h,lve recently elwngecJ employment
S[,ltUS, and so a Illajor part of this vexing problem
results from lack of portability of employer-provided
insurance. Most uninsured individuals, whether em­
ployed (about 50%) or not, are young (50% below
,1ge 34) and healthy (25). Many fmego expensive
Insurance ,It it tllne when they (correctly) view major
illness as unlikcly Less than I % of the population
below ,\ge (15 is both uninsured and uninsurablc
because of a preexist i ng condl tlon (26).
t lnforlunately, our government tax policy penal­
Izes those I/ldividuals who are least able to afford
insurance At present only 25'); of premiums are
deductible by self-employed individuals (after deduct­
II1g 7% of adlusted gross income), while those em­
ployed by small businesses or the temporarily
unempl~)yt'd get no tax break. Thus, while health costs
rise because of the policies described above, tax
treatment t·hat would make Insurance more afford­
able is unfitirly and selectively denied to the self­
employed, many cmployees of small businesses, and
the unemployed. Government further contributes to
the insurance deficit by reql1lring hospitals to bear the
cost of 'i~'lvices to tvIedicare and Medicaid patients.
despitc the decision of government to explicitly un­
dcrfund these programs (27). These governmenl­
m,lndated but unfunded costs are shifted to those
with cOllventlonal Insurance who are often Icast able
to pay.
THE RIGHT TO HEALTH CARE
I' health care a right" While many have argued that
there is a "righl to health care" (28) only limited
attempts have been made [0 define the nature of this
right. Unlike negative rights that establish boundaries
that others must respect. "need confers rights only
when what is needed is recognizable as a need by the
one who is lu meet it" (2li). Should health care bc
considered a "right," a system of defining medical
DIABETES REVIEWS, Volume 2, Number 4, Fall 1994

needs would therefore be necessary. LJltim,ltely need
would be determined by the political process and
enforced by the state. Since everyone must have equal
acccss to things that arc viewed as rights, fair distri­
bution is important. Individuals may find that In the
Interest of "fairness," it would not be russlble to
pursue, even with their own funds, hcalth Glre that
they want. A "right to health care mcly actually
diminish what is available
THE ROLE OF THE PHYSICIAN IN HEALTH
CARE REFORM
Increased g.overnment involvement thre,llens what wc
view as several valuable dttributes of thc mcdical
pro!'ession, including the Independence or' rractitlo­
ners and the ccntral view that physicians must serve as
advoC<lles of their patients' interests. Many prorosals
for new regulations could acceleratc a trend in which
the role of physicians is changing from I:ugely inde­
pendent practitioners to employees of larnc corporate
entities. Currently, such changes havc Misen prin1<lr­
ily through market adaptdtions. Ilowever, an extreme
version of this trend could eventuate in a state where
physicians wcrc civil service "health providers," re­
sronsive entire Iy to the interests of a ., med Ica l-st,1 tc
complex." This extreme is cvident in the views 01 a
prominent analyst who recently advocated "mandato­
ry public servicc by physicians" In the form of ,I
physician draft, so as to instill in physicians "a sense
of oh"g~ltion and social service," clS well as to bring
physicians to locations where they would not volun­
tarily choose to reside (30). Some have attempted to
justify such manipulations of physicians' lives through
lhe claim thaI medical education and medical re­
search have received federal subsidies. Hmvever. this
justification seems implausible given the retroactive
and cocrcive nature of the proposal and the fact that
government policies are primarily responsible for the
high cost of medical euucation. Such manipUlation 01
physicians would ,liso threaten essential aspcch of thc
doctor-patient relationship, which relies heavily on
mutual respect and trust, which would be undermined
if the physician were serving under duress.
To some degree, HMOs already impose connict­
II1g loyalties on primilry carc physici,lns who must
serve hoth the system and the patient (31). Hnwcvcr.
in today's lIMOs, both paticnts and physicians arc
voluntary participants, and the possibliity of leaving
the HMO system altogether creates a strong incentive
to maintain and improve quality and choicc. The
implications of physicians acting as"medical gate­
keepcr" would substantially diller if this process wne
mandated or made virtually unavoidable by the state,
DIABETES REVIEWS, Volulne 2, Numt.Jer 4. Fall 1994
Filer Clild Maratos-Flier
~lnd rhyslcians would he rressured to lilminish their
rolc as patient advocatcs. Both advocates of markets
and of governmellt-funded single-r'lyer solutions (32)
arc concerncd about this outcomc.
POLITICAL SOLUTIONS: THE BROADER
CONTEXT
Politicians arc excessively attuncd to short-term
promises ,Ind ,Ire tyricaily reluctant to !<Ike long-term
responsibility for the consequences of the laws they
cn,lcl Supporllni! this situation is the fact that many
rolicy decisions arc based upon inadequatc data and
potL'lllially enormous cost miscalculations. An eX,lm­
ric IS the estimates made In 19h5 th,ll edicare
would cost 12 billion doll<lls in I()()() instead of the
,Ictual 1(J7 billion dollars. L.egislation is also InRu­
enceu by speci,t1 interests whose agend<ls and modus
operandI arc typically well removed from rublic
scrutiny. !-'in ally, peorle seek to maximize thcir inter­
ests despite r'L'):',U I,ll lon, causing outcomes to VMy from
Inl[l,lI estimates as when Medicarc cost controls re­
sulted 111 cosl shifting to the rrivately insured (10).
GOALS OF AN IDEAL MARKET-BASED SYSTEM
Policics claiming to rrovide health security through
governmcnl-assurnj access to comprehensive health
care of e,lch person's choice, achieved simultaneously
With cost control and hudget caps, cannot, in our view,
succeed, although, like most utopian notions, thcy arc
arrcahng al first !-,-Iance Altempts to legislate such
pollcics would, we believe, lead to accelerating costs,
rcduced ,ICCCSS to care through rationing for mallY
people, or, pcrhars most likely, an uIlaprcaling eom­
hination of both. Our objectlvc is to establish ,In
efficienl IllL~dical mclrketrlaee that would increase the
access to insurance and care of many individuals now
unable to ohtdin these dnd to SII1lu.ltaneously reduce
cost inRatioIl. These goals would hc supplemented by
financial empowerment of those who remain In need
of help. Although eschewing regulation and bureau­
crdey, our rdorm <Igenda would require fundamental
changes in all components of the medical system (34).
Wildt would ,I system that is evolving in such a
direction look like·) first, there would be an evolution
(ow,lrd r,ltlents, rather' rh,ln third rarties such as
employers dnd large insurers, heln the principdl
buyers of health carc and insurancc. ivkdical consum­
ers woulu he Ilettcr dble to compare options and
rrices hdore rurchasing. Decision-making power rc­
garding medical matters woulu shift from impersonal
hureaucracies to individuals. SecoIld, most physicians
would scrve as principal agents of their patients, and
the trend t(,ward physicians being agents of insurers
 The free market and health care reform
or government would slow or be reversed. Third, Ihe
trend toward hospitals being agents tm the Interests
of physicians and insurers would end, and hospilals
would increasingly compete for ratlents by impmvlng
quality and lowering prices. Fourth, health insurance
companies would be in the business of insuring
against risk, rather than buying, managing, and 1',1­
tioning health care, Fifth, employers, would <let ,lS
agents for thcir employees. t'acilitating inflll'med
choices and monitlll'ing insurers. But il employers
failed to accomplish these goals, there would be
financial incentives to remove them fmm the he<lltl1
insurance equation entirely, Fin(llly, government
could be an insurer of last resort: r,llher th,ln pur­
chasing health care, it would Inste,ld p,ly insur,lnce
premiums for indigent polieyholders and promo(L'
policies th,Jt would increase charit,lbk: actiVities.
Tax policy would facilitate these developments by
eneour(lging priv;lte "lvings fm small medical ex­
penses, private IIlsurance fm l'lrge expcnses, and
lifelong savings for medical needs during reliremenL
Government would ':'leourage open eumpctition in
markets for physici;lns services, huspltal services, and
health insurance, It is import(lnl to note that, pres­
ently, virtually every private sector actIon in the ,Ibove
direction is prohibiled or discouraged by governmenl
policy,
Tax Equity
Tax equity regarding health expCllses mLlst bc
achieved, with hcalth expenditures heing equally de­
ductible reg<Jrdless of employmcnt. There h<ls ncvel
been a juslitication, at thc level of either poliey or
ethics, [or the unemployed, p,trt-time workers, the
self-employed, students, and othcrs without employ­
er-provided insurance bClng required lo pay for care
with after-t<Jx dollars whilc those With employer­
provided coverage are able to pay with pretax income.
Employecs should h<tve the option of equal tax dc­
ductibility for personally purch,lsed roliCles, This
would lead to an end to the Jominance of employer­
provided insu r,lIlCC, which cont ribu tcd i m port'l n tly to
the crisis of unirl.~ured lndividu,\h
Medisave Accounts
MediS<lve accounts, or individual medicil ,Iceounts,
are one way to ease an evolution lo a markct-b'lscd,
decenlralized solution, With Medisave accounts as ,In
option, individuals would he encour;u.,:ed to insure
themselves for small medical expense's and rely on
catastrophic health insurance policies tor large med­
ie,l! exrcnscs (18). This could he enacted through a
minor change in the lax law governini,! health insur­
<Ince Ilow would they work') Deposils could be made
to sLlch accounts directly by ;In individual consumer,
by an employer (in lieu of other health bcnefils), or by
government (In lieu of Medicare m Medic<lid), ,Ind in
each Glse the deposit would be tax exempt, as is now
the ca,c for individu,t1 reliremenl accounts (I RAs)
Money could be withdrawn only for medical ex­
pellses. Unspent balances would accumulate lax [ree,
could be uscd for future medical expenses, rolled OVCl
il1to :111 I R.A or rCl1sion pl,ln at'ter relirement, <Ind
accrued to the holder's eSlate,
M,lIly individudls would likely limit Insurdnec: to
high deductible (I.e" $2,llOO-3,()OO), catastrophic cov­
erage' to access the :-mlrkedly reduce premiums of
such pOlicies. They would then deposit the s,lVed
premium (of. for example, an employer-provided
iJendit) IIltll personal Medisave accounts. The insur­
anec policy wou lei eove I' costly trea tmen ts (i.e., dbove
the $2,000 3,000 deductible), while Medisave fumls
would be available to pay sIll,iJl bills. Figures derived
lrom an Interview with 1. P~ltrick Rooney, chle!
executive officer of Golden Rule Insurance, show
th,~t, in an average-cost American city (e,g" Indi'lIlap­
olis), ,I typical low deductihle ($355) policy for <I
family would cost $'+,100. [n contrast, a $2,000 deduct­
ihle pOllcy would cost $1,900, providing a saving of
$2,200, roughly eLJu<iJ to the deductible, If added ta.'\
Ill;;e to the MediS<lve ,Iccount, no out-nf-pocker ex­
pellse would exist. Companles using this approach,
cven without favorable ldx treatment of the depOSits,
have alre(ldy reduced health expenditures (35).
Medical I R!\s otfer many potential adv<lntages
Slilce the ,Iccounts arc held by the individu<Jl, they
address the problem of portabililY, and hal<lnces
coulL! bc used to pay pl"Cllliums between jobs. They
would markedly reduce the costs attrihuted to ,ldmin­
istratlon and hilling, since most routine payments ;lIe
directly fmm the consumer without interposition of ,I
hilling agent or Insurer. Physician paperwork and
<JJmlnistrative hassle would also thcreforc be cx­
pected to decre'lsc. Medisave accounts woulel provide
a gencral tonic to the economy, engendering in­
creased savings. Most important, MedlS<lVe accounts
would invigorate patienls' role as health consumers
,Ind cre,lte deccntr"alized mcchanisms for restr,lining
cos I.
Licensure
Licensure, supported as a mcans to cnsure physician
competence ,lIld prcvent Iraud, has been an dlcctivc
means for the profession to reslrict Ils numhers ,ll1d
limit competition from alternative, often lower cost.
providers (7.-'i(1). CertitiC<ltion might work equally
DIABETES REVIEWS, Volume 2, Number 4, Fall 1994

well, whik authorizing lncre(lsed services Irom an
"rray or Ilon-MD practitioners (37).
Regulatory Barriers
Numerous federal and state regulations are barriers
to efficient medical services. Examples ,lrC pullcic"
thal discriminate ,lg,lInst rural heaJth care facilities
(Ji'UlJ). Medicare/Ml:dicaid regulations un Icvcb 01
sl"ll1ng "nd other dctails ot' service are hard to meet
in rural economic environment, thus limiting care
avail,1ble to ruraJ residents. Other examples arc tax
laws and antitrust provisions that impede cost-saving
(Illiances between institutions and physicl,lns ,Ind
mandated benetit laws that raise costs of catastrophic
Insurance. Since many qualitied applicants to U.S.
medical schools are turned away, while thousands 01
foreign school graduates gain licensure through ex­
amination, it seems logical that new modes of lower
cost mcdlcal education should hc allowed to develop
In this country.
Aid for Those in Need
A free market ror medicine wilJ remove many ,utili­
ci,t! impedimcnts to affordable insurance and care,
but some individuals will remain unahle, throu~h
misfortune, poor planning, or irresponsihility, to ,If­
rord the medical care they need. AlthouiJ,11 we view
the position that medical care should be considered a
right as inconsistent with a proper conception of h,1sic
rights (10), thoughtful means for providing assistance
arc hroadly desired. However, reasofl(lble efforts to
fulfill this need do not require regulation, fT]Jndalcs,
price controls, or outright government takeovcr, any
more than efforts to house the homeless or ked the
hungry require government control of the markets 101
rOOlI and shelter.
The uninsured and uninsurahle can he given
vouchers or tax credits enabling purchase of insur­
dIKe (40) ano [unding of medical IRAs. This ap­
proach acknowledges that Individuals, even when
needy, have diverse desires reg,lrding health ,mel
avoids unnecessarily regulating and homogenizing
care for dll !\mericans.
FI,iWS in the dcsign and funding of Medicare and
Medicaid have fueled the current Crisis of cost and
access, and keeping these programs fiscally sound
over the next two decades will require fundamental
reform. It is frequently noted that, despite the threat
that Medicare will have a fiscal crisis within the next
lO years, this program is popular with its beneficiaries
and the public at large, and is beyond reform for
politiCid rcasons. To the cxtent that this is true:. It
identifies the real threat imposed by "entitlemcnts"
DIABETES REVIEWS, Volume 2. Number 4. Fall 1994
Filer and Maratos-Flier
on a vast scale that, oncc enacted, are ditlicult to
11l0dily or limit. And it may be the case that the
political Impossibility of modifying Medicare will
change at the point at which the next generation
begins to doubt that, despite ever-increasing taxes,
they will nevcr receive henefits compdl'ahle to those
of the current elders. A complete discussion of short­
and long-term solutions to the edlcdl'e prohlem
exceeds the scope of this paper. Ilowcver, onc ap­
proach to a long-term solution would involve creatlrlg
incentives ror individuals to save [or future health
needs through Medisavc ,lecounts, since the present
system encoura 'es dependence on benefits th(lt may
be tiscally insupportable in 10 to 20 years. This is
neither sound poliCy nor ethical. After tr'lnsition to d
Medisave approach, clderly individuals with insuJli­
cient lunds could be given mt':ans-tested vouchers for
the purchase of health insurance. Regarding Medic­
aiel, Introduction of markct principles inlo the proVI­
SllH1 of medical services to the indigent through
vouchers andlncentivL's to managed care would move
in the right direction. Private options for long-tcrm
care should be enhanced by ,dlowing usc or rRAs for
this purpose LIS well as changing the tax status or
insur,lnce premiums for long-term care.
IMPLICATIONS OF HEALTH CARE REFORM FOR
DIABETES CARE
As discussed edl'ller, the original Clinton ,ldministra­
tlon health care plan and the follow-up plans for
health carc reform 11,IVC sought to l'ind a me,lns for
providing universal dccess [0 comprehensive bent':fits
while sirnultdncuusly controlllf1g he,llth [(Ire costs.
Although these plans now aprear to be stalled in
congress, future attempts al health care Idorm are
certain. Prolessionals concerned with diabetes care
must therefore wonder whether efforts to attain both
or these goals through government regulation, if cver
enacted, would actually permit most people with
diabetes to have access to the I-ange of options Cor
diabetes managemcnt thdt they now have, including
the high intensity of diabetes care currently recom­
mended for optim,11 therapy of their disorder. We
think nol, for severdl reasons.
It is Important to recognize that therapy necessary
to limit complications is expensive initially, and that
SdVlrlgS brought about through reduced morbidity are
likelv to be recognizcd only in the long term (after
close to two decades of treatment). It is diQicult to
believe lhat in environmcnts such as HMOs, pre­
krred-providcr organiz,ltions, or other capitatecl sys­
tems, where toral dollars are limited on a day-to-day
hdSis, or In the prescne' of govell1f11cnt-enrmced
 The free market and health care reform
premium caps, maximal emphasis would bc placed on
funding expensive therapies of chronic dise(lscs where
benefits accrue over a long terrn. AdditJOnally, with
increased government involvement in distribution of
health carc dollars, decisions on funding for specific
programs or benefhs will become Irlcreasingly subject
to special interest politics. and the allocation of
resources will be unpredictable.
Finally, most reformers emphasiz.e the necessity, if
cost control is to result from capitated plans, of
having primary C8re physicians as providers, with
limitations on the access of patients to specialists.
Discouraging or prohibiting specialists Irl chronic
diseases such as diabctes or rheumatoid arthritiS from
serving the role of primary carc giver has also heen
discussed. It is difficult to be optimistic about this
focus from the perspective of the patient or the health
professional interested in diabetes. Primary carc phy­
sicians do not typically have either the training, the
resources, or the time to implement the therapeutic
regimens required for optimal diabetes control (4 \).
The original I !ealth Security Act as proposed by
the Clinton administr8tion placed particular empha­
sis on the role of primary earc providers acting as
'·gatekeepers." In such a paradigm for medical care,
self-referral by patients to specialIsts woulu he .... x­
pected to be extremely difficult. P8r'I<.!oxlc<t1ly, those
patients who value health C8rc the most might find it
very difficult t() satisfy their desire to obtain a partic­
ular level of carc.
It is clear that patient. with chronic illnesses
represent a spccial challcng\.' for health care rdorm.
If patients with di8betes or their advocates choose to
believe that such global reforms will produce univer­
sal access to eomprehcnsive care whik controlling
costs, then they may be l<..'mpted to view such propos­
als as being desirable. We, on the otber hand, arc
Skeptical of the outcome on any rdurms of this
nature, and view the care and welfare for many
patients with chronic diseases such as diabetes as
being threateneu by unanticipated consequences on
reform gone b'ld. For all the reasons discusscu In this
article, we favor reforms of the health cme system
b8sed on the free market as the hest long-term
solution to the carc of our patients.
CONCLUSION
The health policy community has paid insufficient
attention to the role of past policies in accelerating
costs and diminishing access to Insurance and has
been too quick to recommend solutions based un
optimistic projections of new rcgul;ltory dforrs. Re­
form ;InU aid to those in need based on free market
- - - - - - - - - - - - - - ------
rrincip,t1s are unique in recogniz.ing the values of
divcrsity and the dcsir8billty of choice in the highly
personal realm of medic81 decision making.. Freed of
rervcrsc incentives and regulatory o!lst'lcles, includ­
ing those that woulu be exacerbated by much of' the
recently proposed reform legislation, markets In med­
icine, as in other areas, will outperform politics in
making desirable health care avatlable to Americans.
ACKNOWLEDGEMENTS
We gratefully acknowledge our many colleagues and
friends who read and commented on various drafts of
this manuscript including C. Ronald Kahn, Peter
Sherllne, William isk8nen, Loren Lomasky, Ross
Levattcr, Johanna Pallotta, Alan loses, and Marie
Vrabel. We would e\peeially like to thank Gerald IV!
Phillips for both his insightful comments and editorial
assistClnce
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