Why Federal Healthcare Vouchers?

Our American Farm Bureau Deficit Task Force spent several two-day meetings in Washington, D.C. discussing healthcare reform with leading experts.  All the experts agreed costs are rising at an unsustainable pace and quick action is urgently needed.  What disappointed and surprised us was that none of the experts provided us with a solution—a comprehensive approach to reforming our current system.

The Task Force’s charge is to find ways to reduce the looming federal deficits.  We could not finish our work without recommending a way to deal with the most important cause of future deficits—soaring healthcare costs.  After much discussion, we decided the best approach is federal healthcare vouchers:

… the federal government should provide each citizen with a voucher sufficient to purchase a bare‐bones, private health insurance policy. These health care vouchers could be used only for insurance plans that incorporate the reforms necessary to reduce the growth in health care costs. To encourage innovation, the requirements that health insurance plans must meet to be eligible for voucher financing would be determined on a regional basis.

I believe we were all surprised by our vote to support vouchers—I certainly was.

I voted “yes” last May for two main reasons.

1. Vouchers offer the best hope of getting key reforms implemented quickly enough to avoid a government takeover of our healthcare system.

Health insurance premiums in the U.S. more than doubled between 2000 and 2009.  According to the Kaiser Family Foundation, the cost of a family health insurance policy now averages $13,375 per year.  When out-of-pocket costs are included, the total is close to $16,700.  Since median family income in the U.S. is approximately $60,000, total healthcare costs are now a quarter of family income!

This year, employers paid on average $9,860 of the $13,375 cost of health insurance for a worker and his family.  Many workers with employer-provided insurance believe they don’t need to worry about rising healthcare costs because their employer is picking up their tab.  These workers are suffering from an illusion.   Good evidence exists that employers recoup the rising cost of health insurance by reducing future wage increases—so workers do ultimately pay the full cost.  Over the last twenty years, output per hour in U.S. businesses has increased by over 150%.  Hourly wages in manufacturing (adjusted for inflation) have declined slightly.  Productivity growth should cause wages to rise, but rising health insurance costs are siphoning off all the extra income.

If healthcare costs continue to grow at their current rate for nine more years, the average cost of health insurance for a family is projected to be $38,000 or ½ the family’s income.  Our current system of private insurance, mostly provided by employers, will self-destruct before that happens.

Our market-based healthcare system has many strengths—including patient choice, rapid innovation, and competition among private insurance companies, hospitals and doctors.  As I discussed previously, its inability to control costs stems mainly from an over-reliance on fee-for-service payments.  Fee-for-service payments—combined with a physician’s dual role as a provider of both diagnoses and of treatments—encourages too much ineffective and costly treatment.  How can doctors’ and hospitals’ incentives be changed quickly without direct government regulation, while still preserving the good features of our current system?

Our recommendation is to have the federal government offer all citizens a voucher redeemable for a bare-bones health insurance policy from one of many competing private insurance companies.  Additional coverage could be purchased and added on if desired.  The tax deductibility of health insurance would be eliminated.  Insurance companies would be required to accept all applicants, but would receive a bigger voucher payment for covering an applicant with a pre-existing condition.  Medicaid would disappear.  Senior citizens currently on Medicare could stay in the Medicare program.  However, younger citizens would stay with vouchers and private insurance when they turned 65 years old.  Hence, Medicare would phase out over time and all citizens would eventually finance their basic healthcare with vouchers.  Finally, the most important change—to be eligible to accept vouchers, insurance companies would be required to change the way they pay hospital and doctors.  Fee-for-service would be phased out and new methods introduced to encourage better outcomes and discourage costly, ineffective treatments.  For example, insurance companies would be required to increase the use of bundled payments, capitated payments, electronic medical records, and self-monitoring by doctors in each local area (Accountable Care Organizations).

2. Vouchers would establish a national healthcare budget and allow the U.S. to control the growth in healthcare spending.


The AFBF Deficit Task Force didn’t make a recommendation on how the healthcare vouchers should be financed.  I’m convinced that financing should come from a new dedicated consumption tax—i.e., a value-added tax  (VAT) or a national sales tax.  The level of the tax would depend on how “bare-bones” is defined.  Martin Feldstein recently argued that the federal government could provide everyone with a high-deductible health insurance policy by using only the extra $220 billion in tax revenue gained by eliminating the tax deductibility of employer provided insurance.  However, if deductibles are set too high, the poor would still need Medicaid and many low and even middle income Americans would need subsidies to pay their deductibles.  One of the great attractions of the voucher idea is that income-based subsidies aren’t required.  Subsidies that vary with income (such as those included in all the healthcare bills now working their way through Congress) are complicated. They also dramatically increase the marginal taxrate faced by those who receive them and would have bad effects on incentives.

Emanuel and Fuchs provide details on the funding of healthcare vouchers.  They estimate that a 15 percent VAT would be needed to provide all Americans, including the elderly who would now be on Medicare, with a voucher for health insurance coverage similar to the plan now covering members of Congress.  Adding a 15 percent consumption tax would represent a significant increase in federal taxes.  However, healthcare vouchers would provide important other benefits:


1. As Medicare phases out and seniors transition to vouchers, the VAT rate would need to increase from “10 to 12 percent to approximately 15 percent.”   However, the 2.9% Medicare payroll tax would be eliminated.

2. The federal government currently spends about $220 billon on Medicare above what is collected by the Medicare payroll tax.  Medicaid also costs the federal general fund about $200 billion. The tax deduction for employer-provided health insurance reduces federal revenue by about $220 billion.  Vouchers would eliminate the need for all three. The federal government would have approximately $600 billion that could be used to reduce the federal deficit.

3. State budgets are currently under severe strain due to the rising cost of Medicaid, SCHIP and employee health insurance premiums.  These programs currently take up approximately 20% of state budgets.  Vouchers would eliminate these state expenditures and should cause a reduction in state and local taxes.

4. Employer-provided health insurance would be eliminated and individuals would pay only for “add-on” coverage above what their voucher provides.  Since an employee must now accept his employer’s choice of a health plan, vouchers would give individuals more choice and increase competition in the private insurance market.  As employer-provided health insurance phases out, wages should start rising again in line with productivity growth.

5. Since vouchers would be financed by a dedicated tax, the U.S. would—for the first time—have a national healthcare budget.  If healthcare costs increased faster than the growth of the economy, either the VAT tax would be raised or changes would be made in our healthcare delivery system to reduce the growth in costs.  Since everyone would bear the cost of a tax increase, our nation would finally have an incentive to deal with the hard choices that we must eventually make—how much to spend on end-of-life care, when to pay for very expensive new medical equipment, how to modify the fee-for-service payment system, etc.

6. Finally, by replacing Medicare and Medicaid with vouchers funded by a new, dedicated tax, the U.S. would eliminate almost all of the federal deficits projected to be such a problem over the next fifty years.  Vouchers would also eliminate the need for large future income tax increases.  Vouchers funded by a dedicated tax would, by themselves, solve the problem that caused our Deficit Task Force to be created.



Ezekiel J. Emanuel and Victor R. Fuchs, “A Comprehensive Cure: Universal Health Care Vouchers,” The Hamilton Project, The Brookings Institution, July 2007.

Laurence J. Kotlikoff, The Healthcare Fix—Universal Insurance for All Americans, 2007

Malpractice Reform and Higher Deductibles Are Not Enough

When I discuss the rising cost of healthcare with my neighbors, they always bring up the need for tort reform to reduce malpractice insurance costs and the importance of expanding the use of high-deductible health insurance policies in combination with “health savings accounts.” Expanding the use of high-deductible policies would give patients added incentives to economize on medical services by forcing them to pay more of their medical costs “out-of-pocket.” I strongly support both ideas and both should be part of any reform proposal. However, neither is likely to slow significantly the long-run growth in medical costs.

Medical Tort Reform

Our laws governing medical malpractice are a mess. Less than 3% of patients who are injured by medical negligence ever get their cases heard in court and the desire to avoid frivolous lawsuits causes doctors to order unnecessary tests and treatments—driving up costs. David Leonhardt summarizes the evidence in this article.

He writes “[malpractice] jury awards, settlements, and administrative costs … add up to less than $10 billion a year. This equals less than one-half of a percentage point of medical spending.” The cost of the “defensive medicine” practiced by doctors because they fear malpractice suits is much greater and has been estimated at up to $60 billion a year. However, this is still only about 3% of healthcare costs in the U.S.

Tort reform that capped excessive jury awards and provided better protection for doctors who follow “best practice” guidelines would reduce the cost of malpractice insurance and the incentives for unnecessary tests and treatments. However, a successful campaign to reform malpractice laws would be unlikely to reduce overall healthcare costs by more than 3 percent.

Higher Deductibles

Increasing the share of medical expenses paid “out of pocket” would cause patients to think more seriously about whether they should seek medical care. They’d be more likely to object if their doctor ordered low-value tests and treatments. In listening to the discussions of my friends on Medicare, I’ve been surprised by how often even the $30 per visit co-pay causes them to postpone an additional visit to their doctor.

Unfortunately, increasing patients’ co-pays is limited as a way to control costs because of the unique characteristics of the doctor-patient relationship. When a consumer goes to purchase a car or refrigerator, he knows what he wants to buy and can determine whether the value of additional features on more expensive models is worth their higher price. When a patient seeks medical treatment from a doctor, he usually doesn’t know what treatment he needs or its value. In at least 70% of doctor visits, patients don’t go to buy a medical treatment. They go for advice about what treatment they need. The more serious the illness, the more likely the patient is to rely on his doctor’s knowledge and advice. Even with a $5,000 deductible health insurance policy, a patient who receives a cancer diagnosis will usually do what his doctor prescribes, even if the treatment turns out to be very expensive.

Since doctors will be making most of our treatment decisions even when patients are paying the full cost “out of pocket,” the focus of any effort to reduce costs must be on doctors and especially on modifying our fee-for-service payment system so doctors have less incentive to prescribe unnecessary tests and treatments.

Using Less Treatment

Up to one-third of medical treatment does little or no good for the patient [see the end of my blog entry “Slowing the Growth of Medicare and Medicaid Cost”].  Several accounts have recently become available illustrating our healthcare system’s tendency to overtreat.  For example, see the Atul Gawande’s article at


or the radio program available at:



Why do doctors order treatments that don’t benefit their patients?  There are at least four reasons:

1.  Profit seeking – Doctors spend their long medical education learning how to treat patients.  Our fee-for-service payment system then gives doctors a strong incentive to use this training and provide additional services.  Medicine is slowly changing from a healing profession to a business.  Read the Gawande article.

2.  Ignorance – In many cases, doctors don’t have adequate knowledge about the cost-effectiveness of different treatment options.   Without clear guidelines, they often will, in good conscience, order the procedures they are trained to provide that earn them the most income.

3.  Patient demands – Patients often ask their doctors to treat ailments for which there is no cost-effective treatment.  They sometimes demand treatments that their doctor knows are not likely to be effective.  These requests are more likely when a patient has insurance and doesn’t have to bear the cost.  Doctors often have a difficult time saying no, especially when their income increases if they give in.

4.  Malpractice lawsuits – To protect themselves from malpractice lawsuits, doctors may order additional tests and treatments.

The best way to reduce healthcare costs and improve the quality of care in the U.S. is to change doctors’ incentives so they will stop ordering ineffective treatments.

I will devote the next blog entry to discussing the last two reasons listed above and will argue that, while they are important, they are not a primary cause of the high cost of healthcare.  Profit seeking and ignorance are the primary causes of over treatment.


Actions to reduce ineffective treatments

A. Improving Payment Methods and Encouraging Self-Monitoring by Groups of Doctors

Dr. Arnold Relman has written a book, A Second Opinion, and many articles, e.g.,


in which he argues that medical costs in the U.S. will be reduced and patient outcomes improved when more doctors start practicing as salaried members of privately-owned, multispecialty groups.  The Mayo Clinic is probably the best known such group.  The cost of care at the Mayo Clinic during the last six months of life is half the cost of such care at, for example, the UCLA medical school.  Several group practices similar to the Mayo Clinic exist around the U.S., including the Cleveland Clinic, Kaiser Permanente, the Billings Clinic and the Health Group in Seattle, and all have been successful in lowering costs.  For a video examining these groups, watch


As a salaried member of a group practice, a doctor’s income depends less on ordering unneeded treatments and he has more opportunity to discuss and coordinate care with his colleagues.

Making group medical practice the norm will take many years to accomplish.  In the interim, two intermediate steps should be taken now.


1. Accountable Care Organizations

Doctors in an area should organize into “Accountable Care Organizations” (ACO).  ACO’s would hold regular meetings at which the member doctors review how medicine is being practiced in the local area and provide feedback to doctors who are either overtreating or undertreating their patients.  The ability to review local practice standards would be facilitated by the widespread use of electronic medical records.  The formation of ACO’s could be encouraged if Medicare and private insurance companies shared part of any cost savings with hospitals and the doctor members of ACO’s.

2. Increase the use of “capitated” payments and “bundling” of payments

Medicare and private insurance companies should move away from fee-for-service payments and pay part of a patient’s care with a single yearly payment to the group of doctors providing his care (“capitation”).  With part of a patient’s care covered by the fixed payment, reimbursement for routine tests and procedures could be reduced—reducing the incentive for extra treatments.  “Bundling” of payments would provide hospitals and doctors with a lump sum in advance to provide care for a particular medical condition.  “Bundling” would encourage doctors and hospitals to improve quality since repeated treatments or readmissions to the hospital would not be reimbursed.


B. Providing Doctors with Better Information about Treatments

For a surprisingly large number of illnesses, doctors currently have inadequate guidelines about the most cost-effective treatments.  Prostate cancer is a good example. Many treatments for prostate cancer are available, including radical prostatectomy, several types of external radiation, brachytherapy (radioactive seed implants), and “watchful waiting.”  The cost of these treatments varies enormously—from very little for “watchful waiting” to over a hundred thousand dollars for newer types of external radiation treatment.  For early stage prostrate cancer, no consensus exists on whether one type of treatment is any better than another type.


Another example of our failure to provide doctors with adequate information is medical devices (e.g., defibrillators and artificial hip joints).


Healthcare costs in the U.S. could be significantly reduced by funding more research on the effectiveness of different treatments and by giving doctors clearer guidelines on which to base their recommendations.


Pet Peeve

Please excuse me while I take a short break from healthcare and blow off some steam.

As a farmer, I’m often sent surveys from the government and from ag suppliers.  These questionnaires ask where I get the expert knowledge necessary to make important farming decisions.

  • Who scouts your fields for diseases and pests?
  • Who determines the amount of fertilizer you apply?
  • Who decides the chemicals you should use to control weeds and insects?
  • Et cetera
  • Et cetera

These questions always annoy me.  “I DO” is almost never one of the choices on the long list of government agencies, ag suppliers and outside experts.  The implication seems to be that I’m a stupid farmer who isn’t competent to make decisions affecting my farms.  I should be relying on someone else.

As a farmer, my profession is to scout my field and make decisions about fertilizer rates and chemical applications.  If I lack this key knowledge necessary to run my farm, I should get another job.  I also believe I am more motivated and competent to conserve the soil and water on my farm than is any outside expert (although I do appreciate the technical advice provided by the NRCS and SWCD in designing conservation practices).

Given the events of the last year, maybe the federal government should be shifting more of its survey efforts into finding out where the leaders of Wall Street and our big banks get their advice — since their ineptitude almost destroyed our financial system.  The farmers I know are competent professionals.