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In the 1992 vice-presidential debate, Admiral James B. Stockdale, Ross Perot’s running mate, opined that the problem of health-care costs might be solved by “crafty people who know how to write contracts.” Although he declared himself “out of ammunition” when asked a follow-up question, his initial observation — probably based on something heard over lunch at the Hoover Institution — was far more insightful than most other candidates’ utterances, before or since, on this complex topic. In fact, the linchpin of any health policy seeking to optimize Americans’ health-care spending needs to be something rarely mentioned in policy debates: freedom of contract. 

If Republicans are serious about accomplishing true “market-based” health reform and expanding opportunities for consumer choice, their reform bill should expressly authorize health plans to write unconventional contracts with their subscribers. Such contracts could be precisely the innovative products that, by offering consumers health care that is substantially cheaper — and only slightly less good — than what they are overpaying for today, can effectively disrupt health-care markets for consumers’ general benefit. Without such contractual options, consumers are left with a Hobson’s choice: Either pay for a costly model of the health industry’s preferred form of health financing or go without any coverage at all. 

Under a long-standing convention unexamined in today’s debates, health insurance is one thing and health care is something else, the former’s principal purpose being to enable patients to afford the latter. Although consumers can choose among financing plans, the content (and thus the costliness) of the care they expect to receive is not negotiable. Instead, all insured patients are essentially entitled, by common law or otherwise, to both provider services meeting a poorly specified “standard of care” and plan payment for all care deemed “medically necessary.” These near-universal terms of entitlement amount to an industry-friendly system of command-and-control regulation because applying them requires reference to medical experts. The professional paradigm of medical care these experts bring with them essentially holds that patients should receive, at whatever cost, any service with some chance of yielding a medical benefit.

This medical-legal environment has served the health industry well — and consumers badly — by largely removing cost considerations from treatment choices. Health plans’ contracts with subscribers might, however, go well beyond the scope of ordinary insurance contracts and also define in sufficiently specific terms the obligations of a health plan’s provider network to its patients, in effect offering health care and financing in a single package. Although writing such contracts would require legal craftsmen (rather than Admiral Stockdale’s “crafty people”), it could be accomplished with legislative encouragement. (See my Health Care Choices: Private Contracts as Instruments of Health Reform, pp. 157–328.) 

The health-care industry’s strong preference for separating the financing of health care from its delivery has dictated developments ever since industry interests introduced the first forms of health insurance in the 1930s, ostensibly as a public service but also to ensure patients’ bills would be collectable with few questions asked. In early years, however, a number of integrated health plans developed, offering the services of in-house doctors and hospitals for a predetermined monthly premium. In not limiting themselves to merely financing fee-for-service care, these plans were a potentially “disruptive innovation,” and organized medicine moved powerfully to stifle them, often violating the antitrust laws in the process. While some such prepaid group-practice plans still survive, their contracts with subscribers say nothing to suggest their doctors might sometimes depart responsibly from industry standards in order to control costs. Provider interests now have little to fear from these competitors precisely because they have not sought to modify medical-legal rules. 

When “managed-care” plans appeared in the late 1980s, they could deal with providers only at arm’s length, as payers. As such, they soon proved vulnerable to an industry-inspired political backlash, largely because most insured workers had long been misled by the nontaxable status of their health benefits into believing health costs were a problem only for their employers and insurers. To them as voters, managed care’s cost savings seemed to benefit only corporate interests, not themselves.

Today, given a proper legislative blessing and with tax changes raising consumers’ cost-awareness, innovative contracts could enable competing health plans to announce in advance their general policies with respect to trade-offs between costs and probable benefits. In the current system, these trade-offs are generally finessed, with the result that spending far exceeds what reasonable prudence requires. Bringing trade-off policies into the marketplace would finally force providers to tailor their styles of medical practice to the preferences and pocketbooks of potential customers.

The only time an expanded role for contracts has come close to surfacing as an issue in the real world of health policy was in the work of the task force of experts charged with developing the Clinton Health Security Act in 1993–94. (See Health Care Choices, pp. 43–62.) Task-force leaders developed legislative language expressly to authorize innovative contracts, with significant safeguards provided by so-called “health alliances” (somewhat similar to Obamacare’s exchanges). (See Health Care Choices, pp. 50–52.) That language could easily be adapted for use in Republicans’ work-in-progress reform bill, perhaps improving chances for Democrat support. 

Like the task-force draft, a Republican bill could give new nonprofit or employer-sponsored alliances the explicit task of verifying that a health plan’s contractually specified rights and obligations are (1) “such as might reasonably be agreed to by an informed, value-conscious consumer” and (2) “adequately specified in the contract” by: (a) reference to responsibly developed “clinical practice guidelines;” or (b) “general language altering [conventional] legal and professional standards;” or (c) identifying a disinterested arbiter to deal with ambiguous situations. The task force also negotiated a final clause providing strong assurance that no patient could be denied any significant, verified benefit of medical science.

Such alliance-provided assurances should answer the natural concern that ordinary people purchasing a health plan cannot be expected to read, let alone understand and compare, the multiple contracts they would confront. While certainly valid, this point is beside the real one, which is to give consumers meaningful, pre-screened choices affecting the cost and content of their future health care. The goal should be to ensure that any choice made by an adequately subsidized, cost-conscious consumer could not be a particularly bad one. In any event, no reform proposal can qualify as truly “market-based” unless it frees consumers to contract for something less costly than health care meeting conventional, industry-determined standards. 

The far-reaching legislative prescription proposed in this essay may be several stretches too far for the current Congress, especially if it must legislate under Senate budget reconciliation rules. Nevertheless, the current Senate Republican reform bill proposes to allow states to obtain federal waivers of some Obamacare requirements, including its mandate for insurers to provide “essential health benefits.” This provision could be made far less controversial and much more constructive if the bill spelled out — and expressly invited states to adopt — this essay’s contractual strategy for lowering the cost of delivering care proportionately across all categories of coverage. Instead of seeking cost control only by dropping whole categories of covered services, such a reform would be a blow for overall cost reduction, comprehensive coverage, federalism, and consumer-friendly market-based reform — all things most conservatives and many liberals could endorse. If one or more states were to elect that approach to cost control, its value might eventually be confirmed and its benefits extended to consumers everywhere.

Clark Havighurst is a professor emeritus of law at Duke University and author of Health Care Choices: Private Contracts as Instruments of Health Reform (AEI Press, 1995).

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