Rx America: What's the prescription for U.S. health-care reform?

Politicians are talking health reform again, and they have three big ideas for how to get there. Each one would make a big difference in your family's bottom line.

By Pat Regnier, Money Magazine senior editor

(Money Magazine) -- If you're running for President, here are three numbers you have to know: The average January low in Iowa is 9 degrees Fahrenheit. It takes 270 votes to win the Electoral College. And 45 million people in the U.S. have no health insurance.

That last figure has become the leading index for economic anxiety in America. It has persisted despite razor-thin unemployment and solid economic growth. And it understates the problem. More than 80 million people lost coverage for a time during a recent two-year period, says Families USA. And millions more know it could happen to them - and not, they hope, at the same time that they happen to get sick or fall off a ladder.

The U.S. spends about 16 percent of GDP on health care, far more than other rich countries, but we're the only one where leaving or losing a job can trigger a medical crisis as well as a financial one. That wasn't so terrifying back when most of us expected to work for the same employer for decades. It makes less sense in a free-agent nation.

Health-care reform has pretty much been off the table since 1994, when Bill Clinton's push for universal coverage was squashed. But that's changing. A recent CBS News/New York Times poll found that two-thirds of Americans think the government should guarantee access to insurance.

For Democratic primary voters, health care is the big issue after Iraq. And it's not just Democrats. President George W. Bush has proposed changes in the way the tax code subsidizes care. One of his would-be successors, former Massachusetts governor Mitt Romney, signed off on a law designed to ensure near-universal insurance in his state.

So the health-care debate is back, and this time it's not going away. Whatever the end result, it's going to have a big effect on your family. You may have to pay higher taxes. Or give up insurance you like for a plan with fewer choices, longer waits for elective treatments or heftier out-of-pocket payments. You may have to become a savvy shopper for your own health plan, instead of relying on your employer.

But the potential rewards are big too. You could stop wondering how you'd pay your family's medical costs if you were laid off. You could think about taking that exciting job at the start-up with no health plan. You might even come out ahead financially, if reform can bring our rapidly rising health spending under control.

As the presidential aspirants unveil their plans and the special-interest groups roll out their attacks in the coming months, expect to hear about those old demons "socialized medicine" and "greedy insurers."

The real debate is more subtle, thank goodness, and comes down to three big ideas that are taking hold in proposals from across the ideological spectrum: making insurance mandatory, changing the tax code, and mixing public and private coverage.

None of these ideas is flawless. But they could be the building blocks of "everybody's second-best alternative," as Jon Kingsdale, director of the new system in Massachusetts, describes the reform there.

Big Idea No. 1: Insurance isn't a right. It's a responsibility.

In most states, everybody who drives has to have auto insurance - you must be able to pay your fair share when there's an accident. By the same logic, perhaps everyone who will ever use the health-care system (that is, all of us) should be obliged to have insurance to pay for it - a so-called "individual mandate."

Democrats including presidential candidate John Edwards and Senator Ron Wyden have proposals that make insurance almost unavoidable. Gov. Arnold Schwarzenegger's reform plan for California would enforce the mandate through the tax system. In Massachusetts, it's already the law: Sign up or pay a fine.

It's certainly one way to get closer to universal coverage. But why the punitive approach? Should the government really care if some decide, for whatever reason, to opt out? The answer comes down to cost control. The uninsured still get care when they show up hurt or sick at the hospital, and someone ultimately has to pay for that.

Government - that is, taxpayers - stumps up some of the cash. But hospitals also offset the cost of free care by charging more to those who do pay. A paper by the New America Foundation calculates that in California, where 20 percent of residents are uninsured, unreimbursed costs add about 10 percent to plan premiums.

It doesn't help that the uninsured tend to get the least cost-effective kinds of medicine. They get less preventive care and crowd the doors to emergency rooms. "People come into the hospital who have never been to a primary doctor," says Celia Wcislo, a labor-union representative on the board implementing the Massachusetts reform. "Now they have cancer and the state pays for their care."

Forcing people to buy insurance also helps address a problem called adverse selection. People who opt out of buying insurance tend to be younger and healthier, while those who most want to buy are often older and sicker. That makes insurance riskier to provide, which means higher premiums. Rope in everybody, and you can charge less.

Finally, the mandate performs a neat political trick: It allows Republicans like Schwarzenegger and Romney to speak of health insurance as a "personal responsibility" even as they expand government's role in it.

The messy details

The personal responsibility pitch goes only so far. The majority of the uninsured aren't looking for a free ride - they plain can't afford insurance. If you require them to buy it, you have to help them.

In Massachusetts the state has set up the Connector, a program to make it easier and cheaper for individuals and small businesses to find coverage. But it is also providing subsidies. So whatever Massachusetts may be saving in hospital and adverse-selection costs, the mandate costs money - it just gives the state more bang for its buck by insuring more people.

If a mandate plan was tried at a national level, it might cost north of $100 billion a year, says economist Jonathan Gruber, another member of the Massachusetts board. And mandates are politically hard to pull off. Compared with the rest of the country, Massachusetts has it easy, with 10 percent of its population uninsured in 2005 - compared with 15 percent nationally.

Even so, the mandate is part of a law years in the making, which required concessions from both Romney and a Democratic legislature. And there's still a lot of push and pull over how the law will work.

The Greater Boston Interfaith Organization, one of the groups that fought for reform, wanted to limit the mandate. It ran workshops where people drew up household budgets, and used the results to question whether many could afford insurance, especially considering that cheaper Connector plans would require significant out-of-pocket costs. "Low and moderate-income people in the Boston area are at the breaking point," says Richard Moore of the GBIO.

In April the Connector board drafted a compromise that exempts some from the mandate. The challenge now: signing up those who won't get subsidies. If many decide the new Connector plans are too expensive or don't offer enough coverage, the mandate won't amount to much more than a harsh new Bay State tax.

Big idea No. 2: The road to reform runs through Form 1040 Top of page