Oklahoma Comprehensive Health Independence Plan

June 2008

Oklahoma Councilof Public Affairs

O-CHIPOKLAHOMA COMPREHENSIVE HEALTH

INDEPENDENCE PLAN

Emphasizing Personal Responsibilityand Individual Empowerment

June 2008

The following study was sponsored by the Oklahoma Council of Public Affairs andmade possible through a grant from the State Policy Network. OCPA is the state’s

premier free-market think tank, whose mission is to accumulate, evaluate, anddisseminate public policy ideas and information for Oklahoma consistent with the

principles of free enterprise, limited government, and individual initiative.

O-CHIP: Oklahoma Comprehensive Health Independence Plan iii

The author wishes to thankPatrick L. Grewe, Travis K. Hughes,

Melissa N. Mulkey, and Kurk C. Zieglerfor their research assistance.

iv O-CHIP: Oklahoma Comprehensive Health Independence Plan

Table of ContentsIntroduction .................................................................................................................................................................. 1

O-CHIP: Executive Summary ..................................................................................................................................... 3

O-CHIP Objectives ...................................................................................................................................................... 5

O-CHIP Proposal

Converting a Spider Web into a Safety Net ............................................................................................................ 7Quit destroying children’s futures and simply provide help ............................................................................ 7Quit destroying hope and initiative and encourage personal development ................................................. 7Apply the Laffer Curve .......................................................................................................................................... 8Encourage the federal government to convert Medicaid to a block grant ................................................... 10

Opening the Way for Insurers to Add More Value ............................................................................................... 13Remove existing regulations that do harm and avoid new ones .................................................................. 15

Reject mandates .......................................................................................................................................... 15Reject community rating and guaranteed issue ...................................................................................... 16Allow underwriting latitude ........................................................................................................................ 16Publicize new policies ................................................................................................................................. 17

Encourage new insurance products ................................................................................................................. 17Provide more value added for people with chronic illnesses ................................................................. 17Encourage development of list billing services ....................................................................................... 19Cover out-of-state residents who pay full cost ......................................................................................... 20Encourage policies for guaranteed insurability ...................................................................................... 20Encourage policies that combine health insurance and disability income ......................................... 21Encourage temporary health insurance for appropriate situations ...................................................... 21Encourage policies that combine long-term care with a life annuity .................................................... 21Consider the role of nurse telelines and other services .......................................................................... 22

Transition Sooner Care to a private sector enterprise .................................................................................... 22

Anticipating Coming Trends .................................................................................................................................... 23Anticipate and plan for the inevitable trend to defined contribution health benefits ................................ 23Provide for one-time election to retain existing coverage .............................................................................. 30Grasp the economic reasons for de-regulation of health insurance ............................................................ 31

Getting Everyone Access to Care in Ways That Make Sense ............................................................................ 37Make health insurance affordable and attractive .......................................................................................... 37

Use a tiered system that considers both income and cost of health insurance ................................... 37Allow the less fortunate to get the insurance that best suits their needs .............................................. 38

Provide incentives for getting health insurance .............................................................................................. 38Provide a tax credit for families with health insurance ........................................................................... 39Provide a tax credit for families with a non-dependent parent in residence ....................................... 39Provide an additional tax credit for those who itemize deductions ...................................................... 39

Impress reality on those who would force others to pay their bills ............................................................... 40Facilitate better debt collection by health care providers ...................................................................... 41Require health insurance to play the lottery ............................................................................................ 42Let freeloaders pay more of the taxes they would otherwise force onto others ................................... 42

Offer incentives to improve quality and reduce cost of long-term care ........................................................ 42

Fostering Wellness and Quality .............................................................................................................................. 45Provide access to quality health care ............................................................................................................... 45

Design a standard policy as an option .................................................................................................... 45Employ a high deductible ........................................................................................................................... 45Use a Personal Health Account with debit card....................................................................................... 45

Establish rules for general usage ...................................................................................................... 46Establish rules for excess funds ......................................................................................................... 46Encourage wellness expenditures ..................................................................................................... 46Allow withdrawals for personal use by those who save taxpayer money ..................................... 46Require preventive care for personal use withdrawals ................................................................... 47

O-CHIP: Oklahoma Comprehensive Health Independence Plan v

Recycle half of personal use withdrawals ......................................................................................... 49Provide for smooth administration of Personal Health Accounts ................................................... 49

Cover mental illness .................................................................................................................................... 50Curb abuse through meaningful audits and stricter eligibility determination .................................... 50

Increase emphasis on eligibility determination ............................................................................... 50Strenghthen audit procedures ............................................................................................................ 51

Provide needed long-term care ......................................................................................................................... 51Furnish nursing home benefits ................................................................................................................... 51Continue home and community-based care ............................................................................................ 51

Place more emphasis on wellness and prevention ......................................................................................... 52Encourage employer-sponsored and individual wellness programs .................................................... 53Create safe harbors for employers encouraging wellness and fitness ................................................ 53

Ensure Oklahoma has enough doctors and other professionals to meet future needs ............................. 53Assure adequate reimbursement to health care providers .................................................................... 53Help rural Oklahoma attract needed physicians and other providers ................................................. 54

Educate health professionals in areas of greatest need................................................................. 54Grant scholarships to students likely to pursue health careers in rural Oklahoma .................... 56Reform existing programs ................................................................................................................... 56Establish funding for a new scholarship program ........................................................................... 56Provide relief for rural physicians ...................................................................................................... 58Explore greater utilization of physician assistants (PAs) and telemedicine ................................. 58Emphasize rigor in high school curricula ......................................................................................... 58

Consider the potential impact of tort reform on cost and quality of health care ................................. 58Consider the impact of tort reform ..................................................................................................... 58Safeguard quality ................................................................................................................................ 58

Help patients become better consumers .......................................................................................................... 59Provide audited performance data to consumers ................................................................................... 59Inaugurate single audits for hospitals and nursing homes ................................................................... 60

Addressing Related Issues ...................................................................................................................................... 61Utilize available technology .............................................................................................................................. 61

Encourage use of an accessible patient database ................................................................................. 61Expand e-prescribing .................................................................................................................................. 61Create a true health information exchange ............................................................................................. 61

Expand medical research .................................................................................................................................. 62Coordinate health care programs .................................................................................................................... 62

Investigate the possibility of partnering with other agencies providing health services .................... 62Coordinate and, where possible, integrate state health care programs .............................................. 63Use TANF grants to help fund health care for the poor .......................................................................... 63Improve county health services .................................................................................................................. 63Provide health care rationally to inmates ................................................................................................. 64Fully integrate mental health into comprehensive health care delivery ............................................... 64

How O-CHIP Achieves the Objectives for Health Care Reform ......................................................................... 67

Appendix A: Incentives for Family Stability and Work Provided by Existing Social Programs ................. A-1

Appendix B: Amount of Medicaid Assistance to Individuals and Families under O-CHIP ......................... B-1

Appendix C: Impact of Income Tax Changes Proposed in O-CHIP ............................................................... C-1

vi O-CHIP: Oklahoma Comprehensive Health Independence Plan

O-CHIP: Oklahoma Comprehensive Health Independence Plan 1

IntroductionWhen I asked Tom Daxon to take on the

issue of health care reform in Oklahoma inAugust of 2007, neither of us fully realizedthe full scope of my seemingly simplerequest. I knew then that the issue wascomplex and intertwined, but I also knew ofTom Daxon’s excellent reputation as a fiscalanalyst and his broad understanding ofeconomic policy issues. He is an exceptionalman and like most exceptional men can bestbe described using exceptional mathemat-ics: Daxon is half accountant, half states-man, half economist and half historian. Ifanyone could find a way through the bu-reaucratic wilderness of our state’s healthcare system, he could do it. His charge wasto create a health care policy study, one thatwas consistent with the free-market philoso-phy of OCPA, and one that would steerOklahoma toward a health care systemdriven by market forces instead of moregovernment regulations, price controls,mandates, and quotas. His work is entitledthe Oklahoma Comprehensive Health careIndependence Plan, or O-CHIP.

Upon completing this study, I know Mr.Daxon feels a bit like the famous trailblazerCaptain Meriwether Lewis (of Lewis andClark) upon reaching the Pacific Ocean. Heis glad this portion of the work is completed.But his exploratory work has revealed howsweeping the full task of health care reformwill be for the policymakers that follow. Hehas seen the conditions and understandsthe political challenges those policymakerswill face in their efforts to reform health care,at least those that dare. Not all will dare.

Mr. Daxon also sees the great potential ofthis reform. Health care reform is a politicalsubject of national scope in which states likeOklahoma may help lead the way back torational, market-based policy. It is an oppor-tunity for efficiencies of the market processto provide more abundantly for Oklahoma’sreal health care needs, while still protectingthe humanitarian sanctities within the healthcare profession.

The timing is fortuitous. Health careconsumes ever-increasing percentages offederal and state budgets, and has rapidly

become one of the most significant govern-ment finance issues for policymakers atnearly every level. The rhetoric of presiden-tial politics has further elevated this issue inthe minds of the American public. Healthcare is a top campaign issue, with eachpresidential contender trying to outmaneuverthe other. O-CHIP offers a breakthrough inthe current debate on health care policy.

O-CHIP challenges two premises of thecurrent popular trend toward full-blownsocialized health care: (1) All health caresolutions must trend toward increasinggovernment intervention; and (2) saidintervention must come from the federallevel of government. Over the past 50 years,health care has become an entitlement inthe minds of many responsible citizens, as ifit is truly an inalienable right in the classicalsense. While OCPA and others have pub-lished many articles that refute this funda-mental fallacy, Daxon’s work incorporates adifferent approach. It seeks to removeregulation of insurance markets and re-empower consumers with the means ofhealth care choice. By removing barriers tomarket forces and re-invigorating healthcare consumers with information and buyingpower, O-CHIP puts in place key catalysts ofreform.

O-CHIP does not instruct citizens aboutthe proper role of government in health care,as tempting as it may be given all of thesupporting arguments and historical ex-amples of colossal failures of governmentsthat take control of a nation’s health caresystem. Instead, O-CHIP proposes a reformframework in which all citizens can takegreater ownership of their own healthinsurance. Former Mayor of New York RudyGiuliani spoke to America’s collectivecommon sense when he said, “It’s yourhealth — it should be your health insur-ance.” O-CHIP appeals to the same com-mon sense, the same spirit of individualliberty and self-determinism.

There is another dimension to O-CHIPthat is profound. It is a clear shift towardfederalism.

Daxon recognizes that national solutions


2 O-CHIP: Oklahoma Comprehensive Health Independence Plan

are needed, but he also knows that not allnational solutions emanate from Washing-ton, D.C. As Justice Brandeis observed in theearly 1900s, our system of federalism affordsus 50 “laboratories of democracy,” each fullof citizens who are very interested in theirown well-being. The remedy for our healthcare challenges may well lie within reach ofthe states, yet paradoxically exceed theability of the federal government, even withthe massive organizational and financialresources at its disposal.

This issue exemplifies the great utility offederalism. Instead of a national health carepolicy imposed from Washington, alternativepolicy solutions should come from the states.If left to the federal government, an ineptand grotesque federal health care system isinevitable, made useless by its very size. Ifleft to the states, the 50 “laboratories ofdemocracy” would propose varying systemsin order to meet the needs arising from thedemographics and economics of each state.

Each of the states can evaluate the

successes of others and copy them, or not.Individuals and businesses will enjoy thepositive health care policies in each state, ornot. Health care service providers will stayin states with favorable public policy, or not.The competitive market between the 50states will reward good states and punishnot-so-good states, as it should. Over time,all participants will benefit from the competi-tive environment, and the United States willretain the distinction of having the bestmedical care for the common man anywherein the world.

Tom Daxon has once again come to theservice of his state and nation. We are proudto publish his fine work, and encouragepolicymakers to consider it as a foundationupon which to base public policy for thebenefit of our citizens, and as an examplefor other states to follow.

Hopper T. SmithPresidentOklahoma Council of Public Affairs


O-CHIP: Executive SummaryO-CHIP is a comprehensive proposal with

simple fundamental concepts:

• Strengthen families and encourage theirstability.

• Reward initiative.• Deregulate insurance markets and open

the way to more value-added products.• Make health insurance affordable for

every Oklahoman.• Reward Oklahomans who acquire health

insurance, penalize those who don’t.• Reward participants who help the Medic-

aid program save money.• Remove barriers to wellness and encour-

age preventive care.• Empower patients to be better health care

consumers.• Achieve better coordination among state-

funded health care programs.

Medicaid is one of several programsintended to assist low-income individuals.The government also provides cash pay-ments through the Temporary Assistance toNeedy Families (TANF) program, foodstamps, housing assistance, day careassistance, and earned income tax credit(EIC) to assist low-income families. Theseare referred to as the “safety net” meant tokeep poor people from complete destitution.

Unfortunately, together, there is almost nocoordination between the programs. Theresult is a series of programs which discour-age family formation and stability, and stifleinitiative. The proverbial safety net becomesa spider web that traps the poor, enablingother forces to rob them of a better life.O-CHIP does not look the other way at thesepractices.

O-CHIP begins integrating eligibilitythresholds. Families need not face dissolu-tion to benefit financially. Individuals withhope and ambition aren’t held back bypunitive arrangements. Once we establish asensible framework to assist the poor, wecan focus more effectively on health careissues. In fact, if we can get in place acomprehensive program to help the lessfortunate in all respects, we will find that our

health care problems are far more solvable.When analyzing health care, we find that

our present policies impact more than thepoor. Health care costs continue to skyrocketrelative to other sectors of our economy.While most Americans report they arepleased with the health care they receive,many middle class families still struggle toobtain and pay for adequate health insurance.

O-CHIP recognizes that our health caresystem works best when everyone has healthinsurance or other non-government means topay for care and addresses these concernsby the following:1. Dramatically deregulating the health

insurance market.2. Providing assistance to those in need by

helping them buy health insurance.O-CHIP utilizes a tiered system of eligibil-

ity, rather than an “all-in” or “all-out” ap-proach when providing assistance. O-CHIPdoes not provide assistance to those able topay for their own care.

Many Oklahomans simply refuse to buyhealth care coverage, particularly those whoare young and healthy. When a large portionof their premiums subsidizes the unhealthy,that refusal may be a prudent decision evenif it effectively freeloads upon others.

By deregulating the health insurancemarket, O-CHIP will significantly lowerhealth insurance premiums for most Oklaho-mans. Individuals will benefit from reducedhealth insurance premiums, and Oklahomabusinesses will become more competitive.O-CHIP also provides a safeguard to pre-vent citizens from being forced to pay higherpremiums. Using the advantages of a freemarket, O-CHIP makes health insuranceaffordable to all Oklahomans while ensuringthey understand the consequences of theirown decisions to buy or not buy healthinsurance.

Those who refuse health insurance andhave no other means to cover their healthcare bills create a cost burden for others.Health care providers, especially hospitals,are forced to shift cost of care to responsibleparties who pay their bills. O-CHIP favors


those who act responsibly and discouragesfreeloaders.

Oklahomans who maintain health insur-ance through their employer or a personalplan receive significant tax relief. UnderO-CHIP, those without health insurance willpay higher taxes, find it more difficult toborrow money, and lose the right to play thelottery.

O-CHIP enlists Medicaid participants tohelp hold down costs. Providing auditedinformation about quality and price willempower them to be better consumers.Those who take advantage of this andspend wisely will help taxpayers. O-CHIPwill reward them by allowing them to keepsome of the savings they generate to use asthey see fit.

Similarly, O-CHIP makes changes in therules affecting long-term care. O-CHIPblocks many loopholes that now allow evenprosperous families to foist the care of theirelderly members on Oklahoma taxpayers.Conversely, O-CHIP rewards families who

help the state control costs.O-CHIP addresses the need for new

doctors and other health care professionals,especially in rural areas. To ensure thatOklahomans will have needed health careresources, O-CHIP funds local hospitals toprovide medical school and other scholar-ships in exchange for service after gradua-tion. Other enticements make these scholar-ships more attractive to prospective ruralhealth care providers.

O-CHIP recognizes that healthy individu-als require less costly health care. Accord-ingly, O-CHIP provides reasonable protec-tion to employers who offer wellness andfitness programs to their employees.

Among other provisions, O-CHIP includes:• Funding medical research with an em-

phasis on maladies which disproportion-ately afflict Oklahomans.

• Encouraging greater use of life-savingtechnology.

• Fostering better design and coordinationof health care programs.


O-CHIP Objectives• Provide Oklahomans greater ability to

improve and maintain their own health.– Good health avoids costly health care.– Foster more interest in wellness by

employers and individuals.– Remove barriers to more effective

programs for the chronically ill.

• Preserve and enhance health care mar-kets and let them heal the sick.– Do no harm to a system that, except for

high cost, most Oklahomans perceiveworks well.

– Encourage the continued developmentof “miracle” drugs, “miracle” equip-ment, and new, effective procedures toimplement them.

– Provide a stable and predictablebusiness environment within whichhospitals and other Oklahoma provid-ers may pursue nationally recognizedexcellence.

– Increase utilization of databases andtechnology to reduce errors and pro-vide needed information to health careprofessionals on a timely basis.

– Ensure the continued availability ofdoctors, nurses, pharmacists and otherprofessionals throughout Oklahoma.

• Assure all citizens access to a systemwhich minimizes damage to the economy.

– Stop distorting the market for healthcare services and insurance.

– Directly address the needs of the poorand medically needy.

• Reduce health care inflation.– Facilitate greater consumer involve-

ment.– Stop pouring money into ineffective

programs.

• Ensure that public health needs do notcontinue to bankrupt hospitals.– Remove barriers to greater insurance

coverage.– Allow hospitals to collect bad debts.

• Curtail freeloading and de facto taxes onresponsible citizens.

• Encourage family stability and work.– Stop encouraging young women to

abandon the fathers of their children.– Reward the hard working poor who

take initiative to better themselves.

• Help rural Oklahoma maintain neededaccess to health care services.

• Create an environment that helps Okla-homa businesses to create more andbetter jobs.



Converting a Spider Web into a Safety NetWhen considering programs to assist the

less fortunate, policymakers sometimesfocus on their pet projects. Such bias mayresult in unintended, sometimes tragicconsequences for the people these pro-grams are meant to help.

Accordingly, O-CHIP reviews the Medic-aid program in terms of its role in the overallsafety net of programs for the poor. Unfortu-nately, the structure that emerges is one thatfrequently destroys families and smothersinitiative. What was meant to help insteaddoes great harm.

In addition to Medicaid for needed healthcare, the poor can also access food stamps,federal housing, and day care. Other pro-grams include Temporary Assistance toNeedy Families (TANF) and the earnedincome credit (EIC) that is part of the taxcode.

Unfortunately, there is very little coordina-tion among all these programs. Programsdesigned to help often actually contribute tothe very poverty, crime, and hopelessnessthey seek to alleviate. Changes needed tocorrect this deplorable cycle of despair arenot complicated, as outlined below. But theyare change.

Quit destroying children’sfutures and simply providehelp.

The most important asset in a child’s lifeis receiving the love and care of a secure,stable family. Having a father in the home ismore important than money or social stand-ing. Having a father in the home is moreimportant than participating in a well-designed social program.

A child from an intact family is less likelyto become involved in crime, less likely to bea victim of violence, and more likely to excelin school than a child raised without a fatherin the home.1

This holds true even when we control theresults for race, income, or the parents’education level.

Under our existing welfare system, a poorwoman who becomes pregnant will usuallyfind that she benefits financially by notmarrying her child’s father. The father’sincome is considered in determining eligibil-ity for government assistance that may bemore financially valuable than his income.

O-CHIP applies no categorical require-ments for eligibility determination. Subjectto the income guidelines and the cost ofhealth insurance, O-CHIP empowers every-one to receive the health coverage they needwithout excluding dad from the family.

Quit destroying hope andinitiative and encouragepersonal development.

One who has watched a spider work itsweb in the evening light has witnessed adreadful yet fascinating drama. Unsuspect-ing insects drawn to the light find them-selves ensnared in a fatal embrace. Theinsect struggles to escape but very few do.

Meaning to design a safety net of manyservices to help the poor, have we insteadcreated an ensnaring web? Rather thancatch people falling on hard times, oursafety “web” only further entangles them.Predators in many guises wait to attack theunsuspecting victims. If we make Medicaidmore efficient and effective but do notconsider the safety web of which it is a part,we may design a program that effectivelyand efficiently removes Johnny’s tonsilsbefore we send him to prison — literally.

The “safety net” designed to catch thosefalling on hard times becomes a snarethwarting those struggling to escape. Littlecoordination exists among the agenciesinvolved to ensure seamless aid to the poor.

Some people fall through the cracks withno safety net to catch them. Others bouncearound several nets that further ensnarethem. Some nets or programs do seriousharm. This is especially true when weconsider the cumulative impact of theprograms.

O-CHIP Proposal


Consider a single mother who wants toprovide a better life for herself and her twochildren. Existing social welfare programsencourage her to desert her husband ornever marry the father of her children in thefirst place. The temptation to leave herchildren’s father may be the most seriousdecision that current social policy encour-ages her to make, but it is not the onlydecision confronting her.

Assume that a motivated single mother isemployed in an entry-level job that pays $7per hour. Wanting the best for her children,she prudently signs up for all the availablegovernment programs that provide assis-tance. She uses the state’s day care pro-gram to help defray the cost of child care.She signs up for food stamps to cover part ofthe cost of meals and incidentals. Sheparticipates in the federal housing programto improve their living conditions.

Now consider what happens when herboss rewards her initiative by offering apromotion and doubling of her wages to $14per hour. What should be a cause for cel-ebration becomes a disincentive. The youngmother loses her food stamps, day careassistance, and most of her EIC. Her hous-ing assistance is cut in half. What’s more, abigger paycheck translates into higherwithholding for Social Security, Medicare,and income taxes. She would actually beworse off than before her wages doubled.

The single mother offers a plausibleexcuse and turns down the offer. Her em-ployer ups the ante to $15 an hour. Now, shestands to lose Medicaid benefits for herchildren and what remains of her EIC andhousing subsidy. Her real income at $15 perhour, including the value of governmentbenefits, would barely be 80% of what it is at$7 per hour. The fact that we tax her earnedincome but not her benefits makes it evenworse.

The spider web is at work.This fictional scenario is based on actual

policies in place today. Because we don’tcoordinate our social welfare programs, low-income people on welfare who show initia-tive usually make themselves worse off, atleast until they progress completely beyondeligibility for all government assistance.

Appendix A provides additional detailsabout this very serious problem.

While O-CHIP focuses on health carereform, the government’s primary healthcare assistance program, Medicaid, iscurrently a contributor to the problem.O-CHIP makes needed reforms to Medicaidthat begin to address these larger issues.

First, O-CHIP doesn’t ignore the presenceof other social welfare programs in estab-lishing its eligibility thresholds and criteria.Rather, it considers the benefits from thoseprograms when determining the level of aparticipant’s Medicaid benefits.

Second, by using a tiered system ratherthan an “all-in” or “all-out” approach,O-CHIP preserves benefits if a participantreaches a particular threshold. Changes inthe amount of assistance occur gradually.

O-CHIP also recognizes that holdingdown a job entails expenses we shouldconsider: employment taxes, income taxes,commuting, and possibly day care. O-CHIPexcludes a portion of earned income whencalculating the amount of assistance forwhich someone is eligible. In effect, O-CHIPuses an approximation of net income todetermine the capacity of a participant topay for insurance and health care.

O-CHIP’s provisions do not discriminateagainst family formation and cohesion. First,O-CHIP allows families headed by marriedcouples to participate on the same basis asother families, but also considers the cost ofworking for a living. Under this plan, asingle person or head of household mayexclude 30% of what the IRS classifies asearned income up to $9,000 in determiningthe amount of assistance. The limit for amarried couple is $18,000, regardless ofwhich spouse earns the income.

While O-CHIP does not remove all disin-centives to family formation and stabilitypresent in our current system, it does makenoticeable improvements.

Apply the Laffer Curve.Many conservatives understand that the

Laffer Curve has a very real impact oninvestors who may consider that a 70% tax istoo high and decide not to invest. What


some fail to see is that we do the samething, except even worse, in imposing defacto rates in excess of 100% on our poorestbreadwinners.

In the 1970s, a prominent economistfamously drew a simple curve on a napkinand changed forever perceptions about therole of tax rates in our economy. Art Lafferpostulated that there are two tax rates atwhich the government will collect no revenuefrom an income tax. The first rate is 0%. Theother rate is 100%. Laffer noted that no oneis going to work if the government gets theentire gain from his or her efforts.

However, Laffer noted that with a rate of1% the government will collect some rev-enue. Similarly, thegovernment maycollect some revenuewith a 99% rate, assome workers maydecide that keeping1% of the fruits ofone’s labors is betterthan nothing. Lafferalso postulated thatthe government wouldprobably collect more revenue with a 2%rate than a 1% rate, although probably notquite twice as much.

His theory evolved into the Laffer Curve,which showed something approximating arainbow on a graph measuring revenuecollections as tax rates went from 0% to100%.

Somewhere in the middle, Laffer argued,was an income tax rate which would maxi-mize revenue collection for the government.At the time Laffer’s theory entered intopublic discourse, the top federal income taxrate stood at 70%, and, considering stateand local income taxes, many high earnerswere paying over three-fourths of theirearnings to government. Many policymakersbought into the Laffer Curve and becameconvinced that the government could reduceits onerous tax rates and actually collectmore revenue.

A newly elected Ronald Reagan was oneof those policymakers. He proposed asweeping reduction in tax rates basedloosely on Laffer’s theory. Once the rate cuts

were fully phased in, which took three years,the economy took off and so did thegovernment’s collection of revenue from itshigh-earning taxpayers who saw their topfederal rate chopped from 70% to 50%.

While controversy swirled about whetherthe rate reductions should have beenphased in, a provision that Prof. Lafferstrenuously opposed at the time, and thefact that the eventual legislation that Con-gress passed carried reductions in lowerrates and a multitude of tax credits andother provisions unrelated to the theorybehind the Laffer Curve, the result was thatthose in higher brackets actually paid morein taxes than previously, even with the lower

rates. Laffer was ontosomething!

The terms “stagna-tion” and “malaise”were often used todescribe the U.S.economy at the timeof Reagan’s inaugura-tion and his earlyyears in office. Thefocus was justifiably

upon getting the economy headed in theright direction again and creating new jobs.That led most policymakers to focus on theeconomy’s productive sector.

However, if the theory behind the LafferCurve is universal to human nature, itfollows that government confiscation of thefruits of human effort that approaches 100%will stifle and extinguish that effort, whetherthe subject is an investor, a highly-compen-sated professional, or a low-skilled worker.

The withholding of a government benefit,such as food stamps, is not technically a tax.However, the result is the same. Losing theability to buy $100 worth of food by getting a$100 raise sends the wrong signal to a low-income worker. We are telling that workerthat he or she won’t be any better off, atleast not in the short term, as a result of hisor her own hard work and initiative.

For workers with families who make lessthan $12 an hour, we confiscate the fruit oftheir labor by withdrawing benefits theypreviously enjoyed when not working andtaxing the money they do earn from their

It is a mistake to attempt toreform health care in anenvironment that looks

solely at health care to theexclusion of related issues.


own enterprise. Just as many observers weresurprised at the response of high-incomeearners to lower tax rates, we should not besurprised at a burst of initiative of evengreater magnitude from low-income workerswhose effective tax rates often exceed 100%today. Placed in a more favorable environ-ment, we might even see many of themcease to be low income.

As detestable as is our antipathy towardhard work and enterprise, the impact of ourcurrent policies on family formation andstability is even worse. Many observersbelieve we are seeing the creation of apermanent underclass as more childrengrow up never knowing a father.

The same policies that discourage workand initiative also discourage family forma-tion and undermine those families that domanage to form by combining the grossincome of both parents in determiningeligibility and, in some cases, giving overtfavoritism to families without a dad presentin the home.

Absent federal action, it is outside theability of O-CHIP to provide what we mostneed: a policy that assists the less fortunatewithout penalizing them for attempting toform stable families and provide a better lifefor themselves and their children. However,O-CHIP seeks to implement policies thathelp the less fortunate where possible.

Encourage the federalgovernment to convertMedicaid to a block grant.

O-CHIP is intended to addressOklahoma’s health care needs withoutfederal legislation. While O-CHIP recom-mends that the state seek Department ofHealth and Human Services waivers, it doesnot primarily seek passage of new federallaws. However, we must address the barriersthe current system erects to creating aneffective state-level strategy to help the poorand open doors for them.

One solution might be to convert Medic-aid to a block grant. This was done on asmaller scale with welfare reform inthe1990s when the federal governmentcreated TANF block grants to replace former

AFDC subsidies. Most observers considerthis a signal success. A block grant wouldhelp the federal government budget its affairswith more certainty and allow innovativeproblem solving to emerge at the state level.

No one cares more about the poor andthe sick in Oklahoma than those who live inOklahoma. The federal government shouldstop interfering with states wanting to helptheir citizens. Nowhere is this need moreevident than in health care.

Owing to the disjointed nature of federalprograms for low-income citizens, an evenbetter solution would be to combine allmajor social welfare programs and theirfunding and turn them over to the states inthe form of a single large block grant thatgives the states real latitude in developingnew approaches to helping their less fortu-nate citizens overcome poverty. Severaladvantages to this approach would accrue:

• Needs differ from state to state. Stateofficials are closer to the problems theprograms are meant to address and couldbe more effective than national officials.

• The glaring lack of coordination wouldlead state-based programs to organize innew and more efficient ways. It is difficultto envision how state officials could do aworse job coordinating TANF, Medicaid,food stamps, federal housing, WIC, etc.than bureaucrats do now in Washington,D.C.

• Some Americans cynically think the realreason behind large social welfareprograms is not to help the poor at all,but to maintain a vast welfare bureau-cracy over which federal officials exertinfluence for the perks of office andthrough which contractors make hand-some profits. This move would help dispelsuch notions and buoy Americans’ confi-dence in their leaders.

This reform is not put forward in the beliefthat federal bureaucrats have an insufficientsympathy for the needs of the poor. It is putforward on the observation that our currentprograms are not achieving the results thatwere originally envisioned for them and thethought that the lack of coordination be-tween them and the relative isolation of


policymakers may be two important reasonswhy. Give Oklahoma the latitude to assistour own less fortunate and we will do abetter job.

If O-CHIP can only impart one idea to thedebate on health care reform, it is this: It is amistake to attempt to reform health care inan environment that looks solely at healthcare to the exclusion of related issues andexpect significant progress. If we coulddevelop a coordinated comprehensivepolicy to assist the less fortunate that wouldconsider the needs for housing, food, healthcare, training, day care, etc. together, wewould likely find that very few health careissues remain that will elude solution.

If we continue to approach health careissues on a stand-alone basis and fail torealize the impact of our failure to coordi-nate health care policy with other programsdesigned to assist the poor, our results willcontinue to disappoint us. We should focuson how best to assist the less fortunate asindividuals and deregulate much of the rest.

Such a sweeping change in policy isbeyond the reach of any state without

legislative action in Washington. Accord-ingly, O-CHIP focuses upon what Oklahomapolicymakers can accomplish in the presentenvironment, but with recognition of theunderlying causes of our problems.

Interested observers will doubtless notethat, at present, Oklahoma is “underserved”in the amount of federal assistance it re-ceives for Medicaid relative to other states.This might seem to mitigate against a blockgrant unless we first increase our Medicaidspending in order to get a larger “startingpoint” for a grant going forward.

Of course, this problem could be rem-edied by a block grant based upon somemeasure of relative poverty, irrespective ofpast spending. More to the point, regardlessof the level of aid received, Oklahoma willbenefit greatly by the removal of counterpro-ductive rules and regulations under which itcurrently labors. We could do more, muchmore, with less as long as the federalgovernment resists the temptation of over-regulating the grant. We should expect otherstates to likewise improve their performance.



Opening the Way for Insurers to Add More Valueexplore how this works.

The essence of insurance is to measureand spread financial risk over a large groupexposed to that risk. Most people view thisas a valuable service because they can paya premium and know they have someprotection against unexpected financialcatastrophe. The policyholder knows that inthe event of a serious accident or unex-pected illness, the insurer will provide thefunds to cover the costs associated with thataccident or illness.

As we’ve noted, insurers must collectenough in premiums to cover their expendi-

tures on behalf oftheir insureds. Fromthe majority of theirpolicyholders in anygiven year, they willcollect more in premi-ums than they pay inclaims. If actuaries dotheir job of assessingrisk well, the insurerwill make a profit. At

the same time, a competitive market whereinsurers bid for the same policyholders willprevent any one insurer from overcharging.

However, when we’re talking about healthinsurance we’re talking about two relativelydistinct groups of people. The first are thosewho may have an accident or succumb to anillness which they do not currently suffer.Someone could wind up in the hospital as aresult of a skiing accident, or they couldsuffer an unexpected heart attack or otherdebilitating illness. They face a risk. Thesecond group is composed of those whohave already had the debilitating illness orhave experienced another health crisis withcontinuing effects.

We try to marry them under the rubric ofregulated health insurance, but we cannotchange the fact that they are two distinctthings — the risk of something “unknown”vs. the existence of known costs.

When we add the cost of paying forknown events to the cost of paying forunexpected events, we change the equation.To stay solvent, the insurer must still collect

Current regulations distort the market forhealth care insurance and raise health carecosts. Government regulation of the insur-ance industry also results in essentially theoutsourcing of a tax. We can relieve manyexisting ills in our health care system byreforming those regulations and lettinginsurance professionals apply their skills.

This section explores how we can removeexisting regulations that unwittingly raisethe cost of health insurance and prevent thedevelopment of valuable new insuranceproducts.

At this point, we should briefly review amajor reason whyhealth care costs arehigher than theyshould be and why O-CHIP will reduce thosecosts.

One reason healthcare costs are higheris that too manypeople don’t haveinsurance and don’tpay their health care bills. We often charac-terize those without health insurance asirresponsible, not pulling their weight.

However, if we look at the major unin-sured group, younger workers in goodhealth, we also see that the cost of insur-ance isn’t perceived as worth the coveragereceived. Many young, healthy workers maybe making a rational decision when forgo-ing health insurance.

When government regulates the healthinsurance markets to reduce the cost ofhealth insurance for those with establishedhealth care expenses, it must get the moneyfrom somewhere. Government subsidies,courtesy of the taxpayers, are used in somecases. More commonly, the government putsthe onus on insurers through rating bands,mandates, high risk pools, and similarprovisions.

In doing so, the government outsourcesthe imposition of a tax earmarked to assistthose suffering from illness. Keeping in mindthat an insurer must collect enough moniesto pay its claims and cover its expenses, let’s

Allowing the market to workpreserves flexibility while

driving practice—by primarycare physicians, specialists,hospitals, and pharmacists—

toward what works.

enough in premiums to cover its claims.Some of the expenditures are no longer forunexpected events, but for known events.

As long as the known events are distrib-uted randomly over those covered andeveryone has about the same level of expen-ditures, there is still not a significant prob-lem. Policyholders are paying more in, butthey are also getting more in return. How-ever, the level of health care expenditures isfar from randomly distributed. Some peoplehave very high levels of expenditures, whilemost have much lower levels.

If we further complicate this picture bylimiting the premiums the insurer cancharge to those with known costs, we em-bark on a road to dysfunctionality. Mostpolicyholders have relatively low knowncosts but have to pay higher premiums sothe insurer can cover the outlays for thosewith high known costs.

Since all other insurers are in the samesituation, an insurer can raise rates onyoung, healthy policyholders paying thebills and not place itself at a competitivedisadvantage. This allows the insurer tosubsidize the premiums of those with knownexpenditures and remain competitive in theinsurance market.

Those with known costs will almost cer-tainly recognize that they are getting a gooddeal and want to purchase the insuranceoffered at subsidized rates. However, toomany people availing themselves of thisopportunity places a burden on other policy-holders because the insurer is taking thesecosts and passing them on to younger,healthy insured policyholders.

What about the prospective policyholderwhose known health care costs for thecoming year are zero? That individual mustdecide if the cost of protection againstsomething that might happen is worth thecost of protection plus a share of outlaysincurred by those with high known costs. Atsome point, some of the healthy prospectswill conclude that the policy isn’t worth therequired premium. This road becomes aslippery slope.

The decision of a few healthy individualsto forgo health insurance puts the insurer ina greater bind. The insurer still has the

same amount of known costs to cover butfewer people to pay premiums. The insurerhas no choice but to raise premiums evenhigher on those who remain in the pool.Remember, those with high costs maycomplain about the higher premiums, but ifthey are rational, they aren’t about to droptheir health insurance.

Now those with low costs must pay morethan before. Fewer low cost people shoulderthe load of paying their share for unex-pected events as well as the known costs ofpolicyholders remaining in the pool. Butwhat do they get in return? Perhaps only thesatisfaction of knowing that someone elsewith greater health needs is receiving care.Some of these may decide that the rationalthing to do is to drop coverage.

As more healthy individuals drop out ofthe insurance market, the cost of coverageincreases even more. The cost of medicalcare also increases because those who canpay must cover their expenses and share thecost for those who pay little or nothing. Atsome point, the health insurance marketbecomes dysfunctional. Some observersmaintain that many areas of the country arealready in this situation.

Of course, when those without insuranceget seriously ill, they still receive somemedical care. And if the patient can’t paythe cost, someone else must. At this point,the insurer is off the hook, but the hospital isnot. Like the insurer, the hospital mustcollect enough in fees to cover the cost of thecare it provides. If some can’t pay, thehospital has no choice but to charge more tothose who can.

Unless the hospital can get help coveringthese costs from someplace, such as thetaxpayer, it will have no choice but to raiseits rates. Higher hospital rates mean highercosts for insurers and that leads to stillhigher health insurance premiums. We findourselves on a slippery slope, indeed.

The present system is not serving us well.Given these alarming trends, it is no wonderthat many are calling for a complete govern-ment takeover of health care or healthinsurance. We face three choices:• Ration health care. This is not an unrea-

sonable response to our current situation.


The government determines what consti-tutes an adequate level of care and seeksto ensure that everyone has access to thatlevel of care but no more, lest costsbecome too high.

• Require everyone to get health insurance.This may require all healthy individualswho elected to forgo coverage to paywhether they personally get real value fortheir insurance or not.

• Allow health insurers to price their poli-cies rationally and find a way other thaninsurance regulation to help those whoare sick.If we remove the known costs from the

equation so an insurer insures against therisk of unexpected events only, we will seeswift, dramatic improvements.

First, under O-CHIP, the healthy customerpays only a premium to cover the cost ofunexpected events, i.e., a premium to coverhis or her costs only. Premiums for healthypolicyholders will decline significantly andquickly. More people will elect to buy healthinsurance because of the lower premiums.

Those who have remained in the healthinsurance market will also pay lower premi-ums because the insurer can spread the riskover more policyholders. When more peoplehave insurance, costs of health care arereduced. With more patients covering theirown care, hospitals no longer transfer costsof treating non-payers to those who pay theirbills.

Making changes in the insurance marketswill reduce the cost of coverage. Reform willalso reduce the cost of health care, furtherreducing the cost of insurance.

There is also another side to the freemarket approach to health insurance, agreat benefit awaiting every Oklahomanwith a chronic illness that will be spelled outin more detail later.

Almost three decades ago, RonaldReagan came to Oklahoma City whengasoline prices were skyrocketing, generalinflation exceeded 10%, OPEC seemedinvincible, and the beleaguered oil and gasindustry was held in low esteem. Referringto the oil and gas industry, he boldly de-clared it was time to “turn the industryloose.” Sensing a political gaffe, his critics

immediately pounced and accused Reaganof preparing to “turn the industry loose onthe American people.”

In spite of this incident, Ronald Reaganwon, and a wave of free market thinkinginvaded Washington, D.C. The energy crisisall but disappeared for the next quartercentury.

The energy crisis in 1978 was not entirelydissimilar from the health care crisis today.

Well-intentioned government policieshave put health insurance and, to someextent, even health care delivery itself in achoke hold. Rather than focus on the failingsof state intervention, many critics cry greedand manipulation by insurers and providers.Perhaps we should again “turn the industryloose” and allow it the freedom to solve ourproblems.

The following recommendations addresshow to marshal the innovative expertise ofprivate insurers to solve the problems ofhealth care finance. In making this pro-posal, OCPA is confident that the industry, ifallowed to flourish, can accomplish far morethan we can presently envision.

Remove existing regulations thatdo harm and avoid new ones.

We have created a series of regulations toassist some people in difficult circum-stances. However, unintended consequenceshave resulted from these regulations, thuscreating new problems. Fortunately, Okla-homa has not made as many mistakes inthis area as most other states.

Oklahoma should avoid the policy errorsof other states and reverse those we haveenacted. Subsequent sections will cover howO-CHIP meets the needs the regulationswere intended to address.

Reject mandates.Many observers advocate coercing more

employers to provide health insurance as abenefit for their employees. They see this asthe principal means of expanding theamount of health insurance coverage.

However, such measures may imposecrushing burdens on employers for little realgain in the number of insured. In addition,


many of our current problems result from thefavorable tax treatment of employer-provided health insurance. It makes littlesense to expand a part of the current policymix that causes so many of our problems.

O-CHIP does not impose mandates onemployers to provide health insurance nordoes it penalize them for not doing so.However, O-CHIP does make it easier foremployers who want to offer employeesassistance in obtaining coverage.

Reject community rating and guaranteedissue.

Some argue for increased insuranceregulation in the form of guaranteed issue(requiring an insurerto insure all comers,regardless of under-writing status) andcommunity rating(charging the samepremium to all policy-holders regardless oftheir health). Theseregulations would beunnecessary if wesimply provide access and assist thoselacking adequate means to purchase healthinsurance.

A situation that vexes many policymakersis the refusal of many young, healthy peopleto buy health insurance. One major reasonfor this could be that they find the insuranceavailable to them is overpriced. As long assome individuals buy their own healthinsurance, even if coerced, those with betterunderwriting evaluations will try to spendless because they receive less value thanthey are paying for. Those more prone toillness and higher costs tend to overspendsince they are receiving more than they arepaying for.

Community rating only makes this prob-lem worse as insurers shift some of the costof claims from high-cost policyholders toyoung, healthy policyholders who arealready balking at the cost. Guaranteedissue forces insurers to accept high-costpolicyholders who do not otherwise meettheir underwriting criteria and leaves theinsurers with one alternative — to raise their

premiums. In raising those premiums, theyconvince more healthy people to go withoutcoverage.

A superior approach is to let everyone beresponsible for their own health care, pro-vided the state assists those with unsustain-able health care costs relative to theirincome. The need for health care services isfar from uniform across the population.Some people need and/or want more.Others need very little.

There is no reason for the government tofinancially aid every person with above-average health care expenses any morethan there is a need to assist everyone withabove-average clothing expenses due to

their size, taste, orbusiness/socialsituation. The govern-ment should limit itsrole to helping thetruly needy.

As in so manyareas, the principlesof free choice andpersonal responsibil-ity can work if al-

lowed to do so. The O-CHIP approach putsthese principles into action and will result insome important benefits:• It reduces costs for all.• It encourages those now freeloading on

the system to become insured.• It allows insurers to develop exciting new

alternatives for the chronically ill.

Allow underwriting latitude.People engaging in unhealthy or irrespon-

sible behavior are likely to incur more healthcare costs sooner than others. Good under-writing will identify the risks of future outlaysfor the insurer and charge an appropriatepremium. Those most likely to incur highercosts will face higher premiums.

We can discourage unhealthy practicesby allowing insurers freedom to underwritecoverage and making individuals respon-sible for the health-related choices theymake. Higher rates will be charged to thosewho engage in unhealthy lifestyles, e.g.,smoking, obesity, and other behaviors thattypically lead to costly health issues.


Ballooning health carecosts are painfully

evident to employersoffering health care

benefits.

Most individual health insurance policiesdistinguish between smokers and non-smokers and charge higher premiums tosmokers. O-CHIP allows insurers to considerother criteria such as participation in high-risk activities or employment in high-riskoccupations.

This approach would allow each indi-vidual to decide if the benefit of high-riskactivities is worth the additional cost. Theycould still engage in high-risk activities, butthey would no longer be able to make otherspay for the costs that result from the deci-sions they make. The underwriters willidentify those activities that lead to higherhealth care costs and price insuranceproducts accordingly.

Similarly, insurers should have latitude intheir product offerings to the extent practi-cable. For instance, an insurer may want tosubsidize, or even provide, nicotine replace-ment therapy for tobacco users among theirinsureds. The insurer will realize greaterprofit if its insureds use less health careservices. If those insureds who smoke doquit, they will use less.

Some observers recommend that the statemandate the use of evidence-based medi-cine by physicians. This system of treatmenthas an impressive history of providing cost-effective care for patients. However, byintroducing free market principles to healthcare, patients will have an incentive to holddown costs and they certainly have anincentive to seek effective care.

Similarly, an insurer may find it can offera more economical policy if it gives prefer-ence to providers who adhere to the prin-ciples of evidence-based medicine. If it hasto pay less to the providers, it has to extractless from its policyholders. Consequently, apotential policyholder will find that he or shecan save money by agreeing in advance toget treated consistent with these practices,and at the same time be assured of treat-ment with practices shown to get results.

However, rather than attempting to findthe very best approach at any one moment,O-CHIP seeks to establish a market wherethe best practices are constantly beingdeveloped and evaluated. This approachrecognizes that the best approach today

may not always work the best. O-CHIPaccounts for positive, new developmentswhile allowing Oklahomans to take advan-tage of what works best now.

Publicize new policies.While O-CHIP will make it advantageous

for many people who currently remainuninsured to get health insurance, it maytake time for word of these changes andtheir impact to reach critical mass. O-CHIPwould make a small appropriation to theInsurance Commissioner to publicize thechanges and the opportunities they present.Such notice should hasten the desiredtransition to the new system.

Encourage new insuranceproducts.

The purpose of this section is not to tradeour existing mandates for new, supposedlybetter mandates, but to free the insuranceindustry to develop the novel approachesthat Oklahomans need. This means that itmay be desirable to provide modest fundingto “jump start” a new product or approach. Italso means we should limit governmentinterference in our private lives to the lowestlevel possible and gain the greatest freedomto manage our own lives.

Careful analysis is required to developnew insurance products which respond bestto people’s needs. The key point is to make itprofitable for insurers and others to innovateand respond. They will eventually developbetter answers than will any legislative bodyor think tank.

The following possible starting pointsconsider unmet needs often due to excessiveregulation of the marketplace. O-CHIPprovides the Insurance Commissioner withthe specific authority and the financialmeans to bring these improvements about.

Provide more value added for peoplewith chronic illnesses.

Many diseases require advanced special-ized treatment. We should encourage thedevelopment of new products to meet thespecific needs of the chronically ill. Whilethese products would be under the supervi-


sion of the Insurance Commissioner, theywill focus primarily on providing services totreat known conditions rather than insuringagainst the risk of new events.

The chronically ill are not all alike. Thosewho suffer from diabetes have different needsfrom burn victims. Both have different needsthan the person with mental illness. In mostcases, the chronically ill need a comprehen-sive multi-disciplinary approach, yet oneunique to the particular illness. The ideal isa team of highly skilled professionals workingthrough an institution able to provide bothcomprehensive and specialized care.

O-CHIP will encourage insurers to de-velop tactics specifically designed for thesufferers of a chronicillness. This does notsever a patient’srelationship with afamily physician. Thefamily physicianwould bond with ateam of specialists togive optimum carewhile attending to thepatient’s continuingroutine health needs.

Such a team might include:• The patient’s primary care physician.• A physician or physicians who specialize

in treating patients with the illness.• A hospital with the facilities needed for

effective treatment and access to otherspecialists in nursing, physical or occupa-tional therapy, nutrition, mental health,etc., as required.

• A pharmaceutical manufacturer thatproduces drugs that effectively addressthe condition being treated.

• A pharmacist who interfaces with thepharmaceutical manufacturer and con-sults with the primary care physicianabout possible interactions with othermedications, including over-the-counterproducts that may be taken for reasonsnot directly related to the chronic illness.The pharmacist would also consult withthe patient about the proper administra-tion of any drugs.

• An insurer who can provide financing ofthe needed care and overall coordination

and management including contact withthe patient to make sure directions areunderstood and followed. (In many cases,the insurer may choose to outsource thistask to a physician, hospital, or even aspecialty enterprise dedicated to provid-ing this service.)This approach seeks to provide the

patient optimum care from skilled profes-sionals current on the most promisingoptions for recovery. The current systemoften focuses exclusively on avoiding costs,especially short-term costs. The O-CHIPapproach is designed to direct superior careto Oklahoma patients.

Innovative individuals responding to thedesires of their cus-tomers and relyingupon their own experi-ence may doubtlesstake such a programin directions wecannot fully antici-pate. However, it islikely that an insuredperson, upon develop-ing a chronic illness,

would be transferred by his or her insurer, atthe insurer’s cost, to the oversight of aninsurer that specializes in the chronic illness.

O-CHIP would also direct the InsuranceCommissioner to develop performancecriteria that might be used in a system inwhich caregivers and their insurers have afinancial stake in a favorable and cost-efficient outcome for the patient. Insurers,hospitals, physicians, pharmaceuticalcompanies, and pharmacists should be ableto assist the Commissioner in developingsuch criteria.

Several promising approaches to healthcare delivery are emerging. In some situa-tions, the pharmacist, often the health careprofessional with the most regular contactwith a patient, assumes a more central role.The Asheville Project, organized aroundsuch an approach, demonstrated costsavings and improved treatment for personswith diabetes.2

O-CHIP does not mandate either collabo-rative drug therapy management or evi-dence-based medicine. However, it does


O-CHIP recognizes that ourhealth care system worksbest when everyone has

health insurance or othernon-government means to

pay for care.

allow insurers to do so and pass on to theirpolicyholders the anticipated savings andthe comfort of knowing that sound practiceswill be used in their care. Allowing themarket to work preserves flexibility whiledriving practice, by primary care physicians,specialists, hospitals, and pharmaciststoward what works.

We must free these professionals from thenecessity of viewing every sufferer of achronic illness as identical to others withsimilar symptoms. In our overregulatedenvironment, the truly sick are the ones theinsurer wants to avoid because they invari-ably lose money providing them care.

Several states, including Oklahoma, haveimplemented “cash and counseling” pro-grams to increase participant satisfactionand reduce cost. O-CHIP would give insur-ers the flexibility to use this approach whilerequiring approval of the Insurance Commis-sioner to ensure that patients are protected.

We are also learning that many of the illand disabled can very effectively managetheir own care if provided the resources todo so. O-CHIP empowers such patients bymaking those resources available directly tothem. Under O-CHIP, we would probably seeinsurers offer incentives to encouragechronically ill customers to control costswhile complying with treatment milestonesbecause it would be in their economicinterest to do so.

A major advantage of O-CHIP is that thesufferer of a chronic illness would receivesuperior care not currently available. OnceO-CHIP is fully implemented, those buyinginsurance would thus prepay for the risk thatthey might contract a serious, costly illness.This is a valid insurable risk. The InsuranceCommissioner would assure the insured thatthe cost to them would not increase with theonset of an illness.

As will be discussed in more detail later,the state would implement these policieswithout causing an increase in anyone’sinsurance premium or allowing an insurer tocancel anyone’s health insurance becausesomeone covered gets sick.

Encourage development of list billingservices.

Many small employers would like to offertheir employees health insurance but do notbecause of the cost, administrative burden,and/or time involved in finding an appropri-ate insurer. A list billing service helpsaddress these concerns.

Under list billing, an employer distributesan annual brochure from the InsuranceCommissioner to employees that describescoverages available on an individual basisfrom various insurers. The brochure oraccompanying materials provide guidanceon premiums charged for the insurancedescribed. However, the actual premiumwould be determined through the insurer’sunderwriting process.

O-CHIP will direct the Insurance Commis-sioner to obtain input from small employersand their representatives in designing thebrochure.

The employer would state the amount ofemployer assistance, if any. Employeescould choose coverage options or elect totake any employer benefit offered in theform of additional taxable compensation.Insurers would be allowed to charge anapplication fee to cover the cost of under-writing and discourage frivolous inquiries.

The list billing service would be providedby a payroll or similar service vendor whocollects the premiums through withholding,remits the amounts due to the insurers, andcomplies with tax and employee reportingrequirements on behalf of the employer.

O-CHIP would direct the InsuranceCommissioner to contract for the develop-ment and maintenance of software thatinterfaces with both insurers and vendorsproviding list billing services. The InsuranceCommissioner would also qualify insurancecompanies for participation in the arrange-ment. Part of the qualification would besystem compatibility with the state’s software.

List billing addresses the employer’sconcerns. All the employer needs to do is:• Select the amount of the monetary benefit

to be provided to the employees.• Distribute the list billing brochure to the

employees.• Forward employee responses to the list

billing service.List billing would provide employers a


known cost of the benefit. It relieves theburden of administration and relieves theemployer of the need to find an insurer. Inaddition, list billing would allow Oklahomaemployers to offer a benefit that otherwisesimilarly situated out-of-state competitorsmay not be able to match easily.

List billing would also offer employees anew benefit and empower them to choosehow to use it. The employee can buy insur-ance from one of many different plans. Anemployee who already has health insur-ance, perhaps through a spouse, can con-vert the benefit to additional taxable com-pensation. Further, the employee who buysan insurance policy owns that policy, whichprovides more flexibility in future careerdecisions.

Many intricate federal rules govern thetypes of benefits that an employer can offerwithout creating taxable compensation fortheir employees. The state will need toconsider these rules in crafting its policies.For instance, each plan will require a spon-sor. It may be possible for the list billingservice provider to serve as plan sponsor —or perhaps the Insurance Commissioner.Such issues still need to be addressed anddefinitely resolved.

Cover out-of-state residents who pay fullcost.

Many economists have put forwardproposals to allow insurance companies tosell policies across state lines. This ap-proach can blunt the effect of onerousmandates adopted by well-meaning butoverzealous state legislators. These man-dates greatly increase the cost of healthinsurance, a major factor in the inability orrefusal of many Americans to buy healthinsurance.

O-CHIP would encourage the InsuranceCommissioner to negotiate compacts withother states to allow reciprocity in marketingto both states. Such compacts would bedone under regular state rule making. Thiswould provide that they become effectiveunless formally reversed by subsequentlegislative action. Such a provision sends amessage that Oklahoma insurers are readyto compete, and that Oklahoma is creating a

favorable environment for them and thebusinesses and the people they serve.

Encourage policies for guaranteedinsurability.

Because of the health insurance environ-ment, many people acting responsibly mayfind themselves without insurance or theability to obtain it. If an insured employee orfamily member develops a chronic illness,the employee may be trapped, unable toleave a job. To maintain health coverage,the employee cannot resign to start a newbusiness, retire early, or leave to have morefamily time.

What the employee needs is the ability toalways be able to purchase health insur-ance at reasonable rates even if they leavetheir employer. Accordingly, O-CHIP directsthe Insurance Commissioner to explore thefeasibility of insurers providing coveragethat guarantees an option to buy healthinsurance in future years at rates compa-rable to what the employee would pay if inotherwise good health.

The existence of such protection not onlybenefits those obtaining coverage to avoidthe risk of becoming uninsured, it will alsoeventually reduce the number of insured inpoor health who raise the premiums ingroup plans. For instance, if an employeebuys protection against becoming “uninsur-able” and a family member subsequentlydevelops a costly health problem, thatemployee is no longer trapped in theemployer’s group plan but may leave topursue his or her career goals. Over time,some will leave who would otherwise stay.

Guaranteed insurability is not the sameas guaranteed issue. With guaranteedinsurability, the potential insured pays a riskpremium to insure his or her insurability. Incontrast, under guaranteed issue, withoutany consideration at all, a potential insuredcan require an insurer to issue a policy. Theinsurer loses money that must be recoveredfrom other policyholders to maintain solvency.

Similarly, a child covered by guaranteedinsurability who develops a chronic illnesswould be able to buy at standard rates uponbecoming an adult. In either case, theemployer’s group plan is relieved of a high-


cost member, reducing the plan’s overallcost and eventually its premiums.

Though there are far more questionsposed than this proposal can answer,guaranteed insurability may be one meansof addressing a serious flaw in our existingsystem that encourages employer-providedhealth insurance. O-CHIP directs the Insur-ance Commissioner to start the process ofseeking a workable alternative.

Encourage policies that combine healthinsurance and disability income.

Under O-CHIP, employers who providetheir employees with a comprehensivebenefit package would retain the immunitiesof the current workers’ compensation systembut would not be required to carry separateworkers’ compensation insurance.

To qualify, the benefit package wouldhave to include:• Health insurance on par with that pro-

vided by the new Medicaid program thatcovers costs up to $5,000,000 over theemployee’s lifetime.

• Life insurance equal to 300% of theemployee’s annual taxable wages up to$100,000. (Note that employer-paidpremiums for insurance above $50,000are taxable to the employee.)

• Accidental death and dismembermentinsurance (AD&D) equal to 300% of theemployee’s annual taxable wages up to$100,000.

• Short-term disability income protection ofat least 60% of the employee’s averageweekly wage for up to 26 weeks.

• Long-term disability income protection ofat least 50% of the employee’s averageweekly wage for up to five years or untilage 65, whichever is longer.

• The employer would have to providecoverage to the employee without cost,except for payroll and income taxes, toqualify for the exemption. As an alterna-tive, the employer would be able toprovide the employee an allowanceunder a cafeteria plan that would coverthe cost of the benefit package.Employers who do not avail themselves of

this option would remain subject to thecurrent workers compensation system.

Disputes between employers and theirinjured employees sometimes arise when itis not clear that an injury was work related.Under the O-CHIP approach, whether theinjury occurred as a result of activity at theloading dock or the fishing dock will nolonger matter since the injury would becovered regardless of the cause. However,an injury sustained before the employerelects to cover employees under O-CHIPprovisions would be covered under the oldsystem.

While the employer would have to provideadditional coverages for employees, theemployer is freed from the costly and highlyacrimonious workers comp system. At thesame time, employees gain the security ofbeing covered for medical costs and lostincome due to injury regardless of where theinjury occurred.

Note that the beneficiary of a workerkilled in an accident would receive both thelife insurance and AD&D benefits equaling600% of the worker’s annual taxable wagesup to $200,000. Note also that the paymentsfor disability income protection made onbehalf of the employee would be taxable tothe employee as would premiums on any lifeinsurance coverage above $50,000.

Under O-CHIP, the disability incomeprovisions of Social Security and SSI wouldbe integrated into the disability incomeprovisions to maximize the benefit to theinjured employee without increasing costs tothe employer.

Furthermore, the State of Oklahoma andits workers would also be likely to benefitdirectly by selecting this new plan for its ownemployees.

Encourage temporary health insurancefor appropriate situations.

A large block of the uninsured is withoutcoverage for only six months or less.

O-CHIP provides grant authority to theInsurance Commissioner to encourageinsurers to offer health insurance on atemporary basis. Temporary health insur-ance would provide very basic coverageonly and exclude all but minimal expendi-tures on pre-existing conditions. The term ofthe policy would be limited to six months.


Many insurers offer some type of cover-age and extensive efforts may not be neces-sary; however, O-CHIP permits the Insur-ance Commissioner and the Health CareAuthority to work with insurers to develop amarketing strategy to provide this coveragefor temporarily uninsured families and makeits availability known.

Encourage policies that combine long-term care with a life annuity.

Former U.S. Treasury official AdamWarshawshy determined that underwritingefficiencies would exist for a product thatcombined insurance for long-term care witha life annuity. Such a product would beattractive to many citizens and benefit thestate. An Oklahoman with long-term careinsurance greatly reduces the likelihood thatthe state will bear the expense for thatperson’s nursing home services.

O-CHIP gives the Insurance Commis-sioner grant authority to encourage insurersto offer these products in Oklahoma. How-ever, since insurers already appear to beconsidering offering this product, suchgrants may not be needed.

Consider the role of nurse lines and otherservices.

The Oklahoma Health Care Authority hasestablished a telephone line so Medicaidrecipients can consult a nurse about healthissues. This service helps divert patientsfrom emergency rooms which may not beappropriate for the patient. When the patienthas a direct financial interest in getting lesscostly care under O-CHIP, telephone calls tothe nurse line will likely increase.

However, since many private providersand insurers also provide this service, weshould question whether the state shouldcompete with them, especially when Medic-aid participants become buyers of regularhealth insurance. Accordingly, the state willdiscontinue its nurse line services. SoonerCare, as a private concern, may provide thisservice to its policyholders. (See nextsection.)

Transition Sooner Care to aprivate sector enterprise.

The state offers health care benefits toMedicaid participants through its SoonerCare program. Sooner Care is administeredby the Health Care Authority and has gained areputation as one of the country’s mostinnovative and effective Medicaid programs.

Sooner Care provides insurance and cost-competitive benefits to a population notgenerally served by private sector insurers. Ithas managed to do this while maintainingvery low administrative costs. The stateshould capitalize upon the efficiencies theHealth Care Authority has created.

Many current Medicaid recipients willwant to maintain a relationship with SoonerCare. In addition, others would doubtlesswant to take advantage of the expertise andefficiencies Sooner Care offers. Rather thandisband a valuable entity, O-CHIP willtransition Sooner Care into an enhancedrole as a private sector entity.

O-CHIP directs the Health Care Authorityto develop a plan to convert Sooner Careinto a private sector enterprise, either as acompany or a trust. Sooner Care would sellits products to any willing buyer whileexisting insurers would be able to offer theirproducts to the existing Medicaid popula-tion. The plan will include provisions foremployees who transition to the new com-pany to receive stock or similar equity. Thenew enterprise would also get authority toraise capital from investors.

O-CHIP will increase the number ofpeople with health insurance, creating newdemand for insurance services. Many ofthose new insureds will come from popula-tions with which Sooner Care has experi-ence. However, given the new demand, it isunlikely that Sooner Care’s emergence intothe regular marketplace will displace exist-ing companies.

However, any employees who do nottransition to the new enterprise and are unableto find employment in another state agencywould receive a generous severance package.


Anticipating Coming TrendsAnticipate and plan for theinevitable trend to definedcontribution health benefits.

Most people obtain health insurancecoverage through their own or a familymember’s employment. Due to dramaticallyrising health care costs and an increasinglylitigious human resources environment, wehave seen major changes in isolatedinstances which will inevitably lead to aflood of change.

Oklahoma policymakers observing theforerunners of these changes may wish theywould stop but they won’t. Legislation to haltsuch changes will only delay the inevitable,and, in the meantime, some jobs will leavethe state for more favorable locales. A betterresponse is for Oklahoma to anticipate andplan for these changes to take advantage oftheir upside and mitigate their downside.

The major change on the horizon is amove to defined contribution plans forhealth care benefits. This section will at-tempt to show:• Why this change is starting to occur and

will become more widespread.• Important differences between defined

contribution plans for health benefits anddefined contribution plans for pensions.

• Some positive aspects of defined contri-bution health benefit plans.

• Some negative aspects of defined contri-bution health benefit plans.

• How public policy may be able to capturethe positives and mitigate the negatives.Under a defined contribution arrange-

ment, the employer contributes a set, ordefined, amount to a benefit plan. Theemployee then has the flexibility to use thatcontribution as best suits him or her. This isdifferent than a defined benefit plan, wherethe employer sets or defines the actualbenefit and then contracts to contributeenough resources to the benefit plan to fundthe purchase of the benefit.

A defined benefit plan assures an em-ployee of a particular benefit, regardless ofany action the employee may take. However,it also robs the employee of any flexibility in

crafting a benefit that he or she might findmore valuable.

The terms “defined benefit” and “definedcontribution” are more often applied toemployer-sponsored pension arrangements.Traditionally, most employers provided theiremployees with a pension if they met certainrequirements for age and length of service.The employer is required to make contribu-tions to the pension plan to assure employ-ees that benefits will be paid as promised.The employee gets a certain, fixed retire-ment benefit in the form of a pension.

However, an employee with other sourcesof retirement income may prefer a differentbenefit. For example, if the employee diesbefore retirement, the employee’s heirs getnothing unless special provision has beenmade. The opportunity to make a largepurchase, such as a vacation cabin, or topay off all existing debt upon quitting workis made more difficult.

Under a defined contribution pensionplan, such as a 401(k), the employee gets adefined amount paid into an account overwhich the employee has some control.Depending upon the employee’s situation,he or she may invest the funds conserva-tively or more aggressively. In the event ofthe employee’s demise, the assets in his orher account pass to his or her heirs. Uponretirement, the employee may take a lump-sum payout, schedule a long-term payout ofbenefits, or purchase an annuity.

More commonly, the employee will electsome combination, depending upon his orher own unique situation and needs. Adefined contribution retirement plan givesthe employee far greater flexibility, but withit comes a degree of responsibility notpresent in the traditional defined benefitplan. An employee who invests irresponsiblyor makes ill-advised expenditures uponretirement will find his or her later yearsmore difficult.

With respect to health care benefits,under a defined benefit plan, the employerprovides the employee with a paid or par-tially paid health insurance plan or member-ship in a health maintenance organization.


The employee has limited, if any, controlover his or her actual benefit structure.

However, a defined contribution healthcare plan is an arrangement where theemployer contributes a defined amount toan account for the benefit of the employeefrom which the employee provides for part ofhis or her own health care needs. Usually,an employee not wishing to use all of theemployer contribution for health insurancemay convert part of the contribution totaxable compensation.

We will revisit these principles later, butthe important things to bear in mind are thatunder a defined benefit plan, the eventualbenefit is fixed, the employee has littleflexibility or control (and also very little riskor responsibility), and the employer makesall the critical decisions. Under a definedcontribution plan, the amount of the contri-bution to the plan is fixed, the employee canmake choices about how best to use thatcontribution given his or her own circum-stances, and the employee makes many ofthe important decisions but also takes on therisk those decisions entail.

The cost of most benefits an employerprovides is relatively uniform from employeeto employee performing similar work. Con-sider paid vacation, for example. Twoemployees with the same pay in similar jobswill impose a predictable, uniform cost onthe employer. The same is true for payrolltaxes and most other benefits.

This changes significantly with healthcare. One employee’s health care costs maybe minimal, while another employee per-forming the same job at the same pay mayhave very significant costs. In Oklahoma, itappears that about 15% of the workersaccount for nearly 85% of the typicalemployer’s health care claims.

Previously, these differences were not asprominent because health care in generalwas less expensive. It was also a commonpractice for an employer to provide healthbenefits through an insurance company.Both of these factors are changing.

Ballooning health care costs are painfullyevident to employers offering health carebenefits. In contrast with what was generallytrue twenty years ago, most of today’s

businesses will self-insure for all but thevery largest claims and only use an insur-ance company to process the claims.

These trends are compounded by recentcourt decisions on what constitutes work-place discrimination. Court rulings threatento turn a trickle of movement toward definedcontribution health benefits into a torrent.

At this writing, the judicial system has notyet taken a hard position that unhealthycitizens are protected as disabled. Thiswould include such conditions as obesityand others likely to lead to higher healthcare outlays. However, some decisionsalready appear to be headed in that direc-tion. More alarming are the numbers ofattorneys eager to represent those citingdiscrimination due to their weight.

In dispensing benefits, the law generallyholds that an employer must provide uni-form benefits in a non-discriminatory man-ner to receive favorable tax treatment. Anyemployer who gives his employees a setamount of money for benefits electedthrough a cafeteria plan or similar arrange-ment clearly meets that test.

To better understand why defined contri-bution health benefits or similar arrange-ments are likely to spread rapidly, we mayconsider a hypothetical employer withtwenty employees performing identical workfor the same pay. In our example, eachemployee is paid $50,000 per year with theemployer spending an additional $25,000each on payroll taxes, employee expensesand benefits other than health care.

Next, we add health insurance to the mixwith the employer self-insuring except forvery large claims. A hypothetical list ofemployees and their costs is provided below.The names are random but are organizedalphabetically, with the highest costs associ-ated with names appearing first and thosewith lower costs appearing last.

In our hypothetical example, the 15% ofthe employees with the highest medicalcosts to the employer (Adams, Barrett, andCooper) account for 85% of the employer’stotal health benefit spending, a ratio thatmirrors the Oklahoma situation. Also notethat our example omits the cost of insuringagainst extraordinary events.


As long as everyone does their account-ing to spread the costs evenly among em-ployees ($5,000 per employee for healthcare in our example), things are fine. Today,many employers still spread their costsevenly. However, as health care costs rise,once immaterial differences become signifi-cant. In our example, the total cost of em-ploying Adams ($125,000) is 66% greaterthan the cost of employing Thompson($75,100).

Now suppose that our employer facesfresh competition from a new entrant. Thenew entrant has a similar profile but offers asalary of $53,000 and a high deductiblehealth insurance plan accompanied by ahealth savings account. Let’s say that theemployer coverage contains a $5,000 deduct-ible and a 20% co-insurance requirement forthe next $25,000 with a loss limit of $10,000.

Let’s also say that the new entrant em-ployer contributes $2,000 per employee to acafeteria plan which an employee mayplace in a health savings account. Of course,each employee has the option of makingadditional contributions to his or her healthsavings account from their own salary.

The new competitor advertises for employ-ees. Absent other considerations, most

employees are not going to leave an exist-ing job for a 6% raise, although some will beenticed. However, there are always otherconsiderations.

Suppose the new entrant’s office is moreconveniently located. Suppose the managerof the new competitor is known favorably orhas other affiliations or a culture that pros-pects would find especially enticing.

Let’s say that Adams, Queche, Reitz,Smith, and Thompson all find the newemployer very promising and decide toinvestigate. What do they find? What is theimpact of the difference in health carebenefits?

With the new employer, Queche, Reitz,Smith, and Thompson would have healthcare costs of $100 per year for which theywill receive $2,000. This amounts to a $3,000raise and possibly another $1,900. Some ofthis may be converted to salary or otherbenefits, especially if the new entrant setsup a cafeteria plan. Queche, Reitz, Smith,and Thompson jump to the new entrant.

Adams faces a much different situation.After hearing about the benefits offered bythe new employer, he realizes that changingjobs will cost him at least $10,000 per year,and possibly more. He would receive an


NAME PAY EXPENSE MED CARE TOTALAdams $ 50,000 $ 25,000 $ 50,000 $ 125,000Barrett 50,000 25,000 25,000 100,000Cooper 50,000 25,000 10,000 85,000Dutton 50,000 25,000 4,500 79,500Edinger 50,000 25,000 3,000 78,000Ferrier 50,000 25,000 2,000 77,000Gurski 50,000 25,000 1,500 76,500Hernandez 50,000 25,000 1,000 76,000Innes 50,000 25,000 750 75,750Johnson 50,000 25,000 500 75,500Kriedermacher 50,000 25,000 400 75,400Lavosier 50,000 25,000 250 75,250Murphy 50,000 25,000 250 75,250Nagy 50,000 25,000 250 75,250O’Toole 50,000 25,000 100 75,100Philos 50,000 25,000 100 75,100Queche 50,000 25,000 100 75,100Rietz 50,000 25,000 100 75,100Smith 50,000 25,000 100 75,100Thompson 50,000 25,000 100 75,100Total $ 1,000,000 $ 500,000 $ 100,000 $ 1,600,000


initial $3,000 raise like the others, but forAdams, a $2,000 deposit in a defined contri-bution health care plan to cover $10,000worth of health care costs is not a winner.Adams stays with his existing employerwhile his healthy co-workers enjoy theequivalent of a $5,000 raise.

The distinction between pooling of risksand pooling of costs is evident in this ex-ample. The four employees who jump to thenew entrant have almost no known costs. Forthem, the health insurance coverage offeredby the new employer protects them againstthe risk that something unforeseen mighthappen.

Adams would also get protection againstunforeseen developments. However, Adamsfaces something he doesn’t need to foresee

because it is already happening: $50,000 inknown cost that must be covered. The valueof health insurance is different for Adamsthan for his four former co-workers.

Let’s now assume that our original em-ployer thinks they can maintain sales de-spite the competition if they replace theworkers they’ve lost. They do some recruit-ing of their own and hire Andrews, Franklin,Kyle, and Pizarro, who, in keeping with ouralphabetical system, face health care costsidentical to Adams, Ferrier, Kriedermacher,and Philos. Our employer has just replaced$400 of medical expenses with $52,500.

An updated roster of employees and theircosts for our original employer follows:

A couple of quick calculations reveal thatour original employer, with 20 employees

ORIGINAL EMPLOYERNAME PAY EXPENSE MED CARE TOTALAdams $ 50,000 $ 25,000 $ 50,000 $ 125,000Andrews 50,000 25,000 50,000 125,000Barrett 50,000 25,000 25,000 100,000Cooper 50,000 25,000 10,000 85,000Dutton 50,000 25,000 4,500 79,500Edinger 50,000 25,000 3,000 78,000Ferrier 50,000 25,000 2,000 77,000Franklin 50,000 25,000 2,000 77,000Gurski 50,000 25,000 1,500 76,500Hernandez 50,000 25,000 1,000 76,000Innes 50,000 25,000 750 75,750Johnson 50,000 25,000 500 75,500Kriedermacher 50,000 25,000 400 75,400Kyle 50,000 25,000 400 75,400Lavosier 50,000 25,000 250 75,250Murphy 50,000 25,000 250 75,250Nagy 50,000 25,000 250 75,250O’Toole 50,000 25,000 100 75,100Philos 50,000 25,000 100 75,100Pizarro 50,000 25,000 100 75,100Total $ 1,000,000 $ 500,000 $ 152,100 $ 1,652,100

Let’s also look at a similar cost profile for our new entrant:

NEW ENTRANTNAME PAY EXPENSE MED CARE TOTALQueche $ 53,000 $ 25,000 $ 2,000 $ 80,000Reitz 53,000 25,000 2,000 80,000Smith 53,000 25,000 2,000 80,000Thompson 53,000 25,000 2,000 80,000Total $ 212,000 $ 100,000 $ 8,000 $ 320,000


now costing $1,652,100, has an average costper employee of $82,605. Meanwhile, ournew entrant has four employees at a cost of$320,000, or an average cost of $80,000.

In our example, not only have the workerswho switched to the new entrant come outahead, but our new entrant has an approxi-mately 3.3% cost advantage while offeringits employees more money. With a 3.3%advantage in a competitive industry, the newentrant will begin winning accounts. In amarket with significant price competition,the new entrant will win many new accounts.Perhaps the next year, the new entrant maydouble its work force at our employer’sexpense again. At some point, our employermay lose too many accounts and decide notto replace employees who leave.

We may think that our employer shouldinvestigate the new applicants thoroughly

and not hire Andrews. However, discrimina-tion against someone with an illness isillegal unless the illness prevents thatperson from performing necessary jobduties. Andrews may find a lawyer whorightfully sues our employer for discrimination,regardless of whether our employer can“afford” to hire Andrews or not. For the em-ployer, the time alone in such litigation iscostly.

We should also consider the impact ofinflation. Let’s say that inflation is 4% for thegeneral economy but 10% for health care.These are reasonable assumptions givenrecent trends. Where does this put us? Ouroriginal employer’s costs for salary andexpenses other than health benefits in-crease 4%, or $60,000. Our originalemployer’s health care costs increase 10%,or $15,210. Meanwhile, our new entrant’s

ORIGINAL EMPLOYERNAME PAY EXPENSE MED CARE TOTALAdams $ 52,000 $ 26,000 $ 55,000 $ 133,000Andrews 52,000 26,000 55,000 133,000Barrett 52,000 26,000 27,500 105,500Cooper 52,000 26,000 11,000 89,000Dutton 52,000 26,000 4,950 82,950Edinger 52,000 26,000 3,300 81,300Ferrier 52,000 26,000 2,200 80,200Franklin 52,000 26,000 2,200 80,200Gurski 52,000 26,000 1,650 79,650Hernandez 52,000 26,000 1,100 79,100Innes 52,000 26,000 825 78,825Johnson 52,000 26,000 550 78,550Kriedermacher 52,000 26,000 440 78,440Kyle 52,000 26,000 440 78,440Lavosier 52,000 26,000 275 78,275Murphy 52,000 26,000 275 78,275Nagy 52,000 26,000 275 78,275O’Toole 52,000 26,000 110 78,110Philos 52,000 26,000 110 78,110Pizarro 52,000 26,000 110 78,110Total $ 1,040,000 $ 520,000 $ 167,310 $ 1,727,310

NEW ENTRANTNAME PAY EXPENSE MED CARE TOTALQueche $ 55,120 $ 26,000 $ 2,200 $ 83,320Reitz 55,120 26,000 2,200 83,320Smith 55,120 26,000 2,200 83,320Thompson 55,120 26,000 2,200 83,320Total $ 220,480 $ 104,000 $ 8,800 $ 333,280


combined costs for salary and all expensesincrease more slowly.

At this point, it may be helpful to providedetails for our employer and the new entrantafter accounting for a year’s worth of inflation:

Note that the average cost for an em-ployee for our original employer is now$86,366 and $83,320 for the new entrant,more than a 3.7% advantage. The gap haswidened and will widen further if health carecosts continue to rise faster than the generalrate of inflation.

We should also note that the migration oflow-cost employees to the new entrant doesnot result from any discrimination on thepart of either employer. Rather, it resultsfrom self-selection on the part of the employ-ees. If each acts in his or her own bestinterest, those with low health care costs willfind the new entrant an attractive choicewhile those with high health care costs, likeAdams, will not.

Without changes in public policy, thisrepresents a bad trend for those with seri-ous, costly illnesses. Let us also considerwhat options exist for O’Toole, with ouroriginal employer, and Smith, with the newentrant, if they fall prey to a devastatingillness during the year.

In the short term, O’Toole is covered undera more traditional approach and faresbetter. After payment of minimal co-pays,most of O’Toole’s costs would be coveredunder a traditional plan. Though protectedfrom the full brunt of the financial calamity,Smith must still come up with $10,000 out ofpocket. The $1,900 that should remain in thehealth savings account from the previousyear plus the $2,100 that should be avail-able from the current year’s contributionreduce the cost from $10,000 to $6,000.However, this is $6,000 more than O’Toolemust pay.

If these health care costs result from anaccident or illness with a prognosis of fullrecovery, both O’Toole and Smith havefavorable long-term prospects. However,what are their prospects if the costs resultfrom the onset of a chronic illness or theyare unable to recover from an injury? Wheredo they find themselves?

By invoking their COBRA option, both can

continue coverage for another eighteenmonths even if forced to quit work. Whathappens at the end of that period? Neitherhas insurance or the prospect of finding anyeasily. An insurer will realize that they areno longer “in good health” and are thereforenot candidates for standard individualhealth insurance policy at competitive rates.

O’Toole and Smith may face the prospectof having to continue to work even if theywould rather not. Their goals change.Instead of simply generating income, theymust have help in covering medical bills. IfO’Toole and Smith are married, perhapstheir spouses would seek employment withhealth insurance benefits. Once again, thejobs offering health insurance may or maynot be otherwise attractive to the spouses.

O’Toole and Smith will find their ownemployment options limited. Perhaps one ofthem always wanted to start a business. Theburden of medical bills will make the real-ization of that dream more difficult. Perhapsone had planned to take a part-time job orleave the work force altogether to spendmore time with the family. Such plans will bemore difficult to realize without healthinsurance.

An employee facing unexpected circum-stances must overcome obstacles created bythe fact that the employer, rather than theemployee, owns the health insurance policy.Once the employment relationship is termi-nated, the employee may need to makesome unpleasant choices. COBRA may granta temporary reprieve, but unless circum-stances improve, the former employee willeventually face some unpleasant decisions.

What we have examined thus far is acomparison between the traditional healthcare benefit plan offered by our originalemployer, and a high deductible plancoupled with a health savings accountoffered by our new entrant. While a highdeductible plan with a health savingsaccount is a move in the right direction, it isnot a true defined contribution plan.

Under a true defined contribution plan,the employer contributes an amount ofmoney to each employee to purchase theirown health insurance plan. Under thisapproach, the employer gains the advan-


tage of further limiting its exposure to healthcare costs. However, employees gain protec-tion in the event of an unexpected accidentor illness. They no longer lose their insurance.

Existing federal rules make true definedcontribution health plans very difficult todesign if the employer wants to retain thetax advantages associated with health carebenefits. Therefore, while some employersare implementing higher deductibles ontheir health plans, they cannot easily imple-ment true defined contribution health careplans.

If they could, and if our new entrant choseto implement a defined contribution healthcare plan, the advantage the new entrantwould enjoy over our original employerwould expand. The new entrant’s workerswould also gain. Under a true definedcontribution health care plan, Smith wouldown his own insurance policy. Note, asdiscussed earlier, that under a definedcontribution plan, the employer makes acontribution and the employee decides howto employ that contribution.

The premiums on Smith’s policy will onlyincrease in line with overall health careinflation, not in line with Smith’s health carecosts. Perhaps more important, Smith’sspouse need not seek employment solely topay the family’s bills.

The example presented contains manyassumptions to simplify the explanation of acomplex situation. However, such assump-tions are very evident in today’s economy. Asoptions become available, workers will actin their own self-interests. Competitivefactors will force employers to respond, andmarket forces will push them in the directionof defined contribution plans or less expen-sive high deductible plans. Our presentsystem rests on an increasingly slipperyslope.

The past few decades have witnessed amajor shift from defined benefit pensionplans to defined contribution plans forretirement. The new defined contributionplans offer employers predictable costs andgenerally simpler administration. Mean-while, defined contribution plans offeremployees greater flexibility and ownershipof an asset that they can bequeath to their

heirs. Younger workers also profit hand-somely from the trend.

Absent unexpected developments, we willsee a similar movement, and one perhapseven more pronounced, toward definedcontribution plans for health benefits. Whilenot offering workers an asset to include intheir estates, defined contribution plans forhealth benefits can address unique needs.

Defined contribution health benefit plansoffer employers major advantages. Perhapsmost importantly, they give the employerpredictable costs as they set a certainamount for the plan rather than leave theemployer at the mercy of uncontrollablefactors. An employer with a definedcontribution health benefit plan will beunattractive to high-cost workers, thusreducing the employer’s overall costsrelative to competitors.

Another increasingly important advan-tage for employers will be avoiding litiga-tion over discriminatory hiring. In a definedcontribution plan, the employer gives eachworker the same amount and has no motiveto do otherwise. Elaborate procedures toensure that the employer does not discrimi-nate against those who might be considereddisabled are no longer necessary. Theadditional savings in overhead and thebenefit of being able to focus on core businessstrategies are also doubtless substantial.

The major negative for defined contribu-tion health benefit plans to employers is thehigher underwriting costs they entail. In thisrespect, they are the opposite of definedcontribution pension plans, where the cost ofsophisticated actuarial modeling needed fordefined benefit pensions is basically elimi-nated by adopting a defined contributionplan.

However, the cost of actuarial servicesactually increases under defined contribu-tion health benefit plans. The actuary mustconsider each individual in more detail.There is a different policy and an underwrit-ing process for each worker. Our earlierexample did not consider this, but therelative cost is less than the average differ-ence in health care expenditures themselvesand growing relatively smaller over time.

Defined contribution health benefit plans


are a winner for most employers. Costs aremore predictable and decrease over time.The risk of litigation is reduced. Even theadded cost of hiring actuaries for moreunderwriting does not offset the positives.

Employees will also see positive changesfrom a conversion to a defined contributionhealth benefit plan. Most important, eachworker will own his or her policy. No longerwill an unexpected health crisis force un-pleasant employment decisions dictated bythe need to get insurance. The employee’shealth insurance is also protected if theemployer goes out of business as the policybelongs to the employee, not the employer.Healthy employees would see an increase inreal compensation, as our example demon-strates.

Without further action, the clear losersunder the evolving system are unhealthyworkers, or perhaps more often, workerswith an unhealthy family member depen-dent upon them for health insurance. If anemployer converted from an existing definedbenefit health plan to a defined contributionplan, high-cost workers would face disaster.

If this happened in our example, Adams,Andrews, Barrett, and perhaps Cooper andDutton would seek other employment withwhat is likely a dwindling number of em-ployers providing traditional coverage in abenefit package.

Defined benefit health plans are sopervasive today that an employee findinghis or her benefit plan terminated shouldhave several alternatives. Businesses start-ing the trend toward defined contributionpension plans were generally new busi-nesses adopting a new structure rather thanexisting businesses converting existingplans. The trend grew as the new plansbecame more common and their advan-tages more widely understood.

To protect people like Adams, Andrews,Barrett, and Cooper, the primacy of definedhealth benefit plans may be preservedthrough regulation. However, if Oklahomatakes such action and neighboring states donot, we can replace “original employer” inour example with “Oklahoma” and “newentrant” with “Texas.” As in our example,Texas would gain jobs at Oklahoma’s

expense, as would Kansas, Arkansas, or anyother state that did not follow our lead.

If we attempt to legislate such a prohibi-tion at the national level, the realities of aglobal marketplace will similarly lead to theexport of jobs overseas.

While businesses improve general pros-perity and provide experience and trainingalong with many impressive benefits toemployees and society, they do not makeespecially good social engineers. Thegovernment can best protect citizens withdifficult health problems by doing so directlyrather than burdening the business systemwith the task.

Fortunately, there is an approach that canprotect high cost employees like Adams andAndrews from calamity while allowingOklahoma employers and their workers toreap the benefits of a better system. Thefollowing section outlines this approach.

Provide for one-time election toretain existing coverage.

Uncoordinated efforts to help the lessfortunate, over-regulation of the healthinsurance market, and ill-conceived taxpreferences for employer-provided healthinsurance are creating our health carecrisis. O-CHIP charts a way out that willmaintain quality health care and accessibil-ity to all Oklahomans. O-CHIP also includesspecial provisions to assure that no oneemployees health insurance premiums willincrease as a result of these changes.

As already noted, the current regulatoryframework forces insurers to overchargehealthy insureds to keep rates lower than forthose with high health care costs. The resultis more healthy workers shopping for healthinsurance find they are buying protection forthemselves and subsidizing health care forothers. Many avoid buying what for them isan overpriced product.

Oklahoma does not go as far as moststates in this regard. Some states havealmost completely destroyed the market forindividual health insurance by enacting theextreme mandatory cross-subsidy: commu-nity rating.

The insurance industry has developed the


concept of the high-risk pool so those withhigh health care costs may buy insurance atwhat are still high but generally moreaffordable rates. Most high-risk poolscharge higher rates than for standardinsurance, but still don’t force their full costonto participants. Participants bear some ofthe cost. Most of it is paid through insuranceregulation that forces insurers to shift someof that cost to other policyholders. The resultis that healthy policyholders still find them-selves overcharged but not by as much asunder community rating.

For employers seeking to shift to a de-fined contribution plan or, pending federalregulatory reform, to a high deductible plan,O-CHIP would allow them to permit theiremployees to buy insurance at the rate theycurrently pay from a special high-cost poolthat O-CHIP would create for this purpose.The state would issue bonds to subsidize thepool so that insurers could offer coverage forless-than-normal charges. In effect, the bondproceeds would replace the subsidy thatnow comes from healthy policyholders.

Individuals would have a one-time oppor-tunity window to sign up for insurancethrough the special high-cost pool. Thosewho sign up would have an individualinsurance policy that they could retain untilthey qualify for Medicare. Premiums wouldnot increase at all the first year, and anyfuture increases would be limited to overallhealth care cost inflation. The insurer couldnot cancel the policy if the premiums are paid.

Any individual who did not sign up wouldneed to get health insurance elsewhere orface the consequences of being uninsured.In a de-regulated market, most peoplewould be able to buy insurance for less thanwhat it costs today. O-CHIP will empowerindividuals to make choices not currentlyavailable to them. However, O-CHIP alsoholds individuals, not the state, responsiblefor the choices they make. O-CHIP will permitevery Oklahoman to afford health insurance.

Under O-CHIP, anyone who decides toremain uninsured and then suffers a serioushealth crisis will be able to receive medicalattention. However, they will also face thevery serious financial consequences of theirdecision.

The state can promote the need forindividuals to obtain health insurancethrough public service announcements andnotices in public facilities. The most effectivepublic announcement is likely a salesrepresentative selling a reasonably pricedproduct that furnishes real value to its buyer.O-CHIP will make this a reality.

Grasp the economic reasonsfor de-regulation of healthinsurance.

Our society declares its willingness tohelp those less fortunate. For those facingserious health issues and resulting highcosts, we express that willingness by helpingthose who are sick to pay their medical bills.

The question is how we do this. Whensomeone receives health care, someone hasto pay. Who should pay? It would seem thatif society wants to provide this assistance, itshould also be willing to pay for it. However,that is not entirely our current practice.

As a society, we do provide Medicaid, agovernment program to assist those with lowincomes. We fund public clinics and healthprograms. We also help many others byallowing them to show up at a hospital andreceive treatment without paying for it. Ofcourse, someone always pays. As previouslynoted, that “someone” is invariably theresponsible citizen who maintains healthinsurance coverage or the taxpayer, or both.

What we are doing is proclaiming thateveryone is assured of health care at theexpense of those who act responsibly bygetting health insurance. The responsiblecitizens pay for themselves, the less fortu-nate, and the irresponsible who don’t gethealth insurance. Figures 1–4 illustrate howwe go about this through insurance regula-tion.

At present, about 15% of our employedpopulation accounts for about 85% of ourhealth care expenditures. The averagehealth care expenditure on the part of theaverage person in the 15% group with highhealth care costs is about 32 times largerthan the average health care expenditure onbehalf of those in the larger, healthiergroup.


Suppose that the average health careoutlay for our larger, healthier group is $500per year, and the average health care outlayfor our smaller but less healthy group is$16,000 per year. If we have a total popula-tion of 100, we have expenditures of $42,500for the 85 healthiest people and $240,000 forthe 15 least healthy people.

If our healthy people pay for their ownexpenditures, they would spend $500 each.If our less healthy people pay for their ownexpenditures, they would each spend$16,000. However, the average expenditurefor the entire group is $2,825.

Of course, not all the healthy people willincur exactly $500 in costs. Some will incur

more and some will incur less. In the sameway, not all the less healthy people will incur$16,000; some will incur less and some willincur more – and two or three may incurconsiderably more. Health care expendi-tures are not randomly distributed. However,for purposes of illustration, we will declarethat each of the healthy people incurs $500and each of the less healthy $16,000. Theseamounts leads us to “85% of the cost among15% of the people,” a good rule of thumb forhealth care cost distribution in Oklahoma.

Meanwhile, some may incur relativelylittle in one year (they would be in thehealthy group that year) but incur significantcosts in another year (when they would be in

COSTWorkers Total Average85 Healthy $ 42,500 $ 50015 Unhealthy 240,000 $ 16,000100 Workers $ 282,500 $ 2,825


the unhealthy group). However, those with achronic illness will likely be among thehigher-cost individuals year after year.

If our healthy members pay for their ownexpenditures, they would spend $500 each.If our less healthy members pay for theirown expenditures, they would each spend$16,000. However, the average expenditurefor the entire group is $2,825.

Health insurance is more than just cost

shifting; it also mitigates risk. The traditionalrole of health insurance was to protectagainst the possibility of future adverseevents. So, we will need to add a premiumto cover the risk of something presentlyunforeseen taking place. For purposes of ourexample, we will declare that the net presentvalue of the cost of future outlays in excessof current outlays is $1,000 per person.When we pool this risk together with the

known costs outlined in Figure 1, we havethe following, as shown in Figure 2.

Now we are asking the healthy to subsi-dize the unhealthy. The average cost foreveryone is $3,825. More precisely, theaverage cost is $3,825 — as long as every-one, healthy and unhealthy, stays in thepool. The unhealthy are enjoying a $17,000

value for $3,825. They are likely to stay inthe pool! However, what about the healthy?They are paying $3,825 for a $1,500 value.Unless someone else pays the bill, some ofthem will probably leave.

Let’s say that 25 of the 85 healthy mem-bers decide to leave. In effect, they aresaying it is not in their interest to spend

COSTWorkers Total Average85 Healthy $ 127,500 $ 1,50015 Unhealthy 255,000 $ 17,000100 Insured $ 382,500 $ 3,825


$3,825 for $1,500 worth of insurance. Ofcourse, many will reason that the value ofprotection against truly catastrophic costs ismore than $1,500. However, some will

reason that it is worth something less than$3,825. If 25 of the healthy group membersdrop out, our revised pool looks somethinglike Figure 3.

The pool has fewer participants, but thosewho have left took less than an averageshare of the total cost. Our unhealthy mem-bers are still getting a great benefit: $17,000in value for $4,600 in cost (although notquite as good as previously with 100%participation). Now our remaining healthymembers are paying even more in premium$4,600, but for no more value. We can

reasonably suppose that some of thehealthy people who would pay $3,835 for ourhealth insurance product will not pay $4,600.

Let’s assume there are five such individu-als. These five healthy members also decideto drop out, leaving us with only 70 members— 55 healthy and 15 unhealthy — to shoul-der the load. Figure 4 illustrates the newsituation.

COSTWorkers Total Average60 Healthy $ 90,000 $ 1,50015 Unhealthy 255,000 $ 17,00075 Insured $ 345,500 $ 4,60025 Uninsured


Our average cost is now $4,821. Theunhealthy members still come out wayahead while the healthy members come outfar behind. Every time costs are added tothe pool that are not distributed randomlyacross the population, we exacerbate theproblem. As long as individuals are free toleave the pool (i.e., decline to buy healthinsurance), the problem worsens as costsare added.

This example is, admittedly, a grossoversimplification for many reasons. First, itomits entirely the need of the insurer tocover administrative costs and make aprofit. It also omits the impact of investmentearnings resulting when premiums for therisk portion of our example are invested inanticipation of their future use.

In addition, the population does not easilydivide into two homogeneous groups ofhealthy and unhealthy. The 15% incurring85% of the costs differ among themselves,some incurring much larger costs thanothers. Similarly, the cost profile of the“healthy” 85% is far from uniform.

However, the underlying principles are ontarget. We do require the healthy who buyhealth insurance to pay more so those withchronic illnesses can pay less. And, it’s alsotrue that many of the healthier members ofour population are passing on the opportu-nity to buy health insurance when they don’tget it for “free” from an employer.

We have transformed insurance fromprotection against risk into the pooling ofknown costs. While the insurer protects

COSTWorkers Total Average55 Healthy $ 82,500 $ 1,50015 Unhealthy 255,000 $ 17,00070 Insured $ 337,500 $ 4,82130 Uninsured


policyholders against the adverse conse-quences of unforeseen events, we also askthem to pay bills that we know will beincurred. We know that the insurer will, ofnecessity, pass those costs on to otherpolicyholders. Through our system of insur-ance regulation, we effectively tax onlythose who behave responsibly to provideaffordable health coverage for those withchronic illnesses.

Some have looked at this situation anddetermined that the answer lies in thegovernment taking responsibility for allhealth care expenditures. This is basicallythe system used in Canada and most Euro-pean countries today. It is true that monetarycosts in those countries are generally lower.

It is also true that many Canadians andEuropeans facing serious health issues goto extraordinary lengths to get medicaltreatment in the United States because thisnation still maintains the semblance of a

free market in health care. When someone’slife and future are on the line, many votewith their feet to leave a system of socializedmedicine.

Others looking at our situation havesuggested a system of mandatory, universalcoverage to address our problems. Whilenear universal coverage is necessary toobtain the best insurance rates, it is asystem that invites government tinkering tothe ultimate disadvantage of its citizens.

O-CHIP allows the markets to work. It willlead to significantly reduced costs. It placesresponsibility on each individual to obtainindividual health insurance. It also providesthe resources for each family to obtainhealth insurance coverage. O-CHIP is basedon the premise that if society is going togrant every individual access to health care,then all of society, and not just the memberswho act responsibly, must pay for the cost.


Getting Everyone Access to Care in Ways ThatMake Sense

O-CHIP assures that every Oklahomancan access the health care system as apaying customer. Rather than develop itsown program, Oklahoma, through O-CHIP,would enable all Oklahomans to purchaseprivate health insurance.

At the same time, O-CHIP takes intoaccount the varying circumstances andneeds of potential Medicaid participants.

Make health insuranceaffordable and attractive.

Rather than attempt to force programs onpeople, O-CHIP empowers people, givingthem tools to solve their own health careproblems as they think best. As explainedbelow, O-CHIP is not a treatment regimenbut a means for the medically needy to takeresponsibility for their own health care. Itallows them to select an insurance productthat will best fit their needs and providesfinancial assistance to those who need it.

By deregulating insurance, O-CHIPeliminates the high cost relative to valuewhich causes many younger, healthierindividuals to forgo coverage. O-CHIPmakes health insurance affordable and ofreal value to every policyholder. This changeholds special promise for many with mentalillness, who may benefit from a more com-prehensive approach to their health care.This expansion of care should bring with itsignificant savings that will offset much ofthe additional cost.

Use a tiered system that considers bothincome and cost of health insurance.

In designing most social welfare pro-grams, policymakers may assume thatneeds do not vary significantly betweenpersons with similar income and familysituations. This is not true in health care. Ina given year, one person may need almost nohealth care while someone of the same age,sex, and family situation may need $100,000or more in services. Accordingly, programswhich determine eligibility to participatebased upon income alone will neglect the

requirements of many of the truly needy.We earlier addressed the pernicious

effects of the uncoordinated eligibilitythresholds for social welfare programs.These effects are compounded by the factthat some programs are largely “all-in” or“all-out.” Rather than a ramp to self-suffi-ciency, the programs become a cliff with asteep drop once eligibility ends.

Currently, Medicaid is primarily an “all-in” or “all-out” system. Meanwhile, somefamilies may need assistance but in anamount less than 100% of their health carebills. We should recognize that those withlow income or high medical bills, or acombination of both, are “medically needy.”O-CHIP targets the medically needy for helpand provides assistance based upon anindividual family’s need.

O-CHIP determines eligibility through acombination of income and health careneeds. Using a tiered system of eligibility, itsimply helps those who can’t afford ad-equate health care.

O-CHIP’s approach has another advan-tage. When policymakers hear of the plightof a family facing dire circumstances be-cause of a particular malady, they oftenenact a program for everyone suffering toany degree from that particular illness. Suchwell-intentioned actions invariably squanderresources. Not everyone afflicted by themalady will suffer to the same extent. Otherssuffering may have access to other re-sources and not require government assis-tance at all.

By offering help and defining the medi-cally needy in terms of both income andhealth care costs, O-CHIP builds a defenseagainst well-intentioned but inefficientsingle disease programs. O-CHIP empowersanyone suffering from any disease to re-ceive help. Meanwhile, those with theresources to manage their own care do notreceive assistance. Public needs are met.The public purse is preserved.

To measure medical need, O-CHIP estab-lishes health care poverty thresholds of


100% of the federal poverty level for a singlefemale, 85% for a single male, 185% for amarried couple and 170% for a head ofhousehold. O-CHIP will cover the entire costof health insurance for any family with anincome below the health care povertythreshold. For other individuals or familiesabove that threshold, O-CHIP will cover thecost of insurance to the extent it exceeds 50%of the family’s income above the threshold.

The threshold for a married couple ishigher than that for the head of a house-hold. Health insurance is usually moreexpensive for adults and for adult females.Many other O-CHIP provisions ensure thatthe needs of children are met.

Under O-CHIP, income is defined broadlyand includes the following:• Non-taxable income.• Government payments and the value of

in-kind resources received in the way offood stamps, housing assistance, daycare assistance, etc.

• 2% of assets on a monthly basis.O-CHIP also provides for an exclusion of

30% of earned income but not more than$9,000 per adult worker per year. Thisexclusion is added to roughly offset the costof working that includes Social Security andMedicare taxes, federal income taxes, stateincome taxes, the cost of getting to and fromthe job, day care, etc. This exclusion is alsodesigned to replace the Oklahoma earnedincome tax credit.

The poverty thresholds for O-CHIP arehigher than Medicaid currently uses be-cause of O-CHIP’s broader definition ofincome. As noted earlier, we must use abroad definition of income that includes thevalue of government assistance if we are tomove away from the perverse incentives inthe current system that undermine familystability and discourage personal initiative.At the same time, O-CHIP excludes a portionof earned income in recognition of the costsnecessary to hold a job. Appendix B illus-trates the amount of assistance O-CHIPwould provide to families and individuals invarious circumstances.

As discussed elsewhere, Medicaid-friendly estate planning has become some-thing of a cottage industry, helping those

well off get the taxpayers to absorb the costof any nursing home stays. However, suchplanning is not limited to those contemplat-ing the last years. Students and others alsogame the system from time to time.

The state may want to consider a lookback provision to require repayment ofwelfare, Medicaid, and other payments inthe event that a recipient experiences asudden and significant jump in income, suchas at the completion of graduate school.

Allow the less fortunate to get theinsurance that best suits their needs.

Rather than provide health care servicesdirectly to beneficiaries, O-CHIP generallyhelps those without private health insuranceto obtain it. The market, not the state, wouldthen determine reimbursement rates andother practices.

Initially, some services might be “carvedout” of the new standard approach. Thesecould include mental illness and care for thefrail elderly, two groups with members whomay need assistance in making appropriatedecisions about their own health care. (Latersections address services for people withmental illness and the elderly.)

However, recent strides in the treatment ofmental illness are allowing increasingnumbers of people with mental illness tomake decisions and manage their livesquite competently. We should not impose abureaucracy where it is not needed but ratherallow those with mental illness to managetheir own affairs when they can do so.

Under O-CHIP, Oklahoma would retainonly the minimum federal mandates fromMedicaid, seeking waivers from the Directorof the Center for Medicare and MedicaidServices (CMS) to allow for a free marketapproach.

Provide incentives for gettinghealth insurance.

By deregulating health insurance, O-CHIPremoves major barriers to its more wide-spread purchase. At the same time, individu-als without coverage force their fellowcitizens to foot the bill in the event they doneed care. It follows that we should encour-


age everyone to acquire health insurance orotherwise be able to provide for their owncare in the event they need it rather thanburden their fellow citizens.

O-CHIP empowers every Oklahoman tobuy health insurance. O-CHIP is also de-signed to provide tax relief to Oklahomanswho carry health insurance and help thestate reduce the cost of health care borne bytaxpayers. In addition, O-CHIP makes severalchanges in Oklahoma’s tax system to facilitatebetter, less costly health care while reducingtaxes and improving the tax system.

Provide a tax credit for families withhealth insurance.

O-CHIP will replace the existing standarddeduction and personal exemption with a$250 per person tax credit for those coveredby health insurance throughout the year.O-CHIP would permit itemized deductions tothe extent that they exceed the federalstandard deduction.

Specifically, a family would be eligible forthe credit for each dependent child withcoverage. The taxpayer would receive thecredit if the taxpayer and all dependentchildren are covered. This emphasizes theimportance of obtaining quality health careaccess for children.

Under this provision, almost all taxpayerscovered by health insurance would receive atax break. Only a taxpayer with a veryunusual set of circumstances would see anincrease, unless he or she fails to get healthinsurance or otherwise provide for paymentof medical expenses.

Married couples with dependent childrenwould get major tax relief under O-CHIP.

Because this is a credit rather than adeduction, it is friendlier to low-incometaxpayers. No claims are made that this willstimulate new economic growth since itdoesn’t reduce tax rates. However, otherparts of O-CHIP do create a more favorablebusiness environment and should encour-age economic growth.

The proposed tax benefit would be avail-able to anyone with health insurance inforce through an employer-sponsored planor an individually owned policy. This in-cludes tribal members as long as the tribe

agrees to pay Oklahoma hospitals for carethe hospitals provide to its members.

A taxpayer who can provide a letter ofcredit or can assure that an unforeseenmedical expense will not result in outlays bythe state or cost shifting to the insured wouldbe eligible for the credit. The Tax Commis-sion would certify such arrangements.

The proposed system would make em-ployers who offer health insurance to theiremployees more attractive. Employeeswould value the insurance more because itwould directly reduce their taxes.

The special exemptions in current Okla-homa law for the blind and for low-incometaxpayers over 65 would be retained. Ap-pendix C contains examples of hypotheticaltaxpayers under O-CHIP compared to theexisting tax system.

Provide a tax credit for families with anon-dependent parent in residence.

O-CHIP includes provisions to prevent thetransfer of assets for the purpose of gougingfellow taxpayers to cover long-term careexpenses. However, while some may schemeabout how to milk taxpayers, other familieshelp the state avoid long-term care outlaysby caring for elderly family members.

Most families willingly provideintergenerational assistance. In many cases,the recipient may be financially independentbut still needs help to retain independence.

To reward and encourage such assis-tance, O-CHIP provides an additional $250tax credit if a Medicare recipient was a full-time resident in the taxpayer’s home duringmost of the year. Even if the elderly parent(or a close relative other than a spouse)does not qualify as the taxpayer’s depen-dent, the taxpayer still gets the credit.

If the elderly parent does qualify as thetaxpayer’s dependent, the taxpayer wouldreceive a second $250 tax credit for theelderly parent/dependent. In either case,O-CHIP rewards a family for caring for theirelderly parents.

Provide an additional tax credit for thosewho itemize deductions.

O-CHIP also provides an additional creditof $125 for all taxpayers ($250 for those


married filing jointly) whose itemized deduc-tions exceed the federal threshold.

Without this provision, those who itemizetheir deductions might see a tax increase.This provision addresses an arcane buttroublesome glitch in the Oklahoma taxcode: the Oklahoma standard deduction isless than the federal standard deduction.

Under Oklahoma law, a taxpayer canitemize on the Oklahoma return only if theyalso itemize on the federal return. A fewtaxpayers itemize on the federal return eventhough they would pay less federal tax ifthey took the standard deduction so thatthey can itemize on the state return. If theamount saved from itemizing on the statereturn exceeds theadditional taxes paidon the federal return,the taxpayer comesout ahead. So doesthe federal govern-ment, but at theexpense of the Okla-homa treasury.

O-CHIP ends thatpractice by providinga tax credit and limiting itemized deductionson the state return to the extent they exceedthe federal standard deduction. A fewtaxpayers may see a very small increase intheir Oklahoma income tax as a result ofthis change: those with itemized deductionsof roughly 90% – 100% of the standarddeduction amount who also know how to usethis tactic.

Those with 100% or more of the thresholdwill itemize on both federal and state re-turns. Those who aren’t very close to thefederal threshold will find that they losemore in federal tax by itemizing than theygain at the state level. However, the addi-tional credit for itemized filers ensures thatthey get a small break rather than a taxincrease if they get health insurance.

As an alternative the legislature couldincrease the credit for having health insur-ance coverage to an amount comparable tothe federal standard deduction and per-sonal exemption. Such a proposal is notmade because of the extreme budgetarypressure that it would create.

Impress reality on those whowould force others to pay theirbills.

In addition to the possibility of significanttort reform legislation (discussed in thesection on “Health Care Quality”), O-CHIPrecommends other legal changes that willhelp achieve the goal of putting qualityaffordable health care within reach of allOklahomans. These changes will alsoreduce the cost of health care for Oklaho-mans who act responsibly.

Health insurance costs too much andhealth care itself costs more than it should.One reason is that the existing system

allows some to free-load off others, takingadvantage of society’sself-imposed ethic tonot deny care. Thisproposal does notinclude a legal man-date for individuals tobuy health insurance.It does include somemeasures to make it

less desirable for those who can affordhealth insurance to forgo buying it. Thechanges below will reduce cost shifting andshift some costs back upon those who inflictthem in the first place.

Some may question why O-CHIP does notcontain a legal mandate for individual oremployer-paid health insurance. In the caseof employers, such a mandate would createnumerous problems and lead to fewer jobs.In the case of individuals, states mandatingthe purchase of automobile liability insur-ance have 22% of their population unin-sured vs. 25% uninsured in states without amandate. This is not the level of progress weseek. We will need to look elsewhere tomake a significant dent in the number ofuninsured.

Mandates for automobile liability insur-ance are not very effective. Why would wethink they would magically be more effectivefor health insurance? Enacting a legalmandate for health insurance might evencreate a false sense that we have solved theproblem when we have not. To impose legal

Under O-CHIP, almost alltaxpayers covered by

health insurance wouldreceive a tax break.


mandates detracts from the need for themore effective measures outlined in thisproposal.

Therefore, O-CHIP does not contain aformal, legal mandate for individuals toobtain coverage. Its provisions will be moreeffective than such a mandate at gettingmore Oklahomans under health insurancecoverage.

Facilitate better debt collection by healthcare providers.

Those who do not maintain health insur-ance will lose the standard deduction andpersonal exemption they now enjoy whilepassing the cost of their own health careonto fellow taxpayers. They would also beineligible for new tax credits offered to theinsured. However, tax policy alone is unlikelyto induce everyone who imposes their healthcare costs on others to change their ways.

Because of regulations requiring hospi-tals to provide services regardless of thepatient’s ability to pay, those who don’t paytheir bills simply transfer the cost of theservices they receive to responsible partieswho do pay their bills. Charges from hospi-tals and insurance companies are thereforehigher than they would be if every treatedpatient paid for services received.

O-CHIP strengthens the ability of hospi-tals and other health care creditors to collectdebts. Interestingly, some Oklahoma hospi-tals are now finding that their largest sourceof bad debts is patients who refuse toaccess a health savings account to pay forlegitimate health care services.

As will be described later, O-CHIP pro-vides a smart card linked to a personalhealth account (PHA) that will pay almostimmediately when a participant uses PHAfunds to obtain care. The amount of baddebts arising from O-CHIP non-paymentsfrom PHAs should be almost zero.

Under O-CHIP, hospitals that post stan-dard fees would be allowed to place a lienagainst any property of a nonpaying pa-tient, including a subordinate lien against apersonal residence. However, such lienswould not be allowed if the reason fornonpayment is simply a deficit in thepatient’s PHA.

In addition, hospitals and other providerscould collect up to $1,000 in attorney fees ifthey are successful in litigation. (They wouldalso have to pay up to $1,000 of thedefendant’s legal fees if they lose.) Thisprovision would eliminate much of thenuisance factor in collecting small accounts.

While these provisions will reduce theproviders’ unpaid bills, the primary purposeis to induce creditors to determine if aprospective borrower has health insurancebefore extending credit. By strengtheningthe ability of hospitals to collect bad debts,the state encourages potential creditors toinquire if a prospective borrower of moneyfor a house, car, or other major purchasehas health insurance.

O-CHIP empowers every Oklahoman tobuy health insurance. O-CHIP reduces thecost of most health insurance policiesthrough deregulation and provides assistanceto those still needing it to afford a policy. Italso creates an expectation of responsibility,imposing a cost on those who fail to gethealth insurance and risk shifting the cost oftheir health care to their fellow citizens.

This is especially effective when weconsider that a highly disproportionateshare of those who can afford health insur-ance but choose not to buy are younger,healthier people. It is also the young whogenerally have the greatest need for creditas their consumption often exceeds theirincome during the period when that incomeand the expectation of future income levelsare rising significantly.

At present, whether a prospective bor-rower has health insurance is usually not afactor in decisions to grant credit. O-CHIPwill change that practice. Just as the homebuyer must show proof of homeowner’sinsurance to obtain a mortgage loan and acar buyer must similarly buy insurance toget a loan for a car, this provision will makeit difficult to obtain credit without healthinsurance already in place.

This provision also gives Oklahomanswho take responsibility for their own healthcare another advantage. Since O-CHIP willincrease the percentage of those who havehealth coverage, it reduces the number of“medical” bankruptcies. This should have a


modest positive impact on consumer interestrates because of less underwriting risk. Onereason that interest rates are generallyhigher in Oklahoma is that Oklahoma hasmore bankruptcies than most states.3

Require health insurance to play thelottery.

It would seem difficult to justify playingthe lottery if one cannot provide for the basicnecessities of life for his or her family. Aslong as lottery advocates do not encouragethe poor to play the lottery irresponsibly, thisprovision should not arouse significantopposition despite the lottery issue’s highprofile.

A ban on playing the lottery on thosewithout health insurance could create amajor burden for those selling lottery tickets.Therefore, O-CHIP would allow someonewithout insurance to play, but require themto forfeit any significant winnings which canthen be used for Medicaid.

Anyone claiming lottery winnings wouldhave to provide proof of health insurancepredating the purchase of the winninglottery ticket by at least six months for allfamily members and dependents. Lotteryticket vendors would have to prominentlyadvertise this fact.

Under current law, lottery winners arealready checked for back taxes and overduechild support. This provision would simplyadd securing proof of health insurance tothe equation.

Let freeloaders pay more of the taxesthey would otherwise force onto others.

Oklahoma provides health care for thosewho need it. Anyone seeking treatment at anemergency room will get some assistance.So will those who visit an FQHC or receivean immunization at a county health depart-ment.

O-CHIP ensures that everyone can affordhealth insurance. It gives a tax break tothose who provide for their own health carecosts and thereby do not burden the publicsystem or force others to pay higher insur-ance premiums.

Under O-CHIP, those who choose to forgohealth insurance and place the cost of their

care in the hands of their fellow citizens willbe required to pay something for that deci-sion. The fee is designed to offset some ofthe costs of providing care if the freeloaderbecomes ill.

The mechanism O-CHIP employs issimple: The standard deduction and per-sonal exemption are more than replaced bya tax credit for those who get health insur-ance. For those who push their risk ontoothers, however, the standard deduction andpersonal exemption are simply abolished.Those without health insurance could stillitemize their deductions to the extent theyexceed the federal threshold.

O-CHIP allows state residents to forgohealth insurance and stay within the law.However, it does require those who wouldfreeload on their fellow citizens to paysomething for the privilege of doing so.

O-CHIP has limited the negatives to thesethree, but the state might want to considerothers. For instance, it could issue a driverslicense only to someone who can provideproof of health insurance.

Some maintain that paying extra so thatothers have the right to make costly deci-sions and defray that cost on others is partof living in a free society. The premises uponwhich O-CHIP is based reject this philoso-phy. Rather, O-CHIP is based on the premisethat each of us should pay our way when-ever possible and that we have a responsibil-ity to pay for the results of our own decisions.

Offer incentives to improvequality and reduce cost oflong-term care.

While O-CHIP gives the most attention toMedicaid provisions that address the needsof those not yet eligible for Medicare, Medic-aid expenditures for those who do qualify forMedicare consume approximately 40% ofOklahoma’s Medicaid budget. The mostcost-intensive portion of these expendituresis for long-term nursing home care.

Medicare covers many of the majorhealth-related expenditures older adults arelikely to encounter. However, Medicaregenerally does not cover routine nursinghome care. The average annual cost of a


nursing home stay in Oklahoma City andTulsa now exceeds $45,000.4 This gap incoverage falls to Medicaid programs to meet.

Eligibility for assistance with nursinghome costs is based upon a combination ofincome and assets. Since retired individualsmay have little income but significantassets, they are required to “spend down”their assets to become eligible for assistance.

An elderly couple wanting to leave anestate may be unable to do so if they incurmajor nursing home outlays for which theyhave not made provision. With increasingnumbers of Oklahomans reaching the ageof Medicare eligibility, the demand fornursing home and other senior services isalso likely to grow.

Where cooperationamong family gen-erations is achieved,a family may find itadvantageous undercurrent law for olderadults’ assets to betransferred to theirheirs. Impoverishingthemselves to qualifyfor state aid, the older adults anticipate theirpossible future need for nursing home carewhile preserving their estate.

This is done at the expense of taxpayerswho themselves provide for their own fami-lies. However, the practice is becomingattractive. “Medicaid-friendly estate plan-ning” has become a staple in the practice ofmany financial planners and similar advisors.

In response, state governments (includingOklahoma’s) provide for “look back” periodsand other means to make the transfer ofassets in anticipation of nursing home needsless attractive. Complications arise when anolder adult who can no longer live indepen-dently and needs nursing home care has aspouse who lives independently and re-quires no nursing home care.

O-CHIP recognizes that the purpose ofMedicaid is to provide assistance to thoseunable to provide for themselves. At thesame time, O-CHIP also recognizes thatMedicaid wasn’t designed to preserve theestates of Oklahoma residents at taxpayerexpense.

Under O-CHIP, an individual could makea gift to an heir if either of the two followingconditions is met:

1. The individual and his or her spousemust own a prepaid long-term care insur-ance policy or have sufficient assets in trustto cover most nursing home outlays;

2. The recipient of the gift assumes inwriting responsibility for the donor’s care inthe event the donor and his or her spouseotherwise becomes eligible for long-termcare assistance under Medicaid.

Similar rules would apply to transfersbetween spouses.

O-CHIP offers all Oklahomans the oppor-tunity to provide for their own needs as they

think best. It alsomakes it more difficultfor freeloaders to shiftresponsibility forthemselves to othertaxpayers.

Alternatively, thestate would place a lienon any property giftedthat would be releasedupon the death of the

donor and his or her spouse, and the reim-bursement of any Medicaid payments thestate made to benefit the donor or his or herspouse.

Under O-CHIP, the assets of a Miller Trust,or any trust in which the applicant for assis-tance has an interest, are included in deter-mining the eligibility and level of benefitsthe state will provide. At the same time, O-CHIP also includes provisions to make iteasier for families to help their elderlyparents during a difficult period.

These provisions include the following:• If an applicant has a long-term care

insurance policy in place, including acombination long-term care and lifeannuity policy as discussed previously, heor she may shelter an amount equal tothe amount of the policy from the state,and the assets will not be used in deter-minations of eligibility or benefit levels.

• A participant who uses a nursing homethat charges less than the state-approvedrate will retain one-half of the savingsand may use it for any purpose.

O-CHIP favors thosewho act responsibly

and discouragesfreeloaders.


• A participant who obtains a reversemortgage for the purpose of paying fornursing home expenses would be al-lowed to place 20% of the proceeds in aspecial fund that may be used for anypurpose. In addition, the fund’s assetswould be excluded from eligibility deter-mination and spend down requirements.

• Contributions made by children to assisttheir parents would only be counted tothe extent the contribution exceeds $25per month, and then only 80% of thecontribution would be counted.

• O-CHIP provides a tax credit to a family ifa Medicare-eligible parent shares a

home as a principal residence.O-CHIP would follow the present policy of

prohibiting the state from seizing the resi-dence of a participant. The state could,however, place a lien against the residencethat would be exercised when the residencewas eventually sold or transferred, unlessthe state was repaid in the interim.

The last provision ensures that an able-bodied spouse may continue to live in thefamily home unmolested while the stateassists with the nursing home bills of thespouse needing assistance. This provisionheightens the likelihood that the state willeventually be reimbursed for its expenditures.


Fostering Wellness and QualityProvide access to qualityhealth care.

Design a standard policy as an option.Under O-CHIP, the state would reimburse

an individual (or family) that obtains healthinsurance through his or her employer to theextent that the cost of the health insuranceto the employee exceeds 50% of familyincome above the poverty threshold. Partici-pants with assets would be required to meet“spend down” tests on assets they ownbefore becoming eligible for assistance.

The section covering eligibility (“A tieredsystem…) addresses how income is mea-sured for this purpose.

This provision will help preserve privatecoverage options in cases where a familyheaded by a low-income worker may beable to take advantage of a plan alreadyavailable to them if they can get someassistance.

Those not covered by insurance madeavailable through an employer wouldreceive state financial assistance, whereneeded, to obtain their own insurance. Theneeds of those eligible for Medicare andthose with a family member suffering from achronic illness will also be addressed inlater sections.

For employees without employer-providedinsurance, the state would work with insur-ers to make certain a “default” or standardinsurance policy is available. Participantswould be required to contribute up to 50% offamily income above the poverty thresholdtoward the cost of the policy, the same aswith those obtaining health insurancethrough an employer.

Note that no participant is required to takethe default plan. Rather, participants areempowered to choose what they think best.Participants may elect to obtain other insur-ance coverage including a more traditionalmanaged care arrangement. However, theparticipant alone would bear the additionalcosts.

The particulars of this plan are addressedbelow. The reader should note that the

amount of O-CHIP assistance is dependentupon a combination of the participant’sfamily income and the cost of obtaininghealth insurance. Accordingly, a relativelyhigh-income family would receive assistanceif faced with crushing health care bills.

One other situation deserves mention.What if an individual decides to remainuninsured until he has an unexpected healthcrisis and shows up in an emergency roomfor treatment? That individual will be re-sponsible for his own bill and the hospitalwill have greater latitude than at present tocollect it. We often sympathize with non-payers because we know many fall throughthe cracks of our current system and simplycan’t afford health insurance. O-CHIPeliminates that excuse.

Employ a high deductible.The standard, or “default,” plan would

provide broad coverage and carry anannual deductible of $4,800 plus an addi-tional $600 for each dependent. In addition,each policy would have a 20% co-insuranceprovision once the deductible is met, not toexceed one-third of the deductible or $2,000,whichever is less. The standard plan wouldcover all expenses currently covered underOklahoma’s Medicaid program.

The amounts of the deductible, co-insur-ance, and other particulars should be setafter a competent underwriting evaluationhas been performed. Such an evaluation isbeyond the scope of this proposal. However,the important aspects of the particularspresented here are that we should end thebias toward family stability and reduce thebias toward personal initiative to the extentpracticable in the current situation, withoutradical changes in the level of benefitscurrently paid to those currently taking partin social welfare programs for the lessfortunate.

Use a Personal Health Account with debitcard.

A funded Personal Health Account (PHA)would come with each policy. The annualamount deposited would be $1,800 for each


adult, $1,200 for the first dependent, and anadditional $600 for each dependent. Forfamilies with children, each policy wouldcontain a $600 difference between depositsinto the PHA and the policy deductible.

Only health care providers registered withthe insurer, wellness providers registeredwith the state, and the participant throughthe insurer could access funds in a PHA.O-CHIP prohibits arrangements which allowmore liberal access to PHA funds.

The PHA is designed to pay for suchroutine care as visits to a doctor or dentist,routine pharmaceuticals, or other serviceslike immunizations. The most common formof access would be through a debit card thatthe participant would present at the time ofservice. A fourteen-day delay between thetime the card is presented and payment ismade directly to the provider should affordopportunity to investigate any suspectedfraudulent activity.

The Health Care Authority will adopt rulesgoverning lost cards. These rules mayimpose a fee on participants losing a card.Such a program can work well so long asthe rules are simple and do not permitexceptions. The state must resist the tempta-tion to add new provisions in future yearswithout a meticulous investigation of theimpact of such changes on the cost of theunderlying system.

Establish rules for general usage.The PHA may be used to pay for any

health-related expenditure for which adeduction may be taken on a federal incometax return provided it is used only with aprovider registered with the insurer. Theinsurer could incorporate providers regis-tered with others, such as the Department ofHealth, if they choose to do so.

Note that a gap of $600 per policy existsbetween the deductible and the amountdeposited annually into the PHA and theremay also be an additional co-insurancerequirement of up to $2,000. Expenses exceed-ing the balance in the account may be paidwith deposits made in the following year.

Establish rules for excess funds.O-CHIP will deposit more into the PHAs of

participants than they are likely to use. Excessfunds may be carried forward or withdrawn forspecial purposes as outlined below.

Encourage wellness expenditures.The new program would provide positive

reinforcement for good health by allowingparticipants to use their PHAs for qualifiedwellness expenditures. These include joininga gym or sports program, or enrolling in aprogram for fitness or weight loss. Anywellness program could become qualifiedthrough application to and approval of theHealth Care Authority. The Health CareAuthority would establish rules for approvalof a qualified wellness program.

A child in a family participating in thenew Medicaid program might be able toafford to play soccer or basketball andreduce the demand on schools to providephysical education classes.

The premise that fitness and healthyliving reduce expenditures on disease isgaining increasing acceptance. The generalconsensus is that poor lifestyle and diet aremajor contributing causes of prematurediabetes and heart disease. Some Okla-homa employers now provide fitness andother wellness activities because it savesmoney on employee health benefit costs.

Allow withdrawals for personal use bythose who save taxpayer money.

Some researchers conclude that anexpansion of traditional Medicaid achievesfew gains in preventive care.5 O-CHIPincludes a unique provision to avoid thatresult.

Under O-CHIP, Medicaid participantswould receive a PHA unless they are enrolledin a group plan or they choose a moretraditional individual plan. Each participantwould use the PHA to pay for health-relatedexpenditures incurred before meeting thedeductible under the plan. Certain wellnessexpenditures, as discussed above, are alsopermitted.

The insurance policy underlying thestandard plan would not cover any item untilthe deductible is met. The annual deductiblewould be met by transfers out of the PHAand, if necessary, from personal funds.


Those enrolled in an employer or other groupplan would not be required to have a PHA.

The state-sponsored plan will includeprescription drug coverage. In many casesdrug therapy is superior to other treatmentregimens in both cost and effectiveness. Asoutlined below, the opportunity for personalgain from the PHA provides participants apowerful incentive to keep drug costs low.

Each quarter, a participating family (orindividual) could withdraw up to 10% of thebalance in his or her PHA if each personcovered has obtained the preventive carerequired for doing so. In addition, a partici-pant with a balance in the PHA sufficient tocover the yearly deductible could withdraw100% of the balancein excess of thatdeductible and usethe withdrawal forany lawful purpose.

O-CHIP makesparticipants respon-sible for state healthcare spending ontheir behalf andrewards those whosucceed in controlling that spending.

Some observers will doubtless balk atsuch an arrangement, arguing that fundsintended for health care should only be usedfor direct health care expenditures. However,all health care consumers are beleagueredby rising health care costs.O-CHIP is based on the premise that weought to do something effective to reduceexcessive health care costs.

The current Medicaid program offersparticipants little incentive to help controlcosts. As a result, participants too often visitemergency rooms for non-urgent care, fail toinquire about the availability of genericdrugs, and are perhaps less likely to deter-mine if a proposed procedure or pharma-ceutical is necessary. In fact, a recent studyfound Medicaid recipients are even morelikely than the uninsured to visit an emer-gency room for non-urgent care.6

Another factor in the failure to restraincosts is that providers get lower fees fortreating Medicaid patients than for treatingthe general population. While the state

doesn’t spend as much on the fees them-selves, this practice has unintended conse-quences which consume some of the appar-ent savings.

Since the fees a provider receives fortreating a Medicaid patient are lower, theprovider may be less interested in providingservices at a time convenient for a Medicaidparticipant to receive care. Limited officehours contribute to expensive emergencyroom visits for simple primary care.

With providers reimbursed at normalinsurance rates rather than lower Medicaidrates, some may find it profitable to adjusttheir practice hours to take in the moreattractive fees. While the program pays

more to physicians, itavoids many of the farmore expensive emer-gency room visits.

The incentive pro-vided under O-CHIP isdirect and individual.Those who can savemoney by not access-ing the health caresystem when care is not

needed will have the opportunity to share inthe savings they generate.

To be effective, the use of the withdrawalis not limited to health care. Limiting with-drawals to use for future health care onlygreatly reduces the incentive’s value to thosewhose help we most need.

Some think that simply allowing partici-pants to roll over their unused PHA balancesindefinitely will accomplish the goal ofinvolving more consumers. However, weshould consider how much value a healthy25 year old will attach to a free month in anursing home sixty years from now. O-CHIPrewards personal responsibility by providingimmediate and valuable compensation toparticipants who help hold down costs.

Require preventive care for personal usewithdrawals.

By providing incentives and rewards tothose who hold down health care costs, werisk having participants forgo neededpreventive care so they will have more fundsavailable for withdrawal. Therefore, partici-

Under O-CHIP, those withouthealth insurance will pay

higher taxes, find loans moredifficult to obtain, and be

prohibited from playing thestate lottery.


pants would be required to obtain a mini-mum level of preventive care before makingpersonal use withdrawals from a PHA.

The Health Care Authority would estab-lish the standards for required care throughrulemaking. For a healthy adult or adoles-cent, this would only consist of a bi-annualphysical and a visit to a dentist. The physi-cal would include a hair-based drug testthat must be passed before personal with-drawals of state funds are allowed. Thestate would pay for the drug test. Note thatfailure to pass the test does not end Medic-aid coverage, only the ability of a partici-pant to make a personal withdrawal fromhis or her personal health account.

O-CHIP uses a hair-based test for druguse because it is reputed to be more accu-rate, and to cover a longer period of pos-sible use. Hair testing is also far less sus-ceptible to “cheating” than more traditionaltests. An evaluation of testing methods isbeyond the scope of this proposal, otherthan to state a preference that the stateshould use a test that provides reliableresults, even at a marginally higher cost.

Also beyond the scope of this proposal isthe question of whether the state wouldrequire a participant who tests positive fordrug use to enter a treatment program. Aswritten, O-CHIP provides a strong incentivefor a participant to act. The participantcannot make a personal use withdrawalwithout staying off drugs for an extendedperiod of time.

Most drug abusers cannot reform them-selves in the absence of some outsideassistance. O-CHIP would make a sub-stance abuse assessment a wellness expen-diture. The Oklahoma Department of MentalHealth and Substance Abuse Services(ODMHSAS) would be able to make otheraddiction treatment services available atsubsidized rates. However, the participantwould need to make at least a minimalindication, by asking for help, that he or shewants to overcome his or her addiction.

O-CHIP, as presently crafted, would notforce individuals into an assessment ortreatment they did not want without an orderfrom a court of law or a parent. Similarly,O-CHIP does not shield those with an

addiction from the adverse consequences oftheir situation. O-CHIP’s approach is basedupon the observation that addiction treat-ment is rarely effective unless the personaddicted wants to change, and further, thatmotivation will more likely result when theaddicted individual must deal with reality.

With regard to pregnancies, an expectantmother would be required to have monthlyprenatal exams. After a birth, O-CHIP wouldonly require such necessary care as immuni-zations and pediatric visits.

In addition, a participant must complywith physician-ordered treatment protocolsordered by a physician, including preventivedrug regimens. A participant’s PHA will becharged for minimum care, whether ob-tained or not. Only those participants whohave accessed all required care and com-plied with treatment protocols in the previ-ous year would be allowed to make with-drawals for personal use from their PHA.

The state would require participants toreceive preventive care to make withdrawalsfor personal use and charge participants forthe cost of that care even when not obtained.This provides a strong incentive for partici-pants to obtain needed preventive care.Such preventive care helps keep future costsunder control by preventing the onset ofserious and costly disease.

In summary, O-CHIP permits personal usewithdrawals for up to 10% of the PHA bal-ance plus 100% of the balance in excess ofthe annual deductible if the followingconditions are met:• The participant and each family member

have been examined by a physician withappropriate tests for the participant’s ageand condition.- Bi-annual examinations only are

required for those under age 40 inotherwise healthy condition.

- The examination will include a hair testfor drug use which the participant mustpass.

• The participant and each family memberhave been examined by a dentist.

• The participant and each family memberhas complied with any treatment proto-cols set out by his or her physician in theprevious two years and the physician has


attested to the compliance.- The protocol will automatically include

appropriate immunizations.- The protocol will automatically include

pre-natal visits.• There are 30 days between the request

for funds and disbursement.

Recycle half of personal use withdrawals.O-CHIP recycles an amount equal to any

withdrawal for personal purposes back intothe new Medicaid program. This acts as aneffective 50% tax on any personal withdraw-als from a PHA. This also corresponds to therequirement that a participant spend 50% ofhis or her income in excess of the medicalneed threshold dis-cussed earlier.

For instance, if aparticipant has a$1,000 PHA balance atthe end of a quarter,he or she could makea $100 withdrawal anduse it for any purpose.However, he or shewould also haveanother $100 transferred out of his or herPHA back into the Medicaid program. Afterthe withdrawal and the transfer, the partici-pant would have an $800 PHA balanceremaining. (If Medicaid is paying for lessthan 100% of the cost of the PHA, the per-centage amount transferred back to theprogram would be pro-rated.)

Some have suggested that the federalgovernment will not allow conversion of anyfederal funds to strictly personal use. If so,perhaps the federal government shouldconsider if it is really serious about reducingcosts or is content to make a losing standupon meaningless principles. In addition,while the 50% tax on personal withdrawalsstill allows for those personal withdrawals, itencourages participants to use the funds forwellness and prevention.

If the federal government refuses toconsider any change, there are severalmeans of addressing their concerns:• Use all taxes on PHA transfers to offset

the federal share.• Adjust the tax rate to equal the federal

share in the federal to state ratio of costsharing, currently about 70%. This willmake the provision somewhat less effec-tive.

• The state could “pay” for withdrawalsfrom TANF, a federal block grant.

• The state could hold the federal govern-ment harmless based upon actual resultscompared to a benchmark. The federalgovernment would not be worse off andthe state could still benefit from thesavings achieved.

Provide for smooth administration ofPersonal Health Accounts.

The smooth operation of the PHA willrequire a cleansystem design andconsistent adherenceto its rules. The statemust not complicatethe system by addingmandates, no matterhow well intentioned,without first determin-ing the impact theproposed change may

have on the smooth operation of the PHA.PHAs would be maintained through an

online system that could only be accessedby licensed health care providers, licensedwellness vendors, insurers, the Health CareAuthority, and auditors of the system. Theparticipant would have “read only” access.

Money would be placed in a PHA for thebenefit of a participant’s family by theinsurer. The insurer would apply to the statefor any reimbursements due.

Each participant would receive a re-stricted-use debit card in conjunction withthe PHA. Money could only be withdrawnfrom a PHA by one of the following:• A health care provider to whom the

participant had presented the PHA cardat the time of service.

• A wellness vendor licensed by the state towhich the participant presented the PHAdebit card.

• The Health Care Authority to issue acheck to the participant for a personalwithdrawal and to transfer funds back tothe Medicaid program.

O-CHIP empowers patientsto obtain and act upon theinformation needed whenselecting the best health

care option for themselves.


The state could further protect cardsecurity with smart cards containing identifi-cation of a unique personal characteristic ofthe participant. Use of the cards is restrictedto only a few vendors and the participantstands to ultimately gain if the card is usedprudently. This should provide considerableprotection against such misuse as a partici-pant “loaning” the card to a non-participant.

PHAs could not be accessed directly topay judgments, nor would they be subject toliens or garnishments except for the benefitof health care providers.

A health care provider would note through“clicking” an on-line box that requiredpreventive care and such related items as anegative drug test had been obtained. Anyrequired preventive care not obtained by thedue date would result in a notice to theparticipant and a hold on personal andwellness withdrawals placed on the account.

If care is not received within 60 days ofthe due date, the state would charge theaccount an amount equivalent to the preven-tive care. If the required preventive care issubsequently obtained, the hold would beremoved from the account and anotherwithdrawal made to pay for the preventivecare. In other words, the participants wouldpay twice for the care if they were more than60 days late in receiving it.

If the rules governing them are keptsimple and are consistently enforced, thePHA system should work smoothly.

Cover mental illness.O-CHIP would cover the treatment of

mental illness and substance abuse. As aresult, the need for many separate govern-ment-supported treatment programs woulddisappear. Given the nature of the illnesses,the state would maintain a vigorous Depart-ment of Mental Health and SubstanceAbuse Services to administer and coordi-nate all public programs.

Because insurance will now cover allphysician-treated mental illness, ODMHSASwould no longer provide these services freeof charge; they would recover their coststhrough fees to clients. ODMHSAS wouldalso have the option to outsource theseservices when it is in the interest of patients

and the state to do so.In making this transition, the state should

take care to preserve the laudable datacollection capabilities of ODMHSAS.

Curb abuse through meaningful auditsand stricter eligibility determination.

Increase emphasis on ligibilitydetermination.

O-CHIP shifts the main burden for control-ling costs to Medicaid recipients by empow-ering the recipients to make their owndecisions and giving them a stake in theoutcome. As a result, the Medicaid programwill become more valuable to the partici-pants. The participants will receive access toan improved health care system and thepotential to share in the savings they helpgenerate by successfully holding down costs.

As a result, unscrupulous individuals willhave more incentive to qualify for Medicaid.Consequently, the new Medicaid programmust include safeguards to limit participa-tion to those truly eligible. The state will alsostrengthen coordination of eligibility determi-nation for various social welfare programs.

The need in this situation is analogous toverifying eligibility for the earned income(tax) credit (EIC). Penalties for misreportingincome must be enforced. O-CHIP will directa portion of Medicaid spending to ensurethat Oklahoma has enough case workers toadequately review applications, as well asthe tools to adequately verify information.

O-CHIP would encourage physicians,dentists, pharmacists and governmentoffices to make available on-line applica-tion. This removes the stigma of having to goto the “welfare office” and also presents anopportune time to apply.

To properly publicize the availability ofhealth insurance and the responsibility ofeach resident to provide for his or her owncare, O-CHIP directs the Health Care Au-thority to work with the Tax Commission, theLottery Commission, and motor licensingagents (often the first contact of a newlyarrived resident with the state government)to provide appropriate notice.

Because O-CHIP makes it possible forMedicaid participants to purchase private


insurance, the Insurance Commissionerwould work with Oklahoma insurers tospread the word about the availability ofbenefits. We should note that, under O-CHIP,insurance agents will be serving their owninterest in doing so.

Strengthen audit procedures.O-CHIP will exert powerful influences

even beyond the provisions in this section toreduce fraud. The best defense againstfraud by providers is an alert group ofcustomers. O-CHIP empowers Medicaidparticipants to become real consumers witha clear self-interest in avoiding unnecessaryexpenses.

One percent of Medicaid expenditureswill be earmarked for pre- and post-auditingfor fraudulent activity and other irregulari-ties, including audits of published perfor-mance data. Hospitals and nursing homesserving Medicaid participants will also berequired to have their auditors review theadequacy of internal controls to preventfraud or to promptly bring such to the atten-tion of appropriate parties.

(More detail about how O-CHIP stream-lines the audits of hospitals is provided in asubsequent section.)

O-CHIP gives cash to participants whohelp hold down Medicaid costs. This incen-tive will result in more people seekingeligibility to participate. Therefore, the Stateshould increase its review of the eligibility ofapplicants, including verification of income.

Under a traditional Medicaid program,the government’s considerable exposure tofraud rested primarily with unscrupulous orcareless providers who over billed or billedfor work they did not perform. Under O-CHIP,private insurance companies will administerbenefits and provide assistance directly toparticipants. Accordingly, the major opportu-nities for fraudulent activity will shift fromproviders to program participants.

Under O-CHIP, the state will need todetermine the extent of eligibility for partici-pation. This will require something similar toa tax audit, especially where citizens withabove-average income become eligible forassistance due to crushing health care bills.

O-CHIP also provides for audits of those

who apply for assistance with long-termcare. Long-term care is notorious for ma-nipulation, much of it legal under currentlaw, to make taxpayers pay for servicespatients could provide for themselves.

However, O-CHIP will tighten many ofthese provisions. A family will not be able tosimply hire skilled professionals to manipu-late the system to protect an estate. This isan unfair process which taxpayers who maynot have a prospect of accumulating anestate are paying taxes to support. O-CHIPwill have the state aggressively pursuerecoveries from estates and diligently reviewapplications for assistance to identifyinstances of abuse.

Provide needed long-term care.Once citizens become eligible for Medi-

care, the cost of their care is for the mostpart federalized. The one major exception isnursing home care and or care provided tothose living independently at less cost to thetaxpayer.

While the needs of uninsured childrenseem to elicit greater attention, the cost ofcaring for those in their last years of life isthe most expensive part of the Medicaidprogram.

Furnish nursing home benefits.O-CHIP would generally retain existing

nursing home services but with severalprovisions designed to help families whohelp the state control costs and preventabuse of the system.

O-CHIP would provide for a more seam-less eligibility system, avoiding the spec-tacle of elderly individuals making specialprovision to impoverish themselves to becomeeligible for Medicaid, even if they may havemore than limited income and assets.

Continue home and community-based care.Many senior citizens can avoid going to a

nursing home if they can receive someassistance with everyday living. Accordingly,home and community-based care programsdesigned to permit those formerly bound fornursing homes to live independently aregrowing in popularity.


These programs dispatch a worker to anolder adult’s residence to assist with tasksessential to helping the person live indepen-dently. These may include bathing and otherhygiene, cleaning and housekeeping, andshopping and similar tasks essential toeveryday life, but which are beyond what wenormally think of as medical care. As aresult, the older adult can often continue tolive independently when they would other-wise need to be in a nursing home.

Policymakers have found that on a case-by-case basis, it is less expensive to providesuch home and community-based care thanto pay for round-the-clock nursing homecare. While the difference in cost varies,depending on the level of service provided,home care is invariably less than the cost ofnursing home care.

In addition, home and community-basedcare is usually popular with the participants.The older adult receives assistance withburdensome and sometimes difficult choreswhile enjoying an independent lifestyle.Many older adults also value the simplehuman interaction of a visit by a homehealth worker.

Most older adults value their indepen-dence and want to avoid living in a nursinghome if at all possible. This presents adifficult challenge for the policymaker. Thestate will provide free nursing home care toan individual who qualifies. However, mostolder adults will do whatever they can toavoid living in a nursing home. They aretherefore unlikely to seek nursing homeassistance unless they have no choice.

Home and community services are an-other matter. Here, the government offers aservice highly valued by recipients. Thenumber of people desiring these serviceswill greatly exceed the number of peopleseeking nursing home assistance. The statemust take care to limit home and communityservices to those who would be in a nursinghome at state expense without such servicesor it must prepare to commit significantlygreater outlays to fund the program.

Another factor that complicates therelationship between nursing home careand home and community-based care is thathome and community care is effective in

delaying the need for nursing home ser-vices. When the individual then deterioratesto the point where nursing home care isinevitable, the cost of caring for the indi-vidual in a nursing home will probably behigher.

Home and community-based care canprovide a better quality of life for olderadults who want to maintain their indepen-dence. It is also much less expensive thanpaying for nursing home care. The stateshould use the home and community-basedoption as an alternative to nursing homecare whenever possible, but take care toavoid the creation of a new entitlement withfar greater appeal than a nursing homestay.

The popularity of home and community-based care makes it especially important forthe state to adopt strong policies to preventasset transfers and similar maneuversresulting in state-provided free care forthose able to provide for themselves.

Place more emphasis onwellness and prevention.

Many observers are encouraging govern-ments to enact far-reaching wellness andprevention programs. While such ap-proaches may have merit, no one wants tobe healthy any more than the patient. Thepatient’s employer, wanting to get produc-tive output in return for the wages andbenefits for which it pays, also has a keeninterest.

Accordingly, O-CHIP focuses upon givingemployers greater latitude to act in theirown self-interest in promoting wellness andprevention among their workforces. Othersteps included in O-CHIP will allow apatient greater constructive interaction witha wellness and prevention expert: his or herown personal physician. Without a largeincrease in the size of government, weshould expect to see improved health on thepart of the Oklahoma population as a result.Individual Oklahomans, who care moreabout their own health than any governmentagency will see to it.

The state may consider sponsoring publicservice announcements that encourage


viewers to discuss the preventive servicesrecommended by the U.S. Preventive Ser-vices Task Force. Once again, the personwith the greatest interest in preventingdisease is the patient. Whatever role thestate assumes, it need not be extensive if webase our system upon free market principles.

Encourage employer-sponsored andindividual wellness programs.

Some observers encourage expandingthe population eligible for Medicaid toprovide more preventive care and thusarrest the development of serious diseaseand costly treatment. However, studiesindicate that traditional Medicaid expansiongains little in the way of more preventivecare. We will need to look elsewhere tomake the progress we are seeking.

At present, many employers are reluctantto endorse specific wellness activitiesbecause of the threat of litigation overvendors or activities it chooses for employ-ees. O-CHIP would create a safe haven forany employer who provides assistancethrough any facility licensed by the Depart-ment of Health.

In addition, O-CHIP would specificallysupport employers who refuse to hire pro-spective employees solely on the basis thatthey smoke. They would be able to dismisscurrent employee smokers with appropriatenotice. O-CHIP would encourage the Insur-ance Commissioner to seek appropriateadjustments in group health insurancepremiums for employers taking such action.

Create safe harbors for employersencouraging wellness and fitness.

Oklahoma employers are doing more topromote wellness and fitness among theiremployees. While employers find healthprograms a good way to promote teamworkand improve working relationships, they seecost benefits as well. Healthy employeescost less to insure, take less sick leave, andare more alert on the job. Many employersconclude that the cost of providing fitnessand wellness programs is more than offsetby benefits to the bottom line.

Some employers do not offer fitnessbenefits for fear of abusive lawsuits. If we

can remove the specter of multi-million-dollar judgments from dubious claims, moreOklahoma businesses would becomeactively involved in promoting wellness andfitness among their employees. It is not thegoal to require that every Oklahomanexercise a certain amount each day. How-ever, if employers find they can be moreproductive with a fit workforce, we shouldhelp them promote an activity that is benefi-cial to both personal health and profits.

Ensure Oklahoma has enoughdoctors and other professionalsto meet future needs.

Assure adequate reimbursement tohealth care providers.

To control rising health care costs, somebudget analysts offer a simple solution: cutprovider fees. If we reduce payments by onethird, we certainly save money on paper.However, we soon find those we depend onto provide services may cut back.

We can then institute some “traps” tomake providers “play,” even with inad-equate pay. These methods rarely work forextended periods and may even driveproviders to other states offering morefavorable environments. Those who dependon Medicaid increasingly find that whenproviders are squeezed, they must drivefarther for care, endure longer waits, andeven find some therapies rationed.

The author is a former Director of Financefor the State and is familiar with this tech-nique, knowing how beguiling it is when thebudget deadline looms and the budget stilldoesn’t balance. However, traps rarely workother than in the very short term, and eventhen, with some negative consequences.

Students of economics will recognize thesimple laws of supply and demand at work.Yet some observers seem to think that healthcare is different. These observers believehealth care is somehow magic and defiesuniversal economic principles.

The author rejects that line of reasoningand, in fact, believes many problems withhealth care financing today are caused byour refusal to recognize that the economics


of health care are like those for other goodsand services. Market clearing mechanismscan work quite well if we allow them to do so.

O-CHIP throws the issue of providerreimbursement rates into the lap of provid-ers, patients, and insurance companies,where it belongs.

The state will no longer set rates whichthen cease to be a matter of direct conten-tion between the state and its health careproviders. The objective is to pay whatproviders require to provide the servicesconsumers will purchase.

However, the state may need to considerrestrictions on the ability of providers toinclude non-health “freebies” with their care.This allows them to bid up costs by essen-tially bribing Medicaid beneficiaries to payhigher fees and effectively kick back some ofthose fees in the form of non-health benefits.For instance, an enterprising insuranceentrepreneur might offer 100 gallons of freegasoline with each health insurance policyas an inducement to buy his insurance.Such an approach by providers wouldthreaten the effectiveness of the provision toallow Medicaid participants to make per-sonal withdrawals from their PHAs.

A related issue is the practice of someproviders to give larger discounts from theirstandard charges to those with insurance.Predictably, some are calling for regulationsto deter this practice. The trial bar is againstirred to exert itself on behalf of those itconsiders offended.

We should realize that insurers and othersperform a service to their customers whenthey negotiate a reduced price for theirmembers. We should be careful not toembrace regulations that would halt thispractice, resulting in higher costs for all. Asystem in which insurers publish their pricesand the prices they have negotiated for theircustomers provides needed transparency.

We should also realize that hospitalfinances must consider not only the feecharged, but the amount of the chargesultimately collected. Several O-CHIP provi-sions will reduce the number of uninsuredand help hospitals collect legitimatecharges more easily. O-CHIP will not onlylead to reasonable rates for hospitals but

also to more realized revenue, importantrelief for institutions struggling to keep theirdoors open.

Help rural Oklahoma attract neededphysicians and other providers.

Educate health professionals in areas ofgreatest need.

Many observers see a serious shortage ofphysicians and other health professionalson the horizon. Some rank Oklahoma asone of the states likely to experience an evengreater need than the country as a whole.Many rural communities are already strug-gling to attract and retain physicians.

One solution to combat this shortage is toexpand the College of Medicine and theCollege of Osteopathy to graduate moredoctors. However, only about one-half of OUMedical School graduates remain in Okla-homa to practice after graduation. Thenumbers for the OSU School of Osteopathyare higher, but a significant percentage stillchooses to practice in another state.

Rather than expand the number of stu-dents alone, Oklahoma should look at otheroptions. Studies show that a high number ofnew physicians begin their careers wherethey served their residency. Placing moreresources into better residency programsmay be superior to simply graduating morestudents.

We may also gain some efficiency in theway physicians practice. Some have notedthat any newly created slots for new medicalstudents will likely be filled by students whowould not be admitted today. Oklahomamay risk diminished quality in its doctors ifwe simply increase the number of newmedical students.

Rural communities face unique chal-lenges. Many, already fighting economicdecline, find it difficult to attract and retainphysicians. These Oklahoma communitiesmay also face shortages in such areas asnursing, pharmacy, dentistry, optometry, etc.The changing demographics of our patientbase and our workforce indicate laborproblems throughout the health care fields.

In an attempt to gain a better understand-ing of the attitudes of medical students


toward practice in Oklahoma, and espe-cially rural Oklahoma, OCPA conductedinformal interviews with students makingdecisions about their futures. New insightsgained provided some understanding ofstudents’ willingness to enter the medicalfield in the first place and their attitudesabout the possibility of practicing outsidethe metropolitan areas.

We met with seven students at the Univer-sity of Oklahoma College of Medicine todiscuss their intended career paths andtheir willingness to consider practicing inOklahoma and especially in rural Okla-homa. In addition, we interviewed 20 under-graduate honor students at OklahomaChristian Universityconcerning theirattitudes toward themedical profession.

The majority ofthe 20 undergradu-ates at OklahomaChristian hadplanned to pursuemedicine at somepoint, and six areplanning to apply for medical school admis-sion. In addition to these six, one studentplans to become a pharmacist and a secondis considering a career in optometry. A thirdis looking at graduate studies in publichealth, perhaps combined with a PA pro-gram for use in foreign missions.

Several issues came up repeatedlyamong those who elected not to pursue acareer in medicine. The long period of studyrequired was a major issue raised by some.A concern about the ability of a practicingphysician to have enough family time wasanother. The ability of a spouse to find aprofessional opportunity was a consider-ation when the students were asked aboutthe possibility of becoming rural physicians.

Each student is on a distinctive odyssey.Deciding upon a career path is a highlyindividualized process and many of thestudents’ comments were profoundly uniqueand personal. Still, some patterns emergedfrom the discussion.

Several of those heading to medicalschool had a mentor and/or other exposure

to medicine that weighed heavily in theirdecision making process. Conversely, somestudents not considering a career in medi-cine said they received no encouragement totake courses in biology or chemistry in highschool, nor did a guidance counselor orteacher ever encourage them to consider ahealth care field as a career.

The medical students ranged from 2nd to4th year students. Though they have alreadydecided on a medical career, some have yetto settle on a specialty. Their commentsproved interesting, especially with regard tothe possibility of a rural practice. Most wereconsidering Oklahoma because of a combi-nation of family relationships, general

familiarity with thestate, and the low costof living.

However, severalstudents citedOklahoma’s failure toenact meaningful tortreform legislation as anegative factor. Allwere familiar with theissue and found it

discouraging to contemplate a legal processwhere they are not confident that decisionswill be just or fair. The added cost of highermalpractice insurance premiums and thedistraction of defending oneself with per-haps unwanted notoriety are hardly factorswhich make Oklahoma attractive.

While most of the medical students seethemselves eventually practicing in Okla-homa, the possibility of practicing in ruralOklahoma was less appealing. This wasespecially discouraging as some of thestudents had previously intended, or at leastwere willing to seriously consider, practicingin a rural area. Several factors persuadedthem to head in a different direction.

The lesser degree of professional collegi-ality in rural communities where fewerphysicians practice was mentioned. Theinability to realistically pursue certainspecialties in a rural setting was also aconcern. In addition, some wondered aboutemployment prospects or other opportunitiesfor a spouse who is also a highly skilledprofessional. However, the biggest issue

O-CHIP providesassistance to rural

hospitals inseveral ways.

with rural Oklahoma among the medicalstudents in our discussion was the quality oflife of a rural physician — or their percep-tion of that life.

Concerns extend beyond long hours andlack of relief from being on call almostcontinuously. Many noted that physicianshave no anonymity in a smaller community.

The experience related by one medicalstudent during a rural rotation is instructive.The local newspaper published the medicalstudent’s picture shortly after he arrived intown and people began actively seeking himout for advice during off hours. One evening,the student went to a local track to work out.He admitted that one reason he selected thetrack was because his cell phone would notwork there and he could thus avoid havingto take calls.

However, just as he started to run, he wasapproached by a local resident who recog-nized him from the earlier newspaper photoand began quizzing him about a personalhealth issue. While the student said herealized that his responsibility as a physi-cian is to be available to patients and assistthem, he found the constant attention andpublic persona unappealing.

The medical students also commented onprograms offered by the Physician Man-power Training Commission (PMTC). PMTCoffers to help defray some of the costs ofmedical school in exchange for a graduate’scommitment to practice for at least a time ina rural area. However, students must committo the program before most have made adecision on a medical specialty.

One program includes a “claw back”provision where a student must pay backthree times the amount of the original loan ifhe or she doesn’t honor his or her commitmentto practice in a rural setting. Many feel thisis too great a risk to consider participating.

Also, many students change their ideasabout how they want to specialize aftercompleting their rotations. They fear beinglocked into a field that they later find is nottheir favorite. They don’t want to have tomake such a commitment which carriessignificant penalties. Most, even someotherwise open to considering a ruralpractice, look for other ways to finance their

medical education.While such informal interviews do not

represent a scientific survey, they do provideinsight into the thinking of bright youngpeople making career decisions and deci-sions about Oklahoma today.

Accordingly, O-CHIP includes severalprovisions to ensure that trained health careprofessionals are available to meet futureOklahoma needs.

Grant scholarships to students likely topursue health careers in rural Oklahoma.

O-CHIP provides for reform of existingprograms as well as new approaches toattracting outstanding students into healthcare professions.

Reform existing programs.O-CHIP will make 3rd and 4th year medical

students eligible to participate in PMTC loanprograms. It would also make the penaltyfor students who enroll in the 1st year only120% of principal plus interest for failure tocomplete the program so long as the studentpractices medicine full time someplace inOklahoma. These changes are designed tooffer more flexibility to medical students whomay not otherwise be ready to participate inthe programs immediately.

Establish funding for a new scholarshipprogram.• O-CHIP will divert 0.2% of Medicaid

expenditures into a program that allowseach county to contract with a localhospital or hospitals to offer scholarshipsin return for service following graduationand certification. O-CHIP would allocateone-half of the funds evenly on a percounty basis and one-half according tothe number of Medicaid participantsresiding in each county.

The program provides a small subsidyto ensure that professionals are availablein future years to provide services toMedicaid recipients. The funding formulatargets funds to the areas of greatestMedicaid needs.

Areas with higher Medicaid populationsobviously need assistance. Rural areasface special challenges in attracting


health care professionals, as alreadynoted in this section. In addition, ruralareas in Oklahoma tend to have higherpercentages of Medicaid participantsamong their residents.

O-CHIP puts money where it may beused most effectively by channeling aidthrough a local hospital. A local hospitalwill understand local needs and havebetter knowledge of local students thanan official in Oklahoma City.

O-CHIP engenders more communityawareness of needs and career opportu-nities by using the local community’sinstitutions. O-CHIP provides hospitalsthe ability to craft tailored programs tomeet unique needs rather than having todepend solely upon PMTC.

Hospitals in smaller towns would bemore likely to sponsor prospective familypractitioners and general surgeons.Larger hospitals in urban areas couldoffer scholarships to those pursuingneeded specialties. Hospitals would beallowed to supplement any scholarshipsoffered with their own funds so long asthey complied with scholarship rules.

At the same time, the county govern-ment provides oversight on the hospital’sadministration of the program.

• At its option, the local hospital couldcontract with PMTC to administer itsscholarship program for which PMTCcould charge a reasonable fee.

This provision allows a hospital to seekoutside assistance if it does not want toadminister its own program.

• The local hospital would select a studentfor the program who is studying full timein a health care field including medicine,dentistry, optometry, pharmacy, anddietetics. Students studying to becomemental health professionals would alsobe eligible. At its option, the hospitalcould select a student pursuing a degreeas a physician assistant, or in nursing,physical therapy, or other non-graduateprogram. However, students studyingbusiness, law, etc. would not be eligibleeven if they plan careers in health care.

• Any student accepted into a health careacademic program would be eligible,

including out-of-state students. However,a non-resident student would have toattend school in Oklahoma.

This provision gives local hospitalsmaximum flexibility to meet local needs.The important thing is not where thestudent getting the scholarship is from,but where the student will practice aftergraduation. This will allow a niece,nephew, grandchild of a resident, aformer resident, the spouse or in-law of aresident, or someone else known to thecounty to be eligible so long as they havean interest in pursuing a health careprofession in the county.

• The scholarship would cover all tuition,fees, and books, and provide an allow-ance for living expenses while a studentis in school.

The program must be generous toattract students and overcome existingobstacles.

• The student would provide eighteenmonths of service in return for a full yearof educational expenses. Residencywould not count as service provided, norwould the student receive additionalassistance. This approach is similar tothe ROTC program that has worked wellfor the armed forces.

• The hospital would be responsible for allhealth care needs of the county, not justphysicians and nurses, but also dentists,optometrists, pharmacists, etc.

In larger counties with multiple hospi-tals, there is less likelihood of shortagesof dentists, optometrists, pharmacists, etc.The need for a local hospital to takeresponsibility for areas normally outsideits purview would be likely in smallcounties with only a few health careprofessionals.

• In the case of a county without a localhospital within the county, the countywould be permitted to contract with ahospital outside the county to spend itsallotment in return for maintaining accessto health care services.Counties without hospitals still have

Oklahoma citizens with health care needswithin their borders. Someone will have tomeet those needs. This provision would


allow a county without a local hospital tolook outside its own borders to make surethat a non-county hospital would be atten-tive to the needs of citizens living in a countywithout a hospital.

Provide relief for rural physicians.O-CHIP would provide a subsidy up to

$75,000 per year to a group of three or morerural hospitals that band together and addsome of their own money to hire or contractwith a physician to provide relief on aregularly scheduled basis to physicians oncall in their communities. This measure isdesigned to provide relief from demandingschedules that prevent many prospectivedoctors from even considering a rural practice.

As mentioned during our survey, thedemanding pace of medical practice andthe challenge of maintaining a vibrantfamily life is a major deterrent for manyprospective doctors, particularly in ruralareas. The job of a relief physician will itselfbe highly demanding and may not attract awilling provider for more than a relativelybrief period.

Explore greater utilization of physicianassistants (PAs) and telemedicine.

One alternative to increasing the numberof physicians is to make better use of theirtime. For this reason, more attention is beingplaced on employing physician assistants.O-CHIP would direct the Health Care Au-thority to conduct a study of how hospitalsand physicians can optimize use of PAs andrecommend steps for Oklahoma to take intraining additional PAs.

Long considered by some policymakers tohold significant promise for helping belea-guered rural health professionals,telemedicine at last seems to be reachingcritical mass, thanks to the efforts of theOklahoma State University Center for HealthScience. Telemedicine can provide neededconsultation by specialists to the patient.This approach holds promise for improvingthe quality of care available in a rural areaand assisting rural physicians.

Emphasize rigor in high school curricula.Oklahoma has debated increasing the

rigor in school curriculum for several years,and some progress is being made. As theinterviews with undergraduate honor stu-dents indicated, we may not be exposingcapable students to the coursework neededto pursue a medical career. The subjectdeserves serious debate apart from anyimpact on health care and is not furtherdeveloped here.

Consider the potential impact of tortreform on cost and quality of health care.

Consider the impact of tort reform.Tort reform is a much discussed topic in

Oklahoma. The existence of what manyproviders consider a system of “jackpotjustice” has led some physicians to withdrawfrom practice, especially those serving high-risk and poor patients. As a result, manypatients have difficulty finding the medicalservices they need.

The purpose of this proposal is not toaddress tort reform. We would note, how-ever, that change in the system wouldundoubtedly reduce health care costs byincreasing the supply of providers in the stateand curtailing unnecessary testing as part ofa “defensive medicine strategy.” Tort reform,regardless of what happens with Medicaid,is likely to remain a hotly debated topic.

Safeguard quality.The state may restrict frivolous lawsuits or

take other steps to restore balance to thelegal arena, as OCPA has recommendedelsewhere. We should explore whether othermeasures would be desirable to ensurehigh-quality care for patients. The statecould consider the following:• Annual published audited performance

reports for hospitals and nursing facili-ties, as discussed below.

• More rigorous continuing professionaleducation for all health care profession-als holding state licenses.

• Periodic peer reviews of health careprofessionals not employed by hospitalsor others subject to performance audits.The peer review itself would not bepublic, but disclosure would be made thatone had been performed and by whom.


Help patients become betterconsumers.

O-CHIP takes steps to ensure that Okla-homans not only have access to health care,but to quality health care.

Provide audited performance data toconsumers.

The state will require a performance auditof each Oklahoma hospital and nursinghome with the findings made public. O-CHIPwill direct the Health Care Authority, inconsultation with consumers, insurers, andproviders, to establish meaningful, consis-tent reporting formats for hospitals andnursing homes.

For example,many observersbelieve that ahospital shoulddisclose infectionrates for its patientsaccording to thestandards of theCenter for DiseaseControl. Already,Pennsylvania is moving forward with such arequirement using unaudited data.7

In establishing the reporting formats andthe data elements to include in the reports,the state must take care to avoid givinghospitals an incentive to decline high-riskpatients. High-risk procedures are morelikely to fail. We should not want to subtlyencourage hospitals and physicians todecline high-risk patients because anunfavorable outcome would negativelyimpact a performance report.

The information submitted by eachhospital and nursing home would be avail-able to the public online and also in pub-lished form. Such access allows individualscontemplating services from the respectivehospital or nursing home, as well as appro-priate government agencies, to review thedata for themselves.

This empowers patients to obtain and actupon the information needed when selectingthe best health care option for themselves.Most of the required data are alreadyprovided in reports to the state agencies andthe Department of Health and Human

Services (DHHS) at the federal level.The information would also be placed in

a performance report following a standardformat and audited according to generallyaccepted governmental auditing standards(GAGAS) by an independent auditor. Inmost cases, this audit would be performedin conjunction with the audit of the hospitalor nursing home’s financial statements.Unless otherwise required, the institutionwould not be required to publish its finan-cial statements.

The hospital would publish its perfor-mance report with the auditor’s opinion. Thereport would include the comparative datarequired, accompanied by an auditor’s

report. The auditor willalso report on whetherthe hospital has con-trols in place that givereasonable assurancethat patients will bebilled solely for workperformed and atappropriate rates.

In a similar vein, theOklahoma Hospital

Association is promoting a much neededproject among its members to bring greatertransparency to the pricing of services.While recognizing the need for availableinformation about pricing to help consumersmake prudent choices, O-CHIP is presentlysilent on this issue and awaits the results ofthe Hospital Association’s admirable effort.

O-CHIP also envisions a very limitedreport or brief statement from physiciansindicating whether they subscribe to certainprotocols or procedures outlined by theHealth Care Authority. Included is “evi-dence-based medicine.” The physicianreports would be available but not subject toaudit.

This provision may present an opportunityfor insurers to provide an important service.At present, much of the public doesn’tconsider a health insurance policy to beworth the money, especially a younger,healthy individual buying at non-grouprates. In the current environment, those withinsurance not only receive assistance inpaying their bills, they often have lower bills


By deregulating the health-insurance market, O-CHIP

will significantly lowerhealth insurance premiums

for most Oklahomans.

due to the insurer’s ability to negotiatefavorable rates.

Some observers have decried the largedisparities often found between the amountan insurance company pays for health careservices and the amount an individualwithout health insurance pays for the sameservice. The author is not defending everypricing practice of every hospital. However,in our economy, we commonly recognize theadvantages of volume purchasing.

By establishing networks with negotiatedprices, the insurer performs a valuableservice for policyholders. Their policyholderbenefits even when they haven’t yet met theirannual deductible. If the networks can beestablished on not only price but alsoquality, the insurer performs an even morevaluable service. O-CHIP is contemplatingthe traditional insurance function and thefunction of a buying club where membersknow they are getting a good price from acapable provider if they stay in the network.

Insurers can also provide a valuableservice by giving their policyholders accessto information on other health care providersas a value-added feature of their product.Insurers may expand on the informationprovided through the single audit processfor hospitals and nursing homes explainedin the next section.

Inaugurate single audits for hospitalsand nursing homes.

Since hospitals must have their financialstatements examined, they are increasinglybecoming audit targets. Hospital financialstatements are carefully examined andsubject to audit by the DHHS InspectorGeneral. Under DHHS contract, oversight ofthe medical necessity of care is provided bythe Oklahoma Foundation for MedicalQuality.

Concerned that some providers aremaking improper charges, DHHS plans tounleash recovery audit contractors onhospitals across the country. Some hospitalsalready note the inordinate amount of time

required by audit concerns. The addedpresence of what is essentially a bountyhunter will add to that burden. The emerg-ing situation is not unlike what once existedwith audits of state and local governments.

Before Congress passed the Single AuditAct in 1984, state and local governmentswere besieged by multiple auditors. Theywere subject to audit by every federalagency that provided them with a grant.Each grant carried compliance rules, andthe feds rightly wanted assurance that theirgrant recipients were adhering to thoserules.

The system also entailed much needlessduplication, with auditors from differentagencies reviewing the same document. Infact, situations arose where auditors foughteach other for access to the same documentat the same time.

The Single Audit Act ended duplicationbut also ensured that all federal grants weresubject to audit. Under the Act, only oneaudit is performed. That one audit examinesthe financial statements, reviews internalcontrols, checks compliance with applicablerules and regulations, and provides reportsupon which all interested parties subse-quently rely.

O-CHIP would direct the Health CareAuthority to seek a waiver whereby allauditing of a hospital or a nursing homethat so elects would be performed by anindependent auditor as part of a singleaudit. The auditor would report on perfor-mance data and whether effective controlsare in place to assure that patients receiveproper billing.

Medicaid would pay for the cost of theadditional audit from earmarked funds asoutlined in a previous section. Consumerscan rely on audited data the hospitals andnursing homes publish. By performing theaudit in conjunction with other audit work,O-CHIP significantly reduces the cost andassures the federal government that theauditing will be accomplished.


Addressing Related Issuesabsent action by the patient, has no accessto the files of the patient’s former physician.

To address this critical need, the statewould contract with a private company tomaintain a medical database. Patients couldthen make sure that all their health careproviders have immediate access to accurateinformation about their medical history,including current treatment regimens. For allparticipants in the Medicaid program wishingto participate in the central database, the newMedicaid program would pay for entering andstoring medical information.

Access to the database would be limited toregistered health care providers from whomthe patient seeks services. The system woulddeny all others access, even with thepatient’s permission. Just as society hasacted to protect the privacy of communicationbetween physicians and their patients, thedatabase would not be available for employ-ers or insurers, or in court actions.

Employers like Wal-Mart, Intel, Dell, andBritish Petroleum are moving to establishemployee medical databases to improve thequality of services to their employees. Sev-eral vendors, from which the state couldrequest proposals, have already developedcompeting products.

Expand e-prescribing.Some observers estimate that as many as

7,000 deaths annually would be prevented byeliminating medication errors.8 The softwareto eliminate most of these errors is available.O-CHIP would direct the Health Care Author-ity to promote its use and seek federal grantsfor physicians, dentists, and pharmacistswho would otherwise find the technology’sadoption too costly. O-CHIP would providestate money to supplement any amountsreceived from the federal government.

Physicians and pharmacists, who may behesitant about adopting an unfamiliarsystem, would obtain partial immunity fromdamage claims for negligence in using e-prescription practices.

Create a true health information exchange.The University of Pittsburgh Medical

Utilize available technology.Many knowledgeable observers believe

our health care delivery system can achievebetter results with the improved applicationof information technology. The federalgovernment provides some grants to hospitalsand other health care providers to developnew software and integration techniques.

O-CHIP will leverage these resources byproviding a state subsidy of 20% of anyfederal cash grants received for informationtechnology development. This will allowOklahoma providers to bid for projects theymight not otherwise afford.

For instance, an Oklahoma hospitalintending to put $400K of its own resourcesinto a project to obtain a $600K federalgrant would have to put up only $280K. Thestate would contribute $120K (20% of thefederal $600K). Any health care providerreceiving such funds would agree to makeany products developed available to otherOklahoma health care providers at cost.Appropriate regulations to keep the Okla-homa program consistent with federalrequirements might be needed.

Improved application of informationtechnology holds significant promise forimproved health care through accessiblepatient databases, e-prescribing, and healthinformation exchange systems. Each isconsidered below.

Encourage use of an ccessible patientdatabase.

As health care services have becomemore complex, one problem a patient oftenfaces is lack of access to personal informa-tion critical to a physician’s informed deci-sion making. Privacy concerns have madeproviders reluctant to forward information toother professionals providing services to thesame patient.

Meanwhile, nearly every individual facesthe possibility of needing urgent care in alocation where the only source of care isfrom professionals unfamiliar with thepatient’s medical history. Patients who movefrom one location to another may be sur-prised to learn that their new physician,


Center (UPMC) appears to have successfullypioneered the integration of health informa-tion systems with actual treatment. UPMChas developed systems to allow informationto follow the patient through the system. Asreported, the goal is highly integrated,interactive delivery of patient informationthat moves with the patient.9

O-CHIP would provide funding for Okla-homa hospitals to adopt similar systemsand also to provide for exchange of informa-tion among providers when required.

Expand medical research.

The Health Care Authority would allocate1% of Medicaid expenditures for medicalresearch on disease and other conditionsdisproportionately afflicting Oklahoma’sMedicaid population (e.g., diabetes afflictsa disproportionate share of Native Ameri-cans). Research would be conducted by theOU Health Sciences Center, the OklahomaMedical Research Foundation, and possiblyother Oklahoma institutions.

Certain population groups are moreprone to particular diseases than others.This provision would assure that diseasessomewhat unique to Oklahoma’s populationwould receive the attention of researchers.Such conditions as mental illness andaddiction which particularly afflict low-income citizens would receive attention.

The Health Care Authority would deter-mine which diseases and conditions aremost common among the Medicaid popula-tion and contract with researchers to con-duct research on means to cure the diseaseor suppress its debilitating symptoms. Initialresearch monies would be allocated forthese purposes:• 20% to investigating ways to enhance the

role of public health policy in preventingdisease.

• 20% to investigating the effectiveness ofwellness and preventive care regimenswhich may include research in specialequipment dedicated to wellness andprevention efforts.

• 20% to investigating treatment for dis-eases to which Oklahomans are particu-larly prone (e.g., diabetes).

• 20% to investigating treatment for dis-eases that disproportionately afflict low-income individuals (e.g., mental illness).

• 20% to furthering understanding and inves-tigating treatment for diseases where Okla-homa research is now considered cuttingedge on a national level (e.g., lupus).O-CHIP would also direct the Health Care

Authority to consider means of incorporatingvalidated research findings into treatmentprotocols and disseminating the informationto providers.

Coordinate health careprograms.

Oklahoma should be able to improve thequality of its health care programs throughbetter coordination. In addition, severalopportunities to save money present them-selves. The state can fund O-CHIP in part bycapturing and redirecting those savings.

Investigate the possibility of partneringwith other agencies providing healthservices.

The Indian Health Service (IHS) seems toface a perpetual funding crisis. Senator TomCoburn recently pointed out that per capitahealth care expenditures by the IHS areabout half those for federal prisoners.10

Some tribal leaders admit that they aresimply unable to meet the health care needsof their members.

Without adequate health insurance, manytribal members are unable to access qualityhealth services that may be availablenearby. At the same time, where available,facilities providing services to non-tribalmembers at a profit would gain additionalresources to pursue their mission.

Few diseases are limited by racial bound-aries. It makes little sense to require a tribalmember to bypass non-Indian facilitiesclose to home to receive care at an IHSfacility farther away. At the same time, anon-tribal member living near an IHS facilityis unable to use it even though the facilitycould make a profit on the service that itcould then use for outreach to tribal members.

O-CHIP directs the Health Care Authorityand the Insurance Commissioner to meet


with tribal leaders and others to explore thepossibilities of greater cooperation betweenstate and tribal programs. The state shouldattempt to fashion its health care reforms ina manner that respects tribal sovereignty andsupports the efforts of Oklahoma tribal lead-ers to improve health care for their members.

Coordinate and, where possible,integrate state health care programs.

Oklahoma funds many programs topromote public health and particular healthservices. O-CHIP calls for better of coordina-tion of some of these programs. It willrequire future study to determine how theseprograms might be more closely aligned orconsolidated for mutual benefit.

While O-CHIP calls for repositioningsome health care programs, it is beyond thescope of this proposal to recommend acomplete realignment. However, the stateshould consider such an effort which isconsistent with O-CHIP’s goal of improvinghealth care for Oklahomans.

The federal government provides assis-tance to the states in the form of “dispropor-tionate share “ (DSH) payments. Thesepayments offset part of the cost of carehospitals provide for which they are notcompensated. Under O-CHIP, the amount ofsuch uncompensated care should declinedramatically. The state would attempt toapply most or all of its DSH payments tocover the cost of its revamped Medicaidprogram.

Similarly, the federal government pro-vides funding for federally qualified healthcenters (FQHCs) to divert the uninsured fromhigh-cost emergency rooms to lower-costclinics. As the number of uninsured de-creases, the need for separately subsidizedFQHCs will decline. Accordingly, the stateshould attempt to fold FQHC subsidies intoits revamped Medicaid program.

Use TANF grants to help fund health carefor the poor.

The medically needy are defined togenerally include those eligible for TANF.Under O-CHIP, TANF recipients wouldreceive additional funds for personal use.First, all Medicaid recipients receive a tax

credit that eliminates any income tax forwhich a low-income family is liable. Second,the PHA, to which Medicaid recipients wouldhave access, allows participants to convertsome of its excess funds to personal use.

Since O-CHIP replaces some funds nowflowing through TANF, it is appropriate toallocate some TANF funding to O-CHIP.

O-CHIP requires participants to pass arigorous drug screening test at least biannu-ally. The particular test contemplated istesting the subject’s hair samples.

Drug screening will be administered aspart of the required physician visit. The testwill determine whether the subject has usedbanned substances during the 60–90 dayperiod preceding the test. In other words, toreceive the full benefit now available underTANF, a subject must abstain from drug usefor at least one 90 day period every twoyears. This requirement is consistent withTANF program objectives.

Improve county health services.A combination of state aid and county tax

revenue support the 69 of the state’s 77counties that operate a county health depart-ment.

Among the valuable services performedby county health departments are educatingthe public about important health issues,coordinating immunization programs toassure that children are properly vaccinatedagainst serious preventable diseases, andproviding or coordinating programs to fightthe spread of serious diseases. Two majorprograms that county health departmentsdeliver are Women, Infants and Childrenservices (WIC), and childhood immunizations.

While Washita County lacks a countyhealth department, the local hospital pro-vides WIC services and immunizations forcounty residents under contract with theDepartment of Health.

The Washita County approach utilizeseconomies of scale and improves the qualityof health care through greater interactionbetween patients and providers. A WICparticipant in Washita County needingadditional intensive services will be placedin the care of professionals currently provid-ing care at the hospital. The patient benefits


from a more seamless transition which leadsto improved results.

Under O-CHIP, more immunizations willbe covered by Medicaid and thereforeeligible for an increased federal match. Atthe same time, O-CHIP directs more re-sources to the center of a community’shealth care infrastructure, the local hospital.Accordingly, the state should consolidatecounty health departments into local hospi-tals wherever it promises improved servicesat lower cost.

In achieving these efficiencies, it is likelythat most county health department person-nel currently providing services could betransferred and employed by the localhospital. When this is not the case, O-CHIPwould provide a generous severance pack-age to any displaced workers.

Provide health care rationally toinmates.

The state may also realize savings inproviding health care for its prison popula-tion. Since inmates in state prisons are notMedicaid eligible, the cost of their care fallssquarely on state and local government.However, it’s possible for the state to provideadequate health care for inmates, realizesignificant savings, and simultaneously helprural hospitals remain viable.

To deliver health care services to inmates,the Department of Corrections generallyemploys its own staff of physicians andnurses working in clinics inside the prisons.Meanwhile, most Oklahoma prisons arelocated near rural hospitals with availablecapacity.

The state can realize savings and therural hospitals gain additional revenue if thelocal hospitals contract with the Departmentof Corrections to manage and staff prisonclinics. The state should address the redun-dancy of two clinics in close proximity whenthe state is strapped for funds to maintainprisons and keep rural hospitals afloat. TheDepartment of Corrections has negotiatedstandard fees with hospitals, a beginningwhich it should expand further.

The ruling of the Oklahoma SupremeCourt that counties are responsible for thehealth care of their inmates highlights a

similar problem. The most efficient way toaddress this problem is to encourage coun-ties to use local providers for inmate healthcare. A move toward county clinics withinthe jails will only lead to excessive costs.

Fully integrate mental health intocomprehensive health care delivery.

The Department of Mental Health andSubstance Abuse Services (ODMHSAS)provides an array of mental health servicesto Oklahomans through a network of com-munity mental health centers. By restructur-ing these activities, the state would makemore of them eligible for the new Medicaidcoverage and federal help with funding. Atthe same time, the state can improve thequality of its services to people with mentalillness.

The ability of modern medicine to effec-tively treat mental illness has increaseddramatically. Disorders considered debilitat-ing twenty years ago are now treated toallow individuals to live relatively normallives and contribute to their communities.With therapy and medication, more peoplewith mental illness are now holding respon-sible jobs and paying taxes.

Traditionally, Oklahoma’s model ofproviding mental health services has cen-tered on state institutions and mental healthcenters. Those who needed services werereferred to the appropriate location wherethey received treatment as resources permit-ted. The mental health effort was organizedaround ODMHSAS’s institutional framework.

O-CHIP would continue the transition thathas begun in Oklahoma’s mental healthsystem to a model centered on individualswith mental illness. Funded directly throughMedicaid, the patient would purchaseservices as needed from ODMHSAS or otherproviders. This change would qualify mostmental health services to individuals forfederal funding through Medicaid.

The key development that makes such atransition timely is the progress made intreating mental illness. In the past, peoplewith mental illness needed a caretaker tooversee treatment decisions. With properattention, many of those same people withmental illness can now make their own


As with Sooner Care, ODMHSAS mayfind it advisable to spin off some of itsactivities into the private sector. While O-CHIPdoes not mandate this, the progress O-CHIPbrings may necessitate such changes. Thestate should be prepared to assist its mentalhealth workers with such transitions.

decisions regarding their care. O-CHIPwould permit them to do so.

It is possible that some state jobs willdisappear as new treatment patterns re-place old ones. When employees are nottransferred to another job within ODMHSASor a private provider, O-CHIP would providean appropriate severance package.



How O-CHIP Achieves theObjectives for Health Care Reform

mental illness, cancer, etc. O-CHIP alsoprovides financial assistance to thoseunable to afford new improved ser-vices.

• Preserve and enhance health care mar-kets and let them heal the sick.– O-CHIP does no harm to a system that

works well for most Oklahomans. O-CHIPimposes few additional regulationswhile it removes many others. WhileO-CHIP provides consumers withhelpful information about providers’medical practices, it also allows experi-mentation based upon the professionaljudgment of a health professional inconsultation with the patient.

– Encourage the continued developmentof “miracle” drugs, “miracle” equip-ment, and new, effective procedures totreat illnesses afflicting Oklahomans.

O-CHIP does not rely on the importa-tion of patented drugs or other de factopatent infringements to control healthcare costs. It preserves the pipeline thatis bringing many dramatic innovationsto treat and cure disease.

– Provide a stable and predictablebusiness environment within whichhospitals and other Oklahoma provid-ers can pursue nationally recognizedexcellence.

The constant demands of developingbetter techniques for patient care andcharging appropriately for services area daunting business challenge. Thestate should not add uncertainty overuncompensated care and regulation tothat burden if we expect our providersto expand and enhance their services.O-CHIP provides the stability andpredictability needed.

– Encourage the greater use of data-bases and technology to reduce errorsand provide needed information tohealth care professionals on a timelybasis.

O-CHIP provides grant support to


This proposal began by enumeratingO-CHIP objectives. Now that the detailedproposal has been outlined, we would dowell to see if the proposal achieves theobjectives outlined. In this section, we willalso attempt to place into context somecurrent health care controversies.• Provide Oklahomans greater ability to

improve and maintain their own health.– Good health avoids costly health care.

In several instances, O-CHIP effectivelyencourages more responsible behaviorthrough participation in wellnessactivities and provision of preventivecare.

Employers who want to promotewellness with their employees will enjoylegal immunity if they utilize licensedfacilities. Medicaid participants canenjoy a portion of the savings they helpthe state generate if they obtain re-quired preventive care. These stepsshould lead to a healthier Oklahomapopulation with fewer uncontrolledchronic illnesses which lead to higherhealth care costs.

– Permit more interest in wellness byemployers and individuals.

Many employers are expressingstrong interest in wellness and fitnessprograms for their employees and canjustify the related expenditures throughfewer work days lost to illness and amore alert workforce. O-CHIP removeslegal barriers to establishing wellnessprograms. In addition, by allowingMedicaid participants to make wellnessexpenditures from a personal healthaccount, O-CHIP encourages Medicaidparticipants to engage in wellnessactivities.

– Remove barriers to more effectiveprograms for the chronically ill.

O-CHIP allows insurers and theirbusiness partners to profitably servethose with such chronic illnesses asdiabetes, auto-immune diseases,

“jump start” greater adoption of prom-ising information technology.

– Ensure the continued availability ofneeded doctors, nurses, pharmacistsand other professionals throughoutOklahoma.

O-CHIP provides aid directly tostudents pursuing health careers inexchange for service following gradua-tion. It also provides assistance tomake medical careers in Oklahomamore attractive to students. The stateconcentrates aid to those who willactually use their skills to serve Oklaho-mans for part of their careers.

O-CHIP also provides assistance torural hospitals for obtaining relief fromround-the-clock on-call demands foremergency room service.

• Assure that all can access the health caresystem with minimal damage to theeconomy.– Do not continue to distort the market for

health care services and insurance.Existing policies force up the cost of

insurance for most of our populationand drive many people out of theinsurance market. This happens whencosts from the sick are transferred tothe healthy and costs are spread onlyamong the healthy that obtain healthinsurance. Requiring hospitals totransfer costs from those without healthinsurance to those with insurance alsocontributes to the problem. O-CHIPcurtails these practices, thus reducingthe cost of health insurance.

We must keep in mind that govern-ments are by nature political instru-ments which base decisions on politicalconsiderations. For those who wantgovernment to be responsive to theelectorate, this is a good thing. Thesituation changes dramatically whendecisions become personal.

Most Oklahomans want to controltheir own health care. When the gov-ernment rations health care, as itinvariably must when contending withlimited resources and excessive de-mands, it must make rationing deci-sions based upon political consider-

ations. The desires of the individualmay conflict with the values expressedin the collective political will.

If we are going to have governmentcontrol health care, we should get onwith designing the best possible ration-ing system. OCPA is far from convincedthat government control is inevitable oreven desirable. Hence, this effort toreform. We should remove the marketdistortions found in health care to builda system that cares for the sick andcontinues to roll back the frontiers oftreatable disease.

– Address the needs of the poor and themedically needy directly.

O-CHIP does not further complicatean already complex system designed tohelp the poor. Rather, it identifies thoseneeding assistance in a consistentmanner, determines a reasonablemeasure of the assistance needed, andprovides it directly to the poor.

• Reduce health care inflation.– Facilitate greater consumer involvement.

O-CHIP presents consumers with newinformation about provider perfor-mance and encourages insurers tonegotiate advantageous pricing ontheir policyholders’ behalf. O-CHIP alsocreates a framework in which consum-ers benefit through making prudentchoices about their health care andrequires them to spend some of theirown dollars to execute those choices.

– Stop pouring money into ineffectiveprograms.

Despite the fact that traditionalMedicaid has consistently failed toachieve its advocates’ objectives, manystill want to expand it. While expansionmay lead to a net loss in the number ofuninsured, such progress will come witha price. Traditional Medicaid expan-sion will crowd out some private insur-ers, leaving a much smaller increase inthe portion of our citizens with healthinsurance than we might at first expectto result.

Fortunately, recent reforms approvedby the legislature and implemented bythe Oklahoma Health Care Authority


have begun pointing the state in a morepositive direction. O-CHIP attempts tobuild upon the progress we are making.

O-CHIP is put forward with the beliefthat we need to unleash the ability ofproviders, insurers, and consumers tobring a needed revolution in this mar-ketplace. O-CHIP gives insurers greaterfreedom to develop new products.Consumers are empowered to makeimportant decisions. Providers will findtheir ability to use creative skillsstrengthened. Providers will also dis-cover that they must pursue successfulcourses of treatment or face the disci-pline of the market.

• Assure that public health needs do notcontinue to bankrupt hospitals.– Remove barriers to greater insurance

coverage.Perhaps no aspect of the 2007 SCHIP

debate has received more attentionthan the high number of Americanswithout health insurance. O-CHIP ad-dresses this problem decisively. First,some background on this complexproblem.Medical care without health insurance— health insurance is a public good.

A common misunderstanding in oursociety is that people without healthinsurance cannot receive health care.This is simply not true. Unlike manypolicymakers who should know better,most of the uninsured understand this.

The author is not arguing that the carethe uninsured receive is always ad-equate or optimum, but it is care none-theless. The difference is the manner inwhich the uninsured receive their care.Almost everyone who shows up at ahospital emergency room receivesmedical treatment.

Another common misunderstanding isthat federal law requires hospitals totreat all comers in their emergencyrooms. Technically, this is not true.Emergency rooms are designed tostabilize and evaluate those whoappear. It is often as expensive toprovide an evaluation as to providetreatment. Therefore, a desperate

uninsured parent will take a sick childto an emergency room confident that aprofessional will see them.

However, the hospital that treated thesick child must recover the cost ofproviding that care. This creates aproblem because the one who mustcover these costs is the patient who actsresponsibly and pays his or her billsthrough insurance or other means.People without insurance literally pushsome of the cost of their care ontoothers.

Even healthy people have accidentsor develop illnesses that may lead toexpensive health care bills. If anindividual does not buy health insur-ance or maintain sufficient personalassets to cover a major medical event,he or she will push his or her costs ontofellow citizens who get sick.

When that fellow citizen with insur-ance gets sick, he and/or his insurer,will pay for the cost of the care receivedplus additional costs so the hospitalscan also recover lost income. Almostany Oklahoma community hospital thattries to eat the cost of all the care itgives away will have to close its doors.

Oklahoma law requires that anyonewanting to drive on Oklahoma roadsmust maintain an insurance policy topay for damages resulting from pos-sible accidents. This requirementprevents a driver from imposing thecost of an accident he causes ontoothers. In the very same way, someonefailing to obtain health insurance forcessome of the costs of that decision onothers.

Some argue whether state mandatesfor liability driving insurance are reallyeffective. That is beside the point.Everyone who can must provide for hisown care so the state can help thosewho can’t. Accordingly, this proposalcreates an environment in which cover-age will become nearly universalwithout imposing a legal mandate.Who are the uninsured and why don’tthey have insurance?

Before attempting to solve the prob-


lem of the uninsured, we should under-stand why some people don’t obtainhealth insurance. More than a superfi-cial look shows many reasons whypeople are uninsured. While this is farfrom a homogeneous population, wecan classify some of the major reasonsto provide more insight.

The most common means of gettinginsurance is through an employer-sponsored plan. By some measures,90% of those with health insurance arecovered through their employer. How-ever, for the self-employed, the unem-ployed, or employees of businessesthat do not offer health insurance(usually low-wage industries), theremay be impediments to obtainingcoverage. A well-crafted governmentpolicy could overcome these obstacleswith minimal damage to the overallhealth system or the economy.

Studies show that a major portion ofthe uninsured are only without healthinsurance for six months or less — 45%of the uninsured, according to onefederal study. Some recent studiesprovide a smaller figure, indicating thatmore of the uninsured are uninsured forlonger periods. The temporarily unin-sured may only lack coverage whenbetween jobs or perhaps starting abusiness. They may be in a probation-ary period with a new employer untilbenefits are conferred. COBRA haslessened some of these problems buthas not eliminated them.

This is still a major problem. A tempo-rarily uninsured person may have anaccident or contract a debilitatingillness during the uninsured period andincur substantial health care costs. If heor she is unable to pay for their care,those costs are almost always shifted tomore responsible individuals andtaxpayers.

For the majority, the cost of coverageis simply too high and a rational, self-interested decision is made to forgohealth insurance. These individuals orfamilies fall into three general catego-ries: the working poor, the chronically

ill, and “the invincibles.” We will exam-ine each category separately.

A low-income family without em-ployer-provided insurance may findthat basic living costs consume limitedresources, leaving nothing to buyhealth insurance or cover basic preven-tive health care. The family may alsoconsider that they can go to an emer-gency room in the event of a healthcrisis. They still receive some care, butlack access to a higher standard ofcare that would come through anongoing relationship with a physician.

Even if a member of a low-incomefamily has a job that offers healthinsurance, the cost of participation mayexceed the income left over after buy-ing food and housing and providing forother basic needs. The family may thinkit best to decline coverage.

The traditional Medicaid structurefocuses primarily on the low-incomefamily, many of whom qualify forMedicaid.

An individual with a chronic illnessfaces different problems in obtainingcare. Treatment for chronic illnesses isoften expensive and an indication thatfuture costs are likely. Accordingly, mostinsurers will deny coverage on anindividual policy to an applicant with achronic illness or restrict the coverageso aggressively that the policy has onlylimited value.

An individual suffering from a chronicillness may not suffer from low income.However, the cost of health care mayconsume or exceed an individual’sincome. The individual then makes arational decision to forgo a limitedinsurance policy or find that no insurerwill offer him or her coverage at anyprice.

The following example demonstratesthe situation:

Smith has an income of $15,000 peryear and health care costs of $500.Jones has an income of $50,000 peryear and health care costs of $40,000.Other things being equal, Jones, de-spite having three times Smith’s in-


come, has a more pressing need forhelp. After health care costs, Smith has$14,500 while Jones has only $10,000.

O-CHIP recognizes the need of theperson with a chronic illness to havecoverage. O-CHIP deregulates much ofthe health insurance market to provideincentives to insurers and providers todevelop new, more effective coveragesfor the chronically ill. Meanwhile,O-CHIP provides direct financialassistance to the chronically ill whoneed it to be able to afford those newcoverages.

The “invincibles” category encom-passes young adults who think they arehealthy. They don’t buy health insur-ance because it’s not in their budgetand they don’t expect to need it in thenear future. They consider themselvesinvincible.

The “invincibles” view almost any-thing they spend on health insuranceas excessive unless the underwritingcosts of a policy cover only the unlikelyevent of a serious accident or illness.Insurance regulations generally addcosts to the policies available for thisgroup to generate the resources to buydown the price of policies for morecostly groups.

According to the Census Bureau, 31%of the uninsured are between 18 and 24and 57% are between 18 and 34. Manyin this age group also have lowerincomes. A number of them have madewhat appears to be a rational decisionto forgo health care coverage becausethey don’t see the value for moneyspent. By contrast, only 15% of theuninsured are over 45.

As we see, the reasons why individu-als are without health insurance varywidely. A government policy draftedwithout consideration of the underlyingcauses won’t solve the problem of toomany uninsured and could make thingsworse.O-CHIP addresses each major causeof lack of health insurance.

A shrinking but still large share of theuninsured are only temporarily unin-

sured. Therefore, O-CHIP directs theInsurance Commissioner to work withprivate insurers to provide healthinsurance for a limited period of time.O-CHIP also provides subsidies toencourage such product offeringsinitially if the Insurance Commissionerthinks that is required.

O-CHIP addresses reasons the work-ing poor are without coverage byremoving categorical requirements forMedicaid and providing assistance tothose who currently find themselvesslightly above the coverage threshold.

When discussing insurance coveragefor the chronically ill, many immedi-ately opt to essentially “tax” the healthythat do obtain coverage — eitherthrough rating bands or forced partici-pation of insurers in “high-risk pools”— to subsidize lower premiums for theotherwise uninsurable.

While a chronic illness may notpresent an insurance risk, it doespresent a known cost. Current policymay provide the chronically ill withlower-cost insurance, but it also de-prives them of specialized coverage orservices that might be more valuable.O-CHIP provides for the development ofnew insurance products to provideinsurance to the chronically ill forunknown events and for services tohelp them manage their illness.

For instance, a product for a diabeticmight include a “hot line” to discusssymptoms, specialized medication, ordietary decisions. The hot line would bestaffed by people expert in diabetes. Aconsortium of an insurer, a pharmacy, aphysician, and perhaps a hospital and/or pharmaceutical company couldprovide the service.

Will such a service cost a diabeticmore than an existing policy not de-signed for a diabetic? Probably. O-CHIPwill consider costs and income inmaking an eligibility determination andprovide financial assistance to thosewho need it.

One difficulty is that many chronicallyill have managed as prudently as pos-


sible under the current system. O-CHIPwill provide for a transition in whichthose currently in a high-risk pool orbenefitting from rating bands wouldhave the option to remain where they are.

The last major group of the uninsured,the “invincibles,” contrast markedlywith the chronically ill. Just as insurershope to avoid the chronically ill, theycovet the “invincibles” because theypay more in premiums than they con-sume in benefits. However, policymakersshould ask if this may be the reason somany of them forgo health insurance.By avoiding the mistake of loadingother costs onto this group, O-CHIPcreates a market in which the“invincibles” will find it in their personalinterest to buy health insurance.

The best way to get this group insuredis to provide them with a product that isreasonably priced in accordance withtheir own personal needs.

O-CHIP does this by allowing thosewho buy insurance to bear only thecosts associated with their own likelyneed to use it. We shouldn’t treat theuninsured with contempt because of aperception that they are not doing theirshare for the common good. From theirviewpoint, we are asking them to makea charitable contribution instead ofinvesting in a policy that is in their ownbest interest.

Lastly, O-CHIP encourages the avail-ability of a product that insures anindividual in the future and reduces thenumber of the chronically ill who lackcoverage. By encouraging more wide-spread adoption of wellness practices,O-CHIP reduces future health carecosts by delaying or eliminating theonset of chronic illness.

– Allow hospitals to collect bad debts.O-CHIP makes it easier for hospitals

and other health care providers tocollect amounts due by providing adebit card in conjunction with the O-CHIPPHA and granting the ability to attach adebtor’s property to recover amountsdue for services.

While these steps may make it more

difficult for the uninsured who encountera health crisis, O-CHIP also providesfinancial assistance to all who need itto purchase coverage. Oklahomahospitals have historically exercisedrestraint in collecting bad debts. Wecould expect the use of the new powersgiven to them to be limited in practice.

• Curtail freeloading and de facto taxes onresponsible citizens.

A major cause of the high cost ofhealth care and health insurance is thelarge number of people who freeloadoff the system. The cost of providingcare for those who don’t pay their billsis shifted to those who do pay.

As we have seen, a number of peoplecurrently freeload because they lackthe resources to provide for themselvesand have no other choice. Othersdecide buying insurance isn’t worth thecost. For someone with limited healthcare needs and few assets to protect,available options are often unreason-ably priced.

Our current regulatory environmenthas enabled freeloading. Forcinghealth care providers and insurers toshift the cost of caring for the uninsuredto the insured has driven up costs,especially for those not likely to file aclaim. Using a largely “in” or “out”system that considers only income failsto provide assistance to many chroni-cally ill who need help to obtain healthcare coverage.

O-CHIP addresses these issues byremoving the major barriers in obtain-ing health insurance. By freeing under-writers to measure risk, O-CHIP willdramatically cut health insurance costsfor the young and healthy. This removesthe principal reason many of them gowithout health insurance. A tieredsystem of eligibility considers bothincome and health care needs andeliminates categorical requirements,thus assuring that all who need assis-tance will have it.

After removing the barriers many facein buying health insurance, O-CHIPthen provides tax benefits to only those


who obtain health insurance. Freeload-ers will find it more costly to continuesponging off others. Not only will theylose tax benefits and be unable to playthe state lottery, they also face the riskof paying steeper premiums shouldtheir health unexpectedly deteriorate.

With O-CHIP, freeloaders will find itmore difficult to freeload and still comeout ahead.

• Encourage family stability and work.– Stop bribing young women to abandon

the fathers of their children.Under O-CHIP, a man and woman are

better off remaining married. This is acritical improvement over the existingsystem.

– Reward hard-working poor people whotake initiative to better themselves.

O-CHIP alone does not completelysolve this problem. However, O-CHIPgreatly reduces the penalty a low-wageemployee faces by accepting a promo-tion. O-CHIP also encourages reform atthe federal level that would allowOklahoma to properly address this issue.

• Help rural Oklahoma maintain neededaccess to health care services.

O-CHIP is designed to help all Oklaho-mans lead healthier lives and gain betteraccess to quality, affordable health care.Some of its provisions, while not neces-sarily aimed at rural communities, willhave a disproportionately positive effecton rural areas.

A hospital is an essential component ofa vibrant community. It fulfills a criticalneed and serves as a focal point for otherimportant services. Physicians are morelikely to practice in a town with a hospi-tal. Because a hospital attracts skilledprofessionals, it enhances the cultural lifeof a community.

Oklahoma health care providers whoserve the Medicaid population havecomplained loudly about their treatmentuntil the legislature provided funding withwhich the Health Care Authority couldimprove reimbursement rates. Theserates have traditionally been far belowthose paid by private insurance and eventhose paid by Medicare. Fortunately, the

Health Care Authority has been able toincrease rates to providers in recentyears, but Medicaid still pays less thanprivate insurance.

The impact of low reimbursements fallsmost heavily upon rural hospitals. Atpresent, those without outside support arethe ones that struggle the most finan-cially. Many rural communities areconcerned that they will lose their hospi-tal altogether.

Despite the lower Medicaid reimburse-ment provisions and the large number leftuninsured by the present system, majorurban hospitals are generally profitable.The same is not true of many rural hospi-tals. O-CHIP provides assistance to ruralhospitals in several ways:– O-CHIP will lead to a higher proportion

of Oklahomans having insurancecoverage. A disproportionate share ofthe uninsured live in rural Oklahoma.By significantly reducing the number ofuninsured, O-CHIP helps rural hospi-tals and other rural providers dispro-portionately.

– O-CHIP replaces the current statesystem with private insurance, resultingin better reimbursements for hospitalsand other providers treating the Medic-aid population. Rural hospitals espe-cially benefit because of higher per-centages of Medicaid participantsliving in Oklahoma’s rural areas.

– O-CHIP provides funding for healthcare scholarships aimed specifically atrural areas. These provisions will helpattract needed professionals to ruralareas and also provide new opportuni-ties for students from those areas.

– By encouraging local hospitals toprovide some services now provided bycounty health departments, O-CHIPimproves the quality of care and pro-vides an additional funding source forthe local hospital

– By looking to local hospitals to provideservices to nearby correctional institu-tions, O-CHIP improves care for theinmates and provides a new source ofrevenue for the hospitals providing theservice.


In summary, O-CHIP helps hospitalsserving rural communities to prosper. Thisis the single most important step thathealth policy can take to contribute to theeconomic health of rural areas.

O-CHIP provisions which reward nurs-ing home residents for finding lower-costcare should benefit nursing homesproviding the lower-cost care. Becauseoperating costs tend to be lower in ruralOklahoma, this should give a smalladvantage to rural facilities and theproviders that serve their residents.

• Create an environment that encouragesOklahoma businesses to create more andbetter jobs.

Like all states, Oklahoma dependsupon its employers to create jobs for itscitizens. The employers provide theeconomic engine that drives the economy,and without them the economy stalls. Astate failing to consider the impact of anyreform proposal on its employers beforeimplementing it may find its economy andcitizens overwhelmed by serious unin-tended consequences.

Most people with health insurancereceive it through their employer. Peopleassociate employment with the benefit ofhaving health insurance. A growingnumber of economists and others arequestioning whether this relationship isbest. For many policymakers, havingmore employers provide health coverageis still the starting point for a discussionof universal coverage, short of a completegovernment takeover.

In this vein, many policymakers want toimpose outright mandates on employersto provide health insurance to theiremployees. Others stop short of a man-date, but want to pressure employers intooffering health insurance. This proposaldoes not include or encourage mandatesupon employers.

When a state imposes a mandate, eachemployer must determine if it can absorbthe higher cost. This is usually done bypassing the mandate’s higher costs on totheir customers as higher prices. If all theemployer’s competitors are in state andface the same mandate, an employer can

usually raise prices to cover the addedcosts.

However, if employers face out-of-statecompetition, they will find themselves at acompetitive disadvantage if they must payfor health care benefits. Their costs havegone up while their competitors’ have not.

Any single mandate, even one as far-reaching as requiring health insurance, isunlikely to force the immediate movementor closure of any but the most marginalbusiness.

However, even if the employer does notclose or move, the mandate will impactthe employer’s margins and financialhealth. The business may not grow asfast as its competitors, and over time itsbalance sheet may deteriorate. It maybecome a takeover target and lose manyof its most highly compensated jobs.Whether it involves a mandate for healthinsurance or other important businessdevelopment issues, Oklahoma shouldtake every reasonable step to assure themost favorable business climate possible.

In addition, the high cost of providinghealth care benefits is likely to forcemany employers to scale back or cancelplans to expand and create new jobs.When we consider that many people whomight want to fill those jobs may havetheir health care needs met by anothersource (the employee’s spouse may havecoverage through his or her job), werealize that we are wiping out opportuni-ties for many Oklahomans to improvetheir situation.

Under O-CHIP, Oklahoma employersgain. Most employers want to providebenefits for their employees and, gener-ally speaking, it is in their own self-interest to do so. In most industries,highly valued employees are more likelyto accept and maintain employmentwhen they are well compensated.

Thanks to our tax laws, health insur-ance is a part of compensation thatemployers can offer cost effectively. O-CHIPstrengthens the employers who provideinsurance for their employees and thusholds down the cost of health insurance.O-CHIP also makes it possible for more



employers to offer coverage. O-CHIP’snew list billing services make it easier foremployers to offer coverage. Employeesowning the policies find their coveragemore valuable.

Employers already providing healthinsurance gain. Their employees enjoy anadded tax break so they receive morevalue from the employer-provided insur-ance than at present. Since theemployer’s objective is to provide cost-effective compensation, the employeralso gains by offering greater value toemployees at no additional cost.

While O-CHIP does not mandate em-ployers to provide health insurance, itdoes make it more attractive for anemployee to work for an employer whodoes. O-CHIP simplifies the process ofemployers offering cafeteria plans.Employers wanting to provide healthinsurance find it easier and more advan-tageous to do so. Meanwhile, O-CHIPcreates an environment that gives pa-tients greater control over their care andaccommodates employer experimenta-tion with more flexible and portablebenefits.

Endnotes1 Patrick F. Fagan, Robert E. Rector, Kirk A. Johnson, Ph.D.,and America Peterson, “The Positive Effects of Marriage:A Book of Charts,” <www.heritage.org/Research/Features/Marriage/index.cfm>.2 C.W. Cranor, B.A. Bunting, D.B. Christensen, “TheAsheville Project: long-term clinical and economicoutcomes of a community pharmacy diabetes careprogram,” American Pharmacists Association (Washing-ton, D.C.), 2003, March-April, 43(2):173-84.3 Morgan Quitno Press using data from AdministrativeOffice of the U.S. Courts, “Table F-2, U.S. BankruptcyCourts” (press release, December 1, 2006).4 The MetLife Market Survey of Nursing Home andAssisted Living Costs, October, 2007.5 Robert Kaestner, Lisa Dubay, and Genevieve Kenney,“Managed care and infant health: an evaluation ofMedicaid in the US,” Urban Institute,<www.urbaninstitute.org/publications/1000830>, April 1,2005.

6 John S. O’Shea, M.D., “The Crisis in America’s Emer-gency Rooms and What Can Be Done,” Backgrounder#2092, The Heritage Foundation, December 28, 2007.7 Martha Raffaele, AP Writer, “Pa. hospital report morethan 30,000 infections in 2006,” York Daily Record, April10, 2006.8 The Institute of Medicine as cited by the Center forHealth Transformation in press release dated December13, 2007.9 “Better Medicine Through Technology,” Information Age,December 4, 2006.10 “Dr. Coburn’s Amendments to fix the broken IndianHealth Care System (Amendment 4034),” website ofSenator Tom Coburn <coburn.senate.gov>, February 14,2008.


APPENDIX AIncentives for Family Stability and Work Provided by ExistingSocial Policy

The charts on the following three pages,prepared by economist Mickey Hepner ofthe University of Central Oklahoma, show:• The approximate effective marginal tax

rate for a single mother with two children;• The approximate family resources avail-

able after taxes and day care expenses;and

• The relative advantages of marriage,cohabitation, and remaining single.Chart 1 illustrates the family resources (by

source) at different wage levels for themother. The first bar represents the family’stotal resources when the mother is notworking. The second bar reflects the valuewhen the mother earns the minimum wage($5.85 per hour) while working part time. Theremaining bars assume the mother is work-ing 40 hours per week. The noticeabledecline in resources that occurs for the

default scenario at $16 per hour is due to theloss of eligibility for the childcare subsidyprogram—leaving the mother to assume thefull cost of childcare.

Chart 2 converts the information fromChart 1 into effective marginal tax rates.These effective tax rates include not onlyfederal and state taxes, but also the reductionin benefits associated with higher incomes.

Chart 3 examines the family’s total re-sources under three different family struc-tures: the parents remain single and liveapart (or clandestinely cohabit), the parentsopenly cohabit, and the parents get married.

As explained more fully in the body of thisstudy, the current network of major socialwelfare programs, often referred to as the“safety net,” actually provides strong disin-centives for stable families or for work andinitiative.

O-CHIP: Oklahoma Comprehensive Health Independence Plan A-1

A-2 O-CHIP: Oklahoma Comprehensive Health Independence Plan

Cha

rt 1

O-CHIP: Oklahoma Comprehensive Health Independence Plan A-3

Cha

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“Sin

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A-4 O-CHIP: Oklahoma Comprehensive Health Independence Plan

APPENDIX BAmount of Medicaid Assistance to Individuals and Families inVarious Circumstances under the O-CHIP Proposal as Outlined

The following charts are provided to givereaders a better understanding of the actualamount of assistance that O-CHIP wouldmake available to people in different situa-tions and how that assistance is related toassistance from other government programs.

We should bear in mind that while suchcharts may be useful analytical tools, thepoor are not carbon copies of each other.Many have unique situations that mayimpact their eligibility and amount of assis-tance and for which these charts do notaccount. For example, a participant may beunemployed and then work several jobs insuccession during a single year. The jobsmay have different pay scales and somemay offer health benefits while others donot. As noted in the text, the state must takecare to properly determine eligibility and theamount of assistance under O-CHIP.

For those who are unaccustomed to thecumulative impact of these programs, theamounts presented may seem surprising.Families and individuals with relativelyhigher incomes are eligible for some assis-tance while some with relatively lowerincomes receive less than full assistance.This results from including the value ofgovernment benefits in personal resourcesand from providing some accounting for thefact that, due to wide variations in healthcare costs among people, need is far fromuniform financially.

These anomalies could be minimized byeither by reducing the threshold at whichparticipants are expected to help pay forbenefits or by requiring a higher percentageof income above the threshold to be used topay for benefits. As presently drafted, O-CHIPrequires participants use 50% of theirincome above the threshold to help pay for

health insurance. A higher percentage, say75%, could be used, but readers are cau-tioned to be aware of the impact such achange may have on incentives for work andpersonal growth.

Readers should also be aware that thecost of living in Oklahoma is generally lessthan the national average. It may thereforebe possible to reduce the threshold andmaintain benefits comparable with otherstates.

Of course, we could also minimize theseanomalies by discouraging family stability,discouraging personal initiative, and con-tinuing with the current model of insuranceregulation that drives up costs and leadsmany to forgo health insurance altogether.

Note that the charts assume that allparticipants get the maximum level of benefitsavailable to someone at their income level.For various reasons, not all do so.

The costs used in the charts that followare based upon a rough approximationusing published insurance premiums forcoverage that includes a health insurancepolicy with a high deductible and co-insur-ance requirements without maternity cover-age. The coverage would include dentaland vision care. The package would alsoinclude a deposit to a personal healthaccount (PHA) as discussed in the text.

The categories given in the charts (goodhealth, fair health, and poor health) are alsorough approximations included to give thereader an understanding of the interactionof need with benefits offered. Note that afew individuals may incur costs that farexceed even those shown for “poor health” ifthey have a chronic illness that requiresintense or costly therapy.

O-CHIP: Oklahoma Comprehensive Health Independence Plan B-1

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B-2 O-CHIP: Oklahoma Comprehensive Health Independence Plan

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aid

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very

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pro

gra

m, and in

som

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ases the A

dju

ste

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esourc

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ill be m

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PL d

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TA

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APPENDIX CImpact of Income Tax Changes Proposed in O-CHIP

The text outlines changes in Oklahoma’sincome tax structure designed to provide taxrelief to those who acquire health insuranceand to require some payment by those whoforgo health insurance and thereby forceothers to incur additional costs. The follow-ing charts show the impact of these incometax changes on various representativetaxpayers.

Examples are given for various types offamilies• Married filing jointly with four dependent

children• Married filing jointly with two dependent

children• Married filing jointly with no dependents• Head of household with three dependent

children

• Head of household with one dependentchild

• Married filing jointly with no dependentsbut with whom a non-dependent parentlives, thus qualifying for an additional taxcredit under O-CHIP

• Single taxpayer under 65• Married filing jointly over 65 and covered

by Medicare• Single taxpayer over 65 and covered by

MedicareThe examples also include different levels

of income from $15,000 to $120,000 anddifferent levels of expenditures qualifying fortreatment as itemized deductions on Sched-ule A of the federal income tax return.

O-CHIP: Oklahoma Comprehensive Health Independence Plan C-1

C-2 O-CHIP: Oklahoma Comprehensive Health Independence Plan








































































OCPA Trustees

Blake ArnoldOklahoma City

Mary Lou AveryOklahoma City

Lee J. BaxterLawton

Steve W. BeebeDuncan

John A. BrockTulsa

David R. Brown, M.D.Oklahoma City

Aaron BurlesonAltus

Paul A. CoxOklahoma City

Josephine FreedeOklahoma City

Kent FrizzellClaremore

John T. HanesOklahoma City

Ralph HarveyOklahoma City

John A. Henry IIIOklahoma City

Henry F. KaneBartlesville

Robert KaneTulsa

Tom H. McCasland IIIDuncan

David McLaughlinEnid

Lew MeibergenEnid

Lloyd Noble IITulsa

Robert E. PattersonTulsa

Russell M. PerryEdmond

Bill PriceOklahoma City

Patrick RooneyOklahoma City

Melissa SandeferNorman

Robert SullivanTulsa

Lew WardEnid

William E. Warnock, Jr.Tulsa

Gary W. Wilson, M.D.Edmond

Daryl WoodardTulsa

Daniel J. ZaloudekTulsa

OCPA Adjunct Scholars

OCPA FellowsSteven J. Anderson, MBA, CPA

Research Fellow

J. Rufus Fears, Ph.D.Dr. David and Ann Brown Distinguished Fellow

for Freedom Enhancement

Patrick B. McGuigan, M.A.Research Fellow

J. Scott Moody, M.A.Research Fellow

Wendy P. Warcholik, Ph.D.Research Fellow

OCPA Legal CounselDeBee Gilchrist Oklahoma City

OCPA StaffHopper T. Smith / President

Brett A. Magbee / VP for OperationsBrandon Dutcher / VP for Policy

Margaret Ann Hoenig / Director of DevelopmentSandra Leaver / Event Coordinator

Marilyn Davidson / Marketing ManagerForrest Claunch / Operations and Special Projects

Clara Wright / Receptionist

1401 N. Lincoln Boulevard Oklahoma City, OK 73104(405) 602-1667 FAX: (405) 602-1238

www.ocpathink.org [email protected]

Will Clark, Ph.D.University of Oklahoma

David Deming, Ph.D.University of Oklahoma

Bobbie L. Foote, Ph.D.University of Oklahoma (Ret.)

Kyle Harper, Ph.D.University of Oklahoma

E. Scott Henley, Ph.D., J.D., D.Ph.Oklahoma City University (Ret.)

James E. Hibdon, Ph.D.University of Oklahoma (Ret.)

Russell W. Jones, Ph.D.University of Central Oklahoma

Andrew W. Lester, J.D.Oklahoma City University (Adjunct)

David L. May, Ph.D.Oklahoma City University

Ronald L. Moomaw, Ph.D.Oklahoma State University

Ann Nalley, Ph.D.Cameron University

Bruce Newman, Ph.D.Western Oklahoma State College

Stafford North, Ph.D.Oklahoma Christian University

Michael Scaperlanda, J.D.University of Oklahoma

Andrew C. Spiropoulos, J.D.Oklahoma City University

About the AuthorTom Daxon (B.A. in economics, M.S. in geography,

Oklahoma State University) is a Certified PublicAccountant who served as Secretary of Finance andRevenue for former Oklahoma Governor FrankKeating. Mr. Daxon also served as the director of theOffice of State Finance, where he was responsible forpreparation of the state budget, financial reportingand accounting, and information services.

From December 1994 through March 1995, Mr.Daxon served as the Interim Treasurer for the OrangeCounty, California Treasurer’s office, following theCounty’s filing for bankruptcy. He was responsible forimplementing controls in the Treasurer’s office andadvising county officials on financial issues. Prior tothe assignment with Orange County, Mr. Daxon wasthe Manager of Quality Assurance for Arthur Andersen& Company, for a major engagement with the Resolu-tion Trust Corporation (RTC). His team eliminated anationally publicized backlog of unreconciled ac-counts and worked with outside auditors to obtain theRTC’s first clean audit opinion. He was also respon-sible for special projects relating to privatization instate and local government for Arthur Andersen. Hewas previously a principal in Arthur Andersen’s Wash-ington, D.C. office, with firmwide responsibilities.

In 1978, Mr. Daxon was elected Auditor and Inspec-tor of Oklahoma. When Mr. Daxon inherited this office,it had been placed on probation by its federal over-sight agency. The office achieved dramatic improve-ment under his leadership. He raised the number ofCPAs/CIAs on staff from 1 to 26 while cutting the totalstaff from 126 to 81. He formed an investigative unitthat exposed questionable practices in certain tagagencies and at the Department of Human Services.He cooperated with federal officials in exposing thecounty commissioner scandal. He introduced modernauditing techniques that included operational reviewsof audited agencies and financial reporting in accor-dance with generally accepted accounting principles,leading Oklahoma to become the first state to issuecomprehensive GAAP-basis general purpose financialstatements, using its own staff.

Documents

Oklahoma Comprehensive Health Independence Plan