Newt Gingrich


At a Glance 

The recently passed Medicare bill includes many provisions that will help to improve the nation's healthcare system: 

  • Allowing the private sector to deliver the prescription drug benefit by competing for consumers will result in greater choice at lower cost. 
  • Offering the option of health savings accounts promises to bring affordable coverage to the uninsured and will encourage healthcare consumers to make cost-conscious healthcare purchasing decisions. 
  • Giving hospitals an incentive to report outcomes will give consumers, for the first time, access to data they can use to make informed choices about healthcare providers. 

The newly passed Medicare bill has set the nation on the right track for effectively meeting the healthcare needs of future generations.

Escalating costs, lack of consumer choice, poor-quality health systems, scarce information about expected outcomes, and unacceptable error rates have conspired to create broad agreement that the present healthcare delivery system is in crisis. Health care is not only the biggest single sector of the economy; it is also growing faster than the economy. It is the biggest cost center in state governments, and the largest cost pressure on small and large businesses alike. More important, health care is a matter of life and death.

The natural economic pattern of the 21st century market system-one the baby boomers, in particular, have become accustomed to-is to have more choices with greater quality at lower cost. Health care and education represent the notable exceptions. Yet as 76 million baby boomers begin to place unprecedented demands on Medicare, they will again expect the same standards of higher quality, more convenience, greater access, better information, all at the lowest possible cost. The only hope of meeting these looming expectations is in transforming the American healthcare system.

None of these realities have escaped our elected leaders in Washington, and the good news is that the Medicare bill just signed into law by the President is an enormous step toward a new health future for 40 million elderly and disabled beneficiaries of Medicare beginning in 2006.

Remarkable for its vision, this legislation is not simply an extension of a program that has changed little in its 38-year history. Rather, because it harnesses the power of patients as consumers, it provides a foundation for bringing the program into the 21st century as a model that will produce higher-quality health care at lower cost.

This bill goes far beyond just Medicare. Because the Medicare program is so large, specific major changes contained in the bill are certain to drive change throughout the healthcare system that will allow, over the next few years, the benefits of a market-based system to take hold. Competitive markets create the opportunity for new entrepreneurial players with new concepts and transformational technologies to enter the healthcare market, thereby initiating the necessary transformation of not only Medicare but also the greater healthcare system.

The Long-Awaited Drug Benefit

First and foremost, the bill adds an overdue prescription drug benefit for the first time-and does so for a reasonable price. Despite the $400 billion price tag for the next decade, this bill begins to significantly replace the supply-control and price-control model of Medicare that has led to spiraling costs with a demand-control and patient-control model that will lead to downward cost pressures. The Congressional Budget Office has noted that the bill offers the most efficient delivery structure for the drug benefit because it allows the private sector to deliver the benefit by competing for consumers. The result will be higher quality and more choices at lower costs.

The bill also encourages greater discounting by pharmaceutical manufacturers because it eliminates Medicaid price controls that were negotiated for Medicare beneficiaries, potentially saving seniors $18 billion in drug costs. Seniors will also receive a Medicare discount drug card. Low-income seniors will be helped by a $600 subsidy already on the card.

Medicare-Approved Private Plans

The bill creates an opportunity for Medicare-approved private plans to thrive in the Medicare program by fundamentally changing the traditional payment structure. Demonstration plans in six test markets will offer coverage and be paid based on a bidding process, rather than arbitrarily set prices. By 2010, a competitive-cost adjustment program will put traditional Medicare into direct competition with private plans, once the demonstrating private plans prove their ability to hold down costs and deliver high-quality care. Beneficiaries are protected from possible volatility with a 5 percent cushion, but if the demonstration is successful, we can move it into a permanent structure, just as we did following competitive-bidding demonstrations for durable medical equipment (e.g., oxygen, wheel chairs).

This bill also thoroughly reorganizes the Medicare bureaucracy. Contracts must be put out for bid. Providers are given opportunities to appeal decisions, and processes will be put in place to make government more responsive. In addition, the people administering the government-run plan will not be in a position to regulate competing private plans.

Health Savings Accounts

A major part of the current problem has been the third-party payer system, which has failed to put patients at the center of their own care, failed to control costs, and failed to give consumers adequate choices. The third-party payer system has resulted in adversarial relationships among payers, the patients, and healthcare providers.

A key element of the bill that addresses the failure of the third-party payer system is the creation of new and long-sought-after health savings accounts (HSAs). These portable accounts will allow individuals to accumulate money tax-free to pay for qualified medical expenses. Because the money is neither taxed going in nor out of the account, it is actually the first completely tax-free account in American history. HSAs will likely help to bring affordable coverage to the uninsured and revolutionize long-term care.

Medicare and other government sources make up roughly 75 percent of the revenues in the long-term care industry. This bill allows HSA funds to be used for the private purchase of long-term care insurance, which will begin to bring affordable private long-term care insurance to Americans and transform long-term care into a more market-mediated system under the umbrella of government regulation.

HSAs can be set up by anyone who chooses to buy a policy with a somewhat higher-than-normal deductible, but with a lower premium-$1,000 for an individual and $2,000 for a family policy. Individuals will be able to make pretax contributions of up to 100 percent of the health plan deductible, with a maximum pretax contribution of $2,500 for individuals and $5,050 for families (indexed annually for inflation). Contributions can be made either by the individual's employer or by family members.

These accounts offer a tremendous advantage, in particular, to young workers who stay healthy over long periods of time, because it allows them to accumulate a substantial amount of money over these periods. The bill in its current form would impose a 10 percent tax for money withdrawn for nonmedical purposes, but my hope is that we can, in the future, eliminate the penalty on withdrawals for expenses such as education or a home purchase once an account has accumulated a certain minimum amount. Nevertheless, HSAs are real assets that individuals own.

Seniors 55 years of age and older will be able to make additional contributions of up to $500 annually (increasing to $1,000 by 2009) to help them accumulate health dollars for retirement. Tax-free distributions are allowed for qualified medical expenses, including the health insurance premiums for retirees, prescription drugs, long-term care service, and long-term care insurance, among others. Seniors will also be able to purchase healthcare policies with no required minimum deduction.

The Engaged Healthcare Consumer

The bill meets one of the most vital objectives for the successful transformation of health care-to return decision-making authority and control to the individual. After all, it is in each individual's best interest to be responsible for his or her own health care. Being afforded such responsibility will transform Medicare beneficiaries into more informed and judicious consumers of health care.

For example, because the Medicare Part B deductible will now be indexed to Medicare costs, and subsidies will decrease to those seniors who can afford to pay more, the 5 percent of beneficiaries with incomes above $80,000 will be encouraged to make better decisions about their health and their healthcare dollars, thereby becoming responsible healthcare consumers, not just passive recipients who are unaware of the costs related to their care.

HSAs, too, will promote more cost-conscious consumer decision-making. Because of the high deductible policies that accompany HSAs, most individuals will control a larger portion of their first healthcare dollar-insurance will kick in only when it is truly needed. The knowledge that they are spending their own health dollars as opposed to a third party's money will give HSA owners an incentive to shop for health plans that best fit their needs.

In short, the evidence is clear that when patients directly control their dollars, they become wise purchasers. This bill's injection of competitive market dynamics into healthcare purchasing should not be underestimated as a means to put downward pressure on healthcare costs.

The bill also acknowledges the need for the payment structure to take into account quality and outcomes. It gives hospitals an incentive to report outcomes so that consumers, for the first time, will have access to data that will enable them to make informed choices about healthcare providers.

To achieve the level of transparency needed, however, we still must address tort reform. Without reining in frivolous litigation, the sharing of information will be an advertisement for a lawsuit. Real-time, systemwide information sharing, however, will allow healthcare providers to learn quickly about best practices and techniques for avoiding errors, thereby saving both lives and money.

A Bold First Step

The new Medicare bill leaves much room for future enhancements. For example, Medicare beneficiaries should be rewarded if they choose hospitals and physicians that have the highest quality standards and lowest cost programs for the diagnosis being treated or that have the best outcomes based on reported data.

Nevertheless, this historic bill will fundamentally transform the nation's healthcare delivery system. It is a solid foundation for the future of health care in America, challenging the members of Congress to rise above the narrow view of reforming Medicare and to begin transforming health and health care by placing informed consumers at the center of decision-making about their own care. Only when America's political leaders embrace this vision will Americans have a healthcare system they can depend on-one that offers the promise of the best possible outcomes at the lowest possible costs.


Newt Gingrich is CEO of the Gingrich Group, Washington, D.C. He is founder of the Center for Health Transformation, a project made up of top leaders in both the public and private sector working to improve the healthcare system. He served in the U.S. House of Representatives from 1978 to 1999, serving as Speaker of the House from 1995 to 1999. He is the author of Saving Lives and Saving Money.

Dana Pavey, a health research director, AEI, contributed to this article.

Publication Date: Thursday, January 01, 2004

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