Health care expenditures are destroying our public finances. Last year, they drained the federal budget of $1.07 trillion, including $260 billion of revenue losses from the tax exclusion of employer-paid health insurance. This was about 7.5 percent of gross domestic product, and it is growing faster than GDP.

We must move effectively to get the health expenditure growth rate down to the growth rate of the GDP in a decade. To fail to do so will do huge damage to public funding for education, and to the credit rating of the U.S. Government.

We need five actions:

1. Cost conscious consumer choice of health plan

Practically nobody has a serious incentive to choose economical care. A $2,000 deductible does not create relevant cost consciousness: the real money is in the high cost cases. The deductible may induce people with chronic conditions to skimp on needed care. Cost conscious choices do work in the annual insurance plan open enrollment where the consumer can see and consider the premiums.

Coverage should be standardized, and consumers should have information on the quality of care. Congress must cap the tax exclusion, preferably at the price of an efficient plan in each region, so that people will be rewarded for choosing an economical plan. The savings should be used to help people with low incomes buy health insurance.

The White House and Congress should resurrect the National Bipartisan Commission on the Future of Medicare, of the late 1990s, and implement its recommendations for defined contributions and multiple choices of health plans. All new Medicare beneficiaries starting in, say, 2012 should have the opportunity to save money by choosing efficient delivery systems – those that have high ratings for quality and consumer satisfaction and low premiums. Consumer choice would create powerful incentives for providers to form and join efficient delivery systems. Congress could then manage growth in contributions the way it has done in the Medicare Prospective Payment System, to control and slow the growth.

2. Organize the market for competition at the consumer level.

Most employers do not offer employees the opportunity to save money by choosing more economical health plans. The lack of that choice blocks the growth of efficient health care delivery systems.

Where people do have such choices, very high percentages choose lower cost organized delivery systems. A market could be developed to drive the transition from uncoordinated fee-for-service systems to accountable care organizations with processes to improve quality and cost.

The Committee for Economic Development (CED) recommended that an independent agency patterned on the Federal Reserve create a national system of regional exchanges through which health plans would offer coverage. The exchanges would enforce rules, such as accepting applicants regardless of their health status and offering a lean standard benefit packages. They would also provide unbiased information and facilitate choice.

To prevent adverse selection, participation in exchanges must be mandatory for large classes of people. The CED recommended rolling this system out by classes of employer size, starting with small firms that need this most, making participation in the exchange a condition for receiving the tax exclusion. Eventually everyone should be in the multiple choice environment.

Through standardization and economies of scale, exchanges would drastically lower the costs of insurance administration.

3. Through market forces, transform the delivery system to integrated high performance systems.

President Obama wants to see information technology, preventive services, and comparative effectiveness put to use to improve quality and reduce cost. We need systems and incentives to make that happen.

Organized systems are needed for many essential functions that support improvement: to align provider incentives; to deploy health information systems; to organize and deploy infrastructure for chronic disease management; to match numbers and types of providers to meet a population’s needs efficiently; to keep providers current on evidence-based practice and supported by tools (such as peer review and check lists) to overcome widespread practice variations and quality failures.

Nationally, we have more than 400 large multispecialty physician organizations, existing in every region of the country, urban and rural. With market incentives, they would transition to accountable care organizations, which would function like integrated delivery systems such as the Mayo Clinic and Kaiser Permanente. The large integrated delivery systems have shown that they can deliver high quality care at a substantially lower cost than other physician organizations.

4. Address other barriers to an efficient affordable health care.

Even if we got everyone into a model of competing systems, there would still remain a great deal of work to correct the inflationary bias and institutions in our health care system, including:

• Shortages of personnel, such as primary care physicians and nurses
• Provider monopolies
• The tort system
• The costs of hyper-expensive biotechnology drugs;
• Regulatory barriers to physician-hospital cooperation;
• Barriers to personnel substitution (nurse practitioners doing primary care under physician supervision, for example), created by state laws to protect providers.

We also need independent technology assessment to develop information about the benefits and costs of new technologies.

5. Use savings to finance subsidies for low-income people to move toward universal health insurance.

Having tens of millions of citizens without health insurance is a moral blemish and an embarrassment for our society. We ought to have reliable universal health insurance for many reasons. Without it, people lose their savings when they get sick, uninsured people burden and threaten the solvency of providers who care for them; and hospitals shut emergency rooms. People with chronic conditions need ongoing care.

The CED issued a report that recommended universal health insurance based on premium support payments for every legal resident. To pay for it, in addition to the savings proposed here, CED recommends a value added tax so as not to add to the distorting tax burden on working, saving, and investing. Eventually this should replace the flawed employment-based system.

Alain Enthoven, Ph.D., is the Marriner S. Eccles Professor of Public and Private Management, emeritus, at Stanford University and a core faculty member at Stanford’s Center for Health Policy and Center for Primary Care and Outcomes Research. He is known as the “father of managed competition.” He is a member of the Institute of Medicine of the National Academy of Sciences. enthoven@​stanford.​edu; 650–723-0641.