A Healthcare Contract With America

A Healthcare Contract With America

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Critics of the Affordable Care Act (Obamacare) need an alternative vision. What follows is a short explanation of the core ideas posted at the Congressional Health Care Caucus and developed in greater detail in the book Priceless: Curing the Healthcare Crisis.

Tax FairnessFamilies at the same income level should get the same help from government when they obtain private health insurance, regardless of where they obtain it. The federal government encourages the purchase of private health insurance through the tax system. Yet the current approach is arbitrary, regressive and unfair. Instead of paying taxable wages, employers are able to purchase health insurance for their employees with untaxed dollars. These employer-paid premiums avoid federal income taxes, federal payroll taxes (FICA), and state and local income taxes as well. This “subsidy” is worth almost half the cost of the insurance for a middle income family. Yet the same family receives virtually no tax relief if it purchases the insurance on its own.

Because of the way we subsidize private health insurance, the higher the family’s tax bracket, the greater the subsidy. A family earning $100,000 gets six times as much tax relief as a family earning $25,000. We are giving the most encouragement to those who need it least.

As an alternative, we should replace the current system of tax and spending subsidies with a system that offers everyone a uniform, fixed-dollar tax credit for the purchase of health insurance. The credit would be refundable, so that it would be available even to those with no tax liability. A reasonable goal, for example, would be a credit of $2,500 per adult and $8,000 for a family of four.

Universality: Unclaimed tax relief should be made available to local safety net institutions to be used in case the uninsured cannot pay their own medical bills. If an individual chooses to be uninsured, the unclaimed tax credit should be sent to a safety net agency in the community where the person lives. These funds would provide a source of finance in case the uninsured are unable to pay their medical bills.

Under this approach, the government pledges a fixed sum of money for every individual and money follows people. If everyone in Dallas County opts to obtain private insurance, there would be no need to fund a safety net and all the government’s support would be in the form of tax credits for health insurance premiums. On the other hand, if everyone in Dallas County opts to be uninsured, all the unclaimed tax credits would go to safety net institutions in Dallas.

This is an easy reform to implement, even if peoples’ insurance status changes often over the course of a year. All the federal government needs to know is how many people live in each community. If the tax credits claimed on income tax returns fall short of their potential for the community as a whole, the balance would be provided in the form of a block grant to be spent at the local level.

Portability: Employers should be able to purchase personal and portable insurance for their employees. One of the biggest problems in the U.S. health care system for the working age population is that health insurance is not portable. In general, when people leave their employers, they must eventually leave their employer’s health plan. Almost all the problems people have with pre-existing conditions arise because of a transition from the employer provided insurance to individually purchased insurance. And those problems arise because the employee doesn’t own the insurance.

There are four advantages to individually owned insurance that travels with the individual from job to job and in and out of the labor market. First, portability allows a long-lasting relationship with a health plan, which in turn allows a long lasting relationship with providers of care. This means that people who switch jobs frequently can still have continuity of care — which is usually a prerequisite for high quality care. Second, people who have portable insurance will not be locked into jobs solely because their benefits aren’t portable. Third, portable benefits are consistent with a mobile labor market, which is a necessary component of a dynamic, competitive economy. Finally, a system of portable benefits is one in which the employer’s role can be purely financial rather than administrative – much like the 401(k) system. Employers could specialize in what they do best, leaving health insurance to insurance firms.

One reason we don’t have portable insurance today is because of the federal tax law. As noted, we generously subsidize employer-provided insurance, but offer very little tax relief to those who must purchase insurance on their own. Even with these discriminatory tax subsidies, insurance could still be portable if employers bought individually owned insurance rather than group insurance. But most states make it illegalfor employers to use pretax dollars to purchase individually owned insurance and most states believe they are required to outlaw the practice under federal law.

The first problem could be solved by providing everyone with a uniform, fixed-dollar subsidy as discussed above. The second problem could be solved by a change in federal policy, freeing employers to provide employees with individually owned insurance on the same terms as all other employer-provided insurance.

Patient ControlPatients should be able to manage more of their own health care dollars. Individuals are able to save for medical expenses in a number of tax-favored accounts. Yet the rules governing these accounts are arbitrary, unfair and void of any clear public policy purpose. To have a Health Savings Account (HSA), for example, people must have health insurance with a rigid, across-the-board deductible. By contrast, people with Health Reimbursement Arrangements (HRAs) can have flexible deductibles, but they can never withdraw unspent money for nonhealth purposes. Flexible Spending Accounts (FSAs) are also completely flexible, but they are use-it-or-lose-it accounts. Any funds remaining at year end must be forfeited.

What is needed is a single, flexible account that can wrap around any health insurance plan. In this way, people could combine self-insurance with third-party insurance in creative and economically efficient ways. Ideally, unspent funds could be withdrawn for other purposes without taxes or penalties.

In addition, employers and insurers should be able to make special deposits to the accounts of the chronically ill. Studies show that chronic patients can often manage their own care with results as good as or better than traditional care. If patients are going to manage their own care, it makes sense to allow them to manage the money that pays for that care. That’s because these programs provide the same incentives and power for patients to manage and control costs as HSAs, since they are effectively spending their own money.

The Commonwealth Fund notes an international trend toward self-directed care (SDC), and it is focused on a most unlikely group of patients: the frail, the old, the disabled, and even the mentally ill.

In the United States, Medicaid Cash and Counseling Programs, under way for over a decade, allow homebound, disabled patients to manage their own budgets and choose services that meet their needs.

  • In Germany and Austria, a cash payment is made to people eligible for long term care—with few strings attached and little oversight on how the money is used.
  • In England and the Netherlands, the disabled and the elderly manage budgets in a manner similar to Cash and Counseling programs in the United States. But the fastest growing use of personal budgets in the Netherlands is for families with children who have attention-deficit hyperactivity disorder, autism, and other types of serious emotional disturbances.
  • Also in the United States, Florida and Texas have SDC programs for patients with serious mental illness, and the Veterans Administration has an SDC program operating in 20 states for long-term care and mental illness.

The British National Health Service (NHS) is contributing to SDC budgets for muscular dystrophy, severe epilepsy and chronic obstructive pulmonary disease. The NHS believes it is saving money in reduced hospital and nursing home costs. The NHS is also about to launch pilot programs that will include mental health, long-term chronic conditions, maternity care, substance abuse, children with complex health conditions and end-of-life care.

In Germany long-term care patients who agree to manage their own budgets spend 50 percent less than what would have been spent in a normal plan. In the Netherlands, spending is 30 percent less. In England, long term care services purchased by individuals cost from 20 percent to 40 percent less than equivalent services purchased by local governments.

Real InsuranceInsurance should not just pay for the cost of becoming ill, it should also pay the higher premium required if patients switch health plans. Insurance markets work best when each enrollee pays a premium that reflects the costs he or she is likely to incur. When this principle is violated (as it is under same-premium-for-all rules), people face perverse incentives. Those who are over-charged will tend to under-insure; while those who are under-charged will tend to over-insure. Even worse, insurers will have an incentive to over-provide to the healthy (to keep the ones they have and attract more of them) and under-provide to the sick (to encourage their departure and discourage enrollment of any more of them).

But what happens if someone gets sick and develops a “pre-existing condition”? Most chronic problems (diabetes, asthma, cancer, heart disease and so forth) do not arise while people are uninsured. They arise when people and their employers are paying premiums. But in a mobile labor market, people leave their jobs. When they seek new insurance, they discover that the new insurer either won’t insure them or insists on excluding coverage for the pre-existing condition.

In popular discussions of this problem, the tendency is to blame the new insurer, but this condemnation is surely misplaced. Remember, the person with the pre-existing condition has been paying premiums perhaps for many years to the original insurer. Does it make sense to allow the original insurer to collect all the premiums but force the new insurer to pay all the bills?

Part of the solution is one already addressed: we should encourage individually owned, personal and portable insurance, so that the problem does not arise in the first place. The rest of the solution is a better insurance product. If people could buy “change of health status” insurance or even better — if that were part of the normal health insurance contract — their original health plan would pay the extra premium being charged by the new plan, reflecting the deterioration in health condition. In this way, people would be insured against the economic consequences of developing a pre-existing condition.

If insurance premiums for people with health problems are artificially low, insurers will run from people such people at the time of enrollment and have no incentive to treat them well after enrollment. Under the proposal made here, the insurer would be fully compensated for the above-average expected costs. As a result, insurers would complete to attract the sick as well as the healthy and would search for ways to better meet their needs.

John Goodman is president and CEO and Kellye Wright Fellow and Peter Ferrara is a senior fellow at the National Center for Policy Analysis.

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19 Comments on "A Healthcare Contract With America"


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Guest
Jul 30, 2012

Let me say it again — the numbers do not add up in the Goodman-Ferrara health plan at first reading.

And it isn’t just me. A reader of the Goodman blog post on “Republican Alternative to ObamaCare” in April stated the following:

– there are 54.1 million family households and 28 million single households under age 65 and not on Medicaid.

At this rate, the tax credits would cost $660 billion.

That is a MAJOR increase in the federal deficit.

Dr Goodman and Mr Ferrara, please answer here when you have a minute.
Something seems fishy/

Guest
Jul 26, 2012

Sorry for the late post, I was on vacation when this first appeared.

I really like the theme and concept, but I am having a real problem with the federal budget numbers in this proposal.

Let me explain.

If you take 300 million Americans and then subtract those on Medicare, those on Medicaid, prisoners, American Indians, soldiers and their families, and illegal aliens, you are down to roughly 180 million.

Assume that 120 million are adults over age 21, and 60 million are children.

The proposed credits as i understand them go against taxes paid, not income, and the unused credits will be spent on safety net institutions ( a great idea, always has been.)

The credit amount proposed is $2500 per adult, and $1,500 per child, effectively.

So the federal government will spend 120M X $2500 plus 60M X $1,500, for a total outlay of $390 billion.

Where will this money come from?

As I understand the proposal, employer payments for health care would become W-2 income.

Employer payments today are in the range of $800 billion.

The extra W-2 income will push some taxpayers into higher brackets, so to be generous let us assume that if $800 billion becomes W-2 income, then federal revenues will rise by at most $200 billion (25% marginal rate)

Hello? This means an extra federal deficit of $190 billion a year. Makes Obama look like Herbert Hoover.

I have heard some commentators suggest that corporations also could not deduct health insurance premiums. That would not raise $190 billion, plus it is very hard to call something W-2 income and not have it be deductible to the employer.

Maybe the $2,500/$8000 numbers are just too high. But Dr. Goodman and Mr Ferrara have a good track record on accuracy, so maybe I am missing a big piece of this.

(I think that when Douglas Holtz-Eakin was defending the McCain health plan, which is this one, he did say that the plan would increase the federal deficit. But $190 billion?

Thank you,

Bob Hertz
The Health Care Crusade

Guest
Jul 9, 2012

You’ve got great insights about health care, point taken!

Guest
Barry Carol
Jul 8, 2012

John Ballard –

I like the exchanges idea conceptually because it will improve transparency and make it easier for consumer to compare insurance offerings both within and across companies. It is also important to note that if you qualify for a subsidy, you MUST use the exchange to make your selection. There is also the issue of how much it will cost to administer the exchanges and who will pay for that. I also think employers, especially larger employers, will continue to play an important role in providing health insurance for their employees and their families.

To my knowledge, though, there is no mechanism to offer risk adjustment payments. Even with Medicare Advantage plans, while the CMS risk adjustment system generally gets high marks from insurers, at the end of the day, it still overpays for the healthy and underpays for the very sick. There have been numerous instances of insurers winding up with losses in certain plans, both Part B and Part D due to unforeseen adverse selection. However, they are only stuck with those losses for one year. The next year, they can change the coverage, raise the premium significantly if necessary or even withdraw from the specific county or region that’s producing the losses.

Regarding the high cost cases, I don’t think there will be any attempt to segregate them. There are efforts to move the very expensive to treat population eligible for both Medicare and Medicaid (dual-eligibles) into managed care from currently unmanaged and uncoordinated care. Even there, though, different strategies will be required because people in this group whose bills are paid largely by Medicaid are generally in need of skilled nursing home care or home healthcare while those primarily reliant on Medicare need acute (hospital based) care for conditions like congestive heart failure, COPD, ESRD, etc.

At the end of the day, the real challenge is to find ways to lower the cost of medical care or at least reduce its growth rate to something closer to the growth of the GDP. Better management of the dual-eligible population is part of that. So is a more sensible approach to end of life care and, in my opinion at least, tort reform, especially safe harbor protection from failure to diagnose lawsuits for doctors who follow evidence based guidelines where they exist. Robust price and quality transparency tools for both patients and referring doctors would also be helpful. Finally, moving away from the fee for service payment model in favor of bundled payments, capitation for primary care and maybe even global payments to ACO’s to care for a specific patient population will also need to be part of the solution going forward. All of this is just my opinion, of course.

Guest
Barry Carol
Jul 8, 2012

John Ballard —

The majority of people who get their health insurance through an employer are in self-funded plans. This means that the employer is responsible for paying all valid claims above a set deductible and after co-pays unless it has purchased stop loss insurance. The insurer processes claims and provides a network of doctors, hospitals, imaging centers, labs, etc. for a set fee per member per month (PMPM) or per employee per month (PEPM). In your area, the insurance card may say Blue Cross and Blue Shield of GA but claims are actually being paid from a checking account provided by the employer and replenished as required. The insurer is the authorized signer of those checks, usually electronic, to providers on the employer’s behalf. This arrangement which is typical among larger companies just doesn’t lend itself to an individual policy that the employee can take with him to another employer.

Smaller employers who buy full risk coverage in the small group or medium size group market are generally experience rated. This means that employers who have older and sicker employees will pay more for coverage than other employers of similar size in the same area whose workers are younger and healthier. A single employee or family member of an employee who has a catastrophic event including a premature baby that needs extensive hospital based care would cause the employer’s premium to spike when it comes up for renewal. This arrangement doesn’t lend itself to employees taking the coverage with them to another employer either. At the same time, selling health insurance policies one at a time, even through an exchange, is more expensive than selling hundreds or thousands at a time.

Guest
Jul 8, 2012

These last two comments have been tremendously helpful and informative. I’m sure it’s old stuff for insurance professionals but for a layman the big picture better explains the smaller parts of a very big puzzle. Many thanks.

I already knew about TPAs and large employers being self-funded. That means that a collection of small companies will never be comparable to the same number of covered employees in a group plan. Do you have any opinion about the exchange concept? They seem to be amphibians in the insurance pond, neither small businesses or large groups.

And would there be a special fund or exchange group for chronically expensive people? It seems to me this is where the biggest opportunity lies with curbing overall costs. A collection of similarly costly patients should be more economically cared for in a collection than scattered among a variety of plans, all of which are trying to limit costs while protracting them at the same time by doing so. (But that’s just a layman’s guess.)

Guest
Barry Carol
Jul 8, 2012

John Ballard –

Everything in life, it seems, involves tradeoff. Anyone who signs up for a Medicare Advantage plan cannot return to standard Medicare later without passing medical underwriting unless the insurer no longer offers MA plans in that area.

Most insurers that offer Medicare Advantage plans do so in counties where they think they can make money and don’t offer them where they can’t. They submit bids each year to CMS against a benchmark which relates to the average cost of standard Medicare in that county. In places like Miami-Dade County in FL, the average cost of standard Medicare is very high so MA insurers can offer a generous plan, often at no cost to the beneficiary, and still make good money. MA plans are especially popular among lower income seniors because you don’t need a supplemental plan. In fact, you couldn’t buy a supplemental plan even if you wanted to. The downside is that you have to accept a limited provider network and if you’re outside your home area, while traveling for example, you may have trouble finding providers who will accept the insurance whereas every hospital, to my knowledge, accepts standard Medicare.

The most comprehensive supplemental plan offered by United Healthcare and endorsed by the AARP costs $225 per month for people 75 and over. For each year below 75, there is a 3% discount from that so-called standard rate. That’s for Part B services. The preferred Part D plan, at least in my area, is an additional $38.60 per month. So people in their mid to late 60’s will pay over $200 per person per month for supplemental insurance plus $99.90 to CMS for Part B coverage plus one of four income related monthly adjustment amounts (IRMAA) for individuals with income above $85,000 and couples with incomes above $170,000.

The maximum IRMAA applies to both singles and couples with incomes above $428,000. They would pay $386.10 per month per person just for Part B coverage whether they use standard Medicare or MA and, if they use standard Medicare, an additional amount which can easily exceed $200 per month per person for supplemental coverage. It isn’t cheap; that’s for sure even though Part A (hospital coverage) is “free.” So far, only about 2% of beneficiaries are subject to the IRMAA. However, since the threshold amounts are not indexed to inflation, the number of people that have to pay the IRMAA will increase over time.

Guest
steve
Jul 8, 2012

Need to make this into a plan and get CBO to score it. My initial thought is that it still leaves those in the 100% of FPL to 300% of FPL vulnerable. Also, what stops an insurer from increasing premiums to the point of being unaffordable if one develops a chronic disease?

Steve

Guest
Jul 8, 2012

Thanks. That clarifies what happened. It’s mystifying for someone just coming into the system. Your mention of “medical underwriting” rings a bell. I think the agent said we would be subject to medical underwriting had the MA provider not left the area and we decided to return to Medicare.

One mystery that remains unsolved for me is why MA had a “premium” of ZERO??? And why even a few miles to the South the premium was a mere $40 (instead of larger amounts for supplements). Clearly the industry was sweetening the bait to capture as many Medicare beneficiaries as they could — presumably because they were getting paid from elsewhere. Was Medicare sending our Parts A and B charges to the insurer plus something more for their “trouble”?

Incidentally, I realized as I read over what I said that my confusion of risk with costs was from looking at it from the consumer point of view. To me “risk” refers to the risk of having a catastrophic medical event, a condition in which HEALTH is at risk. But to the insurance industry “risk” simply refers to how much money is at risk. (It’s similar to the subtle difference by which I regard money in a savings account as an asset, but to the bank the same money is a liability, unless it is not leveraged.)

~~~~~~~~~~~~~~~~~~

Getting back to one of the topics above, Goodman’s argument here is spot on…

Even with these discriminatory tax subsidies, insurance could still be portable if employers bought individually owned insurance rather than group insurance. But most states make it illegal for employers to use pretax dollars to purchase individually owned insurance and most states believe they are required to outlaw the practice under federal law.

Question — Is group insurance mandated by federal law? If so, why? And if not then it’s time to turn that around and aim tax policy to favor individual insurance. Short of single-payer, I favor uncoupling employment from health care for many reasons. And tax policy is but one of several ways to push it along.

Guest
Barry Carol
Jul 8, 2012

John Ballard –

Community rating means that everyone within a given age tier pays the same for health insurance regardless of health status. It’s under medical underwriting where sicker people would be charged more or, in some cases, would be considered uninsurable and not offered insurance at all unless they were accepted into a high risk pool if one exists and is not already closed to new enrollees due to cost constraints imposed by the state operating it.

You were able to switch back to standard Medicare plus a supplemental policy because you were considered continuously insured, which you were. When your MA insurer exited the business in your county, you qualified for one of the exceptions that allowed you to sign up for standard Medicare after you first became eligible for it.

With respect to risk adjustment payments, Germany uses, I think, 80 different factors to determine a medical risk score for each individual. Health insurance premiums are paid into a Central Fund and then, after adjustment for individual risk scores, are distributed to the individual insurers, called sickness funds in Germany. The system seems to work quite satisfactorily.

Guest
Barry Carol
Jul 7, 2012

I think it would be better to get rid of the tax preference for employer provided health insurance altogether in favor of lower marginal income tax rates and a higher standard deduction. I don’t get a tax preference or deduction for buying homeowner, auto, life, long term care or any other form of insurance. Why should health insurance be different? Subsidies are OK to help lower and middle income people buy health insurance, but the percentage of income that they should be expected to contribute toward their premium should be higher than it is under the PPACA, income should be subject to rigorous verification and the penalties for hiding or underreporting income should be stiff. If the value of employer provided health insurance were reflected on W-2 forms as wages, whether taxable or not, most people with generous family coverage would see that 15% or more of their income is already going to pay for health insurance but they don’t know it because the employer is paying most of the cost.

If health insurance benefits were treated as taxable income, though, we would have to develop a fair mechanism to allocate what the employer is paying for health insurance overall to each individual employee. Since people between 55 and 64 years old use 5-7 times more healthcare on average than people in their 20’s, this is a significant issue. Full age rating would probably be appropriate in this context.

The problem of developing a pre-existing condition and then leaving or losing a job and needing to go into the individual insurance market can be addressed by a combination of guaranteed issue, which we have in NJ, and risk adjustment payments to adequately compensate insurers who wind up with a sicker than average population. The payments would come from assessments on insurers who have healthier than average populations. In the Medicare Advantage space, insurers tell me that CMS’ risk adjustment mechanism is quite good though certainly not perfect.

Guest
Jul 8, 2012

I like the idea of getting rid of tax preferences for insurance, for both individuals and companies. With the new rules now governing health insurance, especially medical loss ratio, guaranteed issue and removal of lifetime caps, there is no longer any reason to “encourage” anyone to buy health insurance.

The problem of what experts all adverse selection or moral hazard and politicians call “free riders” not becomes the fly in the ointment. In order for the system to work now somebody will have to put a thumb on the scale from time to time to keep it working. I had to look up “risk adjustment mechanism” and discovered that is exactly what it is designed to accomplish — keeping the system operational by spreading the risk. (“Risk” is not exactly correct, of course, since plenty of people at risk actually die before they cost anything. The phrase should really be cost adjustment mechanism, but that would never sell. Sounds too much like “redistribution.”)

Health insurance is categorically different from all other types of insurance. Home owner, auto and other types of insurance are variable according to a variety of needs and means. People without cars don’t need auto insurance and the owner of a tired old piece of junk is only required to buy liability insurance.

(I suppose states like Georgia, where I live, have adopted “no fault” insurance which means that all medical costs arising from an auto accident are paid by the drivers’ policies irrespective of who may be “at fault.” When the dust settles any companies involved may try to recover their expenses from an “at fault” party among themselves and civil claims are left up to the parties themselves. All that is a kind of “risk adjustment mechanism,” right?)

I had to look up the term and came across a variety of conflicting information. I’ll leave it to the experts to hash it all out, but it’s clear to me that some “risk adjustment” or whatever you want to call it will be essential to the end result. I’m glad to learn that CMS has such a feature for MA. It makes me have a more positive attitude about that alternative to original Medicare.

My wife and I had MA the first year but returned to Medicare the next year. We did that partly because MA was no longer available where we live (it may now be — I dunno) and the agent informed us that under the circumstances we could return to Medicare + a supplemental without facing “medical underwriting.” I presume that means we are in one of those “community rating” areas which will ratchet up premiums for individuals that might cost more.